[House Prints 111-D]
[From the U.S. Government Publishing Office]




   111th Congress }                                       { Committee
    1st Session   }        COMMITTEE PRINT                { Print 111-D
_______________________________________________________________________


                               MEETING ON

                        PRIORITIES FOR THE NEXT
                         ADMINISTRATION: USE OF
                         TARP FUNDS UNDER EESA

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION








                            January 13, 2009





111th Congress }                                         {  Committee
 1st Session   }            COMMITTEE PRINT              {  Print 111-D
_______________________________________________________________________



                               MEETING ON

                        PRIORITIES FOR THE NEXT
                         ADMINISTRATION: USE OF
                         TARP FUNDS UNDER EESA

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION








                            January 13, 2009


                  U.S. GOVERNMENT PRINTING OFFICE
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS McCOTTER, Michigan
CHARLES WILSON, Ohio                 KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIC PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel













                            C O N T E N T S

                              ----------                              
                                                                   Page
Meeting held on:
    January 13, 2009.............................................     1
Appendix:
    January 13, 2009.............................................    83

                               WITNESSES
                       Tuesday, January 13, 2009

Blankenship, Cynthia, Vice Chairman and Chief Operating Officer, 
  Bank of the West, on behalf of the Independent Community 
  Bankers of America (ICBA)......................................    59
Bovenzi, John F., Deputy to the Chairman and Chief Operating 
  Officer, Federal Deposit Insurance Corporation.................    17
Calhoun, Michael, President and Chief Operating Officer, Center 
  for Responsible Lending (CRL)..................................    64
Kohn, Donald L., Vice Chairman, Board of Governors of the Federal 
  Reserve System.................................................    15
Mayer, Christopher J., Senior Vice Dean and Paul Milstein 
  Professor of Real Estate, Columbia Business School.............    65
McMillan, Charles, CIPS, GRI, 2009 President, National 
  Association of Realtors (NAR)..................................    62
Murguia, Janet, President and Chief Executive Officer, National 
  Council of La Raza (NCLR)......................................    54
Robson, Joe R., 2008 Chairman-Elect of the Board, National 
  Association of Home Builders (NAHB)............................    61
Taylor, John, President & Chief Executive Officer, National 
  Community Reinvestment Coalition (NCRC)........................    56
Yingling, Edward L., President and Chief Executive Officer, 
  American Bankers Association (ABA).............................    58

                                APPENDIX

Prepared statements:
    Green, Hon. Al...............................................    84
    Jenkins, Hon. Lynn...........................................    85
    Blankenship, Cynthia.........................................    90
    Bovenzi, John F..............................................   100
    Calhoun, Michael.............................................   119
    Kohn, Donald L...............................................   135
    Mayer, Christopher J.........................................   142
    McMillan, Charles............................................   152
    Murguia, Janet...............................................   160
    Robson, Joe R................................................   168
    Taylor, John.................................................   182
    Yingling, Edward L...........................................   200

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Written statement of the Credit Union National Association 
      (CUNA).....................................................   232
    Written statement of the National Association of Federal 
      Credit Unions (NAFCU)......................................   235
Jenkins, Hon. Lynn:
    Letters from various constituents............................   237
Peters, Hon. Gary:
    Article from Crain's Detroit Business........................   241
Thompson, Hon. Bennie G.:
    Letters to Hon. Ben Bernanke, Hon. Timothy Geithner, and Hon. 
      Henry M. Paulson, Jr.......................................   244
Yingling, Edward L.
    Additional information provided for the record in response to 
      questions from Representatives Foster and Scott............   250

 
                        PRIORITIES FOR THE NEXT
                         ADMINISTRATION: USE OF
                         TARP FUNDS UNDER EESA

                              ----------                              


                       Tuesday, January 13, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:04 p.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Watt, Ackerman, Meeks, Moore of Kansas, Capuano, Clay, 
McCarthy of New York, Baca, Lynch, Miller of North Carolina, 
Scott, Green, Cleaver, Bean, Moore of Wisconsin, Hodes, 
Ellison, Klein, Wilson, Perlmutter, Donnelly, Foster, Carson, 
Minnick, Adler, Kilroy, Driehaus, Kosmas, Grayson, Himes, 
Peters, Maffei; Bachus, Castle, Royce, Paul, Manzullo, Jones, 
Biggert, Hensarling, Garrett, Price, McHenry, Bachmann, Posey, 
Jenkins, Lee, Paulsen, and Lance.
    The Chairman. This gathering will come to order. We will 
have probably a full complement of members. Now the microphone 
seems to be on.
    Mr. Bachus. Yes, mine is on.
    The Chairman. All right. They are on when you don't want 
them to be and then they are not on when you want them to be.
    This is a gathering of the membership of the Financial 
Services Committee. We have not yet been formally constituted 
as a committee by action of the House, but the membership has 
been completed, I believe, on both sides. So this is the 
membership. I will say that the ranking member and I were 
unsuccessful in our effort to reduce the size of the committee. 
We mean no disrespect to our newer members, but we are the 
second-largest committee in the House, and it is unwieldly. And 
I apologize to all members on both sides. It takes longer to 
get to people in terms of questions. We try to accommodate 
that. If we get any bigger, we will have no spectators at all, 
because membership is eating into the public sector. We regret 
that.
    I did want to reassure people the ranking member and I 
tried very hard, but it is a committee that people wanted to 
serve on, so here we are.
    This meeting is to discuss legislation to set conditions 
with regard to the second $350 billion of the rescue plan that 
we adopted last fall. When we adopted that, we put into it that 
there would be a two-part operation: that the Administration 
could in fact with a signed declaration access $350 billion; 
but before they could access the second $350 billion there 
would have to be a period during which they notified Congress, 
waited 15 days, and any Member of Congress could then bring a 
resolution to the Floor to disapprove this. There were people 
who at the time said that this was mere window dressing. It is 
clear that they were wrong.
    This restriction on the second half has turned out to be 
very important, and I think helpful, because there was a great 
deal of dissatisfaction in the Congress, reflecting 
dissatisfaction in the country with the way in which the first 
$350 billion was spent.
    The question now is: Why are we acting at this point? I 
have received a letter from members of the Minority, including 
the ranking member, saying that they wanted to hold off. But 
here is the problem. President Bush, at the request of 
President-elect Obama, triggered a 15-day period yesterday. The 
House has 6 days before a resolution must come to the Floor; a 
resolution of disapproval, because we wrote into this bill very 
powerful rules that allow any Member of the House to get a bill 
to the Floor. The Senate I think has an even shorter period of 
time.
    I think it is important that at least the House of 
Representatives be able to express its views on this before a 
resolution of disapproval comes up. Members will have a right 
to vote on the resolution of disapproval. There will be no 
effort, I am sure, to stop it; and no such effort, if it came, 
could be successful because of the way we wrote this bill.
    There is one issue. As I read the law, apparently we may 
have to vote on Sunday. I think we might be able to get some 
agreement so we don't have to vote until Wednesday. It said 
within 6 days. And there will be conversations going on with 
the leadership. So there will be a vote. Many of us believe 
that before voting yes or no, we ought to be able to say ``yes 
but.'' And that is what this bill is. I take it back. Not ``yes 
but,'' but ``yes if.'' The incoming Administration believes 
strongly that this $350 billion will be helpful.
    Having given $350 billion to the Bush Administration, I 
believe it is reasonable to make it now available to the Obama 
Administration, but with much more in the way of restriction.
    It is probably the case that we will have a hard time 
getting a bill signed into law. The legislation that we intend 
to bring forward does not confer new powers on the 
Administration. It does mandate that they do things within the 
existing powers. That is, everything in the bill could already 
be done if they were ready to do it.
    It reminds me of what Harry Truman said: ``Being President 
of the United States means trying to get people to do what they 
should have done in the first place on their own if they had 
any brains.'' And that is what we are trying to do with the 
TARP. We are trying to get an Administration to do what it 
should have done in the first place. We believe that if these 
conditions are met, that will make it a very useful thing.
    What we expect is that--and I would hope that before we in 
the House voted on a motion of disapproval, we could pass a 
bill that tells the Administration what we think is necessary, 
and that we get a commitment from the new President of the 
United States that he will abide by it. I have a good deal of 
confidence in the new President of the United States. But we 
are putting the bill forward because I have also learned from a 
prior President of the United States, who in turn learned from 
the head of the Soviet Union--and I am of course referring to 
Ronald Reagan's wisdom he passed along for Mikhail Gorbachev--
trust but verify. This is the trust-but-verify bill with regard 
to the Obama Administration and the TARP.
    But let me give you an example, and my time is running out, 
and I am going to hold everybody to the time. If we do not get 
the second $350 billion, I do not see any way that we can get 
substantial foreclosure relief. If we get the second $350 
billion, I believe it should be conditioned upon the 
Administration promising us very substantial foreclosure 
relief, improving HOPE for Homeowners, building on the work of 
FDIC Chairman Bair, acting as Secretary Preston, the current 
Secretary of HUD, says we should do in buying up home 
mortgages.
    I also believe that we can get to a situation where the 
larger banks having gotten money, we can now advance money to 
the smaller banks, the community banks, under conditions that 
will make sure that it is used appropriately, and in most, 
although not every single case, re-lent.
    We will therefore be proceeding in this manner. We will do 
what the rules allow, which is to have 20 minutes of opening 
statements on each side. I will be holding members very 
strictly to a 5-minute rule.
    And I now recognize--or within the 20 minutes, I now 
recognize the gentleman from Alabama for such time as he--he 
says 2 minutes, he wants?
    Mr. Bachus. Mr. Chairman, before I start, I wanted to 
advise our members that we will all be doing 2 minutes, those 
who have requested time.
    The Chairman. All right. That makes it easy for the 
timekeeper. So, 2 minutes for each of the Republican members.
    Mr. Bachus. Mr. Chairman, you and I agree on one thing, 
which is that the $350 billion second affirmation is very 
important. In other words, before we can spend the second half 
of the money, it has to get congressional approval. And if you 
will recall, the purpose of this relief plan or rescue plan, as 
the chairman is saying, or bailout as the American people call 
it, the purpose was to stabilize the financial system. We were 
presented with a doomsday scenario that the markets were going 
to melt down and our financial system was going to collapse. 
And as a result of that, this bill passed.
    What confuses us is, in a letter to House Republicans just 
this past week, Chairman Paulson said this: ``We have in fact 
met our original stated objectives, which were to immediately 
stabilize the financial system by strengthening financial 
institutions, arresting the wave of financial organization 
failures, and establishing a basis for recovery.
    If you all recall when this passed, six major institutions 
had collapsed over a short period of time. The markets were 
going up and down a thousand points. That is no longer the 
case. And Secretary Paulson says he has accomplished the 
purposes of the program.
    Having done that, and prevented maybe a doomsday scenario 
perhaps, we are seeing something else very different. We are 
seeing now this thing transition, if we approve this second 
half, into a grab bag where people can just reach in and get 
taxpayer money. And as most of you know, people are lining up 
to get this money.
    But today we are asked within about a 72-hour period--we 
are going to go to the Rules Committee at 5 o'clock with very 
few specifics--we are being asked to vote about a bill we know 
nothing about; we have not been told why we need it, we have 
not been told what we are going to do with it. We are not 
informed. We don't have the facts. But we are told that we need 
to pass it. And we are not informed. That is not the way to do 
legislation. We understand Americans are struggling, that 
people are out of work, but that is no excuse to rush to 
judgment and really take $350 billion from the very people that 
we are concerned about.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman consumed 2 minutes and 52 
seconds, so we will make an adjustment.
    Next, for 2\1/2\ minutes, Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, I 
have a prepared statement I will submit for the record. I just 
want to say that we know that ultimately this bill will not 
become forceful, but it is a message being sent to the incoming 
President. And I think it is a good message, that there has 
been disappointment on behalf of this Congress. I think it is 
bipartisan disappointment.
    I, for one, worked very hard for the passage of the 
original TARP bill. And I feel that there has been less than 
openness on the part of the present Administration to indicate 
to the American people exactly what the funds were used for, 
and primarily to stimulate positive activities on the part of 
banks to constitute an increase in the lending and moving out 
of the frozen nature of our credit system.
    That all being said, it seems to me very important that we 
realize that this was a commitment of $700 billion. It still is 
a commitment. But most of all, it is not because it is a 
commitment, it is because to date we do not have an affirmation 
that the system has worked. It has worked insofar as we have 
not collapsed into total meltdown, but it is still in the 
process of ``working.'' And it seems to me that in this nature 
it behooves all of us, this Congress and the American people, 
to adopt a plan. And as we originally recognized with the 
Secretary of the Treasury and the President, some mistakes will 
be made, some moneys will be lost, but this is too important a 
problem for the American people, that we cannot stop halfway 
through the course.
    So I highly support the message sent in this bill to the 
new Administration that we will be watching them. We expect 
them to adhere to the principles set forth in the bill. But 
also, we have to send a message to the American people that we 
have faith in the system, that the program will work, and that 
we are going to stay with it as a Congress.
    So on that behalf, Mr. Chairman, I offer my support for the 
chairman's bill. I yield back.
    The Chairman. The remaining time will be 1 minute and 55 
seconds for each of the Republicans to stay within the allotted 
time.
    And the gentleman from Delaware is recognized for 1 minute 
and 55 seconds.
    Mr. Castle. Thank you, Mr. Chairman. Thank you for calling 
the meeting to begin this dialogue on the final $350 billion 
tranche of the Treasury's TARP funds. As I indicated at the 
last TARP oversight hearing, I remain very concerned that we do 
not have an accurate accounting of how each institution 
receiving TARP funds is spending this money. In fact, to me it 
seems to become fungible rather quickly, and it is very hard to 
follow the bouncing ball in this area.
    This program was intended to free up credit and stabilize 
our financial system. Today, we have achieved a level of 
stability. But many mortgages and mortgage-backed securities 
remain unchanged, despite our efforts directing the Treasury to 
adjust these important economic symptoms.
    Further, we do not have a complete accounting of how the 
first tranche of taxpayer money has been used by the 
institutions that now possess these funds, which is 
unacceptable.
    I support the idea put forth by Mr. LaTourette, and I 
applaud the chairman for his support of that amendment. We need 
to understand whether or not institutions receiving TARP funds 
have increased lending.
    I have offered legislation on safe legal harbor, which has 
recently become a law, and is already incorporated in this 
legislation, which would incentivize loan servicers to work 
with borrowers and investors and renegotiate loan terms. 
However, I am disappointed that many struggling homeowners 
remain unable to refinance their loans.
    I see in the chairman's proposal he has revisited this 
issue, and I look forward to working with him and the committee 
on that very important matter. Before any additional funds are 
released, we need to ensure that these matters are fully 
addressed. I yield back, Mr. Chairman.
    The Chairman. The gentleman from Massachusetts, Mr. 
Capuano, for 2\1/2\ minutes.
    Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, again I 
want to state very clear and very strong support for this 
general proposal. I wish we could have done it the last time, 
but the last time we had this bill before us we had a President 
who said you either do it my way or you have a veto, leaving 
people like me with a choice of either voting yes or letting 
the economy possibly go down the tubes. I wish we could have 
had these things the last time.
    I also hoped that even without them specifically in law, 
that we could have taken people at their word, that they would 
have actually done some of the things that we are now saying in 
this bill that they have to do. I don't think these are very 
difficult things. Individual reporting of what happens when we 
give money to a specific bank. How is that difficult? How is 
that impossible? Yet we had administrators who said they 
weren't going to do it. That is insane. It was never set in the 
law, and anybody who says they wouldn't do it I think is being 
misfeasant, malfeasant, and every other feasant I can think of.
    I personally think that this particular bill is very good. 
It is a step in the right direction. I am looking forward to 
the new Administration hearing us. My hope is that this bill is 
part of the disapproval or approval of the next funds. I hope 
they are not separate. I really think that this bill has a lot 
of things in it that we should have had, that I think will 
serve our taxpayers well and will help this economy, and will 
get us the reporting that we need to make wise decisions in the 
future.
    With that, Mr. Chairman, I yield back the remainder of my 
time.
    The Chairman. The gentleman--I lost my place here--the 
gentleman from California, Mr. Royce, for a minute and 55 
seconds.
    Mr. Royce. Thank you, Mr. Chairman. I would just point out 
that thus far, if we look at Congress' track record on 
addressing foreclosures, it has not been that impressive. If we 
compare that to the private sector and with the HOPE NOW 
Alliance, we have made significant progress there. We have had 
in 2008 alone, 2.2 million foreclosures that were prevented by 
the HOPE NOW Alliance. And I think Mike Castle, had his 
legislation gone through earlier, stemming some of those class-
action lawsuits, we could have had more of those foreclosures 
prevented.
    I want to say that I am encouraged that the chairman has 
included the provisions building on Mike's work in terms of the 
lose-or-pay provision in H.R. 384. I think that will further 
protect loan servicers and make sure we have more workouts. But 
the second $350 billion tranche, frankly, is a continuation of 
a bailout policy that I believe has done little good. And I 
think the ultimate destination of this bailout trend should 
give us all pause.
    With the near certainty of future deficits approaching 6 or 
7 percent of GDP, with the Fed's balance sheet expanding nearly 
$2 trillion, with the promise of another stimulus package 
nearing another $800 billion, we are becoming increasingly 
dependent upon our rescuers: the American taxpayers and U.S. 
debt purchasers. And eventually, bondholders will begin to 
reconsider purchasing U.S. debt. While such an occurrence would 
be catastrophic, avoiding such a scenario would require us to 
take a step back from where we are and eliminate unnecessary 
spending.
    Another ill effect of the bailout trend is the rapidly 
increasing role of the government within financial firms. And 
if you look at the December 17th Wall Street Journal, they ran 
a story entitled, ``U.S. Ratchets Up Citi Oversight,'' in which 
they described the active role regulators are playing in the 
day-to-day operations of Citigroup. So it should come as no 
surprise that Citigroup has now announced it would support 
legislative efforts to allow bankruptcy judges to rewrite 
mortgage contracts, a provision they have historically opposed.
    The Chairman. The gentleman from California, Mr. Sherman, 
is recognized for 2\1/2\ minutes.
    Mr. Sherman. Thank you, Mr. Chairman. If we reject the $350 
billion second tranche--and I doubt that the Senate will do 
so--that is not the end but is, rather, a beginning to try to 
write a better program. But I think it is better to try to 
improve the existing program before we have to vote on the 
second $350 billion on January 21st.
    Chairman Frank has a bill that would improve the program. 
Frankly, I think at this stage it is insufficient. I hope that 
the bill is improved by both managers' amendments and other 
amendments on the Floor. Unfortunately, the chairman's bill 
will not be law on January 21st. The Senate is unlikely to act 
that quickly. So I hope that the Obama Administration will give 
us an explicit, unequivocable, and morally binding commitment 
to follow the House-passed bill, and hopefully also to follow 
some of those amendments that would have passed the House had 
they not been blocked by the Rules Committee, if indeed the 
Rules Committee blocks some important amendments.
    So I think members need to know how the Obama 
Administration is going to carry out this bill, and we need to 
know not just statements of principle, but what they are 
willing to bind themselves morally to do. These should deal 
with dividend and stock repurchases by companies holding TARP 
assets. We should deal with warrants. And I know the chairman's 
bill already deals with warrants. I think the manager's 
amendment, as I understand it, will make those provisions 
stronger and better.
    We need to deal with executive compensation. We need to 
deal with salaries and deal explicitly with stock options, not 
just focus on cash bonuses. And we need to focus on perks. And 
this would include--and this is a minor point, but one of 
importance to my constituents at least--not only leased and 
owned luxury aircraft, but also chartered luxury aircraft.
    So I look forward to working on the House Floor and working 
with the transition team so that on January 21st, those of us 
who were skeptical of the first bill can see sufficient 
improvement to vote to release the second $350 billion. I yield 
back.
    The Chairman. The gentleman from Texas, Mr. Paul, for 1 
minute and 55 seconds.
    Dr. Paul. Thank you, Mr. Chairman. This continued debate 
that has gone on about our rescue programs that we have been 
devising is confirmation, I believe, that there is very little 
understanding as to how we got into this mess. And as long as 
we continue to do the wrong things, I don't see any solution. 
But if we got here by spending too much money, borrowing too 
much money, inflating too much money, the Federal Reserve being 
too involved in central economic planning through manipulation 
of interest rates, and Congress passing too many regulations, 
as long as we think that is benign and has nothing to do with 
it, then I guess it seems very logical that we come up by 
spending more money, borrowing more money, printing more money, 
and writing more regulations, and thinking that we are going to 
get different results. But we don't.
    It seems to me today that the big argument is who the 
central economic planner is. Is it the Treasury or is it the 
Congress, is it the FDIC, is it the Federal Reserve? Believe 
me, central economic planning doesn't work. That is why we are 
in this mess. And that is why we have all the malinvestment, 
all the bad debt. If we are looking for a solution, we have to 
have liquidation of debt. We don't want to prop up the bad 
debt. The problem was created by bad policy. But as long as you 
delay the liquidation of debt and the mal-investment, the 
longer the agony will be.
    But to now devise a system where we are going to buy up 
these bad assets, these worthless assets, and dump them on the 
American taxpayer is absurd. It makes no sense whatsoever. What 
we need is a little bit of confidence that a market economy 
works, and get away from this central economic planning, and 
quit arguing over who is going to be the central economic 
planner. Believe me, it doesn't work. It has been tried. The 
20th Century was supposed to have proven that it doesn't work. 
But here we are, we are giving up on it; more government, more 
spending, and more debt.
    The Chairman. The gentleman from California, Mr. Baca.
    Mr. Baca. Thank you very much, Mr. Chairman, for holding 
this important meeting. I too support the proposal or 
legislation, and hopefully, with some additional amendments.
    Families in my district and throughout America are 
struggling to meet their needs. They need help. Just look at 
the unemployment rate. It stands at 7 percent. In my district, 
it is at 20 percent, and by the year 2010, it is going to be at 
12 percent, and the plight of 8,000 families that are 
foreclosing on homes each day. In my district, the San 
Bernardino-Riverside area, we have the fifth-highest 
foreclosure rate in the Nation. And in my area, the credit 
unions, Arrowhead Credit Union just closed four branches.
    The original TARP laid out certain requirements to make 
sure that underserved communities and homeowners received 
assistance. Why didn't they? That is a question we have to ask 
ourselves. Unfortunately, the Treasury decided to do its own 
thing with capital infusion. We have to change that. There has 
to be accountability. There has to be oversight.
    I thank the chairman for moving fast to draft H.R. 384, 
which creates necessary reform, and I state necessary reform 
that wasn't there to correct the TARP programs. I hope the 
chairman will also consider additional provisions which I think 
will help put the Treasury back on the right path, such as: 
tenant protection to ensure renters don't become homeless if 
their landlord is foreclosed; the inclusion of regional public-
private partnerships in the loan modification program; and the 
clarification existing in statutes to ensure credit unions have 
access to TARP funds.
    I look forward to working with the chairman. I yield back 
the balance of my time.
    The Chairman. We will now do a couple of Republicans in a 
row because of the way the allocations are. We are out of 
balance.
    The gentleman from Illinois, Mr. Manzullo, for a minute and 
55 seconds.
    Mr. Manzullo. Thank you, Mr. Chairman. Unfortunately, all 
the plans submitted dealing with bailing out people's mistakes 
and using taxpayers' dollars to buy out bad loans, that is 
called a trickle-down theory of bailout. Let me give you a 
trickle-up that will work, that only will cost $75 billion, a 
lot less expensive than the trillions we are throwing at it.
    In 2007, 17 million new cars were sold. That dropped to 10 
million. That means that we lost $175 billion directly in the 
economy. That comes out to a trillion dollars by the time you 
extrapolate that through economic control.
    Second of all, when cars and trucks start selling, it moves 
inventory from dealers and factory jobs, pays salaries of 
dealers' employees, refurbishes local and State sales tax 
funds, restarts manufacturing, the economy begins to boom, 
people pay the mortgages, and they start buying houses.
    Third, by offering a tax credit or voucher of $5,000 for a 
brand new automobile, we could restore the auto industry in 
this country from the bottom up, put people back to work, and 
get everything going again.
    Nobody is talking about remedies, we are just talking about 
patchwork, throwing money in from the top. That won't do any 
good. Ford now needs money because it doesn't have enough 
sales. This is so simple. We have to restart manufacturing in 
this country to come out of this slump. Don't knock on my door 
asking for a bailout. Let me give you a voucher for $5,000 to 
buy a brand new car, and you could buy a brand new Patriot, 
made in my district for a little over $200 a month for 5 years.
    Mr. Chairman, we have to restart the economy. Restoring 
manufacturing is the only way. Everything else simply wastes 
time and it wastes money. And I have had enough lobbyists 
knocking on my door wanting their fair share. I yield back.
    The Chairman. The gentlewoman from Illinois, Ms. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman. We passed the 
Emergency Economic Stabilization Act in October, and we did 
that after we had first had not passed it because we were 
concerned about the fact that it was not vetted; we didn't have 
the time to look at it. And here we are again looking at the 
tranche for another $350 billion.
    With all due respect, Mr. Chairman, I think that you 
believed that your HOPE for Homeowners program would help 
400,000 homeowners refinance. To date, HOPE for Homeowners has 
only had 373 applications and 13 loans closed.
    We also had never looked at the insurance, which was part 
of what the Secretary of the Treasury was to use. And we never 
have seen any of the purchase of those toxic assets by the 
Treasury, as the bill called for. Instead, we have had the 
purchase of--or putting cash equity into the banks so that they 
could make loans, which they are not making.
    What has happened here? The Government Accountability 
Office faults the Administration for not tracking what the 
banks are doing with the money. There are no answers to that. 
And now we are supposed to take on another bill that is going 
to cost us $350 billion. How can we go ahead when we haven't 
seen it? Process is important. It is important that we have the 
opportunity to really vet this bill. We have already made so 
many mistakes. There are so many mistakes that have been made 
by the Administration that we really need to have more time. I 
yield back.
    The Chairman. The gentleman from Georgia, Mr. Scott, for 
2\1/2\ minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. We are at a 
critical point in our economy. We have 15 days in which to 
either approve or disapprove of President Obama's request 
through President Bush for these funds. But I think that we 
have no choice in this matter, the economy is in such dire 
shape. Nowhere is it in as much dire shape as in the 
foreclosure and the getting help to homeowners. And I believe 
that if we are successful in moving forward on this $350 
billion, it is very critical that in these 15 days we move 
simultaneously to make sure Chairman Frank's bill moves at the 
same time. If not, we will be making the same mistake that we 
made, or the Administration made, with the first $350 billion. 
They moved it, they moved it out, but they didn't have the 
accountability there. They didn't have the transparency there. 
They didn't put the chief inspector general in place. We didn't 
have the oversight committee in place.
    What this measure will do, Chairman Frank's bill will put 
the accountability, the transparency there, and most 
significantly, will put the foreclosure relief in place and a 
plan. I think one of the most important parts about this bill 
is Title II, the Foreclosure Relief Plan. To be able to get a 
plan in place, get it up to $100 billion,that is what is 
needed.
    And it is about time that we give money to the American 
people, to get the American people involved in this, and no 
better way we can do this than to help them to stay in their 
homes. And I believe if we are able to put this plan together 
with up to $100 billion set aside in which we could move, 
working with the FDIC, with Chairman Bair and that plan that 
has been laid out, we will go a long way to establishing this.
    This appealed to the Obama Administration. We not only need 
the Obama Administration to come and ask for the money, we need 
for them to come and ask for the accountability and the 
transparency that goes with it. If they come and just work for 
the $350 billion and try to move this bill out without having 
the chairman's bill along with it that brings the transparency, 
that brings the accountability, and, most importantly, the 
money to be able to get the homeowners so that they can stay in 
their homes.
    This is what needs to be done. Ladies and gentlemen, this 
economy can no longer sustain 6,300 homes being lost to 
foreclosure every day. This bill will help solve that. Thank 
you, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. If government 
could spend its way out of the financial crisis, we would 
probably already be out of the pickle that we find ourselves 
in. We have $7 trillion to $8 trillion of taxpayer exposure 
liability on the books already. And we have a potential $1 
trillion stimulus plan coming down the pike, although most 
economists agree the last stimulus plan didn't work.
    Now we are looking at the second tranche of $350 billion, 
and we may be faced with a number of lousy options. One option 
is to hand the money over carte blanche. I must admit I find it 
somewhat ironic that those who have become the biggest critics 
of the legislation, frankly, had a lot to do with writing it 
and voting for it in the first place. And I think it 
underscores again that haste can make waste. As important as it 
is for us to act quickly, it is more important for us to act 
smartly when it comes to $350 billion of the taxpayers' money.
    I appreciate the fact that the chairman has put a plan on 
the table. And certainly when it comes to institutions 
receiving funds, accounting for how they spend the money, I am 
in accordance with him. I think that is an important provision.
    But I am worried about several aspects of the plan. Number 
one, I fear it may put us on the road to picking winners and 
losers with the express language dealing with the auto 
industry. I want to know how the people in the Fifth District 
of Texas--they want to know are their employers going to get 
bailed out or is it just select employers who get bailed out?
    Second of all, this government putting observers in the 
boardrooms, it may start out observing; soon they will be 
suggesting, and next they will be mandating. That is no way to 
run a railroad. The institution that brought us the single-
largest deficit in the history of mankind all of a sudden is 
now going to tell American free enterprise how to run their 
business? No thank you. With that I yield back, Mr. Chairman.
    The Chairman. The gentleman from in New Jersey, Mr. 
Garrett.
    Mr. Garrett. Thank you, Mr. Chairman, and Mr. Ranking 
Member, for holding this important hearing. And I would like to 
at this time introduce an op-ed by financial institutions and 
monetary policy consultant Bert Ely, that appeared in the Wall 
Street Journal entitled, ``Banks Don't Need to be Forced to 
Lend.'' It provides a very useful explanation of the role that 
capital plays in our financial institutions, and I recommend it 
to all members. Take the time to read it. With no objection.
    President-elect Obama said Sunday on This Week with George 
Stephanopoulos: ``I, like many, are disappointed with how the 
whole TARP process has unfolded. There hasn't been enough 
oversight. We found out this week in a report that we are not 
tracking where the money is going.''
    I believe that the President-elect is exactly right, and 
that these are concerns that many of us voiced early on, prior 
to the passage of the chairman's original bill. If we had taken 
the time to carefully review, hold hearings, and conduct a 
markup over TARP, perhaps we could have foreseen certain 
problems and included provisions to ensure they do not occur.
    Now it appears that we are heading down the same road all 
over again with the chairman's next bill, a bill, by the way, 
the chairman I believe indicated he does not anticipate 
becoming law. When Congress originally debated and passed TARP, 
I believe a number of the problems that we have experienced 
could have been prevented had we taken the normal order. 
However, his original legislation was simply cobbled together 
and rushed through the process.
    Unfortunately, it appears we are heading down the same road 
again today. Chairman Frank released his draft this past 
Friday, and now less than a week later, we are considering that 
exact bill on the Floor this week. So I was pleased to join the 
ranking member in writing a letter to the chairman asking him 
to put this through regular order so we don't make the same 
mistakes that we did last time.
    I was also pleased to join the ranking member when I say 
that we have not seen a compelling case to release the second 
tranche of the TARP funds. In fact, I have seen no case made as 
to why it is necessary to release the other $350 billion of 
taxpayer funds. I have also not seen any evidence that it was 
the original $350 billion that has achieved its original 
purpose of our Nation's financial system. Rather, it was 
actions by the Fed and private marketplace that helped in that 
regard. I yield back.
    The Chairman. The gentlewoman from California, Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman, for 
arranging today's hearing. From the beginning of this financial 
crisis, I have been vocal about the link between the housing 
crisis and the financial crisis we are facing. The economy will 
not recover without immediately addressing the housing crisis. 
In fact, the housing crisis is the main reason why I initially 
supported the Emergency Economic Stabilization Act. However, 
the mismanagement of the first $350 billion has led to banks 
receiving funds without mandates to provide loans to consumers 
or mortgage loan modifications to struggling homeowners.
    The use of TARP funds for unintended purposes has shaken 
the confidence of this Congress. We intended for TARP to remove 
toxic assets and nonperforming loans from the marketplace, 
modify mortgages, and increase the availability of credit. To 
date, no TARP funds have been directed to systematic loan 
modification or increased lending. This is especially shocking 
given the fact that the housing market remains in a free fall. 
Credit Suisse estimates that 8 million homes, representing 16 
percent of all mortgages, will be in foreclosure in the next 4 
years, with 1.7 million foreclosures in 2009. According to Case 
& Shiller, housing prices have fallen 18 percent in the last 
year, and the bottom is nowhere in sight.
    The need to address the foreclosure crisis head-on is why I 
introduced H.R. 7326 in the last Congress and H.R. 37 in this 
Congress, legislation to enact Federal Deposit Insurance 
Corporation Chairwoman Sheila Bair's loan modification plan 
into law. This systematic approach has been successfully 
implemented at IndyMac Federal bank, and has resulted in over 
5,000 IndyMac borrowers avoiding foreclosure.
    Mr. Chairman, I want to thank you. And I am pleased that 
you have included my legislation, H.R. 384, the TARP Reform and 
Accountability Act that the House will soon vote on, because it 
is clear that the economy cannot recover without the recovery 
of the housing market. The housing market must be repaired 
through our efforts with TARP.
    And Mr. Chairman, let me just say for the record, I will be 
giving to you a copy of information that has been released by 
the voluntary program HOPE NOW, leading people to believe that 
they have done 2 million mortgages. That has not happened. That 
is why it is so important that this bill passes, so we can do 
some real loan modifications.
    The Chairman. The gentleman from Georgia, Mr. Price.
    Mr. Price. Thank you, Mr. Chairman. Today, we are once 
again examining an important issue that says a lot about what 
we believe the role of government to be. We are being asked to 
entrust Treasury with the authority to spend an additional $350 
billion, a huge sum of money, and allow them to take on 
additional risk to the taxpayers by pursuing modifications that 
have not proven a wise investment.
    We can all agree that the oversight of the TARP program has 
been wanting. Treasury has failed to answer basic questions, 
struggled to track the billions of taxpayer dollars, and seems 
to have no way to measure the success of the program.
    When Secretary Paulson initially approached Congress with 
an urgent request for funding and broad authority to stabilize 
the economy, a representative from Treasury admitted that the 
Department was arbitrarily asking for a number that would be so 
large that it would undoubtedly calm the markets. In fact, when 
asked how they came up with the $700 billion they said, ``We 
needed a really big number.'' Not very encouraging.
    There have been no indications that the last tranche of 
funding is needed to further stabilize the economy. There have 
been no emergency meetings to explain why this money is 
necessary and how it would be used effectively to justify the 
release. In fact, just a few days ago, on January 8th, Mr. 
Kashkari described our financial system as ``fundamentally more 
stable'' than when EESA was passed.
    Ultimately, we have seen through the failures of the TARP 
program and HOPE for Homeowners that the government is not the 
solution to all our problems. We have seen bailout after 
bailout, yet there doesn't seem to be any relief for our 
constituents. It is because of the hasty passage of TARP that 
we are now in a position to consider sweeping changes to the 
program.
    Regular democratic process would ensure that all Members of 
Congress can make their voice heard on this important issue. To 
say that there isn't time to have a markup is disingenuous and 
not true. We should take the time necessary to ensure that we 
are truly acting in the best interests of the American people. 
Perhaps if we had taken that time to allow markup the first 
time, we wouldn't be in the situation we find ourselves now.
    Rather than entrenching our government in $350 billion of 
additional debt, I think it is time we start considering a 
positive solution that embraces American principles, American 
values, and American vision, none of which appear in the 
current bill.
    The Chairman. The gentlewoman from Minnesota, Ms. Bachmann.
    Mrs. Bachmann. Thank you, Mr. Chairman. Today this 
committee is meeting to discuss the detailed ways in which the 
$350 billion of TARP might be spent, but yet we have not held 
one single hearing on the merits or necessity of releasing this 
second tranche. The committee is proceeding as if the decision 
has already been made to release this second $350 billion 
without holding any substantial debate on whether or not it is 
necessary to stabilize the financial markets.
    When the original bailout was passed, we were told that 
$700 billion was a big number, as the previous Congressman had 
said, picked out of thin air, needed for one purpose, to calm 
the markets. We were not told that the U.S. Treasury must spend 
every penny of it.
    I am concerned, Mr. Chairman, that the committee is moving 
forward with undue haste. Is it necessary to release the second 
tranche for the state of our financial markets? While I agree 
that TARP does have serious flaws and we should look at ways to 
address them, Congress should not rush to vote on this bill in 
the very next few days. In fact, I think it is highly ironic 
that today's discussion will focus on legislation that 
supposedly implements more transparency and oversight of a 
government program, and yet Congress is once again moving away 
from those principles upon the very consideration of this bill. 
Congress owes it to the hardworking taxpayers of our country to 
take a careful look this time rather than repeating the 
mistakes of last October. And I yield back.
    The Chairman. The gentleman from Texas, Mr. Green, for 2\1/
2\ minutes.
    Mr. Green. Thank you, Mr. Chairman. I will be submitting a 
statement for the record. I will be as terse as possible with 
my oral statement.
    Mr. Chairman, this bill is necessary, and I am grateful 
that you have introduced it, because the public is concerned 
about two things primarily. One, how has the first tranche been 
utilized, how has that money been spent; not what banks did it 
go to, not what financial institutions received it, but how was 
it utilized within the financial institutions? This bill 
addresses this.
    The second thing that the public is concerned about is 
foreclosure relief. This bill addresses foreclosure relief. We 
were under the impression that we would get some help for the 
toxic assets in the first tranche. Not enough has been done in 
this area. This bill addresses the toxic assets. If we don't 
address the toxic assets, as Congresswoman Waters, Chairwoman 
Waters has indicated, we are not moving forward on the reason 
that many persons supported the first piece of legislation.
    I absolutely, Mr. Chairman, endorse what you are doing. I 
support it. And I beg that we move as expeditiously as 
possible, because the foreclosure crisis has not gone away. It 
is being exacerbated by our failure to act on the foreclosure 
crisis. And I will submit the remainder of my statement for the 
record, and yield back the balance of my time.
    The Chairman. I thank the gentleman. We have a minute and a 
half remaining on our side, which I am going to use to say 
that--a couple members said we should not be making the 
decision to release the TARP. We are not. I know people don't 
always read what they voted for, but I would have thought they 
might have had somebody read it to them after the fact rather 
than wait for the movie. George Bush decided to release this 
yesterday.
    The bill that members here debated, and which we put in as 
a safeguard, said the President could ask for the second $350 
billion, and Congress would then have 15 days within which to 
consider legislation. So when I am asked, why are we moving 
now--because George Bush, a person for whom members on the 
other side used to have some regard--I understand that they 
don't like it now when we bring him up and they cannot 
dissociate themselves from him quickly enough, but he is the 
President still. And he triggered it yesterday. He did it at 
the request of the new President. We are now in this 
situation--
    Mr. Bachus. Mr. Chairman?
    The Chairman. If the gentleman is asking me to yield, I 
yield.
    Mr. Bachus. A point of procedure. Is this part of our 
opening statements?
    The Chairman. I said, if the gentleman had been listening, 
that we had a minute and a half left. And I was using it.
    Mr. Bachus. I apologize.
    The Chairman. Several other members on this side yielded 
back time. And I will give myself an extra 10 seconds for that.
    Mr. Bachus. I think an extra 20 seconds.
    The Chairman. The point is that George Bush said he wants 
this spent. If we do nothing, if we follow the timetable 
members of the other side want, by the time we do anything it 
would be moot; i.e., it would be irrelevant. We are acting now, 
and we started this process last week in anticipation of this 
happening. So that is the reason for the legislative schedule.
    The bill that passed the Congress and was signed into law 
set a timetable of 15 days, after which congressional action 
will be irrelevant, and George Bush has triggered that.
    Mr. Garrett. Would the chairman yield?
    The Chairman. Yes.
    Mr. Garrett. Just on a clarification--and I may be wrong--
was it not President-elect Obama that requested President Bush 
to--
    The Chairman. Not only was it, I said that. I understand. I 
am sorry. I guess I am having a harder time with my diction 
than usual. Because I said--
    Mr. Garrett. Because a second ago, you just said it was 
President Bush who wanted to spend. It is Obama who wanted to 
spend it.
    The Chairman. I will take back my time. And the gentleman 
is very much in need of clarification. I said in the statement 
I had just finished, President Bush did it at the request of 
the President-elect. The President-elect, I didn't say his 
name, that is Obama, the President-elect. So when I said it was 
done at the request of the President-elect, I made exactly the 
point the gentleman just made. Yes, but George Bush did do it. 
He is still the President. And the timetable is controlled by 
that.
    We have 6 days from yesterday within which time the House 
has to vote. We could just do nothing and have an up-or-down 
vote. Many of us would rather have a chance to say what we 
think ought to be in there and get the new President's response 
before the up-or-down vote.
    The witnesses will now begin. We have two witnesses from 
the financial regulatory area. We will begin with Vice Chairman 
Donald Kohn of the Board of Governors of the Federal Reserve. 
Mr. Kohn.

STATEMENT OF DONALD L. KOHN, VICE CHAIRMAN, BOARD OF GOVERNORS 
                 OF THE FEDERAL RESERVE SYSTEM

    Mr. Kohn. Thank you, Mr. Chairman. I will read a shorter 
version of my testimony, and I ask that my full testimony be 
submitted for the record.
    Chairman Frank, Ranking Member Bachus, and other members of 
the committee, I appreciate this opportunity to review some of 
the activities to date of the Treasury's Troubled Asset Relief 
Program, or TARP, and to discuss how additional funding could 
be used to strengthen our financial system and promote economic 
recovery. A well-functioning, stable financial system is 
essential for healthy economic growth. Unfortunately, as you 
know, the financial crisis that began more than a year ago 
intensified considerably in September of last year, and 
manifested in many countries that it had not yet touched. And 
this led to grave concerns about the stability of the global 
financial system itself.
    Although the economic impact of the worsening crisis has 
been severe indeed, an international financial collapse, which 
seemed a real possibility in early October, would 
unquestionably have led to economic outcomes far worse even 
than those we are currently experiencing. The existence of the 
TARP allowed the Treasury to react quickly by announcing on 
October 14th a plan to inject $250 billion of capital into U.S. 
financial institutions. Although the Capital Purchase Program 
has been in place less than 3 months, many banks, both large 
and small, have applied for and received capital from this 
program.
    The Treasury's actions were complemented by the Federal 
Deposit Insurance Corporation's expansion of bank liability 
guarantees and by the Federal Reserve's measures to increase 
liquidity and support the functioning of key credit markets. 
Together, these actions helped to bolster confidence in our 
lending institutions, enabled them to access funds, and make 
loans.
    As contemplated by the legislation, TARP funds have also 
been used on a targeted basis to prevent potentially disorderly 
failures of systemically critical financial institutions, 
failures that would have had highly adverse consequences for 
the system as a whole. These actions, together with similar 
measures in other countries, have brought greater stability to 
our financial system.
    Moreover, injections of new capital are moderating the 
powerful pressures on the financial institutions that received 
the injections to deleverage by selling assets and pulling back 
from new lending. The Federal banking regulators, pursuant to 
their joint November 12th statement, are working to help ensure 
banks that they are fully meeting the needs of creditworthy 
borrowers. Bank lending to creditworthy borrowers is good for 
the economy. It is also good for the profitability of banks and 
supports their safety and soundness. Regarding the future, the 
remaining TARP funds will play an essential role in further 
strengthening the financial system and restoring normal credit 
flows.
    An important use of these funds will be to step up efforts 
to avoid preventable foreclosures. Preventable foreclosures 
harm not only the affected borrowers and their communities but 
also through their effects on the housing market, the broader 
economy, and the financial system. Although a number of efforts 
are underway to address the problem of preventable 
foreclosures, more needs to be done, and it needs to be done 
quickly.
    In my written statement, I outline several possible 
approaches that appear promising. A second broad use of new 
TARP funding, besides foreclosure mitigation, would be to 
support programs to help restart key credit markets. The 
Treasury and the Federal Reserve recently announced such a 
program, the Term Asset-Backed Securities Loan Facility, which 
is designed to stimulate securitization activity in the market 
for asset-backed securities collateralized by a range of 
consumer and small business loans. If the program is 
successful, it could be increased in size or expanded in scope 
to provide financing for additional types of securities such as 
commercial mortgage-backed securities, for which the markets 
are currently distressed.
    Finally, I would expect the bulk of the remaining TARP 
funding to be devoted to strengthening financial institutions, 
thereby supporting the normalization of credit markets and the 
flow of new credit. Some of this support might take the form of 
additional capital injections, both to offset credit losses and 
to further expand lending capacity. In addition, prudence 
requires that funds be held in reserve as needed to address 
urgent contingencies, such as averting the disorderly failure 
of a systemically important institution. And the Treasury may 
also wish to consider whether to supplement injections of 
capital with steps to reduce the uncertainty about values of 
assets held by financial institutions. As these resources are 
committed, it is important that the rationale for the 
commitment be provided and agreed upon.
    History clearly shows and recent experience confirms that 
because of the dependence of modern economies on the flow of 
credit, serious financial instability imposes 
disproportionately large costs on the broader economy. The 
rationale for public investment in the financial industry is 
not any special regard for managers, workers, or investors in 
that industry over others but, rather, the need to prevent a 
further deterioration in financial conditions that would 
destroy jobs and incomes in all industries and regions. The 
public is entitled to demand that a full and appropriate range 
of accountability mechanisms be put in place to protect the 
public interest and promote the intended objectives of the 
program.
    In addition, concrete actions should be taken to ensure we 
do not face a similar crisis in the future. Thank you. I would 
be pleased to take your questions.
    [The prepared statement of Vice Chairman Kohn can be found 
on page 135 of the appendix.]
    Mr. Kanjorski. [presiding]. Thank you very much, Mr. Kohn.
    The next presenter will be Mr. John Bovenzi, Deputy to the 
Chairman and Chief Operating Officer of the Federal Deposit 
Insurance Corporation. Mr. Bovenzi.

STATEMENT OF JOHN F. BOVENZI, DEPUTY TO THE CHAIRMAN AND CHIEF 
    OPERATING OFFICER, FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Bovenzi. Thank you, Congressman. My thanks to Chairman 
Frank, Ranking Member Bachus, and the members of the committee. 
I appreciate the opportunity to testify today.
    Despite many positive efforts in recent months to stabilize 
the Nation's financial markets and to reduce foreclosures, 
credit remains tight and rising foreclosures continue to push 
down home prices in communities across the Nation. Troubled 
assets continue to mount at insured commercial banks and 
savings institutions, imposing a growing burden on industry 
earnings and restricting lending. Returning the economy to a 
condition where it can support normal economic activity and 
future economic growth will require a number of strategies.
    As you know, the FDIC has implemented the Temporary 
Liquidity Guarantee Program (TLGP) to help stabilize the 
funding structure of financial institutions and expand their 
funding base to support the extension of new credit. The 
program has had a positive impact. There is a high level of 
participation, and it has significantly reduced credit spreads 
for participants.
    In addition to the TLGP and other Federal Government 
efforts, the additional funds for the Troubled Asset Relief 
Program, with appropriate safeguards, would also provide 
important and necessary support to assist financial 
institutions in making loans available to creditworthy 
borrowers and create incentives to avoid unnecessary 
foreclosures. For example, the FDIC believes that addressing 
the problem of troubled loans and other assets continues to be 
vitally important.
    Uncertainty about the potential losses embedded in balance 
sheets is constricting lending to consumers and businesses, and 
discouraging investors from providing fresh capital. A program 
to address the problem of troubled assets would help build the 
foundation for a greater flow of credit and the investment of 
new private capital into the financial system.
    A program to address troubled assets should meet three main 
principles: accountability; transparency; and viability. It 
should be a standardized approach that establishes a fair and 
transparent program, with clear benchmarks for measuring 
performance.
    In addition to these strategies, it is critically important 
that there be a nationwide program for modifying loans to 
prevent unnecessary foreclosures. Minimizing foreclosures 
continues to be essential to the broader effort to stabilize 
financial markets in the U.S. economy. If we do nothing, we 
estimate there will be another 4 to 5 million foreclosures over 
the next 2 years and the very real possibility that home prices 
could overcorrect on the down side. They are already down 25 
percent since their peak in 2006.
    There is a strong business case for modifying loans. When a 
borrower is able to continue making payments after 
restructuring, investors and lenders are better off than having 
to deal with a foreclosed property. This is especially true 
when the housing market has declined sharply.
    In previous testimony, Chairman Bair outlined our plan for 
a nationwide loan modification program. We believe the program 
could prevent as many as 1\1/2\ million foreclosures on owner-
occupied homes. It would set standards for loan modifications 
based on our experience at IndyMac Federal Bank. It also 
includes the defined sharing of losses on any default by 
modified mortgages meeting those standards. This would allow 
unaffordable loans to be converted into mortgages that are 
sustainable over the long term when the value of the modified 
loan exceeds that of foreclosure. While we believe this 
approach will be successful, we recognize there is no silver 
bullet to address the foreclosure problem, and are willing to 
work with others in the assistance of the implementation of 
programs that result in affordable, sustainable loans.
    In conclusion, the incoming Administration will face a 
number of serious economic challenges that require a variety of 
approaches to successfully restore confidence in the financial 
system. The additional TARP funds are essential for financial 
stability. The FDIC supports the request for additional TARP 
funds. We look forward to working with this committee to 
address the significant challenges facing the economy and the 
American people.
    I will be pleased to answer any questions the committee 
might have. Thank you.
    [The prepared statement of Mr. Bovenzi can be found on page 
100 of the appendix.]
    The Chairman. I want to thank both of you. I want to be 
clear that throughout this, we have been working on a 
cooperative and bipartisan basis with the Administration. You 
represent, obviously, two of the major regulators of our 
banking system.
    I would like to emphasize one point which you made. Some of 
those who have been critical have said we shouldn't have the 
release of the second $350 billion--this bill doesn't do that--
have made what seem to me to be contradictory arguments. Not 
everybody has made both arguments, but some have: one, it was 
never needed in the first place; and two, that it has worked--
that there was never a problem, but it has solved the problem 
that they earlier said didn't exist.
    If we had not enacted the original $700 billion, Mr. Kohn, 
what in your judgment would be the situation today?
    Mr. Kohn. If you had not enacted that bill, Mr. Chairman, I 
think we would be in worse shape today. I think the financial 
system was in those weeks, late September and early October, on 
the way to seizing up in a much more fundamental way than it 
had already done.
    There was a palpable loss of confidence across a broad 
array of investors and lenders, and I think that it was 
absolutely necessary. If that had continued and intensified, 
the lending issues that we still see in the economy would be 
even worse. Businesses and households would have even less 
access to funds.
    The Chairman. Thank you. Mr. Bovenzi, particularly from the 
standpoint of a bank regulator, you are probably the bank 
regulator with the broadest range because of the deposit 
insurance, what would the state of the banking industry and the 
system, what would that be like if we had not passed this $700 
billion?
    Mr. Bovenzi. To me, it is clear that the state of the 
banking industry would have been in far worse shape without the 
passage of the funds and the additional programs put in place 
by the Federal Reserve and the FDIC. They all contributed to 
helping substantially. Nevertheless, there are still 
significant problems.
    The Chairman. I appreciate that. And that is part of the 
problem politically. No one has ever gotten elected to office 
by going to the public and saying, look, things are lousy but, 
boy, would they have been lousier if it hadn't been for me. 
That is the situation that those you administer are in.
    My own view is it could have helped more. Now that 
President Bush, at the request of President Obama, has decided 
to trigger this, we have a short window in which we, the 
Congress, can speak out as to what we think ought to be there.
    I think there are two major concerns. There are others. One 
was that money given to the banks, not given but infused into 
the banks as capital, people did not see relending and did not 
see any assistance on that. We think going forward we have a 
better approach. But the single biggest one obviously is the 
absence of foreclosure, and the bill clearly talked about 
foreclosure. It was a major part of getting support for it on 
both sides.
    My question has two parts: one, the reason for foreclosure, 
and I think it is important I guess to say, and maybe I will 
make it just one part, I don't want to go over my time, there 
are those who say those people took out the loans and they 
weren't wise and they shouldn't have done that. What is the 
argument that says foreclosure diminution is just charity for 
people who got themselves into trouble in the first place and 
we ought to stay out of it? What is the broader economic 
argument for it? Mr. Kohn?
    Mr. Kohn. Mr. Chairman, I think foreclosures are 
contributing to problems in the housing market and the broader 
economy. Foreclosures impinge on values in the community at 
large, even for those people still owning their homes and 
paying their mortgages. When there are foreclosed homes in the 
community, they see values go down more broadly. And the 
decline in values, the decline in home values results in more 
losses for banks and other lenders and it causes them to 
tighten up credit more broadly.
    So I think foreclosure prevention would be helpful in 
ameliorating the issues in the housing market. It is not a 
cure-all.
    The Chairman. Let me ask Mr. Bovenzi, because you and 
Chairman Bair work at an agency whose statutory role primarily 
is the stability of the banking system. Is it just charity that 
leaves you and Chairman Bair to be so concerned about 
foreclosures? Not that it is a bad thing. You could be nice 
people.
    Mr. Bovenzi. Foreclosure mitigation is going to help the 
economy overall. Foreclosures put a downward pressure on price. 
If we can create sustainable, affordable mortgages, it helps 
put a floor under those home prices which will help the overall 
economy.
    For those who look at it and ask why folks are getting a 
benefit that they are not, there are certainly other programs 
in place, and steps have been taken to reduce mortgage rates. 
Many people are looking to refinance their mortgage rates and 
reduce their repayments through those means. The program we 
have at IndyMac is also designed to help reduce interest rates 
to make sustainable, affordable mortgages.
    The Chairman. Thank you. The gentleman from Alabama.
    Mr. Bachus. I appreciate the gentleman's testimony.
    To follow up on the foreclosures, as this housing crisis 
has unfolded, it seems we have had an evolution in the reason 
for foreclosures. Originally, we were all concerned about the 
adjusting interest rates on the ARMs. As housing prices then 
fell, we began to be concerned about negative equity, which is 
a different problem.
    Recently, I think we have a third problem which I think is 
much harder to address and I want to ask you to address it, and 
that is the economy, the loss of jobs, and the unemployed. How 
do we address--when you are talking about default and 
foreclosures among the unemployed, is it possible to address 
that situation, Mr. Kohn and Mr. Bovenzi?
    Mr. Kohn. Congressman, I think the major way to address 
that situation is through macroeconomic policy that promotes 
jobs growth. And I think growth in jobs and the prevention of 
further unemployment will depend on a number of things that we 
can do.
    Fiscal policy is important, what the Federal Reserve is 
doing by lowering interest rates essentially to zero and moving 
on the credit fronts. And I think the TARP money to help 
stabilize the banking system and get credit rolling again to 
households and businesses will also be helpful in limiting the 
amount of unemployment and turning the economy around.
    Mr. Bovenzi. I agree. No one solution can solve this 
financial and economic crisis, and loan modifications to make 
them affordable can help where there is no income. However, 
other fiscal policies, programs, and measures are necessary.
    Mr. Bachus. I am not sure. I guess that is my point. When 
you are talking about the unemployed, foreclosure modification 
or these programs are not of much use, would you agree? How 
would the TARP money be used to help people?
    Mr. Kohn. But I think a lot of foreclosures are occurring 
for people who are still employed.
    Mr. Bachus. I am talking about the unemployed, and that is 
the growing problem.
    Mr. Kohn. That we can move against. I agree, it is very, 
very difficult, as Mr. Bovenzi said.
    Mr. Bachus. You have heard Mrs. Bachmann and Mr. Price. 
This number, $700 billion, was a really large number. You spent 
$350 billion and Secretary Paulson says that it has stabilized 
our financial markets and it has restored confidence. You said 
that today to a great extent.
    Tell us how you are going to use this other $350 billion. I 
think we have a right to know.
    Mr. Kohn. I think it is really up to the Treasury 
Department, who will be charged with spending this, the 
incoming Treasury Department, to say that. I think I laid out a 
number of suggestions in my testimony: foreclosure prevention; 
further extension of credit; credit help; capital to financial 
institutions.
    Mr. Bachus. But you just laid out several broad 
possibilities. As a Congress, it is pretty difficult for us 
just to say, here are some possibilities. As you said, the next 
Administration will have to make those decisions. But this 
Administration is asking for money on behalf of the next 
Administration which is kind of a--and I don't think I ever 
thought I would see this day when an Administration that hasn't 
told us they need it is asking on behalf of an Administration 
that may need it, but has yet to tell us what they need it for. 
Can you see our difficulty with that?
    Mr. Kohn. I think the country is in a difficult transition 
period. And therefore, lines of authority are in the process of 
being shifted. I think the two Administrations are working 
together, the incoming and outgoing, very, very well.
    Mr. Bachus. Would you not agree that you spend $350 
billion, that adds to the deficit, and a deficit that is 
already at a trillion dollars a year, does that concern either 
one of you gentlemen?
    Mr. Kohn. I think you need to ask what you are spending it 
for and whether you are getting value for that spending. And I 
think reinforcing and stabilizing the financial system is good 
value for that spending.
    Mr. Bachus. The Secretary of the Treasury made a statement 
last week that he thought the financial system is stable.
    Mr. Kohn. I think it is certainly more stable than it was 
before.
    The Chairman. The gentleman's time has expired.
    Mr. Bachus. Thank you.
    The Chairman. Mr. Kohn, I want to take 10 seconds, and I 
believe in your testimony you pointed out that the $350 billion 
is not all going to be expended, that a substantial part will 
be returned to the Treasury?
    Mr. Kohn. That is right. You are buying assets.
    The Chairman. The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    I am going to do something that is exceptional, and that is 
to give my friends on the Minority a little credit for raising 
the question. I think it is a legitimate question, and that is, 
did we have the time the first time around to go through 
regular order and consider all of the aspects of the 
legislation?
    The answer in my estimation is ``no.'' We had to make a 
very quick decision because the Secretary of the Treasury and 
the Federal Reserve Chairman informed us that we were on the 
road to meltdown without it and had a very limited time to act. 
The Congress, unfortunately, and this committee waived some of 
its regular rules and procedures. As a result, we did not write 
the best bill in the world, taking into consideration 
everything we probably should have.
    That being said--
    Mr. Bachus. If the gentleman will yield just for one 
second, I think I was referring to this time we are not in a 
meltdown, and we should go in regular order and have committee 
hearings.
    Mr. Kanjorski. I think when you are winning your point, you 
should stay silent.
    That was the state of affairs. I wish this time we had more 
time to go through regular order and write a bill that would be 
more representative of the thinking of Congress and the 
American people. Unfortunately, we are restricted, as the 
chairman has indicated, with the 15-day period, and that is it. 
So we have an opportunity now to inject the additional $350 
billion with some indications as to where Congress thinks this 
action should be taken and how, or to take no action, do 
nothing, and let the incoming new Secretary act in accordance 
with any way they wish.
    I do not think we can correct that very much. But I would 
suggest that we are also going to be going into a situation to 
write a new stimulus bill, and that also will have time 
constraints to it. Already, the President-elect has asked to 
have that in his possession by the middle of February, I think 
the Speaker has indicated her desire to do that, and I think it 
is essential that speed be used. However, may I suggest that I 
am also one who thinks that we should have regular order, and 
to get that bill before Congress and to get the additions from 
both sides of the aisle in the form of amendments and otherwise 
is very important.
    So I would urge my leadership, if I may, to move as quickly 
as possible to bring that bill to the various committees of 
jurisdiction so that we can work our input as the American 
people like.
    I humorously have indicated over the last several weeks 
that I have no intention of becoming the chairman of the Potted 
Plant Caucus. But sometimes I am getting the idea we may belong 
to that caucus around here. It is important that the House of 
Representatives and this committee take back its prerogatives. 
That does not mean that every time we get an issue like this, 
by knee-jerk reaction, the Minority or the Majority have to 
take positions that are just obviously not credible positions 
but are really incredible insofar as they do not serve the 
purposes intended.
    So I urge my members on the Minority side to work along 
with us and cooperate with us. Let us reassert the prerogatives 
of Congress, and the House in particular.
    Do you believe that this Administration, and indeed the 
next Administration, could just do a better job of informing 
the American people, and Congress for that matter, as to how 
these funds are intended to be used, will be used, and are 
used? In this day and age of the Internet and the Web and 
everything else that we deal with for the use of public 
relations and how to get information out, it seems to me we are 
doing an awfully poor job. The average constituent that I talk 
to is asking me, ``What did they do with the money? What can we 
expect them to do with the additional money, and is it really 
important?''
    Mr. Kohn and Mr. Bovenzi?
    Mr. Kohn. Congressman, I agree with you, the 
Administration, outgoing and incoming, can do a much better job 
explaining the strategy behind what they are doing, have it 
coherent, how it adds up, and inform the public what they have 
done and monitor the effects that is having. I think 
improvements are required possibly all around.
    Mr. Bovenzi. I would agree. The principles in the bill 
before the committee--transparency and accountability--are 
critically important.
    Mr. Kanjorski. I yield back the balance of my time.
    The Chairman. The gentleman from Delaware.
    Mr. Castle. Thank you, Mr. Chairman.
    Isn't that a two-way street? Are we hearing enough from the 
institutions about what they are doing with the money? It is 
confusing to me in watching all of this. You talk about capital 
acquisitions, but occasionally they go out and buy things and 
their lending doesn't seem to increase. I am not sure we as a 
Congress understand what these institutions have been doing. It 
seems to me that report is very important as we consider these 
various proposals. Am I correct about that, or am I just 
missing the writing on the wall?
    Mr. Kohn. I think we need to do a better job monitoring 
what is going on out in the institutions and getting reports 
from them that then the Treasury and the regulators can forward 
on to the Congress and the American people to give them a 
better sense what is going on and to make sure that the funds 
that are being, as best we can, the funds that are being 
allocated are being used for the purposes intended.
    Mr. Castle. Maybe we can start by demanding that they 
account more themselves and then we review whatever that 
accounting is.
    Mr. Kohn. Exactly. We need to be monitoring. A principal 
way of monitoring would be to have them report to us what they 
are doing.
    Mr. Castle. Mr. Bovenzi, looking at your testimony on page 
9, you talk about the original intent of the TARP funds, which 
was to purchase troubled assets in the original economic 
stabilization bill. You speak pretty strongly about that.
    One question, how much of the $350 billion should be used 
for that, if you have a number? And are you, by making that 
suggestion, being critical of the capital acquisitions and the 
other things that the money was used for instead of the 
troubled asset purchase program that is stated in your 
testimony, and a lot of us thought, was what was the original 
intent of the legislation?
    Mr. Bovenzi. The point I am trying to make is that there 
are still assets in the balance sheets of banks and thrifts 
with uncertain value that are causing disruptions in the market 
system. They require some form of government guarantee or 
assistance to help stabilize the markets before government can 
step out of the picture.
    I don't have an exact number for what amount of the $350 
billion should be used for such a program. My point is to 
demonstrate that there is still an issue with financial 
institutions.
    Mr. Castle. My concern is we didn't do that originally, and 
now do we have sufficient dollars to put into this program to 
do it now to be really of help? I am not sure that you can 
answer that. It is a concern we all need to have since it would 
be shifting gears if that were to happen.
    Changing subjects for a moment, Mr. Kohn, as I understand 
it, the Federal Reserve is a member of the HOPE for Homeowners 
Board of Directors. I don't know your direct involvement in 
that, but obviously that program has not lived up to 
expectations. The original projections we heard were 400,000 
troubled borrowers would be helped by this, and it is a de 
minimis fraction of that.
    Can you give us your assessment of that program as it was 
intended and why it has not worked and what, if anything, 
should be done to help with that?
    Mr. Kohn. I think there were a number of issues there. It 
was not sufficiently appealing to both borrowers and lenders. 
They felt it had a lot of troublesome aspects in terms of the 
requirements, the operational requirements to engage in the 
program. It was relatively expensive, they felt, relative to 
the values they would get out of it. Now the HOPE for 
Homeowners board has made some changes to try to make it more 
attractive for lenders to participate. Whether that is 
sufficient to get participation up, I think, is a very open 
question.
    Chairman Frank has in his bill some more efforts to really 
put in essentially public money more into that program to make 
it more attractive, and I think they could be successful.
    I think it is conceptually a good way to proceed or a good 
aspect of foreclosure mitigation, to help people with the 
principal writedowns, and then reinsure through the Federal 
Government the loans after that. But we need to simplify and we 
need to make it less expensive.
    Mr. Castle. Thank you. I yield back.
    The Chairman. The gentlelady from California.
    Ms. Waters. Thank you very much. I would like to thank our 
panelists for being here today.
    Basically, we have been struggling with how to deal with 
the foreclosure crisis. Again, I think that Chairman Bair of 
the FDIC has shown us how you can be successful in getting the 
homeowners to come in, in the way that you talk to them and the 
letters that you send, and I like the idea that she has 
inserted into her program the writedown of interest. I think 
that is extremely important to modifications.
    And also, I like the HOPE for Homeowners program that 
allows the bank to write down the mortgage 10 percent and to 
help funnel those homeowners into refinancing with FHA. I think 
these two programs are very solid and they make a lot of sense 
and are a good way to modify or refinance.
    What is the difference between these two programs and what 
Fannie Mae and Freddie Mac are doing?
    Mr. Bovenzi. I can talk a little bit about the IndyMac 
program versus Fannie and Freddie. They are very similar in a 
lot of ways. I think at IndyMac what we did--
    Ms. Waters. I know what you did at IndyMac. What is the 
Fannie and Freddie program? How is that different?
    Mr. Bovenzi. They are looking to write down interest rates 
as well. They have started from the premise of looking at loans 
that were 90 or more days past due, whereas at IndyMac we 
started looking at loans 60 or more days past due. You still 
have to do a net present value analysis to see if a 
modification is worthwhile. But that is one difference between 
the two programs.
    Ms. Waters. I have concerns about having to be 60 to 90 
days delinquent. What if Mr. Jones comes in? He is current on 
his mortgage, but there has been a change in income, as I have 
witnessed in talking with some of the people who are in 
potential trouble, and his fixed income is reduced by the 
increased cost of living. His automobile insurance has gone up, 
his utilities have gone up, and he comes to you and says, look, 
I have been doing well with my payments, but now I can't afford 
them in the same way because my income has not increased but my 
expenses have, because I have to pay more for automobile 
insurance and these other things; what can you do for me?
    Mr. Bovenzi. Let me talk about two different situations. At 
IndyMac, there were some loans that the institution owned 
directly, and so the FDIC took ownership of those loans. There 
were other loans that IndyMac serviced for other investors or 
owners, so we would need the consent of those owners in order 
to modify a loan.
    It is more difficult to show the investors on a loan that 
is performing why it should be modified. That becomes a more 
problematic solution for what you are suggesting.
    For the loans that are owned directly by the group that is 
doing the servicing, where they have the financial interest, 
they can look at the kind of situation you talked about and 
say, yes, this borrower's income has gone down, and make an 
assessment. If it looks like they won't be able to continue to 
afford the same payment, then they can make a decision whether 
to modify the loan or not. So there is greater flexibility.
    Ms. Waters. Are you telling me that an investor, that we 
have a loan, where we have a willing citizen who will pay, and 
all you need to do is stretch that loan out to 30 or 40 years 
or slightly reduce the interest rate, that they would not be 
willing to participate in keeping that homeowner in their home 
and not losing any money?
    Mr. Bovenzi. In some circumstances, they may be willing. 
And in others, they may look at the loan and say it is 
performing as-is. If I have an obligation to maximize the value 
to the different investor groups, why should I reduce the value 
by stretching it out?
    It becomes a more complicated situation when there are 
servicers and other investors involved than when it is just 
owned directly.
    Ms. Waters. Thank you.
    Mr. Chairman, I think that is a problem and we should be 
willing to take this warning and work with people in ways that 
do not cost the government or anybody else a dime just by 
rearranging and modifying that loan.
    Mr. Kanjorski. [presiding]. Thank you, Ms. Waters.
    I yield 30 seconds to the gentleman from Alabama.
    Mr. Bachus. Mr. Chairman, Mr. Jones is yielding back 4\1/2\ 
minutes, and I am going to take 30 seconds of his time. Can I 
do it now?
    Mr. Kanjorski. Yes.
    Mr. Bachus. I remember a time when it was the banks who 
loaned money to people and not the other way around. Now it 
appears that the people are loaning money to the banks. Do you 
think it would be better to get back to the old way of doing 
things?
    Mr. Kohn. If what you are referencing is that in the old 
days, in previous times, there wasn't as much securitization of 
the debt.
    Mr. Bachus. The banks loaned money to the people instead of 
the taxpayers loaning money to the bank.
    Mr. Kohn. I certainly would like to get back to where the 
taxpayers weren't loaning money to the banks.
    Mr. Bachus. It certainly would be better the other way 
around?
    Mr. Kohn. It certainly would be.
    Mr. Bachus. I would like your commitment that we get back 
there as soon as we can.
    Mr. Kohn. I think we all share that commitment.
    Mr. Bovenzi. I think we recognize the extreme circumstances 
that came about this past fall leading to this situation, and 
we all desire to get back to a normally functioning market as 
soon as possible.
    Mr. Bachus. I believe we would be better off if we were 
there right now. I think the taxpayers really would prefer, 
instead of loaning their money to the banks, to have the banks 
loan them money. Thank you.
    Mr. Kanjorski. Thank you, Mr. Bachus.
    Five minutes to Mr. Royce from California.
    Mr. Royce. Mr. Chairman, I would like to ask Mr. Kohn a 
question. It goes to an opening statement I made here where I 
mentioned the ill effect of this bailout trend and the rapidly 
increasing role of government that it is playing in these U.S. 
financial institutions, playing in board rooms in this country. 
I will go back to that December 17th article in the Wall Street 
Journal where they ran that story, ``U.S. Ratchets Up Citi 
Oversight.'' And in that story, they describe the active role 
that regulators are playing in the day-to-day operations of 
Citigroup.
    Yesterday in the paper we had a headline focused on the 
effort by U.S. banking regulators to encourage Citigroup to 
shake up its board and to replace the chairman of its board. 
Win Bischoff is the chairman there. And the effort, as the 
government says, is to restore confidence in the beleaguered 
financial giant.
    Being a little concerned about replacing market forces with 
political pull, one leading candidate, as the story mentions, 
is Richard Parsons, Time Warner's chairman, and a member of 
Citigroup's board, who happens to be a member of President-
elect Obama's Economic Advisory Board. Additionally, you have 
the other coincidental change or about face at Citicorp as 
Citigroup changes its position and supports legislative effort 
to allow bankruptcy judges to rewrite mortgage contracts. For 
years, there has been concern in the financial services sector 
that such a cram-down provision would have the effect of 
increasing interest rates for everybody who got a home loan if 
this should happen.
    So here we have a change, coincidentally, that comes with 
the $45 billion of U.S. Government money that goes into the 
corporation and the increasing bureaucratic manipulation, as 
reported by the press, that is going on inside the financial 
institution, inside the firm.
    A major reason that we are in the dire financial straits 
that we are in right now is the market distortions that have 
occurred. And some of that, a great deal of it, has been caused 
by bureaucratic and regulatory manipulation of quasi-public 
entities to begin with. Fannie and Freddie are a case in point. 
And with those two institutions, as we know, for years they 
took on excessive risk. They were encouraged to leverage 100 to 
1. When the Fed came forward and asked for legislation to 
deleverage them in the interest of safety and soundness or 
systemic risk to be able to deleverage, those two quasi-public 
entities lobbied this Congress and killed the bill that the Fed 
wanted, killed legislation which I and Chris Shays had offered 
in order to do that.
    In the meantime, we have these quasi-public entities that 
were encouraged to purchase mortgage-related products tied to 
Alt-A loans, what we now call liar loans. That was an 
initiative by the Congress. The 10 percent, the goal should be 
10 percent, should be in these Alt-A and these other loans in 
order to encourage affordable housing. So you get a sense of 
why some of us would be concerned given the fact that the 
impact of political pull rather than market forces in the past, 
once Congress has given itself the ability to influence these 
decisions and replace decisions which would be made in the 
market, because nobody would have bought those Countrywide or 
those subprime loans except for institutions like Fannie and 
Freddie that needed to purchase them to meet their goals and 
take on that excessive risk and leverage 100 to 1. And the 
consequences, of course, were the cascading effect that we are 
now dealing with now when the mortgage-backed securities 
market, of which they were the dominant player, went belly up.
    So, Mr. Kohn, do you think that these events are linked in 
any way? Do we risk replacing the forces of the market with the 
influence of political pull and political bullying, and we have 
seen a lot of political bullying, whether it is CRA or others 
like Fannie and Freddie, that came back to haunt us and hurt 
the very people that we intended originally to help.
    This will probably not lead to, what was the term you used 
a minute ago, a normally functioning market. That is my 
concern. I ask for your observations, Mr. Kohn.
    Mr. Kohn. I think, Congressman, there are a lot of reasons 
why we are in the fix we are in. As you noted, the Federal 
Reserve supported reform of Fannie and Freddie for a long time. 
But I don't think they are the main or the only reason we are 
here. A lot of private institutions made some very poor 
decisions, didn't understand the risk they were taking, and 
probably because they were complacent about the kinds of risk, 
about house prices, and so a lot of folks made some bad 
decisions. And the regulators were not sufficiently on top of 
the situation to stop this from happening.
    The Chairman. The gentleman's time has expired. We have a 
lot of members, and we need to move on.
    The gentlewoman from New York.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman.
    Congress is considering a very strong stimulus package, but 
many economists believe that a fiscal stimulus alone will not 
be enough to support our economic recovery. Therefore, many of 
us are supporting President-elect Obama's request and President 
Bush's request to relieve and put forward an additional $350 
billion in TARP money. But one of the problems that we have 
with the TARP money is the problem from the very first 
proposal, is that no one knows what the troubled assets are 
worth. So some of my constituents are requesting that part of 
this program require a clear indication of the difference 
between what price Treasury would be buying stock or assets of 
financial institutions and the market price of those 
securities. Some assets are highly illiquid, as we know, and 
may not have a current market quote. But many others could be 
mark-to-market via comparison with other clearing prices of 
other assets or through a modeling of an independent third 
party firm so that the disclosure of the true price would give 
the American taxpayers a far clearer indication of the premium 
they are paying to the financial institutions and help us to 
determine if the benefits of this particular program of buying 
the troubled assets justifies the cost, as there are many other 
routes that we could take.
    I would like to mention one proposal that has been 
submitted to Treasury and to the Federal Reserve from the New 
York State Insurance Department which calls for a modest 
expenditure of TARP money of $5 billion to get the municipal 
bond market moving. As you know, the structured finance 
products have basically frozen that market and governors and 
mayors have called for leadership from the Federal level to get 
this moving again. That proposal is before you. It basically 
would restructure the municipal only insurance companies with 
Treasury's investment and establish a market acceptance of the 
insurers for the benefit of municipal insurers, and it would be 
a relatively small investment into new muni-only subsidies of 
Ambac and MBIA.
    This proposal is before you, and I would like you to get 
back to me or you can comment on it now, but specifically the 
question of taking steps to determine what the troubled assets 
are worth and if you could comment on the proposal put forward 
by the New York State Insurance Department and other proposals 
that have been put out there to get credit out in the community 
through community banks, through the regional banks, other ways 
that we can do it. I applaud the chairman's proposal to bring 
more transparency oversight to help people stay in their homes. 
But if you can talk about the requirements so that we can 
understand the true value of these troubled assets and comment 
on the other alternatives that we can do to get our economy 
moving again and more stabilized, specifically on the proposal 
from the New York State Department of Insurance.
    Mr. Kohn. Congresswoman, I am not familiar with that 
specific proposal. I do know that the Federal Reserve, working 
with the Treasury and other regulators, has been taking a hard 
look at the municipal market and whether there is a way to 
utilize the TARP money should it be made available to help get 
that market moving again. I am sure that is one of the 
proposals they are looking at. If I can get back to you on 
that.
    Mrs. McCarthy of New York. They believe if we had a 
municipal-only insurance company there would be a market for 
it. It is when it is these structured products that pulls it 
down.
    Could you comment on the steps to understand the true value 
of the troubled assets?
    Mr. Kohn. I think it is a very difficult problem because 
the market values of these assets are often--are affected by 
very large liquidity and risk premiums. They are trading at 
prices below what they would trade at if they were held over a 
long period of time. Using models is one way to try to do it, 
but there is no good way to establish values for some of these 
assets. That is one of the issues that needs to be confronted 
if we implement in the second stage of TARP lifting these 
assets off the balance sheets.
    But I completely agree with you that the government needs 
to be very transparent about how it is doing it and what 
criteria it is using and how it is working.
    One of the original ideas behind TARP was to reestablish 
markets for these assets, and I think this would be helpful in 
doing that.
    Mrs. McCarthy of New York. But there may not be markets for 
these assets, and money may be better spent in other avenues to 
stabilize our economy and get loans out to the public.
    As the GAO report said, we have no idea how they spent the 
money. They won't tell us, and why should we give them more 
money if they won't tell us what they did with the first $350 
billion?
    Mr. Kohn. I agree, we need to use the money across a broad 
front of various attempts to unstick these credit markets 
because I don't think any one is going to be successful in and 
of itself.
    Mrs. McCarthy of New York. Thank you. My time has expired.
    The Chairman. The gentleman from Texas.
    Dr. Paul. Thank you, Mr. Chairman.
    I have a question for Mr. Kohn. Last week, we were 
scheduled to have this hearing on Wednesday and it was 
canceled. And we were told--at least I was told--up until 
yesterday that Mr. Bernanke would be here. How long has it been 
that you knew you would have to appear?
    Mr. Kohn. Late last week.
    Dr. Paul. We weren't notified. Not that it is all that 
crucial, but in looking at the schedule, we do know that 
Chairman Bernanke had a speaking engagement in London that was 
scheduled a long time ago. It has been a month. And he had a 
scheduled meeting in Basel, Switzerland, yesterday. So it seems 
like we could have been told about that.
    These hearings I agree are very important, and I think it 
is vital that we have them. And Chairman Bernanke's speech 
today was very important. The world listened closely to what he 
had to say. One thing that we don't know is what happened in 
Basel, Switzerland, at the Bank of International Settlement 
because he was meeting with other central bankers. I am 
interested in as much transparency as possible and I am trying 
to figure out what is going on. Is that a meeting that we can 
get the information on and know what transpired and what the 
agreements and discussions were? Is that something that should 
be available to us here in the Financial Services Committee?
    Mr. Kohn. If there are agreements reached. It is basically 
a forum for exchanging ideas and for finding out how other 
central bankers see their economies developing and what issues 
they see, or giving them a chance to ask us questions and us to 
ask them questions. It is not a forum for reaching agreements 
that are binding on particular central banks. If we were to 
reach an agreement with other central banks to do something, 
obviously we would tell people about it.
    Dr. Paul. That sounds plausible. But we also know when we 
ask the Federal Reserve and we ask the Federal Reserve Board 
Chairman where the funds go that they allocate, we really don't 
get the answers. And there are trillions of dollars worth of 
credit that are injected into the economy and we are not privy 
to exactly what is going on. So there are a few people who get 
suspicious and wonder what really goes on in these discussions 
because you don't have minutes, and you don't have really any 
access. As a matter of fact, those kind of meetings are exempt 
from our oversight by law. They are exempt. We are not even 
allowed to have that, if information isn't given to us 
voluntarily.
    I want to ask another question dealing with the process. It 
seems like we have two vehicles. One, we have where the 
Congress is involved and we debate and we interject our beliefs 
and we appropriate money, and we give it to the Treasury and 
the Treasury does certain things. And then we allow them too 
much license and then we are unhappy. We have that approach.
    The other approach is the Federal Reserve, and there is 
essentially no oversight of what the Federal Reserve does and 
we don't know how that occurs. It seems like the Federal 
Reserve, in my understanding of the law, has a great deal of 
license to do whatever it wants. It seems like they can bail 
out anybody, buy up any assets. I am just wondering why the 
line is drawn where the Fed is involved in trillions of dollars 
where we have no oversight, but then we come over to the 
Treasury and we insist that it goes through this process and 
almost like we are really in charge. But do you see a line 
drawn? Why do we have to appropriate money sometimes and other 
times we totally ignore it?
    Mr. Kohn. I think there is a lot of oversight of the 
Federal Reserve. The fact that I am sitting here, and Chairman 
Bernanke comes to this committee frequently is an important 
part of this oversight. We publish a great deal about our 
facilities, what we are lending, the uses that the funds are 
being put to; is it being lent for commercial paper, is it 
being lent to banks for lending. We publish on a weekly basis 
that material.
    Dr. Paul. Of course, then we get the information that you 
want us to have. I have been on the Financial Services 
Committee for a long time. Would you invite me to the FOMC 
meeting? That is something we get the minutes later on.
    Mr. Kohn. You get the transcript after 5 years, and you get 
the minutes after 3 weeks. I think opening the Open Market 
Committee to the public would greatly inhibit the discussion in 
that committee meeting. I think that it would promote financial 
speculation and would impinge on making good decisions.
    The Chairman. Thank you. I am going to take 10 seconds to 
announce that we have spoken to Mr. Bernanke. There will be an 
oversight hearing on the Federal Reserve's lending of these 
trillions of dollars in February. So we have asked for a 
hearing. That is a fairly new phenomenon at that level. So in 
February, we are trying to clear the date now, we will have an 
oversight hearing specifically on what the Federal Reserve has 
said.
    The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman.
    Mr. Kohn, I have in my BlackBerry an e-mail that I received 
dated September 20, 2008, at 4:27 p.m. It was a Saturday 
afternoon, and it was the first proposal that we received from 
Mr. Paulson regarding the bailout. It was one page long. And by 
an hour later, at 5:42 p.m., even though I was watching a 
football game, I had responded to my staff that we should add a 
provision that made one of the criteria to the maximum extent 
feasible avoiding foreclosures and providing homeowners with 
mortgages on their homes, opportunities to amortize their 
mortgages and stay in their homes. Some version of that was put 
into the original bailout bill, although not quite as direct as 
that. And then Mr. Paulson appeared here and said they didn't 
have the authority to do what the FDIC had done--as proposed, 
rather--because that wasn't the purpose of the original 
bailout.
    We finally have from FDIC a proposal that would do 
something similar to what I proposed within an hour of 
receiving the original proposal, and I am reasonably satisfied 
with that part of it. But it seems to me that ever since then 
we have been engaged in an effort to try to define how much to 
micromanage the use of this money. We took that one page that 
Mr. Paulson proposed that Saturday afternoon and converted it 
to 164 pages, I think the original TARP bill was, and now we 
are back trying to add some more conditionalities, and one of 
the concerns I have is--and we all have had--is that we have 
not wanted to micromanage the use of this money.
    So there is a provision in the chairman's mark that has 
been put out that would require the Secretary to reach 
agreements between the depository institution and whatever the 
Federal banking agencies to which they report on benchmarks 
that the institution is required to meet in using the funding 
so as to advance the purposes of this act, to strengthen the 
soundness of the financial system and the availability of 
credit to the economy.
    One of the concerns that everybody has had is this money 
has gone out and been used for purposes. Can you tell me what 
some of the benchmarks might be that we could evaluate on the 
second half of the money to determine whether it is being 
effectively used to really unfreeze the credit and keep people 
from calling me, businesses from calling me, saying I am just 
getting unreasonable demands from lenders or refusals to even 
consider loaning to me when I have been a good customer of 
theirs throughout the last 10 years? What would be some of the 
benchmarks we would look for?
    Mr. Kohn. Congressman, that is actually a very difficult 
question to answer. I don't think there are going to be any 
easy metrics by which to gauge whether the program is freeing 
up loans. There are a couple of problems here. One is you don't 
know what the counterfactual is. You don't know what would have 
happened if you hadn't put in the money. So loans, in my view, 
if that $250 billion hadn't been put in, the situation would be 
much worse. But that is very hard to measure.
    I think the second thing that is hard to measure--
    Mr. Watt. You can't give me one benchmark? We are not 
talking about unfreezing credit, we are talking about actually 
making loans available. What would be a benchmark?
    Mr. Kohn. We can look at the terms and standards that banks 
are--on which they are making credit available to businesses 
and households to see whether they are reasonable in the 
situation.
    We can look at the amount of loans they make, although that 
may be difficult to interpret. We can certainly ask the banks 
what they are doing and why they are doing it. And I think the 
combination of all of these things will give us insight into 
what the disposition of these funds are. But there is not one 
thing.
    The Chairman. The gentleman from North Carolina, Mr. Jones.
    Mr. Jones. Thank you, Mr. Chairman.
    Along the lines of my colleague from North Carolina who 
just spoke, this was in the Raleigh, North Carolina, paper: ``I 
am the president and CEO of Carolina Finance, an automobile 
finance company. I started in 2000. This is the point I want to 
make. We borrow our capital from Bank of America which has 
pretty much stopped lending despite having been given $15 
billion to help small companies. Further, I have 50 employees 
in North Carolina and Virginia I care about. I do not believe 
the bank bailout funds are being used as intended.''
    Now I want to go to another business owner, and then I will 
get to the question:
    ``The government began to buy ownership in banks by pumping 
$300 billion into these coffers. We were told this was the only 
way, and that this would free up funding. It didn't happen. 
They were not even required to lend the funds out. They kept 
the funds in their banks to improve their own balance sheet. 
Then they began to tighten up their own credit standards by 
squeezing their customers. By squeezing their customers. The 
bank I have been dealing with for 31 years basically told me 
that they wanted my children to personally endorse all loans.''
    Mr. Kohn, this is the problem. I do care about the 
homeowners. I care about those who are having to give up their 
homes just as much as anybody else. But these two companies, 
one has been in business for 30-some years with the same bank, 
primarily, and now they are changing the rules and regulations. 
And this poor man with 50 employees in Virginia and North 
Carolina, he can't even get a loan.
    I would like very much to bring those situations to your 
attention because I don't know how these banks are getting by 
with fattening their profits because they are in trouble. We 
gave them money, the taxpayer did, and yet the taxpayer who has 
a business, small or large, can't even get a loan. If this 
country is in trouble, it is in trouble because all of a sudden 
we are bailing people out and we are saying to those people, 
you keep the money and you don't have to give credit to 
anybody. That is not going to help this country.
    Mr. Kohn. I don't think that is what we are saying. We are 
saying we are giving you the money and we want you to lend to 
households and businesses and municipal governments where you 
can make safe and sound loans. We are working with the 
supervisors of those banks to ask them what they are doing, and 
for the supervisors to make sure and to work with the banks to 
keep lending on a safe and sound basis.
    I think you are right, we need to keep working along a 
number of fronts to open up these credit spigots because they 
have closed. But if we were not to make the next money 
available, I would be concerned that people would get even more 
concerned, and the banks would be more concerned and they would 
tighten up even more.
    Mr. Jones. The issue is if this next $350 billion is 
allocated out and these small businesses, they won't be around 
to complain to their Congressmen. They will be gone.
    I will bring one to your attention, and I would appreciate 
very much if you would get back to me because this is 
absolutely, I sign a contract with you, and now you come back 
to me and say, I want to change the contract. In fact, I want 
your children to contract. They are 25 and 30 years old; they 
are not kids. But it is destroying this country, what is 
happening right now.
    Mr. Kohn. I would be willing to answer your question and 
inquiry. I would also point out that the Federal Reserve 
through its credit facilities is trying to help restart the 
securitization and small business loans. That is one of our 
objectives, and we are moving along that track although we are 
not there yet. It is a problem, I agree.
    Mr. Jones. Thank you. I yield back the balance of my time.
    The Chairman. Before I turn to Mr. Meeks, I am going to 
make a request. We couldn't get started earlier today because 
of Members' travel plans. We have a 6:30 set of votes. I would 
like to get to the second panel. It is a very good panel. I am 
getting tired of the first panel. It is not their fault, but 
there is a certain repetitive nature as to what they are being 
asked. I would like to get to the second panel, so any member 
on the Democratic side who is willing to forgo asking questions 
of the first panel, we will begin with those people for the 
second panel. Think about it. Please notify a member of the 
staff because I would like to get the benefit of the second 
panel. That is obviously an option open on the other side, but 
I am not in charge of them. I am not in charge of you either, I 
am asking.
    And now the gentleman from New York, Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman, and I, in trying to 
determine what we need to do for this, the next $350 billion, I 
have a quick question about something that the Feds, so, Mr. 
Kohn, I would ask you, has done already and whether or not and 
the participation, and that is dealing with the, when the 
Federal Reserve announced it would initiate a program to 
purchase the direct obligations of housing-related Government-
Sponsored Enterprises, with the Freddie Mac and Fannie Mae, and 
I know that there were purchases of up to $100 billion in GSE 
direct obligations in the program and that there were auctions 
being, not auctions but competitive bids, that were going out 
to various individuals to purchases of up to $500 billion in 
MBS, and various asset management, etc.
    My question is, given that there is a series of requests 
for proposal that were issued by the Fed, I would like to know 
if you could tell me what level of involvement of qualified 
minority- and women-owned businesses, if any, have participated 
in the aforementioned Fed endeavor?
    Mr. Kohn. I don't know, Congressman. I will have to get 
back to you on that.
    Mr. Meeks. Could you please get back to me because some of 
the concerns I think that were articulated by Congresswoman 
Waters and before, and we had talked about purchasing the 
illicit assets, it was to make sure that we had a more 
diversified pool of individuals who would also be involved, 
because to me, when you have a diversified pool, you also 
reduce your chances of losing your fund when more people are 
investing the money.
    But let me go to Mr. Bovenzi. Did I pronounce that 
correctly?
    Mr. Bovenzi. Yes.
    Mr. Meeks. Now currently, and I know that in the chairman's 
mark, there is a provision in there looking to include the FDIC 
on the TARP oversight board, and I was wondering, I don't know 
if I stepped out and you indicated before, but whether or not 
you think that the FDIC could play a very meaningful role on 
that board and whether that we should therefore move forward 
and try to do something statutorily in that regard?
    Mr. Bovenzi. I think the FDIC would play a meaningful role 
on that board. Clearly, there is a desire to increase loan 
modifications, and the FDIC, under Chairman Bair, has been 
leading an effort to try to promote loan modifications and do 
it on appropriate standards. In that area alone, the FDIC could 
play a meaningful role.
    Mr. Meeks. Let me just ask another quick question that has 
to do with many of the taxpayers' investments and many of the 
banks through the Capital Purchase Program, and what I think 
that you are hearing from a lot of Members is that because of 
taxpayers' money going in, they want more accountability, and 
they want individuals to make sure that the individual 
institutions are doing business in a more equitable fashion, 
etc. And in that regard, I am looking at ways that we could 
include more people involved in the process. And a perfect 
example of how inclusion could be increased relates to a more, 
in my estimation, equitable distribution of the underwriting 
liability and fees associated with TGLP debt insurances. And to 
date, the banks that have benefited from the FDIC backing have 
issued bonds to maintain their liquidity in uncertain markets.
    My question is, it seems as though that, unfortunately, 
business as usual has continued to take place even though there 
is taxpayer money that has been involved in this, and the vast 
majority of fees associated with the government guaranteed bond 
issuances and this manner of operation I think is inconsistent 
with trying to diversify and be more equitable with practices 
that enable a larger range of firms to benefit from the 
government's activities in connection with the financial 
crisis. So my basic question is, my time is running out, is 
does it make sense for those same banks to also earn the lion's 
share of the fees that are to be earned in connection with the 
issuance activity?
    Mr. Bovenzi. The FDIC has been very supportive of extending 
programs to all banks of all sizes so they can benefit people 
around the country. There are two parts to our Temporary 
Liquidity Guarantee Program. First, there is debt issuance. 
About 6,900 companies have signed up for the guarantee program 
in that regard. It includes small banks and large banks. 
Second, there is the protection for non-interest-bearing 
transaction accounts that is available to banks and thrifts. 
6,700 banks and thrifts have signed up for that program, which 
represents a vast majority of the roughly 8,500 or so banks. In 
terms of capital investments from Treasury, we are very 
supportive of that being made available to banks of all sizes 
and have been working in that regard as well.
    Hopefully, I addressed some of your questions.
    The Chairman. The gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Yesterday, I held a roundtable with some of my not-for-
profit groups in one of my counties. These groups are 
counselors who are working with mortgagors to try and keep them 
in their homes.
    Mr. Kohn, in your testimony, you stated that the Federal 
banking regulators, pursuant to their joint November 12th 
statement, are working to help banks ensure that they are fully 
meeting the needs of creditworthy borrowers. Banks lending to 
creditworthy borrowers is good for the economy, but it is also 
good for the profitability of banks and supports their safety 
and soundness.
    Does this square with an additional $350 billion bill? 
Because this is not happening. These not-for-profits said that 
they are working with the mortgagors. They cannot get the banks 
to return their calls. And if they do, finally, they will talk 
to somebody, and then they will be sent to somebody else, and 
this person says, I haven't seen that; you will have to fax it 
to me. And it goes on and on. And maybe somebody is at the 
point where they haven't defaulted, but by the time the banks 
even get around to bothering with them, they are already in 
default.
    I don't understand why this is happening. Is this something 
that Fannie and Freddie have requested that banks not do? Is 
this something that banks are just so overworked that they 
don't have enough people? We have the counselors, and these 
counselors are even ones that are provided under statute. They 
are really having to raise some money themselves to work with 
these clients. This is a community service. So I don't 
understand why there is isn't more money for counselors. And if 
the lenders don't answer the calls for help, I think it is time 
that they did respond.
    Mr. Kohn. The Federal Reserve has worked closely with 
nonprofit groups across the country helping them to put lenders 
and borrowers in touch with each other, to inform them of the 
rights and options and alternatives they have if they are 
facing problems. I think the lenders, to some extent, are 
overwhelmed by the scale and size of the problem. And they are, 
the servicers and lenders, are working hard to catch up.
    But I also think, as I said in my testimony, that we need 
to do more on foreclosure mitigation. We need programs that can 
be scaled up more rapidly to address more problems. And that 
would be one of the uses for TARP money.
    Mrs. Biggert. The problem is that we have talked about this 
now since we started working on the TARP, and the bill passed 
in October, and we did the housing bill, which was done last 
summer to take effect on October 1st. We are not seeing the 
results. We are not seeing it with the homeowners where there 
have only been 373 applications, and only 13 of those that have 
any closure on this. So, I don't know how--if we are going to 
throw another $350 billion into this, how is that going to 
help?
    Mr. Kohn. I think it can be used to encourage lenders and 
borrowers, lenders in particular, to rewrite loans to make them 
more affordable, both in the interest rate, the term, to some 
extent writing down the principal under something like an 
enhanced hope for homeowners--
    Mrs. Biggert. But the banks aren't doing that. And that was 
in that original bill. We have already done that.
    Mr. Kohn. I think more needs to be done, and it needs to be 
done now. I agree with you, Congresswoman.
    Mrs. Biggert. I yield back.
    The Chairman. The gentleman from Kansas--no, the gentleman 
from Kansas is passing on this round. He is resting on his 
laurels of saving the airline industry, which he did in the 
bill.
    The gentleman from Missouri.
    Mr. Clay. Thank you, Mr. Chairman.
    May I inquire of the two witnesses?
    The Chairman. Yes.
    Mr. Clay. All right. Thank you. Let me start with Mr. Kohn. 
We have seen the first $350 billion of the TARP directed 
towards rescuing financial institutions and the whole of the 
financial sector. Now the Congress had very little control of 
those funds. I pray that they are well spent. And requests are 
now being made for the other $350 billion. Let me just ask you 
some simple questions. Is this not taxpayer money?
    Mr. Kohn. Yes, it is.
    Mr. Clay. We agree with that, then.
    Mr. Kohn. Yes.
    Mr. Clay. Then why can't we direct this to the rescue of 
the taxpayers who are really on the front line of all of this? 
They are getting hit with the devaluing of the 401(k). Some of 
them have lost 30 and 40 percent. Some of them are already 
retired and have lost quite a bit of value in that. Would you 
all be interested--would you entertain legislation that would 
actually help them and put some value back into those 401(k)s 
and retirement plans?
    Mr. Kohn. I think the TARP money is intended to unfreeze 
the credit markets and help the financial markets and build 
confidence. And to the extent that the TARP and the Federal 
Reserve policies and the fiscal stimulus coming put a floor 
under the economy; they will help the financial markets and 
help those 401(k)s. I think it is, to be sure, the money from 
TARP is flowing into the financial institutions, but the intent 
is to help households and businesses, and I think you are 
right; we need to do a better job monitoring how well it is 
doing that.
    It is an indirect way, but it is absolutely essential when 
the contract markets, part of what is going on, one reason the 
financial markets and the economy is in as bad a shape as it 
is, is that the credit markets are frozen up. People aren't 
getting loans that need to get loans. This is depressing the 
economy, and that is putting downward pressure on asset prices 
of all sorts, houses and equities.
    Mr. Clay. Really, the initial $350 billion was the bailout 
for Wall Street, correct? We gave Citigroup $45 billion.
    Mr. Kohn. It was an injection of capital into financial 
institutions, and the government has preferred stock in those 
financial institutions.
    Mr. Clay. Sure. And the stock is worth what? How much?
    Mr. Kohn. It yields a certain amount for a few years and 
more for a few years after that. So there is a return on the 
stock. It is not traded on the market.
    Mr. Clay. What do we have in value today in Citigroup? What 
can we put up, tell the taxpayers they own in Citigroup or in 
AIG?
    Mr. Kohn. I think what the taxpayers have is an implicit 
share of Citigroup. But more important than measuring what they 
own in Citigroup, I think, is the very difficult to measure 
financial stability that you are, that we are seeking in 
exchange for these.
    Mr. Clay. Okay, did the $350 billion helped?
    Mr. Kohn. I think it helped, yes, sir.
    Mr. Clay. Has it turned it around? Has it freed up credit?
    Mr. Kohn. There are some sectors of the market that look 
like they have improved some. But the market is still looking 
very bad. So I think it stabilized the situation, improved it a 
little, but it is still not a good situation.
    Mr. Clay. Let me ask Mr. Bovenzi really quickly, how much 
funding do you think would be necessary to use in TARP money to 
reduce foreclosure?
    Mr. Bovenzi. I don't have the specific number for what 
amount should be used to reduce foreclosures. Chairman Bair had 
talked about one variation of a loss-sharing proposal on loan 
modifications that might cost $25 billion. The bill has numbers 
from $40 to $100 billion. I think it is important to have some 
money allocated and get started on the process.
    Mr. Clay. Thank you very much.
    The Chairman. The gentleman from New Jersey.
    Mr. Garrett. I thank the chairman.
    And I still thank the panel. I am still interested in the 
first panel.
    I find a couple of the questions from the other side 
intriguing. Mr. Watt, I believe it was, made the comment with 
regard to benchmarks, which I think is a legitimate question to 
try to be able to set a barometer of going from the past and 
going forward as well.
    Some might have said that a barometer would be the stock 
markets and their confidence in the whole credit situation and 
the like. And prior to the first bill passage, people said if 
you don't do this, the stock market is going to go down by 500 
or 1,000 points, and lo and behold, of course, we did do it, 
and the rest is history. So that is one barometer and bench 
market.
    Ms. Waters also asked a question, and it just hit my memory 
when she was asking, gave the example of a constituent coming 
to a bank having not-so-great credit history but being on time. 
I actually had a constituent who came and said she called up 
her bank; she has always been on time; and she is a good credit 
risk. And she said she hears all of this stuff going on, on TV. 
So she called up her specific bank and said hey, what are you 
going to do for me? Can you lower my rate or my length of my 
term of my contract or my mortgage and what have you? And of 
course, the bank basically hung up on her. But there is the 
rub, of course, is that we have a moral hazard here, is that 
those people who do everything right are the ones who have been 
penalized, and those people who extended themselves more than 
they ever should have are the ones who are being benefited 
here.
    Changing the thought here for a second, looking at the 
Fed's balance sheet, it is extraordinary as you look over a 5-
month period, I figure roughly in my head right here, roughly 
about 150 percent increase.
    Mr. Kohn. More than that.
    Mr. Garrett. The same timeframe I am looking at, August 
1st, you had $874 billion, and you go up to $2.1 trillion. So 
if you go back further, of course, it is larger. And that is 
extraordinary. And the question as to who is responsible and 
where--responsible as far as the end of the day for the 
liabilities on there versus the assets on there, and that goes 
to Mr. Paul's question and some other questions as well. GSE 
debt on the old balance sheet, prior to August 1st, you would 
see zero. On September--January 7th, it is up to $19 billion, 
and now has potential to go up to $600 billion, I think.
    The question on the other side of the aisle, which is a 
legitimate one, was why did we--if you are able to basically, 
through that mechanism, I think you go through primary dealers 
in order to buy debt, basically buy assets, toxic assets, I 
don't know, but assets nonetheless, obviously the Fed has the 
ability to set up a mechanism to buy assets. Do they have the 
ability to set up a mechanism to buy toxic assets as well?
    Mr. Kohn. No. Our ability to buy assets outright is very 
limited under the Federal Reserve Act. Basically, we can buy 
Treasury and agency assets. We can make loans against any 
collateral as long as we are collateralized to our 
satisfaction, but we cannot go out and simply buy assets if 
they are not agencies and Treasuries. We can simply--
    Mr. Garrett. Basically, you can do that, then, can't you? 
Simply set up a fictitious company and make loans to that 
company in order to buy those assets?
    Mr. Kohn. We need to be--you, the Congress, has told us we 
should be collateralized and secured. And we take that very 
seriously. And that is what we are doing.
    Mr. Garrett. What is the collateral then under Maiden Lane 
Corporation and that situation?
    Mr. Kohn. There were a variety of mortgages and other 
assets there. There was--
    Mr. Garrett. This could be collateral as well through--the 
assets that we would have bought through this program could 
have been collateralized here as well, could it not be 
considered adequate collateral?
    Mr. Kohn. Right. I think what a system that looks like I 
hope will work is one like we are setting up to begin in early 
February, in which we are setting up a vehicle that can use 
Treasury capital to absorb the risk while the Federal Reserve--
    Mr. Garrett. I will ask you some of the details on that. I 
only have a second of time. When you do do those things going 
forward, will you have the requirements that are set forth in 
the chairman's bill here as far as all the other restrictions 
here that we are applying to Treasury on anything that the 
Fed--
    Mr. Kohn. If funds from TARP are involved--
    Mr. Garrett. No. No. No. If the funds, just through the 
Fed, the activity of the Feds, with Fed dollars, will you apply 
the same restrictions that we wish to apply, at least the 
chairman wishes to apply, to the TARP dollars, will you apply 
them to--
    Mr. Kohn. We have not in the past applied those sort of 
restrictions to ordinary well-collateralized loans from 
financial institutions and--
    Mr. Garrett. And I am not suggesting that you are, but you 
can see the distinction that some Members obviously make in 
this situation between restrictions that I think he is 
appropriately making here and that we don't have the control 
over.
    The Chairman. If the gentleman will yield, I did say we are 
going to have a hearing on exactly that.
    And I will say, maybe the Fed should volunteer, there were 
some restrictions I believe imposed on AIG when it was non-
TARP; AIG, they did impose some restrictions in compensation I 
believe on AIG when it would still be the Fed. But the 
gentleman's general point is correct.
    Next, we have the gentleman from California, Mr. Baca.
    Mr. Baca. Thank you very much, Mr. Chairman. First of all, 
I appreciate the question that Mr. Clay asked, and hopefully, 
we can find a remedy for the devaluing of the 401(k) retirement 
plans because throughout all of our districts, people are 
asking what is happening and what can be done, so hopefully we 
will find some kind of a remedy.
    But my question to note is that I notice that there is no 
one from the National Credit Union Association invited to 
testify here. But the credit unions in my district are telling 
me they can't access TARP funds, and they need assistance. The 
largest credit union in my district, Arrowhead Credit Union, 
just closed four branches and reduced operating budget by 10 
percent.
    If you look at the original recovery bill language, 
Congress intended for credit unions to receive TARP funding and 
included them to be amongst the eligible institutions. 
Unfortunately, Secretary Paulson decided to take a different 
route.
    Credit unions make a huge impact on our local communities 
and need all the tools we can get to help them afloat. My 
question would be, what can we be doing to help credit unions 
access TARP funds?
    Mr. Kohn. I don't know what the particular restrictions 
are. I think it is difficult when you have essentially a 
cooperative institution. So, remember, the TARP funds are going 
in as preferred stock in publicly--
    Mr. Baca. But remember that it was included in the original 
language. And Secretary Paulson decided to take a different 
route. So what can be done if it was supposed to be in there?
    Mr. Kohn. I think we should be looking at that.
    Mr. Baca. Will you look at it?
    Mr. Kohn. Yes, with the Treasury Department.
    Mr. Baca. And will you make sure that it is included in 
that?
    Mr. Kohn. We need to talk to the Treasury Department that 
is in charge of the program.
    Mr. Baca. I would appreciate that very much.
    And what is the Federal Reserve doing to help credit 
unions? I would point out that they are statutorily prohibited 
from accepting outside forms or capital so they don't benefit 
at all from the Capital Infusion Program. So again, what is the 
Federal Reserve doing to help credit unions?
    Mr. Kohn. They are eligible to borrow from the discount 
window if they hold, if they are subject to certain 
requirements, and I believe credit unions do borrow from the 
discount window. So to the extent that we have facilities that 
are open to depository institutions, they are open to credit 
unions on the same terms.
    Mr. Baca. Do you know that they do? Or do you believe that 
they do?
    Mr. Kohn. I will get back to you for certain, but I believe 
that they do.
    Mr. Baca. I would like to get an answer on that.
    Thank you very much.
    I yield back the balance of my time, Mr. Chairman, and 
thank you.
    The Chairman. We have seven members left for this first 
panel, so we are going to get to the second panel at 5 o'clock.
    The next is Mr. Posey.
    Mr. Posey. Thank you, Mr. Chairman. Out of respect to your 
request to get to the second panel, I will accept your offer.
    The Chairman. Thank you. I appreciate that. Thank you very 
much.
    Then the next one is Mr. Paulsen.
    Mr. Paulsen. Thank you, Mr. Chairman. I will be brief.
    Mr. Bovenzi, based on some of the testimony we have heard 
with Congress now encouraging banks to lend more freely through 
the capital infusions that have occurred, while at the same 
time, it sounds like there are regulators that are, certainly 
through the FDIC and otherwise, that are urging them to be a 
little more cautious; is there any concern that banks are 
getting mixed signals here simply to shore up their balance 
sheets and hold onto the money? What assurances does Congress 
have or the taxpayers have that the money is actually going to 
make it out into the system?
    Mr. Bovenzi. Banks have many objectives in what they are 
trying to achieve. And if we have, as a supervisor, a weak or a 
problem institution, there is going to be an expectation that 
they get themselves into a healthy state. But the vast majority 
of banks who are well capitalized can focus on lending 
activities with the new funds that they are getting. We have 
recently issued a letter to those institutions telling them 
that we expect them to be able to tell us how they are using 
the government programs to promote lending to creditworthy 
borrowers.
    Mr. Paulsen. Thank you, Mr. Chairman.
    I know as we hear more stories of others lining up to 
access these funds, there will be a concern for those who do 
want to shore up their balance sheets.
    And I yield back, Mr. Chairman.
    The Chairman. I thank the gentleman.
    And next, we have my colleague from Massachusetts, Mr. 
Lynch.
    Mr. Lynch. I will be brief, under the circumstances.
    I do want to ask the witnesses, however, one of the 
concerns I have right now and one of the difficulties that we 
keep running into is the difficulties with the bond insurance 
companies. And looking forward, there is a sizable package that 
has been talked about in terms of a stimulus plan, and yet many 
of our municipalities are just hogtied right now because of the 
bond insurance situation. Either they don't have access or the 
premiums are 40 percent of what they normally should be.
    Would you--and in many cases, they are going to be the ones 
to facilitate a lot of this stimulus going forward. Is there 
any way or would you recommend some type of assistance from 
TARP for some of our bond insurers to sort of, to unclog that 
system?
    And I will yield back with the answer. Thank you.
    Mr. Kohn. I think we ought to be taking a serious, and we 
are taking a serious, look at what will help unclog the 
municipal market. One possible route is through those insurers, 
but it is not the only route. And I think we need to just keep 
pursuing that because it is a serious problem. But I don't know 
if that particular way is the best way to do this.
    Mr. Bovenzi. I have nothing to add.
    Mr. Lynch. I yield back. Thank you very much, Mr. Chairman.
    Mr. Chairman. Thank you, Mr. Bovenzi. That does not always 
stop people from talking.
    The gentleman from Illinois.
    Mr. Manzullo. Thank you, Mr. Chairman.
    I, in my opening statement, talked about how nobody in the 
government is even thinking about how to solve the problem. 
What you are doing is not solving it. You are all assuming that 
at some time in the future, the economy is going to recover 
itself and that everybody will be in a position to pay back the 
banks.
    Take a look at the Federal Reserve. Mr. Kohn your 
organization, agency, had the authority for years to govern 
instruments, to set underwriting standards. And you did 
nothing. You did very little.
    In fact, when Dr. Bernanke was here in the middle of July, 
you said we did a top-to-bottom study of underwriting 
standards, and we are not going to require that you have to 
have proof of your employment before you can get a mortgage. 
Wow. That is astounding. He said, but that won't take place 
until October 1st of 2009. And that was a statement that sucked 
the oxygen out of the air. And you could have said, no more 
teasers, no more 2/28s, and the FDIC had the authority, the 
implicit authority, all along to step in immediately and to 
increase insurance at institutions. But the FDIC sat back, and 
a bunch of us were screaming, saying you have to get in there 
and plug the holes, and then the run came on the banks. And the 
two agencies that were in the best position to do something, 
anything, did nothing.
    And now, you are back with all the answers again. We will 
just give $350 billion to Treasury. Let them come up--I hope 
that you guys stick around to listen to the second panel, to 
the people who are on the streets, people like Cynthia 
Blankenship, who was here a couple of months ago. You didn't 
mention once FAS 157 and the impact that has on community 
banks. Once they assign a mortgage and they agree to service 
the loan, did you know that market to marketing goes in even as 
to the servicing requirements and can suck up hundreds of 
thousands of dollars if not millions of dollars on their 
balance sheets? I don't know if you know that. No one seems to 
care. The Europeans solved market to marketing. They come up 
with their own way. What do we do? We do nothing. You fellows 
have no solutions. You just--a giant bridge, a financial bridge 
to nowhere, just assuming the economy is going to recover. My 
biggest city is at 12 percent unemployment. And you know what? 
It will probably get worse because very few people here have 
the answer. And the answer is simple. You have to get people 
starting to buy again. The homeowners are back. They are 
desperate. You can have all the fixes that you want on 
foreclosures and helping people up, but if people don't have 
jobs, it doesn't do any good. They will fall behind again, and 
what I propose is something so simple. You give a $5,000 
voucher to anybody to wants to buy a new car, you go to the 
dealer, you can buy a brand new car for sometimes 25 percent 
off, money has always been out there. Did you ever ask the 
community bankers 2, 3 months ago if they had money for cars?
    Mr. Kohn, did you do that?
    Mr. Kohn. We talked to community bankers quite a bit about 
their needs and how they are making loans.
    Mr. Manzullo. Right. They have had money, haven't they?
    Mr. Kohn. To some extent.
    Mr. Manzullo. Stick around for the second panel. They have 
always had money for those cars. And so have the credit unions. 
But you guys participated in the big scare going on around 
here. And we had people going into the car dealers back home 
saying we understand there is no money. And the Cynthia 
Blankenships out there and all these community bankers are just 
totally frustrated that the government steps in, that caused 
the problem, and now you guys have the solutions that won't 
work. Why don't we do something very, very simple? Why don't 
you sit down and decide what can you do to get people to start 
buying more automobiles? Once that happens, the economy 
restarts itself. The community banks have money. Credit unions 
have banks. Local branches of national banks have always had 
money to loan. And I just don't understand it.
    The Chairman. The gentleman's time has expired.
    The gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you.
    Mr. Kohn, under the TARP program, it was allowed for 
companies who receive TARP funds to continue to pay dividends 
and to do stock repurchases. Can you think of any reason why 
the TARP program would have worked worse if we had prohibited 
basically taking the firm's extra money and giving it to the 
shareholders of the common stock rather than repay the TARP 
loans?
    Mr. Kohn. Now the companies were prohibited from increasing 
their dividends with the TARP loans.
    Mr. Sherman. And even that was not in the statute. It was a 
practice the Treasury usually followed. But what if there was 
an absolute prohibition on dividends and stock repurchases 
until such time as the Federal Government is repaid?
    Mr. Kohn. I think what is critical here, Mr. Sherman, is to 
not only to make the government money available but to bring 
private money in as well.
    Mr. Sherman. You could certainly exempt newly issued 
shares. But why should the people who bet on the bad 
management, who are holding shares, get our money before we get 
it back?
    Mr. Kohn. And many of the banks that took the money weren't 
themselves troubled, but they were being strengthened so that 
they would be resilient against future trouble. The dividend of 
the regulators, the supervisors have dividend policies that 
need to be enforced. Banks shouldn't be paying out dividends 
from things that are not earning and particularly troubled 
institutions that come into the Federal Government and get--
    Mr. Sherman. But, to interrupt, you seem to think it is 
necessary that we give our money to those who then turn it 
around and give it to their existing common shareholders in 
part to encourage people to take our money or because the 
common shareholders deserve dividends and stock repurchases 
before the American taxpayer should receive the money back?
    Mr. Kohn. No, I don't think the common shareholders deserve 
that. I think the common shareholders don't deserve any more 
than the bank is able to earn on a sustainable basis. And banks 
shouldn't be taking taxpayer money and recycling it into 
dividends that they otherwise wouldn't pay. I agree with that.
    Mr. Sherman. But if they are taking our money and not 
giving it back to us, should they be paying dividends?
    Mr. Kohn. I think they need to look very carefully at how 
they can bolster their capital, raise their capital, and get 
out and repay the taxpayers as quickly as possible.
    Mr. Sherman. Does paying dividends on existing common 
shares bolster capital or deplete capital?
    Mr. Kohn. Taken alone, it wouldn't bolster capital.
    Mr. Sherman. It would deplete capital, correct?
    Mr. Kohn. But if it is part of a package that helps them 
raise capital--
    Mr. Sherman. You could obviously issue a new class of 
common shares and pay dividends on that, or you could exercise 
the political power to squeeze money out of taxpayers and to 
deliver it to management and existing shareholders. They, 
obviously, have taken the latter course.
    Likewise, we were told not to put really strict executive 
compensation limits in TARP and that maybe we were going too 
far with what I thought were extremely modest limits. Do you 
know of a single banking firm that turned down Federal dollars 
because they wouldn't live with whatever executive compensation 
limits there are in the existing TARP bill and program?
    Mr. Kohn. I am not aware of any.
    Mr. Sherman. So we could certainly go a little higher with 
the executive compensation limits since the ones already in 
place have not deterred a single dollar of TARP investment.
    Mr. Kohn. Right.
    Mr. Sherman. I would like to comment on what Mr. Manzullo 
said earlier, twofold. One, as to auto loans, the credit unions 
in my district say they have plenty of money except for the 
most marginal borrowers. And I don't think we are ever going to 
go back to the people who were barely able to get loans last 
year being able to get loans in the future.
    The second thing I will point out is that the greatest 
failure was Wall Street as a unit gave triple-A to Alt-A. It is 
one thing to say well maybe people will tell you the truth when 
you ask them their income. But when you turn to people and say, 
it will cost you $300 on your mortgage not to document, and 
they choose not to document, you know you are making liars 
loans.
    I yield back.
    The Chairman. I thank the gentleman.
    Let me ask unanimous consent to put into the record letters 
from a group of institutions about commercial lending; from 
several of our colleagues, Mr. Donnelly, Mr. Thompson, and Mr. 
Souder, about manufactured housing; and from the National 
Association of Federal Credit Unions and the Credit Union 
National Association supporting the inclusion of credit unions 
in TARP funding.
    I ask unanimous consent that they be put in the record.
    And the gentleman from North Carolina, I believe, is next.
    Mr. McHenry. Thank you, Mr. Chairman.
    And thank you all for your testimony today.
    Mr. Bovenzi, we have had some evolution in the reasons for 
defaults and foreclosures. Initially, the reasons for the spike 
in foreclosure was pointed to ARMs. And that soon evolved, and 
we had negative equity as the next reason for foreclosures and 
defaults. But as this economy is weakened, and we have entered 
this recession, the reason now, as it has evolved, is high 
unemployment, people losing their jobs, which of course is sort 
of the historic reason for people losing their homes is because 
they have lost their jobs and they are not able to simply 
afford it.
    How should the government address this? How should the 
government address these increases in defaults and 
foreclosures, and how does your program apply to this?
    Mr. Bovenzi. I certainly agree that there has been an 
evolution in the reasons for default, and there are many 
different reasons for default. A loan modification program can 
address some of those reasons, but it can't address all of 
them. It would be one part of a package that has other measures 
as well. The loan modification proposals can help in situations 
where an individual's income has gone down, they are in a 
mortgage they can't afford, and they have gone into a default. 
It can be restructured at a lower interest rate in a monthly 
payment that they can afford and sustain, if indeed that gives 
a greater value than would be the case in foreclosure. In this 
kind of market, foreclosure results in an enormous cost on 
financial institutions. So, a great many mortgages can be 
modified successfully.
    But you are right, it does not work in a situation where 
the borrower has no income because of unemployment. In this 
case, other measures are needed, generally some kind of fiscal 
stimulus to try to encourage job creation and employment.
    Mr. McHenry. So do nothing for the unemployed, in essence?
    Mr. Bovenzi. A loan modification program is not the right 
solution for somebody who has no income. We need other kinds of 
stimulus measures to create jobs.
    Mr. McHenry. It is a solution they cannot simply access 
because they have no income. Is that fair to say?
    Mr. Bovenzi. It is fair to say that loan modifications 
don't work successfully for all cases. But, they can work for a 
great many cases.
    Mr. McHenry. In a recent OCC release of data, this last 
month it shows that after 6 months of these loan modifications, 
``they seem to not be working.'' After just after the first 
quarter of 2008, those numbers were released last month, and it 
shows that these modification programs are not working for a 
number of reasons, one of which is that the biggest problem is 
that the servicers aren't participating in the program. So how 
is your program going to really change that initial go at it 
and actually effectively get the servicers to participate?
    Mr. Bovenzi. I would make a few points about that. Clearly, 
foreclosures are going up at a faster rate than loan 
modifications--
    Mr. McHenry. You can give me a bunch of that. I don't have 
much time. Just cut to the chase.
    Mr. Bovenzi. That is part of the reason why it is talked 
about as part of the TARP funding. I think the study you are 
referring to discusses re-default rates being high and talks 
about all kinds of loan modifications. Some of these may be 
very minor adjustments and payments to those like the IndyMac 
program the FDIC put in place, which lowers monthly payments 
enough to make them affordable and sustainable. Thus, the right 
kind of loan modification program can drastically lower re-
default rates. That said, there will be re-defaults. Some 
people will go back into defaults.
    Mr. McHenry. With all due respect, you still have not 
answered my question, and my time is limited here. How do you 
get servicers to effectively participate in this program? 
Because the fact is, unless they participate, it is not going 
to get out to the market.
    Mr. Bovenzi. I think you need to align incentives 
appropriately. In the programs we have had to date, we have 
worked to show how the modification will improve net present 
value, so it is in the interests of the investor and thus the 
servicer. Things that do help the servicer are cost intensive 
and align their financial incentives, which can be beneficial 
as well.
    The Chairman. The gentleman from North Carolina.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    I did not really intend to ask questions about what caused 
the subprime crisis or the Community Reinvestment Act, but I do 
want to address what Mr. Royce had to say earlier.
    Mr. Kohn, the Federal Reserve Board recently published a 
study that 6 percent of the subprime loans in the 2004-2006 
period were by CRA lenders, banks or thrifts with federally 
insured deposits in neighborhoods that were CRA assessment 
areas, the neighborhoods where CRA encouraged lending. Is that 
right, 6 percent?
    Mr. Kohn. I think that is correct, Congressman.
    Mr. Miller of North Carolina. There was also a recent study 
by the Federal Reserve Board of San Francisco, I think, that 
compared CRA loans to loans by institutions not subject to the 
CRA, independent mortgage companies, Option One, New Century, 
Countrywide, in the very same neighborhoods that showed that 
CRA loans were performing substantially better, that the 
foreclosure rate was twice as high in those same neighborhoods 
for lenders not subject to CRA. Is that correct?
    Mr. Kohn. I think it is correct that they weren't 
substantially worse. I am not sure they were substantially 
better. But there was no difference in similar loans made in 
and out of the CRA--
    Mr. Miller of North Carolina. I am talking about loans in 
the CRA assessment areas by CRA institutions and non-CRA 
institutions, the foreclosure rate was twice as high for the 
non-CRA institutions.
    Mr. Kohn. I am not familiar with that result, but I am not 
entirely surprised in some of the non-CRA institutions where 
those--
    Mr. Miller of North Carolina. Chairman Bernanke and 
Governor Kroszner have both said that CRA has played no 
substantial role. Are you aware of any facts that support an 
argument that CRA played a substantial role that is not 
patently ridiculous?
    Mr. Kohn. I think the thrust of all the studies that you 
cited and some others are that CRA did not play a substantial 
role in this.
    Mr. Miller of North Carolina. The questions I wanted to ask 
today are more about how this first $355 million has been 
spent. I don't expect perfection. I have a very realistic view 
of politics and government. I hold my nose a lot, as I did in 
October. But I do object to living in a kleptocracy. I am, Mr. 
Frank, Chairman Frank said he wanted, expected a substantial 
amount of the $350 billion to come back to us, to get it back. 
I don't want to get a substantial amount of it back; I want all 
of it back. And there is very little in the way it has been run 
that makes me think that is going to happen. You said we are 
getting preferred stock. The legislation also called for 
warrants.
    Mr. Kohn. And we got warrants--
    Mr. Miller of North Carolina. I have a question about the 
warrants we got. There was an article in Bloomberg in the last 
week or two that said all 174 capital infusion agreements were 
identical; that we made a $10 billion capital infusion in 
Goldman Sachs in October. The month before that, Berkshire 
Hathaway, Warren Buffett, had made a capital infusion of half 
of that amount and got 4 times the warrants. And if we had 
gotten the same deal, we would have a 21 percent stake in 
Goldman Sachs, and instead, we have less than a 3 percent 
stake. If we had gotten the same deal for the top 25 
institutions, we would have warrants worth, I think, about $130 
billion. Instead, it is a little less than $14 billion. Do you 
know of an explanation for why we got such a bad deal?
    Mr. Kohn. I think we got a pretty good deal, Congressman, 
and remembering that we were trying to encourage people to 
participate.
    When Goldman went to Berkshire Hathaway, it needed that 
capital very badly because of the situation it was in. We were 
trying to encourage, to shore up the system, rather than 
individual banks, we were trying to encourage participation. If 
we make the conditions too stringent, we won't get the 
foreclosure mitigation. We won't get the credit flowing because 
people won't want to participate. So it is a difficult 
balancing act.
    I agree the taxpayers should get some substantial reward 
for making the investment, but we don't want to discourage 
people from, discourage the banks from participating because it 
is that participation--
    Mr. Miller of North Carolina. Joseph Stiglitz, the Nobel 
Economic Laureate, said that the argument that we need to make 
it attractive to banks is code for giving the money away. It 
seems like if we are getting one-tenth of the upside potential, 
the warrants, that we have a lot of room for making it 
attractive to banks without--or making it something that they 
are willing to do and still protect borrowers, still protect 
taxpayers.
    Mr. Kohn. As I say, I think we are trying to balance those 
factors.
    The Chairman. The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you very much Mr. Chairman. I would like 
to hit two issues right quick if I may.
    First, let me ask you, Mr. Kohn, you are a vice chairman of 
the Federal Reserve system, and as such, let me put this 
question to you: Why not open up the Federal Reserve liquidity 
facilities to State and local debt securities, especially as we 
move to address the issue of stimulating this economy in the 
area of jobs? We have facilities, airports, infrastructures 
ready to move with shovel-ready operations. Why not open up the 
Federal Reserve liquidity?
    Mr. Kohn. We are looking very carefully at whether there 
are ways that we, together with the Treasury perhaps, can open 
up that municipal market and make that credit flow. So that is 
under very serious consideration.
    Mr. Scott. How serious, Mr. Kohn? Are you just saying that 
to me to give a nice response or--
    Mr. Kohn. No.
    Mr. Scott. This is a very, very serious critical situation 
we are in.
    Mr. Kohn. I agree.
    Mr. Scott. And the two most critical things we need to deal 
with are keeping people working and in their jobs and in their 
homes. Let me ask you this as a part of our bill that we have, 
are putting forward, that Chairman Frank is guiding us with, in 
section four, regarding municipal securities, it says that we 
wish to clarify Treasury's authority to provide support to 
issuers of municipal securities, including through the direct 
purchase of municipal securities or the provision of credit 
enhancements in connection with any Federal Reserve facility to 
finance the purchase of municipal securities.
    Mr. Kohn. Right. So I think these are options that we 
should be looking at, particularly when the next $350 billion 
is available to the Treasury.
    Mr. Scott. May I encourage you to make sure that we open up 
these Federal Reserve liquidity facilities to help facilitate 
this because there are projects to do that? Particularly help 
us stimulate the economy and create jobs.
    The other issue, Mr. Bovenzi, I would like to talk with 
you. I am so afraid that we are going the make the same mistake 
that we made with this first $350 billion, unless we pass this 
measure that Chairman Frank has put forward. The biggest 
concern I have, I voted against the first bailout, the first 
time around. Chairman Frank asked us to go and put a plan 
together to address my major concern, which was we didn't do 
anything to help with this foreclosure crisis. We have in this 
legislation, in title II, the TARP foreclosure mitigation plan.
    Mr. Bovenzi, the FDIC is going to be very instrumental in 
carrying this out. I want to get your response to this plan of 
taking up to $100 billion--we haven't put that figure; we are 
saying no less than $40 billion, no more than $100 billion. My 
hope is that we get it closer to the $100 billion level because 
it is about time that we try to get some money into the 
mainstream, into the average American's hands, that will help 
them where they need the help most. We have already given it to 
the banks. And we are going to give them more. But I am 
concerned that unless we get it in writing, it won't happen.
    I was on the Floor trying to work on this bill the last 
time. They said we couldn't even put--the very same thing we 
are trying to do now in Mr. Frank's bill was what we were 
trying to do then, and they said we couldn't write it. We 
couldn't put it in. Now we have it. And I want to get your 
response because we have some deadlines in here and some date 
requirements, that not only did we put that in, that we have 
the plan in place by March 15th, that you have a plan that the 
Treasury and the FDIC have a plan in place by March 15th; that 
it gets approval by the first of April; and that the funds are 
committed, began being committed, by May 15th.
    Can you give me your assessment on this? Is this agreeable 
with the FDIC?
    Mr. Bovenzi. From the FDIC's point of view, we have put 
forward a plan. We recognize that it is not the only plan. 
There can be variations that can work as well, and we are 
willing to work with the new Administration and Treasury to 
finalize a specific plan to get in place within those kinds of 
timeframes. The FDIC is ready to work with the appropriate 
parties to try to get such a plan in place.
    The Chairman. Remaining, now we have some of the freshmen 
members who will go in order, through the first and second 
panel.
    Mr. Grayson.
    Mr. Grayson. Mr. Bovenzi, you mentioned several times today 
in your testimony the importance of transparency. Can you 
explain why that is important? .
    Mr. Bovenzi. I think the committee has talked about that 
several times. It wants to see a strategy for how money is 
being spent, understand how it is being spent, and have 
reporting back from institutions to indicate whether it is 
being used for the purposes desired. In order to give 
assurances to Congress and to American taxpayers that it is 
being used for appropriate purposes, we want greater 
transparency and accountability.
    Mr. Grayson. Is it fair to say that when hundreds of 
billions of dollars of the taxpayers' money is being spent, the 
taxpayers have a right to know how?
    Mr. Bovenzi. Yes.
    Mr. Grayson. Mr. Kohn, how much has the balance sheet of 
the Federal Reserve increased since September 1st?
    Mr. Kohn. It has increased from around $800 billion to 
about $2 trillion.
    Mr. Grayson. And what was that money spent on?
    Mr. Kohn. That money was lent. It was lent to banks, 
investment banks. It was spent on lending through the 
commercial paper market. And it was lent to foreign central 
banks that lent dollars to their banks to take pressure off the 
U.S. dollar market. So it wasn't spent. It was lent.
    Mr. Grayson. Which institutions received it, and how much 
for each institution?
    Mr. Kohn. I don't know which institutions, which specific 
institutions received it, but, by categories of institutions, 
that is captured in our balance sheet that we publish each 
week.
    The Chairman. We would like that in writing, Mr. Kohn, for 
the hearing record.
    Mr. Kohn. I am sorry, what in writing, Mr. Chairman?
    The Chairman. The answer that you didn't have right off the 
top of your head to that question.
    Mr. Kohn. But I think I would, you are going to hold a 
hearing on this, Mr. Chairman, and I think I would be very, 
very hesitant to give the names of individual institutions. In 
fact, I think it would be a very bad idea because I think it 
would undermine the utility of the facilities that we are 
giving. But I think we should say more about the categories of 
the institutions.
    Mr. Grayson. Mr. Kohn, you just said that $1.2 trillion has 
been lent or spent, as the case may be, that is $4,000 for 
every man, woman, and child in this country. Don't Americans 
have the right to know how you spent that money?
    Mr. Kohn. Yes, they have every right to know the purposes 
for which we spent it, the types of spending, the types of 
lending that is going on, how, the types of collateral we are 
taking and what we expect to accomplish with that.
    Mr. Grayson. Specifically, I would like to know how much 
was given to Credit Suisse, and how much you go in return; how 
much was given to Citibank, and what you got in return. If you 
put out $50 billion to Credit Suisse, the taxpayers need to 
know about it.
    Mr. Kohn. I would be very concerned Congressman that if we 
published the individual names of who was borrowing from us, no 
one would borrow from us. The purpose of our borrowing is not 
to support individual institutions but to support the credit 
markets.
    Mr. Grayson. Has that ever happened? Have people ever said, 
we will not take your $100 billion because people will find out 
about it?
    Mr. Kohn. We have never--we have always said we will not 
publish the names of the borrowers so we have no test of that.
    Mr. Grayson. What gave you the authority to say that? Isn't 
that something that we should be deciding, not you?
    Mr. Kohn. I think you gave us the responsibility in the 
Federal Reserve Act to oversee the stability of the financial 
system through our lending facilities to be the lender of last 
resort, and we are trying to execute that to the best of our 
abilities.
    Mr. Grayson. And you are saying that entitles you to keep 
secret the expenditure of $1.2 trillion, $4,000 for every man, 
women, and child in this country?
    Mr. Kohn. I don't think we are keeping it secret. I think 
we are releasing a lot of information about it, but I would 
personally--I would personally be very, very reluctant to 
release the individual names of the borrowers.
    Mr. Grayson. What do you think might happen if people knew 
how their $1.2 trillion had been spent? Do you think they might 
be angry?
    Mr. Kohn. No. I don't know, obviously. I think that they 
can judge how the money is spent from what, how the money is 
lent from what we are telling them and whether it is having an 
effect. And I think it is having a positive effect in a number 
of markets. We have seen the commercial paper market, interbank 
market, etc., so I think it has been effective. But we need to 
do more.
    Mr. Grayson. Mr. Kohn, we are talking about secret payments 
of $1.2 trillion. I think you need to rethink your approach 
here. By the way, were these assets mark-to-market?
    Mr. Kohn. Some of them were. Some of them were loans.
    Mr. Grayson. Why not mark these assets to market and let 
people know the current value of this $1.2 trillion that you 
have spent?
    Mr. Kohn. The ones that have market values are marked to 
market.
    Mr. Grayson. So how much of them don't have market values? 
How much of them are worthless?
    Mr. Kohn. None are worthless.
    Mr. Grayson. Then why don't you mark them to market?
    Mr. Kohn. We are marking the ones--we are marking the ones 
to market that have market values.
    Mr. Grayson. My time is up. Thank you.
    The Chairman. As I said earlier, this is for people to 
understand, this goes under, the authorities, as I understand, 
came from a statute passed in the Depression. It was fairly 
dormant, at least as we knew it, for a while. We were told in 
September, Mr. Bernanke summoned a meeting of the congressional 
leadership committee as well and announced to us with Mr. 
Paulson in September that they were going to advance $80 
billion to AIG. I said, somewhat surprised, to the Chairman of 
the Federal Reserve, do you have $80 billion? He said, I have 
$800 billion. He obviously was low-balling what he had. Maybe 
he made some money in the future. That was in September. I 
don't think the program has been active before. Clearly, a lot 
has happened, and as I announced earlier, I spoke to the 
Chairman last week. We have a hearing that we are setting up. 
Mr. Bernanke will be up here, and we will be having a hearing 
specifically on this program, and I say that the question the 
gentleman raised is a question we will be considering. And I 
think, at an appropriate time, we will be looking at that 
statute. I think this is probably not the time with turmoil in 
the market to be amending it. But the subject the gentleman 
raised will be the subject of an entire hearing in February.
    The gentleman from Connecticut, this panel or the next one.
    Mr. Himes. Thank you, Mr. Chairman.
    I have a question directed to Mr. Kohn. I read with 
interest and heard with interest your testimony that the 
Treasury may consider methods to reduce the uncertainty about 
the value of assets held by financial institutions. This 
objective could be accomplished in several ways, including by 
directly purchasing troubled assets. I note no irony in that 
considering the way the TARP was initially set up and designed 
to do.
    But my question is--I am concerned by the fact that we have 
taken limited or no steps to date to truly separate troubled 
assets from the balance sheets of our financial institutions. 
So my question is twofold: one, do you believe that we will 
achieve stability in the banking sector without separating 
those assets from the balance sheets of our financial 
institutions; and two, you outlined two methods by which that 
might be accomplished, but you are silent on whether there 
might be a market-oriented method. Have we reached a level of 
stability where we might count on market players to both value 
and purchase in quantity those troubled assets?
    Mr. Kohn. Right. I think purchasing or isolating the 
downside risk of those troubled assets from the banks would be 
an important aspect to stabilizing the banking system, 
restoring confidence, and bringing private capital back in. I 
don't know exactly how to do it. I think there are, as I noted, 
a variety of ways to do it, including keeping them on the 
balance sheet but writing an insurance policy against really 
adverse consequences for the banks.
    I think valuing the assets is very difficult. To the extent 
that they have markets and are at market value, I think that 
ought to be the default of the value they would be purchased at 
by the government or by the special bank or the insurance. I 
think the other assets are the loan assets, which aren't on the 
market, have reserves against them, and that ought to be taken 
into account. And they are much more difficult to value. But--
    Mr. Himes. But do you believe that we have reached a point 
of stability that we could count on the distressed debt players 
and other market entities to actually purchase the bulk of 
these distressed assets, or do we need to look to a government 
solution?
    Mr. Kohn. I think the government probably still, 
unfortunately, needs to be part of the solution. I don't think 
we are yet at a place where the private sector is ready to come 
in and start buying those distressed assets. I don't think--we 
hear a lot about money on the sidelines waiting to come in. But 
through this whole crisis over the last 18 months it has come 
in from time to time, and then the crisis has gotten worse. And 
I think people are still very, very concerned about that. I 
wish that were not the case, but I am afraid it is.
    Mr. Himes. Okay. One other question to either of you, Mr. 
Kohn or Mr. Bovenzi, the chairman's bill contains at great long 
last a provision for a national program for foreclosure relief. 
We don't hear much, nor do we see much, about the nonmortgage 
debt that American households are carrying. Are we going to 
hear more about that?
    And should Congress right now be thinking about programs or 
other measures we might take to relieve American households 
from nonmortgage debt, a very substantial amount of nonmortgage 
debt that they carry? Do you see that as a risk and therefore 
something that we should be addressing?
    Mr. Bovenzi. I think Vice Chairman Kohn has talked about 
some of the Federal Reserve programs to try to help in some of 
these other areas of consumer credit and free up securitization 
markets. That is a very positive step.
    Mr. Kohn. The most important thing we could do is get that 
credit flowing again to households, to consumers; and we are 
looking at a variety of ways to do that.
    Mr. Himes. Thank you. I yield back the balance of my time.
    The Chairman. Mr. Peters, this panel or the next one?
    Mr. Peters. This panel, please.
    The Chairman. Go ahead.
    Let me say, when Mr. Peters is finished, we are through 
with this panel. I will ask people to leave quickly, and we 
will seat the new panel.
    Because I have to go to the Rules Committee, we will take 5 
minutes. We want to hear from you. Don't thank us. Don't tell 
us how wonderful your organization is. Don't tell us what we 
already know. Get right to the point, because we don't have a 
lot of time.
    The gentleman from Pennsylvania will take over for me, and 
I hope he will be very rude.
    Mr. Peters. I will be very brief. Many of my questions have 
already been answered.
    I will be fairly brief, because I have been hearing from my 
community bankers. We have heard much about community bankers 
here but in particular in Michigan, being a very hard-hit area 
with the auto industry. In fact, there was a front-page story 
in Crain's Detroit Business just a few days ago which was 
headlined: ``Michigan Banks are Getting the Short End of 
TARP.'' In fact, I will put this in the record but read a few 
parts of it.
    With the deadline of the Federal approval fast approaching, 
a summary of Michigan banks that have received funding from the 
U.S. Treasury as part of TARP is getting the short end. In 
fact, in the first round of TARP, according to the figures here 
in this article, only two of the banks of the 208 banks 
nationwide that received money were in Michigan, and none in 
southeast Michigan, which works out to about 2/10ths of 1 
percent of the TARP funds, which is a figure that is easily 
surpassed by Puerto Rico right now for us in Michigan.
    According to the article, many large and regional banks 
have branches in Michigan that have been approved, but analysts 
expect lending in the State based on TARP money to be extremely 
limited. In fact, our community bankers have gone so far as to 
say Michigan is currently being red-lined as a result of the 
troubles in the auto industry and the fact that the economic 
troubles in the State have gone on much longer than other parts 
of the country.
    So I would like to have you comment on that and any advice 
you have of what we need do in this TARP to make sure that 
particularly hard-hit areas like Michigan get the help they 
need.
    I will quote from the article, though, a regulator who is 
quoted here, before you answer, the regulators aren't going to 
talk about it. What they are going to say is--I know this 
because I was a regulator--we treat all our children the same. 
We apply the metrics fairly. It is the same old baloney.
    The truth is, I don't hold out much hope for our community 
banks getting much TARP money because of the auto crisis. The 
regulators won't say it publicly, but they are saying it 
privately, and I know they are. How would you respond to that 
and what should we be doing?
    Mr. Bovenzi. It is certainly a concern that community banks 
have not received the same participation in the Capital 
Purchase Program to date. When the program started out, it 
focused on publicly traded companies, but it is evolving to 
cover all institutions, including small community banks. 
However, there have been a few complications along the way.
    Many small community banks are Subchapter S corporations, 
which take a different type of capital investment. Also, mutual 
ownership creates other complications. Those are things that we 
are working with the Treasury to resolve so we can have greater 
participation by smaller institutions in the Capital Purchase 
Program.
    Mr. Peters. How about specifically in Michigan? Do you see 
there is a problem with the fact that only two banks have 
received any funding out of TARP in the State of Michigan?
    Mr. Bovenzi. That certainly seems like a concern that there 
are only two banks there. I am sure there are other States 
where participation has not been to the extent that perhaps it 
should be. So, we are trying to broaden the program as soon as 
possible.
    Mr. Peters. And if we can keep close tabs on that, I would 
like to have further conversations with you.
    And, finally, the one last point, too, which is very 
important for us in Michigan in the auto industry and moving to 
sell automobiles, we know that stimulating consumer demand is 
very important. One step that would help is have the FDIC 
approve some pending applications for both Ford and Chrysler 
that would allow their financial ARMs to become ILCs. If you 
could comment on what is holding this application up at the 
FDIC.
    Mr. Bovenzi. There are a number of applications at the FDIC 
that are still under review, including those. We have received 
questions in a number of situations asking if the process is 
getting slower and when decisions are going to be made. A 
number of applications have been approved for new bank 
charters, and there are still many we are looking at.
    Market conditions have gotten tougher, so we are taking a 
more careful look at applications. But, we are trying to be as 
responsive as possible. We will try to get back to people as 
soon as possible on specific applications.
    Mr. Peters. But would you agree that providing this for 
Chrysler and Ford, knowing that money would be put in the hands 
of consumers almost immediately to purchase the automobiles and 
get the economy moving?
    Mr. Bovenzi. I don't really want to comment on an 
individual application. My comments were meant to be more 
general about the process.
    Mr. Peters. Okay. Thank you.
    Mr. Kanjorski. [presiding]. Thank you very much, gentlemen. 
Thank you very much. And in accordance with Mr. Frank's 
instructions, good-bye. Thank you.
    Will the next panel please be seated?
    We are going to have Ms. Janet Murguia, president and chief 
executive officer, National Council of La Raza; Mr. John 
Taylor, president and chief executive officer, National 
Community Reinvestment Coalition; Mr. Edward L. Yingling, 
president and chief executive officer, American Bankers 
Association; Ms. Cynthia Blankenship, vice chairman and chief 
operating officer, Bank of the West, on behalf of the 
Independent Community Bankers of America; Mr. Joe Robson, 
chairman-elect of the board, National Association of Home 
Builders; Mr. Charles McMillan, 2009 president of National 
Association of Realtors; Mr. Michael Calhoun, president and 
chief operating officer, Center for Responsible Lending; and 
finally, Mr. Chris Mayer, senior vice dean and Paul Milstein 
Professor of Real Estate, Columbia Business School.
    Ms. Murguia?

   STATEMENT OF JANET MURGUIA, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, NATIONAL COUNCIL OF LA RAZA (NCLR)

    Ms. Murguia. Thank you.
    Good afternoon, everyone. My name is Janet Murguia, and I 
am president and CEO of the National Council of La Raza. NCLR 
has been very committed to improving the life opportunities of 
the Nation's 44 million Latinos for the last 4 decades. It is 
our 40th anniversary. Thank you all for bringing attention to 
this very important issue.
    The Pew Hispanic Center released a report this week that 
nearly one in ten Latino homeowners missed a mortgage payment 
last year. One in six say there have been homes foreclosed on 
in their neighborhood. These are staggering figures that call 
for a very bold response.
    When Congress approved $700 billion in recovery funds last 
year, it was definitely a bold move. Unfortunately, TARP has 
not lived up to expectations. With more than half the funds 
committed, millions of homeowners have been left out. It is 
time for Congress and the Administration to apply the same 
boldness to struggling families. Unless we intervene, millions 
will lose their home and their financial safety net.
    My written statement makes the case for a national 
foreclosure strategy. It describes how TARP has fallen short 
and shares recommendations.
    In my brief time today, I just want to share with you a 
couple of stories of families impacted by the foreclosure 
crisis. I testified early last year that 2009 and 2010 would be 
the peak years for foreclosures in the Hispanic community. Now 
that 2009 is upon us, I am sincerely concerned that a 
significant number of our community will lose their homes.
    The situation facing Latino families has become infinitely 
more complicated. Not only are their loans unaffordable, they 
are losing their jobs, their home values are plummeting, and 
the cost of daily expenses are going up every day. Meanwhile, 
their chances of getting help have not improved. Servicers are 
still taking months to approve modifications. They routinely 
offer workouts that are simply unaffordable.
    One of our counselors in Los Angeles has been working to 
secure a modification for a family who had their work hours 
cut, but they have been getting the runaround since October. 
This week, the servicer told them they could not approve any 
workouts until their own merger is complete.
    In Detroit, a counselor had to get the State Attorney 
General involved to save her elderly client's home from 
foreclosure. The modification requested was working its way 
through the proper channels. However, the servicer sent the 
file to foreclosure before a determination could be made.
    There are stories like this one after the other. Making 
matters even worse, families in the position to purchase are 
being shut out. So we are getting hit on both sides. Access to 
lending is not happening.
    In Phoenix, one of our counselors was approached by a local 
judge who wanted to refinance his home. He owes less than 80 
percent of his mortgage, has excellent credit, and has never 
missed a payment. Despite being a great candidate, he still 
can't get a loan.
    TARP had two key goals that could have helped the Hispanic 
community: reduce foreclosures; and increase lending activity. 
From where we stand, working with hundreds of thousands of 
families every day, TARP has failed these goals. Period.
    We are also deeply troubled that there has been no public 
disclosure of how TARP money is being spent. We must have more 
accountability.
    We are in dire need of a national foreclosure prevention 
and recovery strategy. The impact of TARP's shortcomings falls 
squarely on the shoulders of hardworking families. Before 
approving any additional funding, Treasury and Congress must 
ask how recipients will ease the impact and burden of 
foreclosures.
    NCLR makes three simple recommendations: First, require 
Treasury to implement a systemic loan modification program. 
NCLR has long supported the FDIC approach. Second, require 
banks to use a portion of TARP funds to increasing lending to 
communities. And third, report the uses and impact of TARP 
funds on a quarterly basis.
    All of these are reflected in Chairman Frank's legislation 
that addresses them quite straightforwardly. The bill mandates 
a foreclosure prevention program and gives Treasury several 
models to choose from. It includes incentives to jump-start 
lending and requires key public disclosures.
    NCLR strongly supports the minimum $40 billion targeted for 
modifications, which represent a mere fraction of the 
investment made in private institutions overall. We won't be 
able to get our economy back on track until we get average 
families in a position to pay their mortgages. It is that 
simple. We look forward to working with all of you toward that 
goal, and we endorse Congressman Frank's legislation.
    I would be happy to answer any questions. Thank you.
    [The prepared statement of Ms. Murguia can be found on page 
160 of the appendix.]
    Mr. Kanjorski. Thank you, Ms. Murguia.
    Mr. Taylor?

STATEMENT OF JOHN TAYLOR, PRESIDENT & CHIEF EXECUTIVE OFFICER, 
        NATIONAL COMMUNITY REINVESTMENT COALITION (NCRC)

    Mr. Taylor. Yes. Thank you.
    Honoring the chairman's request, I am going to skip the 
amenities and the information about NCRC except to say I am 
John Taylor from--
    Mr. Kanjorski. We love you all.
    Mr. Taylor. Wonderful. But I wasn't going to--okay.
    First, we think additional TARP funds should be prioritized 
in the most effective manner that serves homeowners and stems 
the foreclosure crisis.
    NCRC is also pleased that the chairman's TARP reform bill 
provides significant financing of up to a hundred billion 
dollars for foreclosure mitigation, addresses many of the 
barriers frustrating loan modifications, and institutes reforms 
in the Federal Housing Administration's HOPE for Homeowners 
Program.
    NCRC recommends that a significant portion of the remaining 
TARP funds be used to address the foreclosure crisis. Financial 
markets will not stabilize and the economy will not rebound 
until the foreclosure crisis is addressed by the implementation 
of a large-scale loan modification program.
    Moreover, substantial intervention is necessary to respond 
to the contagion effects of the foreclosure crisis. Failure to 
address mounting foreclosures continues to drive home prices 
down, which results in a wider range of problems for the 
financial system and the overall economy. Thus, NCRC recommends 
the investment of the remaining TARP funds in an economic 
recovery program that promotes infrastructure projects and 
small business and micro-enterprises that create jobs and 
rebuilds communities.
    Finally, considering the magnitude of the current financial 
crisis and its potential long-lasting effects, immediate action 
is needed to address the problems that caused this crisis, 
which are unfair and deceptive practices that led to the 
undermining of the national economy. I will begin with the need 
to use TARP funds to address foreclosures.
    To date, TARP funds have been spent on efforts that have 
only marginally contributed to the stabilization of the 
financial system. The first $350 billion were used to inject 
liquidity into the markets through cash investments into 
financial institutions and emergency loans to the automotive 
industry. However, the financial markets remain unstable, as 
preventable foreclosures continue to weaken the national 
economy and devastate local communities. Recently, the second 
report of the oversight panel criticized the U.S. Treasury 
Department for failing to use any of the first $350 billion to 
mitigate the foreclosure crisis.
    Moreover, as detailed in our written testimony, while 
helpful, Federal programs and voluntary efforts to stem the 
foreclosure crisis do not address the breadth and the depth of 
arresting this crisis. Immediate solutions are needed to 
restore the health of our financial system and overall economy. 
Therefore, NCRC recommends that a significant portion of the 
remaining TARP funds be invested in a large-scale loan 
modification program that will assist homeowners.
    In January 2008, NCRC proposed the establishment of a 
national loan modification program called the Homeowners 
Emergency Loan Program, or HELP Now. NCRC believes that HELP 
Now is the type of loan modification program needed to address 
the magnitude of the current crisis. It would authorize the 
Treasury Department to buy troubled loans at steep discounts, 
equal roughly to the current write-downs by financial 
institutions from securitized pools. This will result in a 
relatively low cost to taxpayers. The government would then 
arrange for these loans to be modified through existing 
entities and sell the modified loans back to the private 
market.
    It should be noted that a number of legal scholars have 
suggested that there are legal impediments regarding the 
complexity of selling loans held in securitized pools. Further, 
we all now know voluntary actions on the part of investors and 
servicers have proved minimally successful. Therefore, NCRC 
recommends the alternative approach of using eminent domain 
with the HELP Now proposal to immediately purchase these loans 
from investors and servicers.
    The current economic crisis would justify the government's 
use of eminent domain laws for a compelling public purpose.
    In addition, eminent domain would overcome several 
barriers. Through compulsory purchases of troubled loans, 
reluctant servicers, investors, and lenders would not need to 
be persuaded to participate.
    In addition, as a supplement to a loan modification program 
such as a HELP Now, judicial loan modification should be 
strongly considered. Judicial loan modification would assist 
borrowers facing foreclosures that a TARP program may not reach 
because of the scale of the crisis. Allowing struggling 
borrowers to access bankruptcy protection would enable up to 
600,000 families to seek immediate help to avoid foreclosure, 
again at no cost to the taxpayer.
    In addition, included in this effort should be funds to 
support Legal Service attorneys to represent borrowers of 
modest means. This would ensure that modifications are adhered 
to and redefaults minimized.
    Recently--I will skip this piece here.
    While a loan modification program such as HELP Now would 
help stabilize the U.S. economy, substantial intervention is 
necessary to respond to the contagion effects of the current 
crisis. NCRC believes that economic recovery programs that 
promote infrastructure projects, and small business and micro-
enterprises that create jobs are essential to rebuilding 
communities.
    Mr. Chairman, I see that my time is up, so I want to simply 
ask that I be allowed to also enter into testimony two 
statements, one from the Association for Enterprise 
Opportunity, which represents micro-enterprise organizations, 
to speak about their perspective on use of TARP funds, and also 
from another NCRC member, an organization in St. Louis that 
deals with fair housing matters, and to submit that to give you 
a local perspective of use of TARP funds.
    Thank you very much, sir.
    Mr. Kanjorski. Without objection, it is so ordered.
    [The prepared statement and attachments of Mr. Taylor can 
be found on page 182 of the appendix.]
    Mr. Kanjorski. Mr. Yingling, you are recognized for 5 
minutes.

STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, AMERICAN BANKERS ASSOCIATION (ABA)

    Mr. Yingling. I am pleased to testify on behalf of the ABA 
on the future of TARP.
    The ABA sees this hearing and the legislation that is being 
proposed as an opportunity for a new beginning. Everyone is 
frustrated about the current confused situation. The public, 
the Congress, and I can assure you traditional banks, are all 
frustrated. Strongly capitalized banks that never made one 
subprime loan and that are the foundation for an economic 
recovery find themselves lumped together with failing 
institutions and even institutions that helped cause this 
crisis. We are committed to work with this committee to clarify 
once and for all the purpose of the Capital Purchase Program, 
to target remaining TARP money to where it will do the most 
good and to provide the transparency needed to restore public 
confidence.
    As our written testimony shows, the nonbank credit markets 
are not working. All roads point to traditional regulated FDIC-
insured banking as the foundation for a solid recovery through 
the expansion of bank lending and, as the chairman has stated, 
through applying bank-like regulations to other sectors of the 
financial services industry. It is time to put together a plan 
that will get the job done and that has the clarity to restore 
public confidence. In that regard, ABA has four 
recommendations.
    First, the confusion should be addressed. The various 
components of TARP should be clearly separated within the 
overall TARP program. For example, the Capital Purchase Program 
for healthy banks should be separated from the program to 
support failing institutions. These are different programs, 
with different goals, with different costs and require 
different policies. Unless the programs are more carefully 
defined, Congress cannot do its job of setting policy, having 
effective oversight, and measuring costs and results.
    The bank Capital Purchase Program, or CPP, is now 
constantly confused with other uses of TARP, such as the use of 
funds to support automobile companies, yet they are different 
and in many ways opposites. The CPP is only for healthy banks, 
not for troubled institutions. The CPP was not sought by the 
FDIC-insured banking industry, while troubled institutions have 
sought TARP help. The CPP is designed to enable the banking 
industry to be a strong source of credit going forward when 
other sources, such as securitization, have closed down. And, 
finally, there is little doubt the government will make 
billions of dollars on the CPP, while investments in troubled 
institutions might in some cases cost the government billions. 
I reiterate that the CPP is very different from programs 
designed to help troubled institutions.
    Our second recommendation is that the original $250 billion 
allocated to the CPP be made available and made available 
equally to all FDIC-insured banks. We are not asking for 
additional funding for the CPP, just that the original program 
be fulfilled. As it stands, the current $250 billion allocation 
has in effect been overpromised. In addition, thousands of 
banks are not currently even eligible to subscribe solely 
because of their ownership structure. This is unfair to those 
banks, but, most importantly, it is unfair to their 
communities, which will not have the same opportunities to have 
credit made available. For example, many New England 
communities are served primarily by mutual institutions, and 
yet mutuals are not yet eligible for CPP funding. I do note 
that the Treasury today announced that it is going to make the 
program available to Subchapter S banks, and that will be a big 
help.
    Our third recommendation is that some TARP funds be 
allocated for foreclosure prevention. The housing crisis is 
still central to our economic problems, and foreclosures are 
devastating families and communities. We support using the FDIC 
proposal as a base, and we have put together a group of experts 
to provide information to the Congress and the FDIC to make it 
work.
    Our final recommendation is that the Congress, the new 
Administration, and the regulators adopt a consistent approach 
to our industry. We recognize this is not easy. There is an 
inherent conflict in difficult economic times between lending 
more to help our communities and making sure lending decisions 
are prudent. However, banks are now constantly pushed and 
pulled, encouraged to take CPP capital to support lending, and 
virtually simultaneously told by regulators to build extra 
capital and tighten lending policies. It is a tough balance, 
but our government needs to do better.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Yingling can be found on 
page 200 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Yingling.
    Ms. Blankenship?

   STATEMENT OF CYNTHIA BLANKENSHIP, VICE CHAIRMAN AND CHIEF 
     OPERATING OFFICER, BANK OF THE WEST, ON BEHALF OF THE 
        INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)

    Ms. Blankenship. Yes. I am Cynthia Blankenship, chief 
operating officer and vice chairman of the Bank of the West in 
Grapevine, Texas. I am also the chairman of the Independent 
Community Bankers Association that represents only community 
banks and has approximately 5,000 members.
    My testimony includes recommendations for changes in the 
TARP and the deposit insurance system. We applaud the chairman 
for addressing many of these issues by introducing the TARP 
Reform and Accountability Act of 2009, and ICBA urges its swift 
passage.
    I want to emphasize at the outset that community banks had 
no role in creating the financial problems we are addressing 
today. They did not engage in irresponsible subprime lending 
and have remained strongly capitalized. As a result, we are 
well positioned to drive economic recovery in our communities. 
That is why we are pleased that H.R. 384 directs the Treasury 
to quickly provide the TARP funds for all sizes of 
institutions, including Subchapter S banks like my bank and 
mutual banks.
    Mutual banks still represent about 10 percent of the banks 
nationwide. The Treasury's term sheets released so far do not 
work for these institutions. And, as Mr. Yingling addressed, we 
understand that there will be a term sheet for Sub S published 
tomorrow, but still we have nothing for the mutual banks.
    Those banks play a vital role in their communities, 
particularly in the New England States, where they are the 
predominant small business lenders. While the vast majority of 
community banks generally have enough capital to serve their 
current customers, additional capital from the CPP for 
interested banks would help them serve additional consumers and 
businesses. We urge Treasury to act quickly to include all 
banks in the CPP.
    Additionally, we suggest that a representative of the 
Community Banking sector be appointed to the TARP oversight 
board to ensure that community banks have equal access to TARP 
programs. The TARP programs are not enough. ICBA is hearing 
from community bankers across the country about the overzealous 
and unduly overreaching examiners. They are in some cases 
second-guessing bankers and professional independent 
appraisers, demanding overly aggressive write-downs and 
reclassifications of viable commercial real estate and other 
assets. This will lead to a contraction in credit. Community 
bankers avoid making good loans for fear of examiner criticism. 
Therefore, we recommend that bank regulatory agencies adopt a 
more flexible and reasonable examination policy, particularly 
with respect to real estate lending so that community banks can 
meet their community credit needs.
    The chairman's proposal changing the government foreclosure 
mitigation efforts will also benefit hard-hit communities. H.R. 
384 makes changes to the HOPE for Homeowners Program and 
directs the Treasury to use TARP funds for foreclosure 
mitigation, which should significantly enhance these efforts.
    ICBA is also pleased that H.R. 384 addresses key deposit 
insurance issues. Congress and the FDIC must deal with expiring 
deposit insurance and glaring inequities in the deposit 
insurance system so community banks will have continued access 
to local deposits, which are their main source of lendable 
funds. The bill makes permanent the increase in deposit 
insurance coverage from $100,000 to $250,000.
    ICBA also supports making permanent the temporary full 
coverage of transaction accounts. Both of these programs are 
vital confidence-building measures in our communities.
    ICBA applauds the chairman for including a provision to 
give the banking industry more time to recapitalize the FDIC 
Deposit Insurance Fund, an idea the ICBA has strongly 
advocated.
    Even with these improvements, glaring inequities remain. 
The ``too-big-to-fail'' institutions have a deposit insurance 
product that is far better than traditional FDIC insurance, 100 
percent coverage for all liabilities. Congress should direct 
the FDIC to assess special premiums on these banks that are so 
interconnected with the financial system that the government 
will not allow them to fail.
    Unfortunately, short-term crisis management last fall led 
to the creation of even larger institutions. To prevent a 
recurrence, Congress should break up the systemic risk 
institutions or require them to divest sufficient assets so 
they no longer pose a significant risk to our economy.
    Mr. Chairman, ICBA again commends you and your colleagues 
for working swiftly to address the pressing issues of the TARP 
and deposit insurance. We appreciate the opportunity and look 
forward to working with you on the many services you will be 
dealing with.
    [The prepared statement of Ms. Blankenship can be found on 
page 90 of the appendix.]
    Mr. Kanjorski. Thank you, Ms. Blankenship.
    And now, we will hear from Mr. Robson.

 STATEMENT OF JOE R. ROBSON, 2008 CHAIRMAN-ELECT OF THE BOARD, 
          NATIONAL ASSOCIATION OF HOME BUILDERS (NAHB)

    Mr. Robson. Yes. I thank you for the opportunity to testify 
today.
    The National Association of Home Builders was a strong 
supporter of EESA and the underlying TARP program. 
Unfortunately, while the stated intent of the legislation was 
expanding the flow of credit to consumers and businesses on 
competitive terms, the home building industry continues to 
experience severe credit problems. Additionally, the TARP 
program does not adequately respond to the Nation's foreclosure 
crisis, which must be addressed to keep people in their homes, 
stabilize home prices, and promote recovery of the economy.
    NAHB supports the foreclosure mitigation proposal put 
forward by the FDIC and supports the use of TARP funds to 
address such mitigation efforts. The plan is a creative 
approach to loan modification. It contains features including 
risk sharing with current mortgage holders and enhanced 
compensation for servicers that will facilitate a systematic 
process to rework the terms on troubled loans. NAHB believes 
this approach can produce a significant reduction in impending 
foreclosures.
    NAHB finds it disturbing that banks that have received TARP 
funds have not used the resources to expand credit liquidity. 
For the home building industry, the dramatic deterioration in 
credit availability has severely impacted the acquisition, 
development, and construction credit market. Home builders are 
having extreme difficulty in obtaining credit for viable 
projects. Builders with outstanding construction and 
development loans are experiencing intense pressures as the 
result of requirements for significant additional equity, 
denials on loan extensions, and demands for immediate 
repayment. In short, the credit window has slammed shut for 
builders all over the country.
    NAHB urges the committee to encourage regulators and 
lenders to give leeway to residential construction borrowers 
who have loans in good standing by providing flexibility on 
reappraisals and forbearance on loans to give builders time to 
complete their projects.
    NAHB believes that lending institutions receiving TARP 
funds should be accountable for the use of those funds. NAHB 
applauds the chairman for including provisions for reporting, 
monitoring, and accountability within H.R. 384. Such scrutiny 
should focus on assessing how TARP funds are used to support 
lending, as well as how resources are employed to support 
efforts to work with existing borrowers to work out loans and 
avoid foreclosures.
    The FDIC has just issued a letter to financial institutions 
it oversees to require documentation of the use of TARP funds. 
NAHB urges the other banking regulators to take similar steps 
to incorporate monitoring of TARP fund use in their supervisory 
systems.
    Policy efforts must also address the issue of housing 
demand. Falling home values are at the core of the economic 
crisis, driven by a record high supply of existing homes. 
Congress must pass temporary and targeted incentives to 
encourage Americans to buy homes if we are to stabilize the 
home prices, home values, and market overall.
    To bring consumers back to the market, reduce inventories 
of unsold homes, and stabilize home values, NAHB is advocating 
for a temporary program to strengthen housing demand and 
promote economic recovery. An enhanced home buyer tax credit, 
coupled with a mortgage rate buydown, will help restore 
consumer confidence and stimulate demand for homes by creating 
a sudden incentive for home purchases.
    NAHB appreciates the provision in H.R. 384 directing the 
Treasury Department to develop a program to make interest rates 
more affordable for home buyers. NAHB believes the plan should 
go further by including a specific rate target. We believe that 
temporary and targeted lower rates are needed to produce a 
significant change in home buyer sentiment and stimulate home 
buying demand sufficient to reduce unsold inventories.
    The credit market freeze, the declines in home prices, the 
surge in foreclosures, and the reduction in the home building 
activity are historic in scope, and time for action is now. We 
appreciate your efforts in addressing the shortcomings of TARP. 
Then you again for this opportunity.
    [The prepared statement of Mr. Robson can be found on page 
168 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Robson.
    Mr. Charles McMillan.

   STATEMENT OF CHARLES McMILLAN, CIPS, GRI, 2009 PRESIDENT, 
             NATIONAL ASSOCIATION OF REALTORS (NAR)

    Mr. McMillan. Thank you, Mr. Chairman.
    I am Charles McMillan, president of the National 
Association of Realtors and director of realty relations and 
broker of record for Coldwell Banker Residential Brokerage, 
Dallas-Fort Worth.
    There is no question today that our Nation is facing an 
economic crisis, and housing is at the core. Realtors support 
the TARP Reform and Accountability Act. H.R. 384 reinforces 
NAR's keys to recovery and would help stimulate housing 
investment, mitigate foreclosures, help current homeowners, and 
address the problems with liquidity in the commercial mortgage 
market.
    I am here today to testify on behalf of more than 1.2 
million members of the National Association of Realtors on the 
ground who are involved in all aspects of the real estate 
industry regarding priorities that we believe should be 
addressed when deploying the additional funds for the Troubled 
Asset Relief Program.
    First, we agree that low mortgage rates are key to reducing 
the supply of inventory and stemming further price declines. In 
November, the Federal Reserve announced that it would purchase 
debt and mortgage-backed securities from Fannie Mae and Freddie 
Mac. That helped to reduce mortgage rates by more than 60 basis 
points. It was a step in the right direction, but we can do 
more. Realtors also support the idea of a mortgage buydown, as 
well as other efforts to help reduce rates, including 
additional purchases of mortgage-backed securities.
    Second, we believe ensuring consumers can get or modify a 
home loan is key to our economic recovery. H.R. 384 would help 
in several ways. It requires that a significant portion of the 
second $350 billion in TARP funds be used for foreclosure 
mitigation. It would protect servicers who engage in loan 
modifications from liability as long as they act in accordance 
with the Homeowner Emergency Relief Act. And it would improve 
the HOPE for Homeowners Program by eliminating the 3 percent 
upfront premium, reducing the annual premium, and raising the 
maximum loan to value for many borrowers.
    We support these measures. However, we believe regulators 
also must work with financial institutions to improve the short 
sale process, remove unreasonable underwriting guidelines, and 
insist that credit reporting agencies correct errors promptly.
    Third, Realtors believe a healthy commercial real estate 
market also is key to our economic recovery, and we thank 
Chairman Frank for including commercial provisions in your 
bill. We support efforts to clarify Treasury's authority to 
provide support for commercial real estate loans and mortgage-
backed securities. Another option would be to use the Federal 
Reserve's Term Asset-Backed Securities Loan Facility to provide 
capital for new high-investment-grade commercial loans.
    In addition to the provisions I have mentioned, we ask that 
Congress consider additional incentives to bring buyers back 
into the market and reduce inventory. One of the easiest ways 
is by making the $7,500 first-time home buyer tax credit 
available to all buyers and eliminate the repayment 
requirement.
    We also ask that the 2008 FHA and GSE mortgage loan limits 
be made permanent. As of January the first, the loan limits in 
high-cost areas fell. Regulators also have recalculated the 
median home prices for all counties nationwide, which has 
further reduced the loan limits in many markets. Many borrowers 
are facing higher mortgage rates and are simply unable to 
secure funding. We are concerned, on a related note, about 
recent increases in lender fees imposed by Fannie Mae, and we 
ask that Congress seek an explanation for these higher costs.
    In closing, Realtors agree that by refocusing TARP on 
housing finance and by creating additional incentives for 
potential home buyers we can put our Nation's economy on the 
path to recovery. We thank Chairman Frank for introducing H.R. 
384 to help unlock the housing market and for including 
provisions to address credit problems in commercial real 
estate. The National Association of Realtors and our members 
stand ready to work with Congress and a new Administration on 
these proposals, and I welcome any questions. Thank you so much 
for the privilege to testify.
    [The prepared statement of Mr. McMillan can be found on 
page 152 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. McMillan.
    And now, we will hear from Mr. Michael Calhoun.

  STATEMENT OF MICHAEL CALHOUN, PRESIDENT AND CHIEF OPERATING 
         OFFICER, CENTER FOR RESPONSIBLE LENDING (CRL)

    Mr. Calhoun. Thank you, Mr. Chairman.
    I am Mike Calhoun of the Center for Responsible Lending.
    Time is running out to stem the flood of foreclosures and 
protect Americans from an even deeper financial meltdown. I 
will commend to all of you the recent report from Credit Suisse 
that came out last month. It predicts that over the next 4 
years, 8 to 10 million American households will lose their 
homes to foreclosures. That is one out of six of all households 
in the country that presently have a mortgage. Again, one out 
of six families are projected to lose their homes to 
foreclosure over the next 4 years.
    These devastating foreclosures continue to increase, 
despite the existing efforts. Congress intended when it passed 
the original TARP authorization that there would be substantial 
new efforts to address these foreclosures, but, unfortunately, 
they have not been forthcoming. The challenge is that we are 
caught in a Gordian knot created by the existing securitization 
and servicing structure. Mortgages were fragmented into small 
interests, and then the critical servicing of these loans, 
which includes decisions on foreclosures and loan 
modifications, were placed into the hands of an independent 
party who is financially penalized if they make loan 
modifications. So, not surprisingly, we are not getting the 
results that we would like.
    Several recommendations for the TARP funds.
    First, a significant portion of the remaining funds must be 
committed to directly preventing foreclosures, at least $100 
billion. I would note that means that less than 14 percent of 
the total TARP funds would be used for addressing the core 
problem of the housing market, these foreclosures, and that 
problem is driving the overall financial crisis in our economy.
    Second, these funds must be used effectively and 
efficiently, as they are using precious tax dollars. But if 
there is a lesson we have learned over the last year and a 
half, it is that there is no perfect solution. Just as we do 
not fail to attack cancer because of undesirable side effects, 
we must also realize that the huge economic damage of 
continuing foreclosures far exceeds the cost of new efforts to 
address these foreclosures.
    Third, experience over the last year and a half also 
teaches us that considerable flexibility is needed with 
Treasury still in the use of the TARP funds. For example, as it 
has been noted, the difficulties of the HOPE for Homeowners 
Program when we had prescriptive structure. So the plans should 
include the FDIC program that has been mentioned today, but 
there are other ideas that should be considered as well, some 
of those mentioned by John Taylor today. In addition, 
purchasing service rights to gain control over the modification 
of mortgages, purchasing second liens that currently block many 
of the modifications, as almost half of these troubled loans 
have second mortgages held by different parties that hold the 
first mortgage. And there should be compensation for servicers 
who perform mortgage modifications, as now they have to do this 
at their own expense.
    Finally, payments in exchange for deferred debt should also 
be explored. At the same time that this flexibility is 
provided, the case has been made well today that increased 
accountability, goals and transparency, as demanded in the 
pending legislation, are long overdue.
    Next, we must remove legal and accounting barriers that 
continue to block these foreclosures. These include the 
prohibitions in many of the pooling servicing agreements on 
modifications, the FAS accounting rules that prevent sales of 
loans out of pools to make them eligible for modifications, 
and, as mentioned, exposure to investor lawsuits.
    I will mention in particular an idea advanced by Professor 
Michael Barr, and that is to use REMIC rules as the leverage to 
get these desirable results. All pooling and servicing 
agreements require that they comply with the REMIC rules. And 
that means that if going forward--the REMIC rules provide tax 
status on these pools--if going forward continued tax advantage 
for the pools was conditioned on removing these barriers, we 
think they would rapidly decrease.
    The final point is that I would again urge the bankruptcy 
reform that would permit judges to make limited modifications, 
which would save up to 800,000 families from foreclosure at no 
cost to taxpayers.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Calhoun can be found on page 
119 of the appendix.]
    Mr. Kanjorski. Thank you very much.
    And now, we will finally hear from Dean Chris Mayer. Dean?

 STATEMENT OF CHRISTOPHER J. MAYER, SENIOR VICE DEAN AND PAUL 
  MILSTEIN PROFESSOR OF REAL ESTATE, COLUMBIA BUSINESS SCHOOL

    Mr. Mayer. All right. Thank you.
    I am Christopher Mayer, Paul Milstein Professor of Real 
Estate at Columbia Business School.
    We are witnessing an unprecedented housing and foreclosure 
crisis. House prices are in a near free fall. More than 2.2 
million foreclosures were started last year, representing 3 
percent of all owner-occupied houses. And the problem will get 
worse without prompt action. Over 4 million Americans are at 
least 60 days late on their mortgages.
    We must act now. I am here to describe a two-pronged 
approach to this crisis.
    First, Columbia Business School Professor Glenn Hubbard and 
I propose that the government arrange for the GSEs to issue new 
mortgages at a rate that is 1.6 percent above the 10-year 
Treasury bond. With Treasury rates at 2.4 percent, this would 
immediately lower conforming mortgage rates to as low as 4 
percent.
    I want to be clear. This is not a subsidized rate but what 
the mortgage rate would be if credit markets were functioning 
normally. These mortgages would be profitable for taxpayers. 
House prices have already fallen at or below where fundamentals 
suggest and may decline an additional 10 percent or more 
without action. Our plan would stimulate as many as 2 million 
new home purchases, helping to absorb the inventory of vacant 
houses and putting a floor on house prices.
    Lower mortgage rates would also allow as many as 34 million 
Americans to refinance their mortgages, saving an average of 
$425 per month, or $174 billion per year every year. This is a 
permanent reduction in homeowners' mortgage payments and will 
stimulate higher consumption growth than any one-time tax 
reduction.
    Next, Columbia professors Edward Morrison, Tomasz 
Piskorski, and I have developed a new proposal which was 
distributed with my written commentary to prevent needless 
foreclosures.
    Recent research shows that banks that manage their own 
portfolios are about a third less likely to pursue foreclosures 
than servicers of securitized mortgages. Why do securitizers 
opt for foreclosure? First, it is costly to modify a mortgage, 
and they aren't reimbursed. Second, the servicer faces great 
litigation risk whenever it modifies a loan. Third, some 
securitizations even forbid modifications.
    This is an important problem. Although securitized 
mortgages represent only 15 percent of outstanding loans, they 
account for about half of all foreclosure starts.
    We propose that servicers be paid an incentive fee equaling 
10 percent of mortgage payments, for up to $60 per month. This 
program aligns incentives between servicers and investors and 
makes modification the cost-effective and preferred solution. 
If a mortgage is ongoing, the servicer receives a monthly fee. 
If it goes to foreclosure, there is no fee.
    Second, the Federal Government should eliminate 
restrictions on modification in existing securitization 
agreements along the lines of section 205 in this proposal. 
Explicit contractual restrictions should be deleted. Ambiguous 
provisions that should be clarified via a safe harbor that 
insulates reasonable good-faith modification from litigation if 
the increase returns to investors as a group. We propose 
compensatory payments to the small number of investors whose 
interests might be harmed. But the cost of that is less than $2 
billion in total.
    Our proposal benefits homeowners as much as servicers and 
investors. A homeowner is a prime candidate for loan 
modification when her income is sufficient to make payments 
that over time exceed the foreclosure value of your home, just 
as envisioned in proposed bankruptcy reforms.
    But bankruptcy reform, which is getting a lot of attention, 
is dangerous. Cram-downs raise the cost of future borrowing. If 
just 1 in 12 existing homeowners decided to stop paying and 
pursued bankruptcy, we would have double the current 
delinquency rate and a catastrophe.
    This is not unprecedented. It has happened before with 
credit cards.
    In addition, servicers might actually prefer bankruptcy to 
loan modification, because typical securitization agreements 
reimburse servicers for expenses in any legal proceeding, be 
they a foreclosure or a bankruptcy, but the servicer is not 
paid if they modify the loan. Bankruptcy reform could result in 
millions of needless and damaging Chapter 13 filings, delayed 
resolution of the current crisis for years, and two-thirds of 
all bankruptcy plans ultimately fail.
    The FDIC proposal is a big step forward but has its own 
drawbacks. It encourages servicers to modify as many loans as 
possible, reducing ultimate payments to investors, but does not 
condition the incentive payment on successful modification. 
Additionally, the mortgage guarantee provision could cost 
taxpayers $70 billion and is unnecessary under our plan, which 
would encourage a similar number of modifications for a 
fraction of that price.
    The proposals I discuss today would address the current 
crisis at lower cost and more effectively than other programs. 
Losses for bad loans would remain with private investors, 
rather than taxpayers.
    With prompt action, I believe we can finally begin to plan 
for a housing recovery. Thank you.
    [The prepared statement of Professor Mayer can be found on 
page 142 of the appendix.]
    Mr. Kanjorski. Thank you very much, Dean.
    I am going to pass on my questions, and I will recognize 
Mr. Moore.
    Mr. Moore of Kansas. Thank you.
    I would ask Ms. Murguia, in the Congressional Oversight 
Panel's second report issued on January 9th, the Panel said 
they wanted more information about what standards the Treasury 
uses to select which institutions are to receive TARP money. 
Since they are not here to explain the standards that they may 
use, what standards do you believe should be used to ensure the 
remaining TARP funds are spent fairly and responsibly?
    Ms. Murguia. Thank you, Congressman Moore. Thanks for your 
leadership on this.
    I think the legislation laid out by Chairman Frank here 
includes some of the key incentives that we need to see or the 
key targets, and that is requiring simply to implement a 
systemic loan modification system. We need to require that for 
any of our folks who are engaging with Treasury. Anybody who 
wants to receive these funds has to demonstrate that they are 
willing to come up with that and to show other ways in which 
they are increasing lending and putting capital out to those 
who need that access. And, for us, the key benchmark is a 
systemic loan modification. We need to see that in any piece of 
legislation.
    There are other incentives, and you have heard from other 
folks here about financial incentives that could be added to 
that, but we can't require on voluntary programs any more folks 
to come forward. That simply isn't good enough. We have had 
programs like HOPE for Homeowners and FHA Secure that relied on 
folks to do it voluntarily, and they just haven't been 
effective. We need something systemic, and it needs to be a 
clear incentive for folks to engage in this.
    Mr. Moore of Kansas. Thank you very much. Thank you, Mr. 
Chairman.
    Mr. Kanjorski. Thank you, Mr. Moore.
    Mr. Posey?
    Mr. Posey. Thank you, Mr. Chairman.
    Three very brief questions. First, for the Dean, by what 
mechanism do you suggest that Congress practically implement 
lowering mortgage interest rates to around 4 percent, as you 
recommended?
    Mr. Mayer. I think this would have been an interesting 
question to have asked Mr. Kohn when he was here earlier.
    Essentially, what we are doing now is relying on the 
Federal Reserve to print money and use that to purchase long-
term mortgage-backed securities. That isn't really an 
economically viable solution, and it puts the U.S. Government 
at greater risk. What we should be doing instead is issuing 
Treasuries to offset mortgages. Mortgages are longer duration 
assets, and we can issue Treasuries to support those assets. 
That is a much more viable solution. It is much more efficient, 
and it doesn't rely on broken credit markets, which are 
currently setting mortgage rates that are just too high.
    Mr. Posey. Okay. Thank you.
    And, for Mr. Yingling, in your testimony you cite that 
during the current recession, bank lending has actually 
expanded 12 percent for business loans and 9 percent for 
consumer loans. In this case, what do you think accounts for 
the constriction in credit markets?
    Mr. Yingling. I think it is important to get some facts on 
the table, because I think there is understandably a great deal 
of misunderstanding, particularly among the public and the 
media about this.
    We definitely have a credit crisis. But people extrapolate 
from that and think that means banks aren't lending, like banks 
provide all the credit. Banks in recent years have provided in 
the traditional way about one-third of credit. Two-thirds is 
outside the banking industry.
    In our testimony, we have some very interesting charts, 
because they show what has happened to the nonbank part. And it 
is like a cliff. In the last 6 months or so--or year or so, the 
nonbank lending has gone down almost 90 degrees; and the 
nonbank credit markets are totally broken. It is interesting 
that the bank credit actually in 2008 expanded, as you said; 
and this is highly unusual.
    We have a chart in there that shows during a recession--and 
we now know we have been in a recession all during 2008--bank 
lending generally goes down because the demand goes down. So I 
am not saying there aren't issues relating to bank lending, but 
I think the critical point is traditional FDIC-insured banks 
are in a position to lend, and in fact they not only have to 
continue lending, they have to make up some of this gap from 
nonbank lending. That is why we really need to focus on FDIC-
insured traditional banks, and we would agree with the 
provisions in the bill that talk about methods to measure that 
so we know what banks are doing.
    Mr. Posey. Thank you.
    Mr. Chairman, do I have time for one more question?
    Mr. Kanjorski. I am sorry?
    Mr. Posey. Do I have time for one more question?
    Mr. Kanjorski. You can have it.
    Mr. Posey. Thank you, Mr. Chairman.
    This is for Ms. Blankenship. I have been concerned for some 
time about the delays in the Treasury's deployment of funds to 
small community banks, including S corporations and mutuals. 
Your members are at a disadvantage because of the Treasury's 
inability to roll out guidelines. Can you tell me what your 
discussion with the Treasury has been and what, if any, 
rationale Treasury has provided for such a lengthy delay?
    Ms. Blankenship. It has been a source of frustration, I 
will tell you that, for many community banks. And you are 
right. Roughly one-third of community banks, even as it stands 
today, have no access to TARP funds. And they are highly 
frustrated.
    In our discussions--and we have been working with Treasury 
over the last several months and made suggestions. The response 
is that because of the structure of Subchapter S and the 
inability of their tax structure to be allowed to issue 
preferred stock. But there are other ways around that. You 
could do phantom stock. Or there are other ways. We could 
simply allow Subchapter S banks to issue preferred stock.
    And the mutuals have their own issues as well. I am 
continuing to get letters from members and in particular one 
Subchapter S bank in Florida that was well capitalized. And she 
said, I have made my application, and it has been sitting for 
months, and I am highly frustrated that the big banks got their 
money initially. You need to understand that, when there is a 
mandate for lending, the community banks have nothing to do 
with this money but lend. That is all we can do to leverage it 
and make it. And we make 77 percent of farm loans and 40 
percent of all small real estate commercial loans. We can't 
turn around and invest it. We don't have investments overseas. 
We invest it back on Main Street. So that is why it is so 
vitally important to give this remaining one-third of all banks 
access to this. Because those banks on Main Street are vitally 
important in our communities.
    Mr. Posey. I agree. And frustration is a very kind word.
    I thank you, Mr. Chairman. I yield back.
    Mr. Kanjorski. Thank you very much.
    Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Ms. Murguia, thank you for being here. I was looking 
through your testimony, and on the second page you have a 
quote: ``For the Hispanic community, we expect the height of 
the crisis will likely come in 2009 and 2010, when interest 
rates are scheduled to adjust on loans common among Hispanic 
borrowers.''
    This would suggest what the NAACP suggested, which is that 
Hispanic borrowers were targeted for subprime loans. Do you 
have either empirical evidence or anecdotal evidence that this 
is in fact what has happened in the Hispanic community as well? 
Because we hear a lot in here about how we blame the victim. 
You should not have allowed us to rip you off.
    Ms. Murguia. Sure. Absolutely. And, actually, I was here I 
think a year ago testifying before this committee and talking 
about the nature of predatory lending, offering lots of 
statistics and stories about how in our community--and our 
organization has a network of at least 15--excuse me, 50 
homeownership counseling sites through our network of 
affiliates, community-based organizations which work directly 
through families, trying to get them good information so that 
they can prevent being subjected to this exploitation. And what 
we have found, of course, the best evidence is that when these 
folks have access to good education, when they have been 
prepared to know how to understand the system and navigate that 
system, guess what, none of those families are in homes that 
are in trouble with loans that are in trouble. But when we 
don't have the ability to get to those families and protect 
them and get them the information that they need and with 
people that they trust, then, obviously, we have real problems.
    And what we saw and what we are seeing now is that many of 
those subprime loans, many of the servicers that were targeting 
folks out there clearly targeted those who were most 
vulnerable. And a lot of those folks were out there.
    Of course, you always have a small fraction of folks who 
maybe should have known better. By and large, we understand 
that can happen. But, by and large, we are talking about a 
number of people who were not given the right information. The 
landscape just was not fair for them in terms of the folks who 
work with them.
    When they are working outside of those community-based 
organizations, they are just very vulnerable. And we have seen 
that happen through our own network and seen story after story 
where that has been the case. And, of course, now that is being 
proven out through the statistics that we are seeing here 
today. And we are going to see 2009 and in 2010 this higher 
peak of percentage of those loans that will go into foreclosure 
among the Latino community.
    And, obviously, it is important for us to say we can step 
in, we can still intervene and help protect some of these 
families from losing those homes. But it is going to require 
this bold effort by Congress to move on legislation like this 
so that we can have an intervention and so that we can have 
this systemic ability to have modifications tied to what 
families can really afford. If we can do that, the FDIC model, 
the mod in a box, we can get some progress on helping folks 
save those loans and helping financial institutions not inherit 
properties they have no knowledge of what to do with and no 
real recourse for what to do with them.
    So, obviously, we see that as a real problem. We think this 
legislation that Chairman Frank is offering will help us move 
in the right direction. But the key, Congressman Cleaver, is 
accountability. We have had all this money go out the door. And 
even if we just put some quarterly reporting here we would be 
able to tell you how families could be or were being served. 
Right now, nobody can talk about that, because they can't point 
to any evidence that Treasury has been able to come up with. So 
accountability really matters, especially now.
    Thank you.
    Mr. Cleaver. That segues into a question for Mr. Calhoun.
    In your testimony you mentioned that considerable 
flexibility should be allowed for the Treasury. We just went 
through that. We just went through considerable and, I must 
add, stupid flexibility for Treasury. Nobody can speak for 
Congress, but I can almost assure you that if flexibility is 
built into any legislation for Treasury it ain't going 
anywhere. I know it is bad English, but it is good politics.
    Mr. Calhoun. When I talk about flexibility, I am talking 
about how they carry out the foreclosure prevention program. 
But the legislation I think is actually well designed, and 
requires that by March 15 there be a specific foreclosure 
prevention program that also has to be approved by the TARP 
oversight board and failure to do that cuts off all of the TARP 
funds. So I applaud that approach in the legislation. So I 
agree with you, the past experiment worked very poorly.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Kanjorski. Mr. Lance.
    Mr. Lance. Thank you, Chairman Kanjorski.
    My questions are directed at Professor Mayer. Mr. Calhoun 
said, as I understand it, roughly one in six mortgages may be 
in foreclosure, those who have mortgages. Those are dramatic 
numbers. You stated in your testimony that foreclosures will 
increase unless we do something quickly, and I think Congress 
will do something quickly. But you also say it is important to 
protect taxpayers. As I understand your written testimony, you 
believe that section 204 can be improved and not as much money 
necessary as has currently been anticipated. Could you explain 
that in a little greater detail?
    Mr. Mayer. Yes. Probably the most expensive provision, and 
I think the FDIC estimates of the mortgage guarantees are about 
$25 billion. I think one could easily look at what existing 
loan modification programs have done and easily come up with 
estimates that are much higher than that.
    So the question is if we are going to spend what I would 
guess is $50 billion to $70 billion or more on mortgage 
guarantees, you would really like to know that is going to be 
effective.
    To our view, the barrier for servicers is not about the 
Federal Government guaranteeing mortgages, the barrier for 
servicers are really twofold. First, they are not compensated 
to modify loans properly, and they are not incented to do that. 
And the second is that they have very complicated pooling and 
servicing agreements.
    So under our proposal we break down both of those barriers. 
We explicitly call for change in contracts where necessary to 
make clear that servicers' duty is to improve returns for all 
investors.
    Mr. Lance. And that can be done constitutionally?
    Mr. Mayer. That can be done constitutionally, and this is 
co-authored with a professor at Columbia Law School who has 
clerked on the Supreme Court, Professor Edward Morrison.
    And the second part of this is we believe that there are 
better ways to incent servicers. So instead of paying $1,000 
for a modification, we should pay you less money up front but 
more money every month as the borrower makes payments. So the 
modification has to be successful.
    Mr. Lance. Thank you. Then going on regarding your 
litigation safe harbor suggestion, the legal standard of 
servicers' reasonable good faith belief, I have a concern that 
might be interpreted differently among the various Federal 
circuits, and if you would comment on that and how we might be 
able to resolve that issue.
    Mr. Mayer. Not being an attorney, I will defer to working 
with my co-author and other people on this. This has been 
vetted by constitutional scholars at various other law schools 
as well as including at least one sitting Federal judge.
    Mr. Lance. I do have the burden of being an attorney, and I 
would appreciate any written information you have through the 
Chair.
    I yield the balance of my time.
    Mr. Calhoun. There is some suggestion, and some of it is 
incorporated in the existing legislation, of setting up a 
standard net present value test and then if the servicer 
complied with that net present value test so that it showed 
that the projected recovery to the investors was higher with 
the modification than with the foreclosure, then that would 
provide a more definite test. I share the burden and your same 
concern.
    Mr. Lance. Thank you, Mr. Chairman.
    Mr. Kanjorski. Thank you, Mr. Lance. Mr. Perlmutter from 
Colorado.
    Mr. Perlmutter. Thank you, Mr. Chairman.
    I am going to start with Mr. Yingling. You and I have been 
at several of these hearings starting in September, November, 
and now. Mr. Calhoun, in answering one of Mr. Cleaver's 
questions, said that TARP has not performed well, or 
``poorly,'' I think was your term. We have heard credit crisis, 
liquidity crisis, housing crisis, foreclosure crisis. Have we 
done anything by TARP from September until now? Have we 
improved the situation as we saw it and we were presented with 
information in September of this year?
    Mr. Yingling. In some ways, yes. But there are really 
terrible problems left.
    We have a chart in my testimony that looks at the spread 
between LIBOR and Treasury, and I don't want to get too 
technical. But back at that period, the international lending 
markets were a disaster. It shows how that spread had spiked up 
to historic levels and so banks around the world wouldn't lend 
to each other. That has come down. I think it is clear there is 
more confidence in the financial markets. So we have 
accomplished something.
    Mr. Perlmutter. I think at the time the big concern was 
banks were not lending to one another. That was the testimony 
that we had, that this was like the panic of 1907 when banks 
refused to do business with each other because they didn't know 
which bank would be left standing. Have we improved that 
situation?
    Mr. Yingling. Yes, we have improved that situation.
    Mr. Perlmutter. I have taken a lot of heat for voting for 
this bill, and I want to know whether we have made some 
progress somewhere.
    My second question, when we have had these hearings, we 
talked about stabilizing the markets, restoring confidence, and 
stimulating the economy. A lot of what I am hearing, Mr. 
Robson, from the Realtors, we want to stabilize real estate 
prices so we can start building again. So many people rely on 
the value of their homes as really their whole net worth. I 
have heard from Dean Mayer and I know that the Realtors are 
supporting kind of a refinancing buydown so we can start buying 
and selling houses. In the bill that we have before us, it 
doesn't really give us any particulars, but do you see with 
Dean Mayer's proposal or some other proposal how we can get the 
real estate market moving again at a 4, 4\1/2\, 5 percent 
lending rate?
    Mr. Robson, I will turn to you first.
    Mr. Robson. I am not sure if 4, 4\1/2\ percent is enough. 
We are advocating 2.99 for a short period of time, maybe go up 
to 3.99 percent. It is really more of a shock to the system. 
Certainly, mortgage mitigation is important. You have to keep 
the excess inventory from building up. But you also have to 
have some sort of stimulus to encourage buyers to get back in 
the market because they are staying away. They are afraid. It 
is the biggest investment that most people are going to make, 
and they are going to be very cautious in doing it today.
    Mr. McMillan. I did not flippantly make the comment that I 
was representing Realtors and representatives of consumers on 
the ground. I think one of the things that we need is more 
realism in the workout. We speak of loan mitigation and we 
speak of recidivism amongst those who were mitigated. One of 
the things that is not addressed is there has not been realism. 
When we talk about loan modification, when the lender 
acquiesces to reduce the existing mortgage by 10 percent when 
the market shows that this property has clearly fallen 30 to 40 
percent, they are just prolonging failure.
    The other thing that I see when we talk about mitigation of 
mortgages, we are only speaking of workout. We are not 
advocating that a homeowner keep their home at any expense. But 
the circumstances show that the homeowner is not in a position, 
perhaps they have lost their job, then we are looking at 
realism with respect to the short sale. And the short sale will 
permit the property to be purchased by an able and willing 
borrower today, many of which we bring to the table, with 
proper credit credentials and offering a reasonable price with 
respect to today's market, and that is sabotaged by delaying 
tactics and others that eventually permit the property to go 
straight to foreclosure.
    Mr. Perlmutter. Thank you.
    Mr. Kanjorski. The gentleman from Illinois, Mr. Manzullo.
    Mr. Manzullo. Mr. Chairman, may I ask if there is anybody 
left in the room from the Federal Reserve or the FDIC? Anybody 
here from those organizations? Raise your hands.
    I think that is the problem; they are gone. They don't 
understand that really there is a consensus here that you have 
to get people to start buying houses again. Pouring money to 
bail out crappy loans, that is not going to do any good. That 
is why I encouraged them to read Ms. Blankenship's testimony. 
No one is talking about the zealous over-regulators that 
seemingly have a mission to destroy community banks. Ms. 
Blankenship, what is going on there?
    Ms. Blankenship. What we are hearing from our bankers in 
the field is that in many cases you have examiners coming in 
and they have a knee-jerk reaction, if you will, from this 
crisis. I believe our system is broken in one respect in that 
you should have regulation according to risk. The banks that 
actually got us into the bailout, if you will, got the money 
first.
    Mr. Manzullo. The guys who caused the problem or the people 
who caused the problem got the money.
    Ms. Blankenship. Right. We are sitting on Main Street, and 
yet we have to deal with over reaction by the examiners, 
reputational risk, lack of confidence by our own customer base, 
and so we have had to spend all this time and resources 
reeducating our customers while our business model is a basic 
business model and my banking business model has nothing in 
common with Bank of America.
    Mr. Manzullo. When you were here a couple of months ago 
with your fellow colleague from Texas, who is the head of the 
Automobile Dealers Association, and we talked about the fact 
that money has been out there, has your bank ever had a crunch 
on lending money to people who want to buy automobiles?
    Ms. Blankenship. No, but we have had decreased demand 
because we had competitors, the GMAC and some of the other 
nonbank lenders, even the credit unions, who were able to offer 
substantially lower rates. The money is there to lend.
    Mr. Manzullo. Somebody created the myth--no, it is not a 
myth when it gets to guys who are building subdivisions and on 
that level. But when we talked to--what is name of the lady who 
is 300 miles away from you, which is across the street in 
Texas, but she said that at her Ford dealership, and as I talk 
to people across the country, people come in and say, I didn't 
think I was going to be able to buy this car, and people are 
saying that probably with homes, and the people who got it 
right here are those who say the only way out of this mess is 
to empower those people who are still working to buy homes. 
That is the only thing that is going to work. Everything else 
is patchwork. You can have all of the remedies you want for 
mortgage mitigation, etc., but if people are not working, 
everybody is wasting their time and those poor folks will end 
up losing their homes anyway.
    Another example, I have a 150-year-old building in downtown 
Oregon, Illinois, population 3,500. I just got two tenants 
after it being empty for almost 2 years. When I sell it, if I 
resell it, there is a huge recapture tax. If I didn't have to 
pay that recapture tax, I would take that right off the 
property and lower it a tremendous amount of money. But my 
problem is, where are the people in government who think 
according to free market and common sense principles? Anybody? 
Mr. Taylor, you want to use eminent domain. That is about as 
far from free market as possible, but I will give you a chance 
to answer the question.
    Mr. Taylor. I just want to say, it is your free market that 
brought us to this situation. It was a market that was free to 
cheat and free to corrupt, it was all of those things. It is 
the lack of regulation. It is not overregulation that got us 
here.
    Mr. Manzullo. We know that.
    Mr. Taylor. I agree with you, jobs are part of the answer. 
But we need to understand if we allow another 8 to 10 million 
foreclosures to occur, I can assure you that many of the 
homeowners in your district right now who are working will lose 
their job.
    Mr. Manzullo. But if you restart the automobile industry, 
it is so easy because you will be the direct beneficiaries of 
that. When people go back to work in the automobile industry, 
it goes all of the way up the line. It is trickle up. That is 
how it works.
    Thank you.
    Mr. Kanjorski. Mr. McMillan?
    Mr. McMillan. Mr. Chairman, I wanted to address his 
commercial challenge because we represent commercial real 
estate as well, and we have many anecdotal stories from our 
commercial practitioners, many of them owners of high-quality 
commercial assets themselves, and have been with lenders for 
many years. Many of them have 50 percent equity and their loan 
is about up and the lenders are refusing to give them money.
    One of the things that we propose is the use of the Federal 
Reserve's Term Asset-Backed Securities Loan Facility to provide 
capital for those new high investment commercial grade loans.
    Mr. Kanjorski. Thank you. Mr. Ellison.
    Mr. Ellison. Thank you, Mr. Chairman.
    Mr. McMillan, I am going to pick up right where you left 
off. Many of my people in Minneapolis say the next shoe to drop 
is the commercial real estate market. Do you agree with that?
    Mr. McMillan. Absolutely. That is our next crisis and that 
crisis, sir, is more imminent than we know.
    Mr. Ellison. How did the commercial borrowers get into this 
mess? The general wisdom in the residential market is there is 
a proliferation of exotic mortgages, 2/28s, 3/27s, all of that 
stuff. How did you guys get into all this stuff?
    Mr. McMillan. Sir, that is an excellent question. The 
analysis by our folks show that the majority of businesses are 
fueled by small businesses, and those are the tenants in these 
commercial buildings. As these small tenants themselves 
experience difficulty in financing, the vacancy rates begin to 
go higher. And we have seen vacancy rates in many commercial 
markets move from traditionally 3 percent to 10 percent, which 
we know is problematic when we begin to do our due diligence 
with respect to analyzing commercial purchases.
    Mr. Ellison. One of the points I have tried to make to 
people is if you do the business of selling mortgages and you 
go into the market 3 and 4 times in the morning and 3 or 4 
times in the afternoon, you are at an advantage with anybody, 
whether they be a residential purchaser or a commercial 
purchaser. Therefore, we need the regulation Mr. Taylor is 
talking about because we have a significant imbalance.
    Moving on, we have heard that we have a demand-side problem 
here, that unemployment income is a real issue. Mr. Calhoun, 
can you talk to me about this phenomenon of the FICO scores 
that are very high being the only ones who can actually borrow 
money these days? Do you agree with that and what do we do 
about it?
    Mr. Calhoun. I think everybody at the table would agree 
there is essentially no private label lending, that all of the 
mortgage lending that is occurring today is government 
guaranteed through FHA, VA, or Fannie or Freddie. They have 
generally imposed higher FICO score standards.
    We need to expand back through both FHA and the GSEs, more 
access to those lower FICO scores.
    Part of the problem is again we have talked about mixed 
messages. There has been, if you will, an overreaction of 
credit. Credit was too loose and needed to contract some, but 
there has been a substantial overreaction and the markets need 
to be loosened up, and the TARP funds--I want to make sure that 
my comments were understood before--the TARP funds have 
stabilized credit markets and eased credit in some significant 
ways. Their greatest failing is they have done little or close 
to nothing in terms of foreclosure prevention, which not only 
keeps families in their homes but it prevents a flood of 
inventory on the market. In markets like California, 40 to 50 
percent of the real estate transactions are foreclosures and 
REOs and they are crowding out the home builders, who can't add 
any inventory to that overflooded market.
    Mr. Ellison. Mr. Taylor wants to discuss the FICO score 
issue, and I might want a house, might need a house, but if I 
have a 600 score, not a 700 score, I can't get a loan.
    Mr. Taylor. There is no reason that a healthy competitive 
banking system, this system represented by Mr. Yingling, can't 
meet the needs of low- and moderate-income and blue-collar 
working class people. In fact, they did quite effectively up 
until 2003, when we had a steady growth in homeownership rates 
among low-income people and among minorities. There were huge 
jumps. In 1993 and 1994, a 50 percent increase in new 
homeowners in African-American and Latino communities. 
Tremendous success, all prime lending. In fact, if you look at 
the high-cost lending that did occur, this predatory, toxic, 
usurious, free market stuff that was allowed to occur 
unregulated, less than 10 percent was to the first-time home 
buyer. Less than 10 percent to a new homeowner. Half was 
refinance, the other half was people expanding their house.
    Mr. Ellison. That is an important observation. I have been 
singing that song myself.
    Let me say, part of the new TARP bill, the chairman's bill, 
says there will be a safe harbor for servicers who will modify 
loans. This safe harbor is something you all support, I assume. 
Can you talk about the importance of this provision? And also 
if you might, how we need to get investors in this conversation 
if we are going to do anything more than just voluntary 
modifications: What are the investors going to do?
    Mr. Kanjorski. Mr. Ellison, you have run out of time. Does 
somebody want to answer?
    Mr. Taylor. All these questions always end with how are we 
going to get the investors involved, and that is the problem. 
With servicers, their primary obligation is to maximize profits 
for the investors, for the trustees. That is their job. So, 
yes, we support that safe harbor because that will give them 
the security of being able to make some modifications, but they 
are still going to make modifications where many are going to 
end up redefaulting because they are not going to get the 
investor to go along at the level that needs to occur.
    I wish some Member of Congress would look at the eminent 
domain idea because none of you strike me as having taken the 
time to have done that. Look at what that offers because that 
gets at all of the investor problems. That gets at all of the 
voluntary issues, and it brings that mortgage down to a level 
where we don't even need a 50 percent guarantee and we could 
have the free market refinance these loans and taking the loss 
that has already been suffered on Wall Street. Take a look at 
that.
    Mr. Mayer. Our proposal does precisely that in a legal way 
without the mortgage guarantees, I would sort of reiterate 
that, and it does so in a legal and constitutional way without 
having investors step in and impair modifications. So I would 
encourage consideration of that view.
    Mr. Kanjorski. Thank you.
    Eminent domain is primarily State law, not Federal law. 
Each State has a different process through which you exercise 
eminent domain. So what you are suggesting is that we preempt 
State law and nationalize it. I won't argue that may be where 
we are headed, but you really want to think seriously before we 
usurp all real estate law at the Federal level.
    Mr. Taylor. I am talking about a national problem. If you 
want to wait for the States to pass legislation to try to do 
something, good luck. But the Federal Government has the 
authority; there is no question about it.
    Mr. Kanjorski. Mr. Foster.
    Mr. Foster. Mr. Robson, I should say I am a little 
pessimistic about the near-term prospects of restarting the 
home construction industry when there is a big overhang. We are 
basically overbuilt.
    I was fascinated by your comment in your written testimony 
that there is no overhang in multi-family homes. If that is 
true, that means that is where there is hope that we could 
incentivize something that might restart some construction.
    Mr. Robson. That would be correct except nobody can get 
financing.
    Mr. Foster. Can you get some documentation for this zero 
overhang in the multi-family homes?
    Mr. Robson. It is just the vacancy rates. When people are 
foreclosed on, they have to go somewhere. That is the bottom 
line. There is always an offset between excess inventory in 
single family versus multi-family. The problem is there is 
very, very little multi-family being built now because they 
can't get financing.
    Mr. Foster. Professor Mayer, I think this represents as 
good an example as I have seen of a semi-voluntary mortgage 
modification plan. Have you or someone scored the effect on the 
balance sheets of the big financial players, the taxpayers and 
so on, of each of these things to the best of your ability?
    Mr. Mayer. There is no way to effectively do it because you 
don't know who owns what securities. We have put forward very 
detailed cost estimates as to what this would cost various 
groups, including taxpayers. Our estimate for taxpayers is that 
the total cost of the servicer incentives is about $9 billion. 
The cost of making aggrieved investors whole is very modest at 
$1.7 billion. So the total cost to taxpayers of our program is 
$10.7 billion. We estimate it reduces at least a million 
foreclosures. But I will say essentially the proposal is very 
similar to the FDIC except that it provides higher powered 
incentives for people to modify loans than is true under the 
FDIC, and we see no need for the incredibly expensive mortgage 
guarantees where taxpayers were taking on half the losses 
because mortgage guarantees aren't the problem, and so why 
should we spend that kind of money on something where it is 
unnecessary to achieve something that we are trying to get.
    Mr. Foster. In your testimony, you indicated that you felt 
housing prices had already fallen below what their fundamentals 
would suggest, and you have a link on your written testimony 
that appears to be broken, at least on my hard copy. I would 
appreciate getting that information because that again is 
fascinating, if true.
    Mr. Yingling, first, I have to commend you on the numbers 
and the graphs. You are right, the graphs on page 9 and 
following are tremendously interesting. And since they say they 
are from the Fed, maybe we can believe them.
    The one labeled ``Bank Lending Continues To Grow'' and 
shows that bank lending has been essentially constant or so 
slowly growing during all of this period, which is very 
different than what we are hearing anecdotally. Is the mix of 
loan types changing? If we are seeing a lot of the loans that 
are increasing are preestablished credit lines that are finally 
being exercised, and in order to cancel that you are actually 
squeezing on other small businesses, and so on, because this 
really seems like it is inconsistent with what I am hearing 
from my constituents who come to my office every week 
complaining that the banks are cutting them out in ways that 
they didn't use to.
    Mr. Yingling. These graphs could add 55 footnotes to 
explain all of it. I think there is a little bit of the element 
you just talked about. There is some drawing down credit lines. 
But let me have sent to you the details on all of it.
    But I think the fundamental fact is still true, that it is 
amazing that bank lending, traditional bank lending, has held 
up because if you look at the other graph that talks about 
during recessions, it almost always goes in the tank as loan 
demand goes down.
    I think it is true there are loans available and, sure, in 
individual instances credit lines have been tightened. But 
there is a gross misperception that lending is not available 
from banks.
    Mr. Foster. Do you have a breakdown of the different types?
    Mr. Yingling. We can provide all that. We will give you a 
complete breakdown.
    Mr. Foster. Thank you.
    Mr. Kanjorski. Mr. Driehaus.
    Mr. Driehaus. As we are about to be called over to vote, I 
guess I would like to focus on one aspect of this crisis that I 
don't think gets nearly enough attention. Mr. McMillan, you 
talked about being real and looking at the reality of this 
situation. It seems to me that TARP has to some extent thawed 
the credit crisis and, thanks to the efforts of Chairman Frank, 
we are going to see an increase in foreclosure mitigation.
    But the communities I represent have been paying the price 
of this foreclosure crisis for years. And a $7,500 tax credit 
is just not going to do the job in terms of incentivizing 
people to go in and purchase homes. It is barely going to cover 
the cost of the copper pipe that was stripped out of the home 
in the first place.
    We have a crisis of huge proportion in these low- and 
moderate-income neighborhoods. My fear is that this 
legislation, the TARP legislation, isn't going nearly far 
enough to help those neighborhoods recover. I waited for this 
panel because so many of you represent the folks on the ground, 
the folks in those neighborhoods.
    So while I don't expect you to give me the answers right 
now, and we actually all have to run out of here to vote, I 
would encourage all of you to think about that, whether this 
addresses that part of the problem, those communities like 
Cincinnati and other older cities that are struggling over the 
enormity of the costs associated with the foreclosure crisis 
and how we are going to help them recreate the market because a 
$7,500 tax credit just doesn't do it.
    I would encourage you to forward your responses in writing 
to myself and the committee. That may begin this conversation.
    Mr. Kanjorski. Thank you very much. Mr. Maffei.
    Mr. Maffei. I want to thank the panel for staying so late. 
Given my position on this august committee, I have a feeling I 
will be thanking panels a lot for being here.
    I just want to follow up on something Mr. Foster was 
questioning about. Mr. Yingling, about your charts, because I 
think you put this as simple as I have heard it yet, which is 
that banks are continuing to lend and in fact are lending at a 
higher rate but the secondary market is so completely dried up. 
My constituents, like Mr. Foster's, are experiencing this as 
banks lending less. They are experiencing freezing in their 
home equity lines of credit. They can't get car loans and they 
can't get student loans in some cases, and it is the bank that 
is telling them no even if it may be the secondary market. Can 
you explain why that is or how we can describe that better?
    Secondly, does title IV of the chairman's bill address that 
at all when it gives additional authority to the Treasury 
Department for purchasing asset-backed securities that would 
help with loans for autos and student loans?
    Mr. Yingling. The answer to the last question is yes. Part 
of it is just education. The media goes out and says bank 
lending is down, and it confuses people. Mr. Manzullo had an 
interesting comment. And I had an occasion just this week where 
an Ohio banker told me that an automobile dealership in his 
small town closed down and the automobile dealer said, it is 
because I can't get credit for my auto loans. And then the 
reporter came to the banker and said, why aren't you lending 
for auto loans? The answer was that he was lending. It was the 
captive finance company of that automobile company that 
couldn't get loans out. So I think a lot of it is education.
    The secondary market is really a huge problem in student 
loans and credit card loans and auto loans. People don't 
realize that half the funding of credit card loans has 
historically come from the secondary market. So we need two 
prongs. We need to support banks around the country so they can 
pick up some of the slack here, and we need to undertake 
methods to unfreeze the secondary market.
    Mr. Maffei. My district is, according to Forbes magazine, 
the second best. This is Syracuse, New York, the second best 
real estate market in the country, not because our property 
values are going up but our property values are not going down 
and yet people are getting their home equity loans stopped 
essentially in their tracks.
    Mr. Yingling. In our testimony, there are numerous 
government policies that move in the opposite direction. It is 
amazing to see the conflicting messages that banks get. Our 
accounting policies are a prime example of it.
    Mr. Maffei. One last question, and then I will go vote and 
allow the chairman to dismiss you.
    Would some of these smaller loans, would that be helped by 
easing up, and I am assuming I know your answer to this, but 
easing up for the community banks? Are they more likely to 
offer those kinds of loans, is that part of the problem, bank 
lending continues to grow but is more on the bigger bank side 
than the smaller banks?
    Mr. Yingling. I think it is all banks. But certainly, 
community banks are a major source. Mr. Taylor talked about the 
fact you go back a little ways in history and you would find 
that banks did a lot more of it and they did it better. We 
talked about the foreclosure crisis and we talked about the 
ability to work out loans if you actually made the loan. So I 
think there is a strong reason to focus on the traditional 
FDIC-insured banks as the basis for getting us out of this 
mess.
    Mr. Maffei. Ms. Blankenship, do you have anything to add to 
that?
    Ms. Blankenship. Yes. As I stated earlier, we have to be 
able to put those loans on our balance sheet. And I haven't 
seen the data, but I would believe the community banks have 
increased their lending simply because our balance sheets--
really that is the biggest part of our assets, our balance 
sheet. Unlike some of the larger regional or the super large 
banks, they have investments and off balance sheet assets, but 
we only have liquid assets and primarily loans. That's how our 
model works. We have to make those loans.
    Mr. Maffei. So if more TARP funds became available?
    Ms. Blankenship. Yes.
    Mr. Maffei. If you have any data on that, please send it to 
us. Thank you, Mr. Chairman.
    Mr. Kanjorski. Just 30 seconds to Mrs. Maloney.
    Mrs. Maloney. First, I would like to thank the panelists 
and be associated with the comments of my colleagues on the 
need for TARP money and focus on government programs to help 
Americans stay in their homes and help stabilize the markets, 
help our economy, and help individual families.
    I am pleased to see, Mr. Yingling, that more credit is 
getting out into the communities, but that certainly is not 
what we are hearing. The stories I hear from my constituents 
are that commercial lending they once had access to is no 
longer there, that the lines of credit for businesses with good 
balance sheets that have been around for decades providing 
services, they are having their lines of credit cut and that 
the lending is not there. So what is the shift that is the 
problem? If banks are putting more money out there, then other 
sources of lending must be cutting back. We do know about the 
problem with the cars that my colleagues mentioned, but then we 
just put TARP money out there for GMAC to start loaning 
specifically for cars. What we hear from the economists who 
come before us is that we have to get this economy moving and 
the small loans going out there to be moving forward.
    I would say that in our TARP efforts, we have stabilized 
the financial markets considerably. There were many forced 
marriages, mergers, acquisitions that were in response to 
economic crisis, and that was the purpose of them. But we are 
now hearing that the financial institutions are now asking for 
a second TARP program.
    Now this second TARP program, what are you hearing that 
this should be used for? Since the institutions are stabilized, 
is it to buy the toxic assets which we have not done in the 
past, or in what specific way do you think this additional 
access to capital should be used? And first and foremost, even 
though your statistics are great that more lending is out from 
financial institutions than ever before, that is not the story 
we are hearing from Main Street and our districts. We are 
hearing from legitimate, respected businessmen and women that 
they do not have access to capital. If banks are lending more, 
where is the cutback that they don't have it? Yet, they tell me 
that they used to get it from their bank and now they can't get 
it from their bank.
    Thank you for your efforts to help stabilize our economy 
and move us forward in a positive way.
    Mr. Kanjorski. Thank you, Mrs. Maloney. Who do you have 
that question directed to?
    Mrs. Maloney. Mr. Yingling.
    Mr. Yingling. I will be brief.
    I don't want to say that there aren't terrible problems 
still in the credit markets. We think if we get the rest of the 
CPP money, that is the part of the program that goes to banks 
that was originally talked about so that the community banks 
and others get it, that ought to be enough, and that the focus 
going forward needs to be on other programs and those programs 
with the stimulus and the TARP ought to be on these other areas 
that people talked about: foreclosure prevention, on getting 
the secondary markets opened up, and getting the housing 
started, and that we need a broad approach to lending that 
covers all of these types of things.
    Mr. Kanjorski. Thank you very much, Mr. Yingling. Thank 
you, Mrs. Maloney.
    Mr. Scott, 15 seconds.
    Mr. Scott. With this economic crisis really challenging 
even some of our strongest financial service companies, can you 
tell this committee what role the Federal Home Loan Banks have 
played for your industry and what your recommendation for them 
going forward would be? I think it is important to get the 
Federal Home Loan Banks' perspective?
    Ms. Blankenship. For many decades, Federal Home Loan Banks 
have played an important role for the community banks in 
particular because they provide a source of liquidity for us, a 
source of funding at a time when the funding is becoming more 
and more challenging for community banks. We have to have the 
ability to gather those funds so that we can turn those funds 
around and loan them back and invest in our communities. So we 
need the government to understand that and we need Congress to 
help ensure that we can still have access to those Federal Home 
Loan Banks because without that we have to fall back on 
borrowing from other banks or other sources of maybe higher 
cost of funds, which in turn makes the loans higher.
    Mr. Scott. Do you have any specific recommendations going 
forward?
    Mr. Yingling. We will provide those for the record.
    Mr. Kanjorski. I want to thank the panel. I am sorry I 
didn't get a chance to ask questions. Thank you all for being 
here and giving of your time here today. The committee fully 
appreciates it.
    This meeting stands adjourned.
    [Whereupon, at 6:44 p.m., the meeting was adjourned.]





                            A P P E N D I X



                           January 13, 2009






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