HOUSING FINANCEWHAT SHOULD THE NEW

SYSTEM BE ABLE TO DO?: PART I

GOVERNMENT AND STAKEHOLDER PERSPECTIVES

HEARING
BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION

MARCH 23, 2010

Printed for the use of the Committee on Financial Services

Serial No. 111115

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WASHINGTON

56779 PDF

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HOUSE COMMITTEE ON FINANCIAL SERVICES

BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
ZQUEZ, New York
NYDIA M. VELA
MELVIN L. WATT, North Carolina
GARY L. ACKERMAN, New York
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
DENNIS MOORE, Kansas
MICHAEL E. CAPUANO, Massachusetts
N HINOJOSA, Texas
RUBE
WM. LACY CLAY, Missouri
CAROLYN MCCARTHY, New York
JOE BACA, California
STEPHEN F. LYNCH, Massachusetts
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
AL GREEN, Texas
EMANUEL CLEAVER, Missouri
MELISSA L. BEAN, Illinois
GWEN MOORE, Wisconsin
PAUL W. HODES, New Hampshire
KEITH ELLISON, Minnesota
RON KLEIN, Florida
CHARLES A. WILSON, Ohio
ED PERLMUTTER, Colorado
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
CARSON, Indiana
ANDRE
JACKIE SPEIER, California
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

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware
PETER T. KING, New York
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
RON PAUL, Texas
DONALD A. MANZULLO, Illinois
WALTER B. JONES, JR., North Carolina
JUDY BIGGERT, Illinois
GARY G. MILLER, California
SHELLEY MOORE CAPITO, West Virginia
JEB HENSARLING, Texas
SCOTT GARRETT, New Jersey
J. GRESHAM BARRETT, South Carolina
JIM GERLACH, Pennsylvania
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia
PATRICK T. MCHENRY, North Carolina
JOHN CAMPBELL, California
ADAM PUTNAM, Florida
MICHELE BACHMANN, Minnesota
KENNY MARCHANT, Texas
THADDEUS G. McCOTTER, Michigan
KEVIN McCARTHY, California
BILL POSEY, Florida
LYNN JENKINS, Kansas
CHRISTOPHER LEE, New York
ERIK PAULSEN, Minnesota
LEONARD LANCE, New Jersey

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel

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CONTENTS
Page

Hearing held on:

March 23, 2010 .................................................................................................
Appendix:
March 23, 2010 .................................................................................................

1
73

WITNESSES
TUESDAY, MARCH 23, 2010
Berman, Michael D., Chairman-Elect, the Mortgage Bankers Association
(MBA) ....................................................................................................................
Bowdler, Janis, Deputy Director, Wealth-Building Policy Project, the National
Council of La Raza (NCLR) .................................................................................
Calabria, Mark A., Ph.D., Director, Financial Regulation Studies, the Cato
Institute ................................................................................................................
DeWitt, Robert E., Vice Chairman, Chief Executive Officer, and President,
GID Investment Advisers LLC, on behalf of the National Multi Housing
Council and the National Apartment Association .............................................
Geithner, Hon. Timothy F., Secretary, U.S. Department of the Treasury .........
Malta, Vince, 2010 Vice President and Liaison to Government Affairs, the
National Association of Realtors .........................................................................
ODonnell, Vincent F., Vice President, Affordable Housing Preservation, Local
Initiatives Support Corporation (LISC) ..............................................................
Sanders, Anthony B., Distinguished Professor of Real Estate Finance, School
of Management, George Mason University ........................................................
Wartell, Sarah Rosen, Executive Vice President, the Center for American
Progress (CAP) .....................................................................................................

48
56
50
54
7
59
52
58
47

APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E. ...................................................................................
Berman, Michael D. .........................................................................................
Bowdler, Janis ..................................................................................................
Calabria, Mark A. .............................................................................................
DeWitt, Robert E. .............................................................................................
Geithner, Hon. Timothy F. ..............................................................................
Malta, Vince ......................................................................................................
ODonnell, Vincent F. .......................................................................................
Sanders, Anthony B. ........................................................................................
Wartell, Sarah Rosen .......................................................................................
ADDITIONAL MATERIAL SUBMITTED

FOR THE

RECORD

Frank, Hon. Barney:

Written statement of the National Association of Federal Credit Unions ..
Maloney, Hon. Carolyn:
Written responses to questions submitted to Vincent ODonnell .................
Royce, Hon. Ed:
Written responses to questions submitted to Hon. Timothy F. Geithner ....

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HOUSING FINANCEWHAT SHOULD

THE NEW SYSTEM BE ABLE TO DO?:
PART IGOVERNMENT AND
STAKEHOLDER PERSPECTIVES
Tuesday, March 23, 2010

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The committee met, pursuant to notice, at 10:03 a.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Watt, Sherman, Capuano, Hinojosa, McCarthy of New
York, Baca, Lynch, Miller of North Carolina, Green, Donnelly,
Minnick, Peters, Maffei; Bachus, Castle, Royce, Paul, Manzullo,
Biggert, Miller of California, Capito, Hensarling, Garrett, Neugebauer, Marchant, Posey, Jenkins, Paulsen, and Lance.
The CHAIRMAN. The hearing will come to order. Let me make an
announcementI dont know why I say, let me make an announcementwhos stopping me? I am now making an announcement.
The President is signing the health care bill today. That is why
there are so few Democrats here and why there may soon be fewer
Democrats here because the signing is now. Ordinarily, I would
have considered postponing the hearing, but this hearing has already been postponed once. Were about to go into recess. We have
a crowded hearing schedule. We have hearings coming up on Lehman Brothers, on Greece, and on some other issues, therefore, I did
not want to postpone this hearing, and so were going to go ahead.
And what I will do is proceed. Members will get a chance to ask
questions if and when they come, but thats why we are somewhat
thin, particularly on the Democratic side.
I also want to announce that we are, I think, close to some agreementthe gentlewoman from West Virginia and the gentleman
from California have been working on the FHA reforms. I know
there has been a lot of Minority/Majority cooperation there. And we
were on track to have a markup on Thursday. We will now almost
certainlywell, we wont be having a markup on Thursday, we
have to give notice. We probably wont be here. But we will schedule that markup as soon as we come back, and I think we will have
an agreement on an FHA bill to come to the Floor.
Finally, we are going to go ahead on Thursday with the hearing
on the Federal Reserves need to deal with the liquidity that they
have provided and what they will ultimately do. Mr. Watt wants
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to go ahead with that, and I agree with him. Once again, we have
had postponements because of the snow and other reasons. So that
hearing, the hearing on the Federal Reserve, will go forward on
Thursday. The markup obviously will not happen since we almost
certainly wont be here.
And with that, I recognize for the first opening statementwe
have 8 minutes of opening statements under our agreement on
each sidethe chairman of the Subcommittee on Capital Markets,
which has jurisdiction under our rules over the GSEs, the gentleman from Pennsylvania, Mr. Kanjorski.
Mr. KANJORSKI. Thank you very much, Mr. Chairman. Last
June, the Capital Markets Subcommittee held the first hearing on
housing finance in the 111th Congress to examine the present status and future structure of Fannie Mae and Freddie Mac.
Today, we continue with what will undoubtedly be a long-term
negotiation about the prospective configuration of our Nations
housing finance system. As a result of considerable stress in our
economy, and because of a need to maintain access to affordable
mortgages, then-Secretary Paulson placed Fannie Mae and Freddie
Mac under conservatorship in late 2008. Since then, the Treasury
Department has committed to purchase more than $125 billion in
preferred stock of the enterprises. Government agencies have also
purchased in excess of $1.3 trillion in mortgage-backed securities.
Together, these actions and others have helped to keep housing
credit available for Americas middle class and prevented a complete collapse of our housing markets.
Lawmakers also must now begin to grapple with what type of
housing finance system we should construct for the future. In this
regard, we have no shortage of ideas. While we must give a
thoughtful consideration to each of these proposals, we must keep
in mind the importance of why we created housing GovernmentSponsored Enterprises in the first place, to increase liquidity and
to improve the distribution of capital available for home mortgages.
My goals in this debate are: to establish a more stable, long-term
funding source to help average Americans buy a home; to limit taxpayer risk through strong regulation; and to ensure that the housing finance system continues to support community bank and credit union lending. The task before us is not all that different from
the one that engineers and policymakers faced in preparing for the
Big Dig, the enormous construction project that significantly
structured how traffic flows through downtown Boston.
We must figure out what pieces of the old housing finance system worked and keep them. We also need to determine what parts
of the infrastructure we need to eliminate. In order to ensure access to affordable mortgages in the interim, we must additionally
work to keep capital moving through the financial pipelines during
our legislative debates.
Finally, we must figure out how to pay for this enormous undertaking. As we kick off this years deliberations, the Treasury Secretary has joined us. In the near future, we will also hear from the
Secretary of Housing and Urban Development. After the completion of these initial proceedings by the full committee, the Capital
Markets Subcommittee will renew its examinations of these matters by exploring more detailed and technical questions related to

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Government-Sponsored Enterprises and our Nations housing finance system.
In sum, Mr. Chairman, I appreciate your efforts in convening
this hearing as we receive testimony regarding what functions a
new housing finance system should be able to perform. We also
have to work to do no harm to those parts of the housing finance
system that have worked well, and to protect taxpayers from future
losses. I look forward to a fruitful set of discussions.
The CHAIRMAN. The gentleman from AlabamaI am now reading from the Republican listis recognized for 1 minute.
Mr. BACHUS. Thank you, Chairman Frank, for holding this very
important, and I think long overdue hearing. Its unacceptable that
more than 18 months after the GSEs were placed in conservatorship the Treasury Department still does not have a plan for Fannie
and Freddie. Without reform, the bailouts will not stop, the housing market will not find its footing, and the American economy will
not recover. But so far the response has been to pledge unlimited
bailout aid and guarantee all the GSE debt, which has already cost
the American taxpayers more than $127 billion.
The question posed is, what should the new system be able to do?
The answer is simple: Protect taxpayers from further losses and
bailouts in order to build a stable housing finance system based on
private capital. While the Administration and Congressional Democrats have remained silent, Republicans have introduced legislative
measures to immediately address the failuresI yield myself an
additional 20 seconds
The CHAIRMAN. The gentleman is recognized for 20 seconds, but
it will all come out of the 8 minutes.
Mr. BACHUS. and to put forth real solutions. Mr. Chairman, I
hope today is the beginning of open dialogue between Congress and
the Administration and that you follow the leadership of House Republicans and phase out Federal credit privileges and taxpayer
support and guarantee of Fannie and Freddie. Thank you.
The CHAIRMAN. The gentleman has consumed 1 minute and 26
seconds. We are going to hold ourselves to this. So, the gentleman
from California is recognized for 112 minutes.
Mr. ROYCE. Thank you, Mr. Chairman. We are all well aware of
the damage caused by the mortgage giants Fannie Mae and
Freddie Mac. Because they were perceived to be governmentbacked, they were isolated from market forces that would have otherwise prevented the excessive risk-taking. As a result, they wiped
out any form of competition and formed a duopoly over the prime
secondary mortgage market and dominated much of the junk loan
market.
As a matter of fact, between homeowners and flippers, 30 percent
of the loans they held were flippers, you had over 10 million individual loans outstanding in 2008, held or guaranteed by Fannie
and Freddie. Those junk loans accounted for 85 percent of their
losses. They were at the heart of the housing bubble. The 1992
GSE Act, which included the affordable housing mandates, played
a significant role in the accumulation of those junk loans. Going
forward, these requirements should be repealed, as should any
other mandate on financial firms that puts at risk the safety and
soundness of the institution for a broader goal. They were over-

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leveraged 100 to 1. I carried legislation on the House Floor that
would have allowed the deleveraging of the institutions, would
allow the regulators to do that. Never in the future should we allow
that kind of arbitrage and overleveraging of institutions like this,
and thats why I say the 1992 GSE Act with the affordable housing
mandates frankly should be dropped. Thank you, Mr. Chairman.
The CHAIRMAN. The gentlewoman from Illinois, for 1 minute.
Mrs. BIGGERT. Thank you, Mr. Chairman. Since entering into
conservatorship in the fall of 2008, Fannie Mae and Freddie Mac
have lost $174 billion, and billions more in losses are anticipated.
Taxpayers have loaned the Enterprises over $127 billion and are
liable for over $5 trillion in outstanding mortgage obligations.
Edging out private sector mortgage market participants, Fannie
Mae and Freddie Mac guaranteed or financed over three-fourths of
new single family home mortgages in 2009. Taxpayers deserve to
know where their dollars are going, what risks they are being exposed to, and how these institutions are being managed or mismanaged. Republicans have proposed reforms that will impose
some commonsense accountability on these institutions and take
immediate steps to wind down the immense risk they pose to the
long-term stability of our housing market.
GSE reform is critical. I yield back.
The CHAIRMAN. The gentleman from California, Mr. Miller, for 1
minute.
Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. As we
know, the government currently owns 80 percent of Freddie and
Fannie. We can all agree that the current scenario is not one that
should last indefinitely, but I must disagree with anyone who suggests that Freddie and Fannie were the cause of the current housing crisis and must be abolished immediately.
In California, Freddie and Fannies serious delinquency rates are
dramatically lower than the jumbo market, evidence that while
many of their loans were bad, they are outperforming the rest of
the market. Currently, Freddie and Fannie and FHA make up
roughly 90 percent of the loans made today. I have yet to see a viable alternative from this Administration or this Congress. We must
find a path to effectively return Freddie and Fannie to profitability,
allowing the government to recoup its investment in the secondary
firms and ensure that there is a viable secondary mortgage market
while removing the government from the home loan business.
I look forward to hearing testimony from the witnesses today on
how we should reform GSEs. Thank you. I yield back.
The CHAIRMAN. I now recognize myself for the remaining 4 minutes and 40 seconds on our side. I very much agree that this is a
subject that has to be addressed. Thats why I initiated the scheduling of this hearing. I regret the fact that constituency commitments of mine made us hold off a couple of weeks. We will have
the Secretary of HUD coming forward. And I want to stress that
I believe this should be seen as a hearing and as a legislative task,
more importantly, not simply about Fannie Mae and Freddie Mac,
but about housing finance.
We have a very complex housing finance system that was allowed to grow in bits and pieces without any overall vision. There
is the FHA and Ginnie Mae, two Federal agencies. There is Fannie

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Mae and Freddie Mac, hybrids as they were, public shareholder
corporations given by a variety of congressional and presidential
mandates from both parties directions to do good, which came into
conflict in some ways with their private mandate.
There are the Federal Home Loan Banks, which should not be
left out, which play a very important role in the housing finance.
We will have two hearings here. We have a very large number of
private sector witnesses, and I will say that many of them will be
in agreement with what we just heard from the gentleman from
California. We have two jobs here today. One is to figure out the
best way to wind down Fannie Mae and Freddie Mac. But an
equally important job is to decide what goes in their place.
Now when I say decide, much of that will be purely private. It
will not be government-mandated. But there will be some role for
government agencies in figuring out the interaction of all of these,
who provides liquidity to the secondary mortgage market? Is there
a role for subsidy? My own view has always been that its a mistake for the government to heavily subsidize homeownership, and
that we are much better off trying to subsidize rental housing because when you put people into decent rental housing, you do not
confront the problems that we have seen from putting people inappropriately into homeownership. But there are some claims to be
made for helping some working people get into homes after careful
scrutiny. That may be partly the FHA, but it may be some other
modes as well.
So, yes, it is important to put into place a way to wind down
Fannie Mae and Freddie Mac. I believe the overwhelming consensus from people concerned about the economy in general and
the role of housing in the economyRealtors, home builders, mortgage bankers, bankers, advocates for various groups, advocates for
minority groups, and advocates for lower-income peopleall agree
that simply abolishing Fannie and Freddie, as well as we do that,
would not be enough for this committees role. We also have to
make decisions about what replaces it.
Now again, many of those replacement entities will be purely private and may need no role for us. I notice there was a piece in the
Republican bill that said, well, any State or Federal Government
can charter a corporation to do this. Sure they can. They already
can. And we would expect that. But I think those who are going
to be doing the purely private aspect have a right to know, what
is the role of Fannie Mae going to be? Where will the Federal
Home Loan Banks be?
So again I stress, and this is the beginning of this process, we
will simultaneously, I hope, be figuring out how best to wind down
Fannie Mae and Freddie Mac and make sure that before that is
completed, we are ready to replace the functions they are now performing in the economy without leaving this great vacancy. Its the
old story that says you cant really tear down the old jail until you
build the new one. And thats partly where we are with regard to
this effort.
We have a very important set of functions that are being performed, and its important for us to deal with the replacement of
Fannie Mae and Freddie Mac knowing that there will be a new set
of institutions that will deal with housing and that will also deal

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with the economy. And as I said, thats one of the things that we
get from all of the participants in the economy who are coming forward.
The goal of this committee will be to, I hope, come out with legislation that does both of those jobs: winds down Fannie Mae and
Freddie Mac; and appropriately puts the government into places
where it should be and leaves room for the private sector where the
government shouldnt be.
The gentlewoman from West Virginia is recognized for 1 minute.
Mrs. CAPITO. Thank you, Mr. Chairman, and I would like to
thank you for this hearing today, something that needs immediate
attention. Our Nations housing finance system is slowly recovering, but the system is being dominated by the GSEs, and we
need to work together to restore a strong private market presence.
As many of my colleagues know, the FHA is facing serious challenges with their capital reserve levels. Im pleased that Secretary
Donovan and Commissioner Stevens are taking a proactive approach in seeking a bipartisan consensus to resolve FHAs challenges, and were still working through that process.
Unfortunately, the same commitment to reaching a consensus
could not be said for the Administrations approach to the GSEs.
Despite the complete collapse of Fannie and Freddie in 2008, and
the massive taxpayer exposure, the Administration chose to barely
mention the reform of these entities in their budget this year.
The time for action is now. Republicans on this committee have
put a statement of principles forward. The Federal Government
should not be playing this large a role in the Nations housing finance system. We need to begin determining the roles of the GSEs
and what the appropriate role for the government is in housing finance.
I look forward to hearing the testimony of the witnesses. Thank
you.
The CHAIRMAN. Next, we have for 1 minute and 10 seconds, Mr.
Hensarling.
Mr. HENSARLING. Thank you, Mr. Chairman. Of all the dumb
regulation and legislation that caused our economic crisis, none
was dumber than that which created the GSE monopolies and gave
them ever-increasing affordable housing missions. In other words,
the Federal Government told them, we will let you monopolize a
market as long as you securitize and insure mortgages for people
who cannot afford to pay them.
Regardless of many good motives and good people, ultimately the
story of the GSEs is one of enriched executives, cooked books, political bullying, a massively inflated housing bubble, millions of home
foreclosures, a shattered economy, and the mother of all taxpayer
bailouts. The answer from the Administration to all of this, page
352 of the budget, quote, The Administration continues to monitor
the situation. It is unacceptable to protect the structural status
quo to announce Christmas Eve multi-million-dollar bonuses for
their executives and announce unlimited taxpayer exposure.
Republicans are attempting to lead. Im attempting to be one of
them. Thats why I have introduced H.R. 4889, the GSE Bailout
Elimination and Taxpayer Protection Act, that over a 5-year period
would transition the GSEs to an innovative and competitive mar-

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ketplace without taxpayer bailouts. I encourage members to consider it, and I yield back.
The CHAIRMAN. The gentleman from New Jersey, for 1 minute.
Mr. GARRETT. Thank you, Mr. Secretary. It has been 3 months
since the Obama Administration lifted the $400 billion cap on
Fannie and Freddie and also allowed to be paid out literally millions of dollars to executives whom a lot of people are saying simply
losing the taxpayers money. And today is simply our very first
hearing on the topic, which I think is unbelievable. The ranking
member and I sent a letter to the chairman immediately after that,
saying we should have a hearing on this. It has been 3 months. We
have had 20 hearings on other sundry issues, and its only now
that were having this hearing today on one of the most important
topics, over $400 billion in CBO estimates as far as the cost of it.
For a lot of these people, its uncomfortable to discuss this issue
because some of them played a supporting role in helping the demise of the GSEs, Fannie and Freddie. But, from your perspective,
I know you said in the paper, AP has a story that says, if we rush,
theres risk if we do not achieve enough and not get consensus or
something on this, through sweeping enough. Rush? It has been almost 18 months
The CHAIRMAN. The gentlemans time has expired.
Mr. HENSARLING. since we have had this collapse. I dont think
18 months
The CHAIRMAN. The gentlemans time has expired. The Minority
is entitled to divide its time as it wishes. Im not the one who says
people should get 1 minute, but if you have 1 minute, you get to
talk for 1 minute. The Secretary of the Treasury is now recognized
for his statement.
STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER,
SECRETARY, U.S. DEPARTMENT OF THE TREASURY

Secretary GEITHNER. Chairman Frank, Ranking Member Bachus,

and members of the committee, thanks for giving me the chance to
come before you again. I want to compliment many of you for pointing out that the challenge of reform of the GSEs requires a broad
look at the full range of government institutions that operate in the
housing market. This is a complicated, difficult question, but I
think were now at the point where we can begin a serious effort
to build consensus on reform.
Fannie Mae and Freddie Mac played a significant role in this financial crisis. Over the past decade, they were allowed to take on
excessive risk and leverage with inadequate capital and inadequate
oversight. And by the fall of 2008, their potential collapse posed a
threat to the entire American financial system. Fannie and Freddie
operated with a perception of government backing, which allowed
them to take on significant leverage and build up a retained portfolio to a size the market never would have allowed for a fully private enterprise.
Meanwhile, the government did not move quickly enough to put
in place a set of restraints on their activities, restraints that would
have protected the system from failure. This committee understands as well as anyone that these failures were not unique to
Fannie and Freddie, which is why you moved late last year to pass

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a comprehensive set of financial reforms for the rest of the American financial system.
The failures of Fannie and Freddie were symptomatic of failures
in the financial system as a whole, failures made by people over
a long period of time. As the GSEs were growing, they retained
portfolios and taking on tremendous amounts of risk, there was a
damaging erosion in underwriting standards and a buildup in leverage across the rest of the financial system.
Private companies, mortgage brokers, and large financial institutions with no government backstop and support were also becoming
overleveraged. These institutions were offering credit that too
many Americans could not afford and in many cases did not understand. And underlying all of this, of course, was the unrealistic assumption that housing prices would always go up. Together, these
failures brought America to the edge of financial collapse.
Over the past year, the Administration, Congress, and this committee have made important progress towards comprehensive financial reform, and today this hearing marks the beginning of the
next stage in the process of reform, evaluating how to bring reform
to the GSEs and the entire housing finance system. Over the coming months, were going to consult broadly across the public and
private sector, across both sides of the aisle, working closely with
this committee and your counterparts in the Senate to take a fresh,
cold, hard look at the core problems in our system. Were going to
consider a full range of options, a full range of alternative models
to determine what role the government, and what role the private
sector should play in promoting a stable and efficient housing finance system.
We believe any reform should meet the following broad objectives: to ensure broad and reliable access to mortgage credit; to provide financing for affordable rental housing and ownership for
Americans; and to protect consumers and to safeguard the stability
of our financial system.
Effective reform has to end the system in which the benefits of
government support were captured by shareholders rather than
homeowners and where the taxpayers were left with very substantial losses.
As we move forward, its critical we facilitate a smooth transition
to any new system, and I want to be clear. Treasury remains committed to supporting the continued activities of the GSEs in conservatorship. We will continue to make sure they have sufficient
capital, the capital necessary to perform under any guarantees
issued now or in the future, and to meet their debt obligations. And
we will be very careful not to pursue policies or reforms that would
in any way threaten to disrupt the function or liquidity of the securities they have issued or the ability of Fannie and Freddie to
honor their obligations.
Thank you, Mr. Chairman, and I look forward to your questions.
[The prepared statement of Secretary Geithner can be found on
page 126 of the appendix.]
The CHAIRMAN. I thank you, Mr. Secretary. And before I get to
the questions, I do want to address some of the history. The gentleman from New Jersey raised some questions. First of all, he said
that we have been waiting 3 months for the hearings. Well, as he

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knows, 3 weeks of that came because I had it rescheduled on
March 2nd, and had to postpone it, and this was the first day we
could get. So I think the desire to make points here sometimes
breaks out of the bounds of normal conversation. Yes, the hearing
would have been 3 weeks ago, but I had a problem, and we do have
other hearings that are scheduled. Many of those hearings, by the
way, have been at the request of the Minority.
But he also then said that it was uncomfortable for some of us
to talk about this because of our role in helping Fannie and
Freddie. The gentleman from California, Mr. Royce, also mentioned
his efforts to try and rein things in. Well, its true. And again, the
history gets forgotten here. The Republican Party controlled the
House from 1995 through 2006. No legislation became law at that
point. The House did pass a bill in 2005 under the chairmanship
of Mr. Oxley to reform Fannie and Freddie. Most of the Republicans supported it. Some opposed it as too weak. Its true, the gentleman from New Jersey thought that was not a good bill, but it
was a Republican bill in a Republican House.
So the notion that some of us on this side, I dont know whether
the assumption is that we inhabited Mr. Oxleys body, that we
somehow captured his mind, that we were working through Mr.
DeLay, who was running the House at that point. Im not sure
what thebut it is true, the gentleman from New Jersey, Mr. Garrett, offered an amendment to strike the higher cost loan limits,
and he did get some support. The gentleman from New Jersey
mentions in 2005 under Republican control, he actually got 53 Republican votes. Of course, 168 Republicans voted against him.
Those voting against him included my friend here, Mr. Bachus,
Mrs. Biggert, the minority leader now, Mr. Boehner, Mr. Cantor.
These are all apparently our tools. I have to tell you, you dont
know how good we are that I got all these people to vote to undermine poor Mr. Garretts valiant effort here.
So then Mr. Royce had his bill. He did a little better than Mr.
Garrett. He got 70 Republicans and only lost 153 of them. And
again, the same people voted against him: Mr. Oxley; Mr. Boehner;
Mrs. Biggert; and Mr. Bachus. So this notion that it was the Democrats who stopped him. By the way, Mr. Garrett had previously
said, well
Mr. GARRETT. Would the gentleman yield on that?
The CHAIRMAN. Ill yield if I get unanimous consent for an additional 40 seconds, sure.
Mr. GARRETT. I think my words actually were to the Secretary
that some members of this committee were uncomfortable with discussing this issue, and looking at my notes, I never mentioned
Democrats once at all, so I think the chairman doth protest too
much.
The CHAIRMAN. I dont know what doth protest too much
means when someone is correcting something. I thought he had
said people on the other side. But if in fact he was referring to Mr.
Bachus and Mrs. Biggert and Mr. Castle and Mr. Boehner and Mr.
Cantor, I accept my correction, and I appreciate his making sure
that people know that he was criticizing them, not just some of us.
Mr. Royce got 70 Republican votes. The same group of people
voted against it. By the way, the bill that the Republican House

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passed was then denounced by the Republican President. Some will
remember famously Mr. Oxley saying that he could have passed
this legislation in 2005 if he hadnt gotten the one finger salute
from the White House. The Secretary of the Treasury at the time,
Mr. Snow, was in favor of going forward. What happened then was
the Republican Senate and the Republican House had a fight and
no bill passed.
Then comes 2006, and Mr. Paulson becomes Secretary of the
Treasury, and as he reports in his book, he asked for permission
to negotiate with the Congress. He got the President, whom he admires for doing this to let him do it, over the objection of many others in the White House. He then mentions in the book that he
began negotiating with me and with the Democrats. In that next
election, the Democrats got the Majority. He then points out in his
book that we honored the agreements we had made and that in
2007. When we took office, we passed a bill that he said was far
from perfect, but was still better than the Republican bill in 2005.
So I apologize to the gentleman from New Jersey. I thought he
was saying that it was the Democrats who had done this. Instead,
he was talking about Democrats and also the Republican leadership. I will say that previously the gentleman from New Jersey had
said that, well, Republicans had triedI do remember this; we can
check the transcriptto fix the bill, but they were outvoted by the
Democrats and some Republicans. In fact, in 2005, the records are
all here, no amendment either in committee or on the Floor aimed
at making the bill tougher on Fannie and Freddie that received a
majority of Republican votes passed. In other words, the bill that
passed committee and on the Floor was supported by a majority of
Republicans in every single case. In no case did a majority of Republicans get overridden because a minority of Republicans voted
with the Democrats.
Now that is the history, and we do have to go forward. I believe
with regard to the current situation there is agreement that we
need to replace Fannie and Freddie. There may be disagreement
about whether doing that is enough or whether or not we need to
also figure out if we need to restructure the Federal Home Loan
Banks and Ginnie Mae and the FHA, and if we need to provide any
more authority in terms of the liquidity of the secondary mortgage
market. All of those subjects are before us. In some ways they are
harder intellectually, and thats why were here to deal with them.
The gentleman from Alabama.
Mr. BACHUS. Thank you. I guess theres a question in there
someplace for Mr. Geithner.
The CHAIRMAN. No, no there wasnt.
[laughter]
The CHAIRMAN. The rules sayIm sorry, this wont come out of
the gentlemans time.
Mr. BACHUS. Oh, sure.
The CHAIRMAN. The rules say each member has 5 minutes.
Mr. BACHUS. Oh, youre right. Youre absolutely right.
The CHAIRMAN. Sing a song if you want to.
[laughter]
Mr. BACHUS. Secretary Geithner, how can you say that the regulatory reform bill in the Senate is comprehensive when it doesnt

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include the GSEs reform? And as Chairman Frank has just said,
we all realize now that thats a critical part of financial reform.
Secretary GEITHNER. The reform of the housing finance system
is going to be a critical part of overall financial reform. But for reasons I think you understand, we decided to do this in two stages,
and were now at the beginning of the next stage. This is going to
be a very complicated consequential process, and were going to
have to take a careful look across again the full range of institutions that operate in these markets. There are parts of the system
that worked very well over a long period of time, but there are
parts
Mr. BACHUS. Of course, Fannie and Freddie were not a part of
the system that worked very well.
Secretary GEITHNER. No, I think thatI agree with you about
that. I think that you cantif you look over the past decade, a lot
of things went wrong. The system did work relatively well for a
long period of time, but things started to change at the beginning
of this decade. At that point, you saw Fannie and Freddie start to
build up these very large retained portfolios. Theres a huge
amount of risk in those portfolios. They also started to provide
guarantees that ultimately resulted in them taking on more credit
risks than they were charging for. Both of those mistakes were central to the problem.
Mr. BACHUS. All right. Mr. Secretary, I would have to disagree
with you. In 1997, they started making loans without
downpayments, and to people with questionable credit, so I think
that it was a disaster waiting to happen. And I will say that several of us did speak on the House Floor at that time and resisted
the Clinton Administrations efforts to relax those standards.
Secretary GEITHNER. Well, there was aI was not a combatant
in these debates in that period of time, but there was a long period
of advocacy by people up here in the Congress on both sides of the
aisle and in the Administration starting in the late 1990s designed
to try to bring stronger oversight, greater constraints in them. But
of course, ultimately, as many of you have said, those efforts were
not successful and that was a very consequential failure of policy.
Mr. BACHUS. Right. And I think the time is now, not some second
stage. Let me ask you this. Several alternatives have been suggested to reform them. One is to simply nationalize them and make
the government guarantees explicit and permanent, and allow
them to continue to have a line of credit with the Treasury and
borrow from the Fed, and be exempted from State and local taxes.
Another is to create more GSEs to compete against each other,
and this is the government competing against itself, but still with
the government subsidy and guarantees and privileges. Isnt a better alternative to do what we Republicans are saying, at least long
term, and lets phase out the governments subsidy and guarantee
the duopoly over time, transition housing finance to a competitive
market based environment and implement a withdrawal of all Federal Government support?
Secretary GEITHNER. I agree with you Congressman, that I do
not think either of the two options you began with look particularly
appealing at this stage. I think the two options you laid out at the
beginning, full nationalization or creating a whole new class of

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GSEs to compete with each other with the same basic model, those
do not look like appealing options to me. I have not had a chance
to look in detail at your proposed alternative, but I will, and I am
happy to spend time working closely with you on that. I think you
ended by saying transition to a world in which you phase out all
government support in any form. Is that what you said?
Mr. BACHUS. Well, particularly the GSE that has a line of credit
with the Treasury or ability to borrow from the Fed or exempt from
State and local
Secretary GEITHNER. I personally think, as I said in my testimony, that we need to end a system in which you have this awkward combination of private shareholders with a broad sense of explicit implicit support. I think that system was a terrible mistake.
Those mistakes were very consequential. And whenas we work
together to create a new system to replace our current one, we can
at least agree we should not recreate that fatal mix of public and
private shareholders in the same institution.
Mr. BACHUS. But I think as long as you have a government entity competing with the private market, if you subsidize them in any
way, its unfair competition, and I think it crowds out the private
market, and I think we have seen the result of that.
Secretary GEITHNER. Well, I think, again, thisthe heart of this
debate will be to think about what is the appropriate role for the
government in providing some form of guarantees to assure a more
stable flow of housing finance, and what role should the private
markets face. Thats the fundamental question we face, and we
should take a fresh, cold look at that. And thats going to be critical
to reach consensus on before we figure out what the transition period should bethat transition pass should be to that new regime.
The CHAIRMAN. The gentleman from Pennsylvania.
Mr. KANJORSKI. Thank you very much. Welcome back, Mr. Secretary. It seems you have been remiss. You have not been here for
at least a week.
Secretary GEITHNER. I have had the privilege of being before this
committee many times over the last year, and I look forward to
many more times.
Mr. KANJORSKI. Very good. And Mr. Secretary, it seemed we had
some testimony the other day from Chairman Bernanke and former
Chairman Volcker. And I thought part of Mr. Volckers testimony
was particularly enlightening insofar as he was calling the committees attention to the difficulty of getting the regulators to regulate
in accordance with their authority. To a large extent, I listened to
the banter back and forth early. We are still, I guess, attacking
each other as to who is at fault and why are they at fault. And I
think you are taking the correct perspective there. That is history.
Now we have to go forward and do something, and we have to
address and answer some very serious questions. I happen to agree
with you that with all the errors that may have occurred at some
time with Fannie and Freddie, the reality is for a period of 20 or
30 years, we had a relatively stable real estate market that functioned very well at poor times, so that we did not have stops and
starts as we have had in prior decades.
The question I guess that comes to my mind is, what are we
going to be able to do about when this Congress passes authoriza-

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tion for someone like the Federal Reserve to create and control
mortgages and how they are made, and who is allowed to get them,
and they do not exercise that influence? And regardless of whether
the Republicans were in power for the 10 years in which that failure occurred, or whether the Democrats were in power, we can see
that sometime in the future, one party or the other will be in
power, and we are not quite getting the anticipated results from
regulators that at least in policy we pass here as a matter of law.
Should we start with that proposition and seebecause it really
does not matter what we do here if it is not implemented. What
plans can you make, or are you intending to make, for better implementation of public policy as set by the Congress?
Secretary GEITHNER. I think you have to start by making sure
that the entity that is responsible for constraining risk-taking over
these institutions, for example, has the authority and the ability to
put in place those constraints. And among the many failures of policy in this area was we did not give the responsible body, which
used to be called OFHEO, the authority to constrain risk-taking,
set capital requirements high enough, and protect the taxpayer
from loss in those entities. I think thats the most important thing.
If you dont have that, nothings possible.
Of course, that may not be sufficient. You still need to make sure
that Congress is holding those supervisors, those oversight bodies,
accountable for performance over time. But I think you have to
start again by making sure there is clear authority and accountability for constraining risks that can pose systemic damage to the
financial system as a whole.
Mr. KANJORSKI. Are the independent regulators too independent
in terms of when they seem to be going astray in what they are
doing?
Secretary GEITHNER. Well, I
Mr. KANJORSKI. Neither the Executive Branch nor the Congress
can do much about it. They are independent, and
Secretary GEITHNER. I think that we created a system that put
a lot of challenge on the regulators for the following simple reason:
Parts of the system were held to quite high standards for capital
consumer protection underwriting standards. But there were vast
parts of the system that were not held to similar standards and
had no oversight or effective enforcement in place. And when you
do that, what happens is risk tends to migrate from where its constrained to where it is unconstrained. Risk tends to move to where
regulations are weaker and the supervisor is more compliant or
less experienced.
So a central feature to the bill this body passed and a central
part of reforms moving through the Senate are to make sure you
have a level playing field across the system with clear standards
enforced evenly across institutions doing similar activities. If you
do that, you make the job of the supervisor much easier. If you
make it easy for firms to evade those protections, you make their
job much more difficult. And if you look back over the history of
Fannie and Freddies role in the mortgage market where you saw
like you saw across the system as a whole, you saw mortgage underwriting business migrate from those institutions to parts of the
system that were engaged in a competitive race to the bottom in

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underwriting standards in consumer protection. And the most important thing we have to do in financial reform, and this will be
true as we move to housing finance too, is to make sure there are
clear standards set across the marketplace with clear accountability for enforcing those standards.
Mr. KANJORSKI. Thank you, Mr. Secretary. My time has expired,
Mr. Chairman.
The CHAIRMAN. The gentleman from Delaware.
Mr. CASTLE. Thank you, Mr. Chairman. Mr. Secretary, I have
about three questions here. Im going to try to put them all together, so this might get a little complicated, but last month I
asked Federal Reserve Chairman Bernanke whether Fannie Mae
and Freddie Mac served their purpose and whether we should be
looking at some different way to finance mortgages since the problems we had, the expense of them at this point. And he responded
that the Fed has been very vocal on this issue for years. He said
we need to very cautious about returning to the existing structure
with potential conflicts between private shareholders and public objectives, and suggested either privatization with government guarantees or a public utility approach. My first question is, would you
agree, or could you comment on that assessment?
My second question is, using the Federal Home Loan Bank
model, is that something you could actually substitute for all this
in terms of what were doing or not doing as far as the future is
concerned? They dont seem to have had the problems that the
other GSEs have had.
And then my last question is, what about just eliminating all
these support systems, just a system whereby institutions which
are making loans have to stand on their own in terms of what they
are doing? Im not necessarily saying I advocate that or you do, I
just would be curious about your comments on it.
Secretary GEITHNER. I agree with the quote you attributed to
Paul Volcker about his diagnosis of what happened, what caused
the problem in this context. Hes absolutely right. And I think the
two options you summarized there should be among the options we
take a careful look at. I think the Federal Home Loan Bank System is not without challenge today. And I think as the chairman
said at the beginning, when you look at the housing finance markets and reform of the GSEs, you have to look at the FHLB structure as well to make sure that it can play the role its designed to
play, again without leaving us with too much risk in the future
that the government is going to have to come in, to step in to underwrite those losses.
You ended by asking, is it possible to advocate a system in which
the government plays no role in providing support for mortgage finance market through explicit guarantees, subsidies, support for liquidity? And I think there is certainly a pure theoretical option in
which that may make sense. But my own view is theres probably
going to be a good economic case, good public policy case, for some
continued provision of a carefully designed guarantee by the public
sector going forward, because housing markets are so critical to
overall economic activity. They play such a large role in peoples
wealth, the perception of wealth. They are very vulnerable to vola-

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tility when you seewhen you experience broader financial markets shocks to the financial system.
And because of that unique role housing markets play, I think
theres likely to be a good public policy case, good economic case,
likely that both conservatives and liberals could agree on, for the
design of a carefully calibrated guarantee, appropriately priced,
that would continue in some form.
Mr. CASTLE. What do you think the timetable on all this is? We
have had a lot of discussion, some hearings now and that kind of
thing. Is this something that you feel needs to be addressed in the
next 2 or 3 months, or within a year, or do you have any thoughts
about the timetable of how quickly Congress and the Administration should move on these issues?
Secretary GEITHNER. I think realistically its going to take several months to do a careful exploration of the problems, solutions,
alternative models, and to try to shape legislation that could command consensus. And again, I think were at the point now where
we can start that process in earnest, and I think we should try and
get it right. But I dont see why this should take years. I think
really at the moment now where there is a huge, compelling need
to make sure we design the successor system, and its very hard,
I think, for anybody to argue that we can live with the system as
it now is indefinitely in the future.
I know people are worried that were not going to take advantage
of this moment together and put in place reforms, because many
people tried in the past and failed to get consensus. But I dont
think we face that risk now, frankly, because I think no one can
look at the model we have today and say we can afford to live with
that model going forward. So I suspect youre going to find very
broad support for reform. The challenge is going to be just to design something that we think is going to work better in the future.
Mr. CASTLE. I would agree with you that its going to take time
to put it together, but I would hope that we could work on it together as rapidly as possible. There are a lot of dollars out there
and a lot of correction which is needed. Thank you, Mr. Secretary.
I yield back, Mr. Chairman.
The CHAIRMAN. The gentlewoman from California.
Ms. WATERS. Thank you very much. Thank you, Mr. Secretary,
for being here to discuss Fannie and Freddie, the GSEs that we depended on for many years to provide mortgage support, and mortgage financing for lower- and moderate-income homes. With the
missteps of Fannie Mae and Freddie Mac into the subprime mortgage market during the past several years and the resulting
conservatorships, they were given little credit for their decades of
support for mortgage finance. They developed the fixed-rate, 30year mortgage and consistent underwriting standards that made
mortgage credit and homeownership available to millions of American families. These were the good aspects, and I wont run away
from that. I know that since they have been in trouble and some
of us have been accused of having given them so much support that
people are sometimes hesitant to say that. I believe that they dove
into the uncharted waters when they followed private firms into
the subprime market in an effort to increase market share and
earnings of as publicly held companies. This effort to meet earnings

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targets may have been the fatal flaw in their structure. If they had
not been so focused on quarterly earning reports, they may have
weathered that storm.
Now having said that, we continue to have a great need for our
low- and moderate-income housing in this country. This committee,
led by our chairman and strongly supported by members of this
committee, particularly on this side of the aisle, are supporting a
$1 billion housing trust fund, national housing trust fund. Thats
important to us right now. And we thought we were going to get
the resources from Fannie, Freddie, their profits, what have you.
Thats not possible at this time. Do you have any ideas about how
we can support this housing trust fund? I would like to hear from
you on that.
Secretary GEITHNER. Congresswoman, let me just start by saying
I think what you said at the beginning is very important for people
to understand. Our system, our housing finance system, did work
remarkably well over a period of many, many decades. It was in
many ways the envy of the world. Things started to change,
though, in the late 1990s, and in the last decade you saw a dramatic increase in risk on their balance sheets, and a substantial
erosion in underwriting standards more broadly. And as we know
now, those mistakes caused a huge amount of damage. But I agree
with you that its important as we think about the future, to make
sure we retain what was good in this system. I dont think, though,
its going to be tenable to try to recreate the system as it exists
today in the future. I think were going to have to do things. Were
going to have to do a fundamental change if were going to achieve
the objective you laid out at the beginning.
We are, of course, prepared to work with you and your colleagues
on the committee to find ways to provide continued support for the
housing trust fund. Im not in a position today to describe in precise detail how we can do that, but were prepared to work with
you on that, and we do have some suggestions.
Ms. WATERS. I appreciate that very much, and we look forward
to working with you on that. As I wrap this up, I would just like
to be clear about whether or not were talking about Fannie and
Freddie formulated perhaps in different ways to continue the mission without the risk, or are we talking about getting rid of them
altogether? What are we talking about here?
Secretary GEITHNER. As many of your colleagues have already
said, I dont think there is a credible argument that we can abolish,
put out of existence these institutions today. That would not be responsible. One could not defend that. But I think we need to be
very careful as we work together to design the future of the American housing finance system, that we preserve what was good, but
we end what was too risky.
Ms. WATERS. That makes good sense. And in the interim, I appreciate your representation that you will help us to do what we
can to fund this housing trust fund. We need something while
were trying to reorganize those GSEs. Thank you.
The CHAIRMAN. Will the gentlewoman yield?
Ms. WATERS. Yes.
The CHAIRMAN. You have 30 seconds left. I just want to stress
again the Administration has committed to work with us on this.

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We are talking primarily here about rental housing. I want to
make that point clear. Were not ruling out homeownership, but
many of us believe that we did too little in terms of rental housing,
and the right rental housing financing avoids a lot of the problems
we have gotten into in the past.
The gentleman from California, Mr. Royce.
Mr. ROYCE. Yes. Mr. Geithner, I want to thank you, and I also
want to thank you for the period of time when you were at the Fed.
I went back through my notes. I counted 15 times when the Fed
came before Congress and warned us about the moral hazard with
respect to the GSEs. And I admit we were in the minority, those
of usI think there were about 70 of us who listened to the Fed
about this argument, about the overleveraging. But my amendment
on the House Floor was not actually written by me. It was actually
written by the Fed, just as over on the Senate side, Chuck Hagels
amendment which was brought forward, was at the behest of the
Fed to allow them to deleverage the arbitrage that was going on
at Fannie and Freddie. And it was Chairman Dodd who blocked
that amendment of Hagels or that bill that came out on the Floor.
The CHAIRMAN. Would the gentleman yield?
Mr. ROYCE. I will yield if you will yield me additional
The CHAIRMAN. Yes. I would point out that at that time, Chris
Dodd was not even the ranking Democrat. The Republicans were
in control in the Senate at that time in 2005.
Mr. ROYCE. Right.
The CHAIRMAN. Paul Sarbanes was the ranking Democrat, so
Chris Dodd was the second ranking Democrat in the Minority.
Mr. ROYCE. Yes. Right. And he objected on the House Floor to
the bill going forward. But the point Im making is that the Fed
recognized the problem created in the housing market, but theres
another aspect of this that economists have talked to me about.
And we have also seen over the last 10 or 15 years the huge increase in the derivatives market, and this is where Im going with
this, with respect to the GSEs. How much of that was tied to the
GSEs, especially since they trade in the derivatives market the
same way they did in the housing market?
And I was going to ask you, Mr. Secretary, have you looked at
this issue where GSEs were a large driver in the growth of the derivatives market and in the non-risk adjusted trading that went on
in that market? In other words, the point Im trying to make is
that these entities, because of the presumption, because of the
moral hazard, the same argument you were making to us, just like
investors in their debt believed they were triple A, the counterparties here believed they were triple A. But here, it had additional
significance. And so they played a big role, I think, in the growth
of the derivatives market on Wall Street. How do we mitigate that
going forward in the context of GSE reform? Thank you, Mr. Secretary.
Secretary GEITHNER. GSEs take on two types of risk: credit risk,
the risk the homeowner defaults; and interest rate risk, because a
lot of the mortgages are guaranteeing their 30-year, fixed-rate
mortgages. They need the capacity to hedge those risks. They need
to use derivatives markets to hedge the interest rate risk on their
books. So I think what they did there was necessary. Again, the

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central failure of oversight of the GSEs was not to force them to
hold enough capital to back their commitments. They took on more
risk than they had capital to support.
This committee has passed a sweeping set of reforms to establish
oversight over the derivatives markets, and those reforms would
make sure that you can force institutions that operate in those
markets to hold capital against the commitments they write, would
force standardized derivatives on to central clearinghouses where
you can regulate and supervise margin, would give the SEC and
CFTC the authority to police fraud and manipulation in those markets, and would bring broad transparency and disclosure to trading
in those important markets. We think those reforms are central to
reduce the substantial systemic risk that comes from the growth in
those basic markets. And I think if we put those reforms in place,
we will be doing a very important set of changes in building a more
stable system.
Mr. ROYCE. I understand that argument, but there are two
points: one, you still have the moral hazard problem because of the
presumption of the government-backed guarantee; and two, they
were the 800-pound gorilla. So when you, in the Fed then and
Treasury now, come forward and say, Well, we have to make sure
they dont overleverage, they were overleveraged at a hundred to
one. They were involved in arbitrage big time. And all the Fed was
asking was for the ability to deleverage this portfolio, arguing that
if we slowly did that, we would avoid the bust in the market, we
would avoid the systemic risk that would otherwise hit us. And
that systemic risk did hit us and the Fed turned out to be absolutely right about this.
But how do we overcome the fact that when you create a Government-Sponsored Enterprise, it becomes so powerful that it leans on
the very institution thats supposed to regulate it?
Secretary GEITHNER. I would just say again, even without the
many failures around the GSEs, what happened in derivatives
markets posed systemic risk to the American financial system. And
so even again without the challenges we face in the GSEs, we
would have to bring about broad reforms, establish oversight over
the derivatives market themselves. And youre of course right to
emphasize again the heart of all financial crisis is when you have
too much leverage, not enough capital to back commitments. That
simple failure was pervasive across the financial system, not just
in the GSEs.
Mr. ROYCE. Mr. Geithner, I have a few other questions for the
record, and if you wouldnt mind getting back to me in writing, I
would appreciate it. Thank you very much.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, gentlemen. I thank them for having
yielded, and I recognize the gentlewoman from New York, but I ask
for 20 seconds, if you would yield to me?
Mrs. MALONEY. Absolutely.
The CHAIRMAN. Just to say that, yes, the Fed was complaining
about Fannie and Freddie buying up mortgages. But the Fed was
also at the time refusing to use authority that Congress had given
it in 1994 to stop the bad mortgages from being made in the first
place. So they were worried about the secondary market when they

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were neglecting their opportunity to correct the primary market. If
the Fed had used the authority that Congress granted them that
Mr. Greenspan now acknowledges he could have used, you wouldnt
have had those bad loans made in the first place for Fannie and
Freddie to buy up.
The gentlewoman from New York.
Mrs. MALONEY. Thank you. Welcome, Mr. Secretary. In 2007,
both Fannie and Freddie invested in a very successful affordable
housing project in the district Im honored to represent called
Stuyvesant Town and Peter Cooper. Over 25,000 constituents live
in this affordable, rent-stabilized rental housing. Fannie and
Freddie were the senior debt holders in a $22 billion commercial
mortgage-backed securities deal that included the Stuyvesant
Town/Peter Cooper debt. It was well known in the press and by
economists and people looking at the deal. They knew at the time
that the rental income on the Stuy Town property would not be
sufficient to meet the owners debt service obligations. The owners
knew that they would have to turn over or convert affordable housing to market rate units in order to increase the rental income and
accelerate the rate of turnover. Hundreds and hundreds of my constituents, the tenants, were dragged into court to defend their
homes on very frivolous lawsuits. Knowing this, Fannie and
Freddie still invested in the debt.
And I would like to ask you, Secretary Geithner, what can be
done to prevent GSEs from investing in properties that can only be
profitable if you convert affordable housing to market rate by forcing out certain tenants? That certainly works against the mission
of Fannie and Freddie to build or provide a base for affordable
housing. I am working on legislation with the chairman and others
to ensure that Enterprises cannot receive affordable housing goals
credits for investments like the one they made in the Stuy Town
debt. Do you believe they should receive housing goals credit for
this type of investment where they know cannot continue to provide affordable housing?
Secretary GEITHNER. Congresswoman, I dont know, but I would
be happy to spend some time talking to you and your staff about
that particular problem and how we can prevent this kind of thing
from happening again. I cant tell you now what is possible in that
area. But I understand your concerns and Im happy to work with
you on it.
Mrs. MALONEY. Thank you. In this vein, New York City has a
growing problem of overleveraged multifamily properties, including
the Stuy Town project. What incentives can we put in place to encourage GSEs and community banks to work with local housing authorities to ensure troubled affordable multifamily buildings are
sold to buyers who are in the business of preserving affordable
housing? Were working so hard to build affordable housing and yet
when its sold, it is sold under an umbrella that absolutely makes
it impossible to continue as affordable housing.
Secretary GEITHNER. Congresswoman, Secretary Donovan and
my colleagues at Treasury have spent a lot of time looking just at
exactly those issues, and again, I would be happy to have them
come to you and talk through the range of options we think would
be most productive in meeting that objective.

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Mrs. MALONEY. And how do these securitized loans get detangled
in a timely manner in order to protect tenants from a tumultuous
foreclosure process, which is what we are now confronting with
Stuyvesant Town and Peter Cooper? We cant even figure out who
owns it now. So what are your ideas in that area?
Secretary GEITHNER. Again, I am happy to come spend some
time talking to you about that. In the market we created for housing and finance, we have made it much more complicated in many
ways, to work out economically sensible restructuring of loans
backed by real estate than may have been possible in a more simple system in the past. Youre citing just one example of that.
There are thousands of examples across the country of that. And
I think the reforms that this committee has put forward to try and
improve the way the securitization markets work would be helpful
in that area. But they will take some time coming, and theyre not
going to provide immediate relief to the problems youre facing, but
we would be happy to spend some time talking with you about how
to address the specific problems you refer to in New York.
Mrs. MALONEY. Thank you, and my time has expired.
The CHAIRMAN. The gentlewoman from Illinois.
Mrs. BIGGERT. Thank you, Mr. Chairman.
Mr. Secretary, it seems like the GSEs have exposed the fallacy
of bifurcating the mission or consumer protection regulation from
the safety and soundness oversight. When HUD oversaw Fannie
and Freddies affordable housing mission and OFHEO served as its
safety and soundness regulator, I think the result was a $227 billion bill for the American people.
Do you think the Administration is posed right now to make the
same mistake by creating a consumer financial protection agency
even if its in the Federal Reserve or whether its been some places
have talked about it being a separate agency? Can you explain how
the financial institution supervision would be? Or do you think it
would be more effective if theres the one regulator to focus on both
consumer protection and the safety and soundness?
Secretary GEITHNER. Congresswoman, that is a very important
question, and Im glad you raised it. We are now living with the
consequences of a system which for many, many decades gave bank
supervisors the responsibility to write and enforce rules for consumer protection, and that system did a terrible job for the country. It did a terrible job of protecting consumers, and it did not do
an adequate job of protecting the safety and soundness of the
banks in our country.
There were failures in both those two areas, and our judgment
is youre going to get better outcomes in consumer protection and
better outcomes in safety and soundness if you separate those functions. We propose that. I dont know if this helps the argument, but
Secretary Paulson in 2006 in his Financial Blueprint2008,
maybeproposed exactly the same, basic model, which is to separate consumer protection from safety and soundness supervision
with the basic judgment that that would produce better safety and
soundness regulation and better consumer protection.
Mrs. BIGGERT. So you would really advocate for separating them?
Secretary GEITHNER. Oh, absolutely, and, again, I do not believe.
I have heard this argument a lot from bankers and supervisors,

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and I do not believe it is a strong argument. Again, look at what
that system produceda colossal devastating failure. Let me try
one simple example. Why should there be any conflict between
rules designed to give consumers adequate disclosures so they can
make choices of what type of mortgage product to take and rules
designed to enforce sound underwriting standards for consumers?
I do not see the basis for conflict. Now, in the bill this committee
passed in recognition of that concern, there are a careful set of
checks and balances against the risks that the consumer agency
would somehow write rules that could imperil the stability of the
financial system. But I think those jobs are better separated. President Bush and Secretary Paulson had the same view in their proposal, and I think the record of the current system supports that
judgment.
Mrs. BIGGERT. Well, wasnt it that the Federal Reserve was really responsible for writing the rules and regulation, the financial
regulators?
Secretary GEITHNER. I think thats the point. Again, I think that
you want bank supervisors worrying about risk management, about
capital, about liquidity. You want them focused on those core
things. You dont want them having to spend a bunch of time also
having to worry about consumer protection if that job can be better
done by an independent agency.
Mrs. BIGGERT. I guess I see it differently as with the GSEs and
the banking industry, the consumer regulations, and the other regulators was separated and it didnt work.
Secretary GEITHNER. Again, I respect that view, but in fact, the
GSEs played a generally quite responsible role in what they did in
establishing standardized mortgage products; and, generally, they
held to better underwriting standards than was true of the private
market. So I dont see the failures and successes of the GSEs as
undermining the argument for separating consumer protection
from safety and soundness supervision and banks.
Mrs. BIGGERT. Does it create a duplication? What if the consumer protections with GSEs or with the banking industry that its
something that one way they propose that this will protect the consumers, and then the regulator with the safety and soundness, and
theyre in conflict?
Secretary GEITHNER. Well, again, if theres any risk of conflict,
you can deal with that risk by making sure that you have a body
that looks at conflict and can pass judgment on conflict. But I think
its very unlikely there would be any conflict.
The CHAIRMAN. The gentleman from California, Mr. Sherman.
Mr. SHERMAN. Thank you, Mr. Secretary.
Our housing market is to some extent broken. Thank God, the
GSEs and FHA are really providing all the financing outside of
Beverly Hills. The definition of median home price is distorted, because you may have a few arms-length sales, willing buyer, willing
seller, home in good condition, and then you have tens and hundreds of thousands of foreclosure sales of homes in terrible repair,
deeds in lieu.
Now, focusing on high-cost areas, including Los Angeles and the
10 largest or most expensive metropolitan areas, what would happen if at the end of the year, the maximum home limits for Fannie

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Mae and Freddie Mac not only decline from $729,750, but not just
to $625,000, but the government resets the loan to the current median price? Im told in Los Angeles this means that the FHA limit
drops from $729,000 to $376,000. The GSE limit, Fannie and
Freddie, dropped from that $729,000 to $417,000. I dont expect
that by the end of this year, were going to have a robust, middleclass home finance market independent of the GSEs. What happens if you have that sudden inability to buy and sell a home anywhere in some of our countrys remote, largest areas? What happens to the national economy? Could it cause a second dip in this
recession?
Secretary GEITHNER. Congressman, thats a very important question. I dont have a judgment now about what Congress should do
with those temporary increases and the conforming limits. I think
it was very appropriate that Congress extended them. I fully supported that. I dont have a judgment yet. I would say the following,
though. I think it was very important for people to understand that
the basic mistakes most governments make in dealing with financial crises, real estate crises, is they tend to prematurely declare
victory, say that the great risks are behind us, and they tend to
walk-back support too quicklynot too slowly. And I think its important to recognize that this housing crisis, the financial crisis has
caused a huge amount of damage and it is going to take quite a
long time for us to heal and repair that damage. I dont know how
long its going to take, but its going to take some time still.
Mr. SHERMAN. Do you think were ready by the end of this year
to see the GSE limit drop in half in Americas most important and
largest cities without damaging the economy of the country?
Secretary GEITHNER. As I said, Congressman, Im not in the position yet to make that judgment. We dont need to make that judgment yet. Well have to make that judgment at some point this
year, but not quite yet. But, again, I want to underscore I think
your basic point is we have to be very careful that we are doing
carefully designed, sensible things to help facilitate this process of
repair and recovery.
Mr. SHERMAN. Let me move on to the next question. This one is
just for the record, because I dont want to get you in trouble with
the Senate. But a year ago today, the President nominated an
Under Secretary for International Affairs, which is still on hold in
the Senate after a year, as well as other major positionsthe
Under Secretary for Domestic Finance and the Assistant Secretary
for Tax Policy. And so the question for the record is, do holds, filibusters, and the Senate practice of not allowing a nominee to work
as an acting on a temporary basis until the confirmation, do those
Senate practices lead to higher unemployment to companies not
being able to find out what the tax regulations are because you
dont have an Assistant Secretary for Tax Policy? And are there
hundreds of thousands or tens of thousands of Americans unemployed today because of the perks and prerogatives of the other
body? Dont answer that one for the record. Let me guess.
Secretary GEITHNER. Say. Can I just thank you for raising that
concern and for pointing out that these three senior positions in the
Treasury remain unoccupied today. It has now been 15 months
since the President took office. And we have an amazingly talented,

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dedicated, hard-working group of people at the Treasury doing a lot
of important things for the country, but we need to get those people
in place.
Mr. SHERMAN. Finally, we have disagreed on whether the Executive Branch should have permanent, unlimited bailout authority to
make sure that the creditors and counterparties of major institutions on Wall Street can get bailed out only by the Executive
Branch. Congratulations on convincing the Senate, at least this far,
to give you that permanent, unlimited buy authority.
Secretary GEITHNER. Can I respond to that, Mr. Chairman? Actually, we agree on more than you think. As I said in the past in this
hearing room, I would not support that, and neither your bill nor
the Senate bill gives the Executive Branch the authority you describe. What it does do is make it clear that a large institution in
the United States, if that institution in the future manages itself
to the point where it gets to the edge of the abyss can no longer
survive, then the government should have no option at that point
except to put that institution into a form of receivership so it can
be dismembered over time.
The CHAIRMAN. Mr. Secretary, at this moment of agreement
among you, Mr. Sherman, and the Senate, we are going to move
on. The gentleman from Texas, Mr. Neugebauer.
Mr. NEUGEBAUER. Thank you, Mr. Chairman. Mr. Secretary, it
is good to see you again. Given the unprecedented support that the
Federal Government, both at the Federal Reserve and the Treasury
has propped up, the securitization market for housing in this country, one of the things that concerns me is that the longer we keep
this government presence, I think the longer that the private sector
and private securitization sits on the sidelines. Because quite honestly, now, we do know that there is some activity pending out
there, and there could be, but not to the level that we have had
in the past, so what do we do?
And, you sayhere you are sayingCongressman, Im not really
ready to do anything right now, but I am very concerned. Its kind
of like a muscle. Like the doctors tell you the longer that you dont
use a muscle and you keep your arm in the sling, which is where
we have the housing finance market todaywe have it in a sling
the harder it is to rehabilitate that arm once you take it out of the
sling. How are we going to do that and what is your Blueprint to
do that?
Secretary GEITHNER. Congressman, I worry a lot about that risk,
and you are right to highlight it. But I think the main risk we face
today is we still have an economy that has only now been growing
now for three quarters. We have unemployment at around 10 percent, much higher in many parts of the country, a housing market
still overwhelmingly dependent on the government, because there
is no private will to provide financing for residential real estate,
and it is going to take us a while to get through this and be confident that we have a recovery in place led by the private sector
that could be self-sustaining over time.
The main risk we face today, still, is that there is still enormous
damage caused by this crisis. You see it conspicuously in housing
across the country. If you look at what we have done in the rest
of the financial system, you can see we have been very, very careful

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to unwind, to walk back to terminate and end the emergency programs that we no longer need to put in to keep in place, so we have
ended the money market guarantee fund. The FDIC is no longer
providing guarantees for the debt of bank holding companies.
We have replaced the overwhelming majority of public investments in our banking system with private capital. We are
unwinding and trimming as the Fed is doing all those emergency
programs, exactly for the risk you pointed out. We do not want
these markets excessively dependent on government support in the
future, and we want to see those private markets come back as
quickly as we can.
Housing still has been so damaged. That process and repair is
going to take a long time. But if you look at what we have done
in those other areas, you can see we have been willing and careful
and effective and walking back and unwinding the things that no
longer play a useful, essential role in supporting recovery.
Mr. NEUGEBAUER. I hear what you are saying, and I agree with
some of that as well. But one of the big problems here is that we
really dont incentivize people to get into the securitization on the
private side because of the interest rate levels that make borrowing
very, very inexpensive. And so they can borrow very inexpensively.
They can go out and buy the Freddie and Fannie products and the
Ginnie Mae products, and so theres not a lot of incentive to go out
and look for private demand in those markets.
Secretary GEITHNER. Again, I agree with that risk. I think if you
look, youll have a chance to talk to Secretary Donovan about this,
but if you talk to him, or you talk to Ed DeMarco who runs the
FHFA, youll see that they have put in place a variety of changes
already in underwriting standards and how they price their guarantees. It is designed to help promote the private sector coming
back and replacing them as things start to heal, but that process
is going to take some time. I think youre right to underscore its
importance, and I will be fully supportive of that effort as we move
to a transition where the private sector can play a larger role.
Mr. NEUGEBAUER. And one of the things I have heard also is, for
example, PMI was an important part of the private securitization
market. But what the PMI companies tell me is that they cant
compete with the Federal rates, and so sometimes we have to bring
a level playing field here so that there is a yield difference there
that people are willing to say, I would rather have the higher yield
here, and so I will move outside of the current parameters and
move into the private securitization.
Secretary GEITHNER. Again, I agree with you about the objective.
Its the question about how we do it; and, again, I just want to underscore that even though the economy is growing now and we
have brought a measure of substantial stability back to the overall
financial system and interest rates are much lower today than they
were, theres a lot of challenge ahead still in the housing market
and housing finance market. And we need to be very careful that
were still helping to facilitate this process of recovery as we transition to a new, better system.
Mr. NEUGEBAUER. One final, quick question: As Chairman
Bernanke is wrapping up his purchase program of mortgages, what
do you think that does to the market?

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Secretary GEITHNER. I would leave that to the Chairman to describe, but again as the Fed does the careful responsible thing of
winding down its emergency actions, we want to make sure again
that the full complement of government policies in this area is
helping facilitate this process of repair and recovery. And, it is getting better. We are making some progress in that area, but there
is a lot of damage still out there.
The CHAIRMAN. Before getting to Mr. Capuano, I ask unanimous
consent that a letter from the National Association of Federal
Credit Unions be put into the record. Just, GSEs allow credit
unions to obtain the necessary liquidity to create new mortgages,
despite their conservatorship, Fannie Mae and Freddie Mac have
made it an important tool for credit unions to help free them up
to make more loans; and theyre a valuable resource for low-and
moderate-income members. As Congress considers ways of reforming the current system, we believe it is important that safeguards
are in place to make a very smooth transition, and the important
roles that Fannie Mae and Freddie Mac play for credit unions not
be capitalized.
Thats from the National Association of Federal Credit Unions.
The gentleman from Massachusetts is recognized for 5 minutes.
Mr. CAPUANO. Thank you, Mr. Chairman. Thank you, Mr. Secretary.
Mr. Secretary, there have beeen a lot of big things talked about
today, but I look at Fannie and Freddie maybe too simplistically,
and Im just curious. Im not sure I know the exact number. Do you
know the number of the general percentage of homeownership in
this country prior to the existence of Fannie and Freddie? Am I
right to think it was in the 30 to 40 percent range?
Secretary GEITHNER. You mean going back to the 1930s?
Mr. CAPUANO. Yes.
Secretary GEITHNER. I dont know, but a small fraction of where
it is today. I agree with that.
Mr. CAPUANO. And today, its around 70 percent, give or take?
Secretary GEITHNER. Today, its about two-thirds.
Mr. CAPUANO. And I look at homeownership. Maybe Im wrong,
but I think its probably the main financial aspect of this country
that helped create and maintain the middle class. I come from a
neighborhood where everybody I know, their way into the middle
class was the purchase of a simple home, oftentimes a multifamily
home. And I look at Fannie and Freddie as symbolic if not in fact
responsible for that. Prior to Fannie and Freddie, how did people
get mortgages? The private market alone? There was no government involvement.
Secretary GEITHNER. Thats right.
Mr. CAPUANO. And for me, thats what this is all about. I guess
I understand that Fannie and Freddie like everything else needs
to be retooled. I have no problem with that, but as far as the current economic crisis, did Fannie and Freddie create the derivatives
market?
Secretary GEITHNER. No.
Mr. CAPUANO. Did they participate in it any worse or any differently than a million other private entities?
Secretary GEITHNER. Differently, but I wouldnt say worse.

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Mr. CAPUANO. And so they did some bad things, but no worse
than many private entities of this country around the world.
Secretary GEITHNER. Well, I would say they were better than
most private entities in these markets.
Mr. CAPUANO. And that is my problem. Im not going to suggest
that they dont need to be retooled. Im not going to suggest that
we dont need to revisit them. Im certainly not going to suggest in
any way that they dont need to be overseen or even destroyed and
recreated in a different fashion. None of that bothers me, and
thats why I havent yet made up my mind exactly how I would like
to approach this or like to seen it approach.
Thats why I came today to listen to different ideas, but I will
tell you that for me, subjecting homeowners or potential homeowners to nothing but the private market has been tried in this
country for 150 years and failed to create a middle class. Since government got involved indirectly through Fannie and Freddie, we
created the middle class, and we sustained the middle class. And
when we are done with this, for me, that is the goal, the only goal.
As a matter of fact, anything short of that, my emotions might
overcome me, and I might be tempted to scream out that someone
or something or some group of people might be a homeownership
killer, if they got rid of Fannie and Freddie, and I hope that doesnt
happen. Thank you, Mr. Secretary.
The CHAIRMAN. The gentleman from Texas.
Let me just, before Mr. Hensarling, the Secretary has asked, and
I think reasonably, to leave at 12:30. I would note all the members
now here will be able to question him. Other members, if you plan
to come over here about 12:15 to question the Secretary, have
lunch instead and then come over and talk to the second panel.
The gentleman from Texas.
Mr. HENSARLING. Thank you, Mr. Chairman. Welcome again, Mr.
Secretary.
I note that it was about 18 months ago that the President was
elected. I think it was 13 months ago that the Administration decided to double taxpayer liability for the GSEs; 9 months ago that
the Administration asked
Secretary GEITHNER. Not to double the liability under the original preferred stock agreements.
Mr. HENSARLING. $100 billion per to $200 billion per?
Secretary GEITHNER. Under the law the Congress passed, you
gave my predecessor unlimited authority to make sure Fannie and
Freddie could meet their obligations. At that point, in effect, the
government committed to make sure they had whatever capital
was necessary to meet those obligations. All I have done is carried
out that basic commitment using the authority that Congress gave
my predecessor.
Mr. HENSARLING. Okay. Well, exercising that authority.
Secretary GEITHNER. It didnt change our liability.
Mr. HENSARLING. Mr. Secretary, please, I control the time here.
It was 9 months ago that in the Administrations White Paper, we
were told to expect some type of plan or option in the budget. We
know what that plan was and that is you continue to monitor the
situation. Three months ago, the Administration announced unlimited taxpayer exposure for Fannie and Freddie.

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I just note, Mr. Secretary, in 18 months, the Administration has
clearly found the time to put forth a plan that would provide substantial regulation for one-sixth of our economy of healthcare, extend more control over broker-dealers, investment banks, credit
card companies, community banks, hedge funds, finance companies,
payday lenders, pawn shops, and auto companies, but still no plan
for the GSEs except seemingly unlimited taxpayer exposure.
So one Members opinion, Mr. Secretary, with respect to the timing, I just thing the timing is unacceptable. But lets talk about the
taxpayer exposure. Clearly, youre familiar with the numbers. CBO
estimates over the next 10 years, $376 billion. We know that
theres trillions more of exposure there; and, so, on the one hand,
I see that Treasury continues to monitor the situation. I guess my
greater concern is, is there in fact a de facto plan, perhaps not by
design but perhaps by accident.
I note that the chairman of our committee in January stated that
Fannie Mae and Freddie Mac are now basically public policy instruments of the government. Charles Haldeman, Freddie Macs
chief executive has stated, Were making decisions on loan modifications and other issues without being guided solely by profitability. Daniel Mudd, who is Fannie Maes former CEO said, The
government is running Fannie and Freddie as an instrument of national economic policy, not as a business.
It appears to many of us, and Ill give you an opportunity to disabuse me of the notion or to accept the premise that what we now
have is the GSEs or essentially an instrumentality of the Administration to fund taxpayer funds and to frankly fail foreclosures mitigation plan with nothing else in sight. So Ill yield to you, Mr. Secretary.
Secretary GEITHNER. Thank you, Congressman. Let me tell you
what our strategy and our plan is. Our strategy is to fix this damaged housing finance market to make sure this economy recovers
from the trauma caused by the recession. Were going to do that
as carefully and quickly as we can.
As part of that process, we will be working with this committee
to lay out a comprehensive set of reforms to the housing finance
system, including the GSEs. But our obligation now and our priority now is to try to make sure that we heal what is broken in
this housing finance system, and we help this economy dig out of
this terrible mess.
Mr. HENSARLING. I understand that, Mr. Secretary, but theres
still no timetable for that. Is that correct? As of today, there is still
no timetable for a plan dealing with the GSEs?
Secretary GEITHNER. Again, were looking forward to having this
debate about reform. You are not going to care more about this
than I am. Im the one who has to preside over a set of broad commitments that I inherited from my predecessor, and we are going
to do a careful, competent job.
Mr. HENSARLING. Mr. Secretary, its just a simple question. Is
there a timetable or is there not a timetable?
Secretary GEITHNER. We are going to do a careful competent
job
The CHAIRMAN. It is The gentleman from Texas time.

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Secretary GEITHNER. of digging out of that mess and making
sure that we work with you to put in place a set of reforms that
will leave our country in a better position.
Mr. HENSARLING. Well in the little bit of time I have left, Mr.
Secretary, in your mind, in the Administrations mind, is there any
reason that inherently we must have a Government-Sponsored Entity to securitize mortgages in order to have stable homeownership
in America, because I note many other nations do not have GSEs.
Secretary GEITHNER. This is the central existential question as
you contemplate reform; and, as I said earlier in response to one
of your colleagues, I think there is a quite strong economic case,
quite strong public policy case for preserving designing some form
of guarantee by the government to help facilitate a stable housing
financing market. But it cant be the one we have today.
It cant be the one we have lived with over the last decade. Its
going to be significantly different, but we will likely conclude as our
predecessors have that there will be some rule for a guarantee of
some sort.
The CHAIRMAN. Thank you, Mr. Secretary.
The gentleman from Texas, Mr. Hinojosa.
Mr. HINOJOSA. Thank you, Mr. Chairman. I want to also say welcome to our Secretary.
As you know, most of us and most of my colleagues are aware
that April is National Financial Literacy Month. Throughout that
month, special attention will be focused on efforts to increase the
awareness of financial education and the importance of managing
personal finances, increasing personal savings, and hopefully reducing personal debt in the United States.
I look forward to working on financial literacy education and capabilities issues with you, Mr. Secretary, as well as with Michelle
Greene, your Deputy Assistant Secretary for Financial Education
and Financial Access. I have listened very carefully to many of
your responses, and I agree with you that the system for protecting
consumers in the mortgage market was and remains fundamentally flawed, and consumers should have the information they need
about the cost, terms, and conditions of their mortgages, which
would be incorporated into legislation reforming the House Finance
System.
I am sick and tired of listening to some of the folks who signed
contracts and showing me the 20 or 25 items that were listed on
fees, something very different than what it was years ago. I am
pleased that the truth in lending and real estate settlement procedures will be placed under one roof in the Wall Street Reform and
Consumer Protection Act. We should address my many concerns regarding the implementation of both of these acts.
Mr. Secretary, do you intend to provide housing counseling in
languages other than English?
Secretary GEITHNER. Did you say counseling?
Mr. HINOJOSA. Yes.
Secretary GEITHNER. I believe that it is true today that the substantial support Congress has authorized to give in support of
counseling agencies across the country now includes many nonprofits which provide those services in languages other than
English, but Ill check that for the record.

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Mr. HINOJOSA. I was pleased when I visited the Federal Reserve
Branch in Dallas that they are very strongly supporting these financial literacy programs and have it in eight languages. In Texas,
its not uncommon to have school districts that have 40 or 50 languages spoken by some of the limited English-proficient students.
So this is something that is very important, and I know some of
my colleagues here in Congress dont want anything but English in
materials that are used by some of our Federal agencies, and so I
disagree with that.
I think that this is such a big investment that its important to
me that this concern be addressed. Fannie Mae and Freddie Mac
as Government-Sponsored Enterprises are responsible for helping
many middle-class families in my district in buying a home. So its
important to me that they survive through these difficult times.
What actions will Treasury take to ensure that they survive?
Secretary GEITHNER. Oh, Congressman, as I said, we are going
to do everything necessary to make sure they can not just meet
their obligations, but they can continue to play an important role
in supporting housing finance markets as we work on the design
of a better, stronger, more effective housing finance system in the
future.
We are completely committed to that and we will do everything
necessary to make sure we allow them to continue to play the very
important role they now play in providing a stable source of housing finance for this country as we try to dig out or repair whats
broken in our financial system.
Mr. HINOJOSA. As you may well know, I have been a very strong
proponent of community banks, because my district is one that has
a very, very large number of community banks and that is one of
the sources of borrowing. Some of them bought stock from Fannie
Mae and Freddie Mac and took a huge loss. Is anything being considered to help them so that their balance sheets can look a little
bit better because of the losses they took?
Secretary GEITHNER. Congressman, we have proposed legislation
to the Congress that would establish what we call a Small Business
Lending Facility. And this facility would make capital available to
small community banks so that they have more financial resources
to support lending to their customers as we come out of this recession. And this legislation would establish a $30 billion lending facility. It involves very, very modest costs and we think this is one
of the most important things we can do to help small community
banks continue to get through the very challenging period we still
have
Mr. HINOJOSA. What is the timetable to make that happen?
Secretary GEITHNER. The leadership of both bodies are considering taking up a small business bill which includes a set of tax
provisions and financial credit support mechanisms like the one I
described.
Mr. HINOJOSA. Thank you.
The CHAIRMAN. The gentleman from New Jersey, Mr. Garrett.
Mr. GARRETT. Thank you, Mr. Chairman. Thank you, Mr. Secretary. In your testimony, you briefly talked about an alternative
to securitization and that is covered bonds. Paul Kanjorski is not

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here right now, but he and I dropped in a bill this past week, H.R.
4884. I wonder whether you have looked at that?
Secretary GEITHNER. I havent yet looked at it, but I will. And
I would say that I understand. I know that you have been a long
proponent of this issue of covered bonds. We do have a covered
bond system in the FHLB today.
Mr. GARRETT. Right, but this is structured statutorily, so
Secretary GEITHNER. Yes, it is. I would be happy to work with
you on that, and I think looking at the covered bond model will be
an important part of looking at the reform agenda.
Mr. GARRETT. And would that be something we would help if we
can get that done sooner this year rather than later?
Secretary GEITHNER. Its possible. I dont know. Again, my basic
feeling, like many argued when we were looking at financial reform
of the private financial system in the United States, you want to
look at comprehensively at the full complement of institutions, policy issues involved in this area. But again, I am happy to work
with you on that part of reform.
Mr. GARRETT. Great. A couple of weeks ago, weIm back now
to the GSEs, like everyones talking about. We had the hearing
here at the Budget Views and Estimates. I introduced an amendment that went down along party lines, which would basically put
the GSEs on budget and applied $1.6 trillion of GSE debt, should
be subject to the debt limit.
Secretary GEITHNER. Okay.
Mr. GARRETT. Back then, when Chairman Bernanke was here, I
asked him his opinion of this, and I also asked him another question, and Ill ask you the same question, is the debt of the GSEs
sovereign debt?
Secretary GEITHNER. Congressman, this is a very technical question, the appropriate accounting treatment of Fannie and Freddie
and their obligations, so let me just give you two responses on this.
Mr. GARRETT. Yes and no?
Secretary GEITHNER. Determining the appropriate accounting
treatment of these obligations, we have followed the advice of accountants. GAO agrees with the judgment we have made, and does
not think its appropriate for us to consolidate. We followed that
basic model.
On your second question, let me repeat again what I said in both
my written statement and my oral statement. We will do everything necessary to make sure these institutions have the capital
they need to meet their commitments.
Mr. GARRETT. And I understand that from reading your statement. But its really a basic question, and Im not a Treasury Secretary or the Chairman of the Fed. And even Chairman Frank, not
even, but the chairman also recognizes and he understands the difference because in his statement he says, Imeaning the chairmanhave noted that Fannie and Freddie debt did not have the
legal standing as Treasury debt. So, he recognizes that there is a
distinction between sovereign debt and GSEs debt.
Secretary GEITHNER. Absolutely, they are different, but again, I
want to emphasize again in saying they are different that I want
to make sure that you understand, again I say this as clearly as

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possible, we will make sure that they have the financial resources
necessary to meet their obligations.
Mr. GARRETT. Okay. I understand that. And the chairman says
the same thing that he and many others want to make sure that
is being done. Although, the chairman did say, I believe, throughout the debate, we will make sure that there are no implicit guarantees, hints, suggestions, or winks or nods, we will be explicit as
to what is and what is not an obligation of the Federal Government. So, with the debt that were incurring since this has all happened going forward, is that on the same standing as the existing
debt that is out there? In other words,
Secretary GEITHNER. That issue by the GSEs?
Mr. GARRETT. Yes.
Secretary GEITHNER. Yes.
Mr. GARRETT. It is? So, when he says that we should have no implicit guarantees, hints, suggestions, winks or nods, we are nodding
and winking and guaranteeing about that, as well?
Secretary GEITHNER. No, no. Were not doing nodding and winking, were saying very clearly, and Ill say it over and over again,
we will make sure, using the authority Congress gave us that these
institutions have the ability to meet their obligations present and
future.
Mr. GARRETT. So, the chairman is incorrect when he states that
there is a distinction between the debt that these have and sovereign debt?
Secretary GEITHNER. No, I dont think so. No, as I said, and of
course, you know the answer to this question, they are different
types of obligations. But again, I want to make it clear you understand that we will use the authority Congress gave us to make
sure they can meet their commitments.
Mr. GARRETT. I do, and okay, so what Im hearing is, it is not
sovereign debt, but it is debt that we will stand behind.
Secretary GEITHNER. Well, Ill repeat it. Ill try and say it the
same way every time I said it.
Mr. GARRETT. Is it sovereign debt?
Secretary GEITHNER. No, as I said, its not sovereign debt in
that
Mr. GARRETT. Okay, thats good, thats really all I needed to
know. Its not sovereign debt, but its debt were going to stand behind.
Secretary GEITHNER. I want to make surethis is a very extensive issue. Were going to make sure that these institutions have
the resources they need to meet their commitments, past and future.
Mr. GARRETT. Right. So, as I have heard it, and I understand it,
it is not sovereign debt, but it is debt that we are going to stand
behind, and because Congress has given you that authority to
stand behind that
Secretary GEITHNER. For very good reasons, yes.
Mr. GARRETT. Okay. And I still have 30 seconds left.
The CHAIRMAN. You had 3 seconds.
Mr. GARRETT. Excuse me?
The CHAIRMAN. You had 3 seconds left when you said that. We
will make it 10 seconds more now.

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Mr. GARRETT. Do you have any comment on the fact that
Bloomberg is reporting that the bond market is saying that its
safer to lend to Warren Buffet than to this Administration right
now because of the spreads?
Secretary GEITHNER. I dont agree with that comment. And I
would say the following, which is that it is very important that the
Congress work together to make sure we put in place over time a
set of policies that will bring down our fiscal deficits to a more sustainable level. Thats very important to the strength of this recovery. Its going to be very important to future growth of the American economy and we look forward to working with Members on
both sides of the aisle to develop a political consensus to bring
those deficits down to a sustainable level.
Mr. GARRETT. Thank you.
The CHAIRMAN. The gentlemans time has expired. The gentlewoman from New York.
Mrs. MCCARTHY OF NEW YORK. Thank you, and welcome again,
Mr. Secretary. Watching, listening to the debate, I cant help wonderingmany, many years ago, a lot of years ago, I bought my first
home and I, a single woman starting out in nursing, which by the
way, back then nurses didnt make much money, so every door was
closed to me as far as buying a home. And it was my parents
home. I was a good risk. But, it was through the GSEs that actually I was able to get a loan. I never missed a payment, and I paid
it off. So, there are a lot of us out there who certainly took advantage of it.
And from my understanding from a lot of these statistics, the
majority of middle-income families will do everything they possibly
can to make sure that they always pay their mortgage so they have
a roof over their head. Thats their dream. That was my dream. So,
I was just curious, when we started going into this spiral downfall
with the GSEs and also with the subprime lending crisis that we
saw, who actually had the worst record? I know in New York City,
we had aI was reading somebodys testimony that 13,000 out of
20,000 loans defaulted. And that came through a housing agency.
So, we need to look at things, how to change things, but I agree
with my colleague that financial literacy is going to be an important part.
But, I just want to know now, what are we doing as far as the
government to encourage more lenders to work towards loan modifications before people go into foreclosures?
Secretary GEITHNER. That is a very good question. The program
that we put in place to make it possible for homeowners to restructure, modify their loans is now reaching more than one million
Americans. And what this means is for those families, those one
million Americans, they now have substantially lower monthly payments, which on average is putting $500 to $600 more in the pockets of those families than they had before the modifications. Were
trying to make sure that as many of those as possible are translated into permanent modifications. And were going to keep working to make sure this program reaches as many people as we can
to make sure people who do not need to lose their homes can stay
in their homes.

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Mrs. MCCARTHY OF NEW YORK. Just one other question, too.
Withobviously with the GSEs, and they have the backing of the
Federal Government, on that, there are going to be a lot of homes
that probably will not be, theyre foreclosed now, theyre sitting
there. What are the chances of turning some of those homes over
into rental properties where people are getting back on their feet
again?
Secretary GEITHNER. Well, again, I think there are substantial
opportunities for doing that. A lot of that is happening. And again,
I would be happy to ask my colleagues, or my colleagues at HUD,
or FHFA, to come brief you in more detail on what they can do in
those areas.
Mrs. MCCARTHY OF NEW YORK. Thank you.
The CHAIRMAN. The gentlelady from West Virginia.
Mrs. CAPITO. Thank you. Thank you, Mr. Secretary. I would like
to talk about this maybe a little more simplistically and a little
more globally. I just got the report this morning that existing home
sales are down again for the third straight month. Unemployment,
as you mentioned in your opening statement, remains too high. We
have witness after witness, particularly from the financial institutions, asking why theyre not lending or why people arent borrowing, lack of confidence, uncertainty.
My question is, is the lack of a certain plan forward with Fannie
and Freddie leading to the uncertainty, as well? Ill just give you
an example. Speaking with a community banker several weeks ago,
asking him, why are you not getting into the mortgage market because the FHA has taken up so much more of the mortgage area?
And he said, well, maybe if you would give me a loan guarantee,
maybe I would get into that a little bit more.
Are webecause of this, all of the government involvement with
Fannie and Freddie and dollars and just what you said, that we
will back the debt of Fannie and Freddie, could that be part of
I know we need to do it slowlybut could it be part of the, maybe
putting it in some mud and making it going slower, so that the confidence is not rebounding the way that we need it to in order to
get out of this slump that were in?
Secretary GEITHNER. I dont think so, but Ill give you my sense
of this. I think if you talk to, as you do, and as we all do, community bankers across the country and you ask them whats happening on the lending side, generally what they say is the following: They say, loan demand is still very low; they say, the supervisors are being very tough on us; and to some extent, they say,
they would like to know what the rules of the game are going to
be in terms of broader financial reform.
So, for example, the bill that passed the House last December
and the bill now moving its way through the Senate, they would
like to know a little more certainty about what the rules of the
game are going to be on capital, things like that, going forward.
I think those are the principal factors still affecting the lending
conditions for small community banks and I think we can do something about those things. Again, we can, as the Chairman of the
Fed, and the Chairman of the FDIC are doing, try to make sure
that their examiners across the country are not overdoing it. We
can make sure, as I said, to your colleague, that we provide capital

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to small community banks so they can have a little bit of assistance
to get through this that will help support lending. And if we pass
financial reform, that will bring some clarity to the rules of the
game, that would be helpful.
But I do not believe that what Fannie and Freddie and the FHA
are doing now is overwhelmingly constructive to the process of repair of housing finance.
Mrs. CAPITO. But, at the base of a recovery, a good, solid recovery, is going to be this bouncing back of the housing market at the
most fundamental part. Would you agree with that?
Secretary GEITHNER. It will, again, its hard to tell the timing
now, but part of recovery will be more durable stability in housing
prices.
Mrs. CAPITO. Right.
Secretary GEITHNER. And as that happens, youre going to see
the private market come back and take back some of the business
of housing finance that is now dominated by Fannie and Freddie
and the FHA.
Mrs. CAPITO. Okay, on a totally different topic, and we have
talked about this a little bit, the Administrations Making Home
Affordable modifications and refinancings, is that where we have
done the $1 million dollar modification, is this affecting the bottom
line of Fannie and Freddie at all? And are you concerned about the
re-default rates on some of these re-modifications in terms of the
ones that are held by Fannie and Freddie?
Secretary GEITHNER. No, its not hurting the bottom line of
Fannie and Freddie at all. The way this program works for both
a private lender and for Fannie and Freddie is that they do the
modifications if the economic value of the mortgage is better after
being modified than it would be in foreclosure. So, because of that,
thats what these modifications do. They put Fannie and Freddie
in a better position, not a worse position than if no modifications
were happening.
Mrs. CAPITO. But, were still having re-default rates in those?
Secretary GEITHNER. Yes, absolutely. Again, given, as you said,
how high unemployment is across the country still, youre going to
still see re-default rates happen; its just inevitable. We want to
make sure were doing as much as we can to help people who lose
their jobs and face the risk of losing their homes, but youre going
to see some risk of re-default rates across Fannie and Freddie and
the banks who hold mortgages.
Mrs. CAPITO. All right. Thank you, Mr. Secretary.
The CHAIRMAN. Thank you very much. Now, we will hear from
Mr. Lynch of Massachusetts.
Mr. LYNCH. Thank you, Mr. Chairman. Welcome, Mr. Secretary.
I think one of the major weaknesses in our housing finance system
is the securitization process, and I was happy to see that you called
that out on page 5 of your testimony and devoted a really substantial section to that.
There was an article, Im not sure if you saw it, in this past Sundays New York Times by Gretchen Morgenson where she astutely
points out that much of the difficulty with the mortgage-backed securities part of our crisis was rooted in the opacity of these products. And part of the problem, obviously, was that the ratings and

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valuations that were assigned to these mortgage-backed securities
were completely wrong. But, because of the complexity and the
opacity, folks were induced to rely on just the rating. And that was
a real problem.
As Ms. Morgenson points out, the Bank of England has just
issued sort of an advisory, I think they call it a consultive report,
and their Bank of England risk management division has recommended thatand they face the same problem, because in England, the collateral is being posted using these mortgage-backed securities and so, and at their discount window facilities, similar to
what were doing here. What theyre recommending is that there be
more useful information, additional information, supplied by those
who, the issuers, the people who are creating these mortgagebacked securities, so that individual parties, the market, the banks,
will be able to look through and actually vet them themselves rather than relying on Triple A and I think in our own situation with
the Fed doing what theyre doing, I think especially, theyre posting
collateral in much the same way. Is this something that, this is so
important, this is such a critical part of credit formation here in
this country, its a great thing, the securitization, if its properly
used with proper standards.
Is this something that we need to look at, as well, in terms of
getting more information to the markets so they can discern the
proper valuation on a rolling basis, not just a static number or rating when the issue comes out, but ongoing.
Secretary GEITHNER. I completely agree with you. I think you
said it very well, bringing more transparency to those structures so
the investors can look through them, and understand the true risks
in them is very important. Its also very important, as many of
your colleagues know, to bring more transparency to the rating
processes themselves, and we would like to see the rating agencies
be compelled to disclose much more about the models used to underpin those ratings. We want to make sure that in the regulatory
system that supervisors preside over, theyre not creating incentives that encourage overreliance on ratings.
That set of changes, including most importantly, the one you
began with, we think would make a big difference.
Mr. LYNCH. Let me ask you about that. In your report, its a little
bit vague about the reform of the rating agencies. You do mention
it, but can you drill down on that a little bit?
Secretary GEITHNER. The reforms that this committee has embraced and which were the center of our proposals really had two
pieces. One is to give the SEC the authority to police conflicts of
interest because you dont want the judgment skewed by the model
these firms have been operating with and in the future. You dont
want their economic interests
Mr. LYNCH. Right.
Secretary GEITHNER. in the issuer altering their judgment, assigning excessively favorable ratings. Thats very important.
Two, again, is to bring much more transparency to the rating
process, make sure they have to disclose much more information
about the inputs into their models into the rating and that way investors can bring an independent assessment about whether the
ratings make any sense.

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Again, the big mistake that underpinned almost everything that
happened in our housing markets was that everyone made a judgment, almost everyone made a judgment that house prices would
not fall in the future.
Mr. LYNCH. Yes.
Secretary GEITHNER. And the ratings were too favorable. Because
of that, there was too much leverage, because of that, there was too
little capital, because of that, it was a systematic failure across the
GSEs and across private lenders. Transparency will help in that
area but we also have to make sure we put in place stronger capital requirements, other things, so that were arent vulnerable to
those kind of mistakes in the future.
Mr. LYNCH. Right. Thank you, Mr. Secretary. I yield back, Mr.
Chairman.
The CHAIRMAN. Thank you, Mr. Lynch. Now, well hear from Mr.
Marchant of Texas.
Mr. MARCHANT. Thank you, Mr. Chairman. My questions have to
do with the projected losses, or the existing losses that are in
Fannie Mae and Freddie Mac. Are you fairly confident, do you have
any confidence that the loans that are being originated today and
have been originated in the last year are high-quality loans and are
not of the same quality as the loans that were originated in the
previous 3 years?
Secretary GEITHNER. Congressman, my sense is that the underwriting standards today are much stronger than they were. And I
think the people who have looked at this question carefully say if
you look at what these institutions are doing today enters a new
guarantees and how theyre pricing them for those guarantees,
means that the business is on a more stable footing, stand up footing today than it was.
Mr. MARCHANT. With respect to the ability in the long term of
having Fannie or Freddie or a successor agency repaying or earning back the losses over a long-term horizon, do you see that as a
possibility?
Secretary GEITHNER. I do not believe, Congressman, well, let me
say it the other way around. I think the Government of the United
States is likely to face substantial losses on the inherited commitments of these two institutions. It is very hard to judge what those
scale of losses are, both the OMB and the CBO, as well as the FHA
do a rolling assessment of those estimates. Theyre going to move
around a bit, but theyre going to be very substantial.
Mr. MARCHANT. I would like to explore the bridge, I call it a
bridge loan, its the loan that youre making from the Treasury to
Fannie and Freddie every month to meet their obligations. And I
would like to explore if in fact, the government or the Treasury, at
some point, is going to have to take some kind of a loss on, eventually, some kind of a loss on these funds? Why would we, what went
into the judgment call of charging Fannie and Freddie such a high
rate on the loan that its making to Fannie and Freddie, if in fact,
that only adds to that long-term debt and in fact, may exacerbate
that long-term debt? Why are we not dealing with a lower-cost facility? Because the cost of funds isor is this money coming out
of TARP? How is this income being booked? Those are

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Secretary GEITHNER. Those are very good questions. And this is
under the authority we call the MAHRA authority, not under the
TARP. And this was authority that again, President Bush asked
for and received from the Congress. I have been carrying out the
responsibilities that I inherited in that context.
What were doing, Congressman, again, were trying to make a
careful judgment of how best to minimize the extent of losses the
taxpayer ultimate bears, maximize the chance we carefully manage
these institutions as we promote a recovery in the housing markets. Were trying to balance those objectives and were going to do
the best job we can. Again, Im trying to make sure that we reduce
the risk of future loss from these institutions and well look at the
broader terms of our engagement through that basic objective.
Mr. MARCHANT. But, you see where a person
Secretary GEITHNER. I do understand your point. It wouldnt
make sense to charge a punitive rate if were only charging ourselves for that, so youre making the right point.
Mr. MARCHANT. You go into a small bank and make a $10,000
car loan, and then each month, they loan you the money to make
the car loan, then at the end of 3 years, you could have a $14,000
car loan, and I dont know what would have been accomplished in
that, exactly.
Secretary GEITHNER. I understand the point youre making. We
did take some actions at the end of last year to restructure those
commitments in some ways, partly in response to that concern. But
again, were going to do what makes overall sense for the taxpayer,
economically, in terms of reducing the risk of ultimate loss.
Mr. MARCHANT. Thank you.
The CHAIRMAN. The gentleman from Indiana, Mr. Donnelly.
Mr. DONNELLY. Thank you, Mr. Chairman. Thank you, Mr. Secretary for being here. I think one of the things that has caused continued housing problems is obviously the unemployment rate, that
people cant afford to move into homes, to purchase homes. And a
huge portion of the unemployment difficulties, at least in my area
of the country, has been credit availability, and continues to be so.
I have business after business after business who, in trying to
they have had their lines of credit cut, lines of credit cut not because they have missed a payment, but because a covenant was
missed because maybe their sales were down for a quarter during
that time. And they have spent the last year in order to get down
to that lower number of the line of credit, selling equipment, laying
off employees, and telling me they could be adding employees if
they werent in this situation. We have jobs bill after jobs bill
across the street. The real jobs bill, the folks in the shops tell me,
is having a normal credit situation.
So, what can you tell me where were going to be as we move forward on this?
Secretary GEITHNER. Youre absolutely right. Many businesses
across the country still are suffering from a very, very tight credit
environment, even ones that have quite good businesses and have
very good payment history. Youre absolutely right. The bill I referred to a few minutes ago, which is a small business package of
incentives and assistance, has three important components.

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One is, as a series of tax measures for small businesses, zero capital gains rate on investment of small businesses, more favorable
expensing depreciation, range of tax provisions which we think
would be very helpful.
The second is, it includes expanded authority for the SBA to provide guarantees, both the size of guarantees and the economics of
the guarantee. We think it would be very helpful.
And this is the critical thing, we propose a $30 billion small business lending facility that would make capital available to small
banks so they can do a better job of meeting the loan demand of
their customers.
We think giving capital to small banks is one of the most effective things we can do. It can happen very, very quickly if Congress
gives us the authority. And that will help make sure a dollar of
capital to a small bank means $8 to $10 in lending capacity. Without that capital, its hard for many of them to raise capital in the
private market, so theyre going to have to reduce lending to their
customers.
We think that mix of tax incentives, SBA support, and a small
business lending facility would make a big difference.
Mr. DONNELLY. Here is the other conundrum, so to speak. I get
emails from the businesses, from my friends who run businesses,
and they say, the banks wont lend us anything. And the banks
come in to the office and they say, we have money to lend and
were looking to make good loans.
So, how can we put these two sides together?
Secretary GEITHNER. I think what typically happens is, you have
a bank that may have been a well-run bank, may have made a lot
of good decisions over time but also may have gotten itself very exposed to commercial real estate. It has customers they have been
working with for 30 years. They find themselves, because of a
bunch of judgments in commercial real estate, having to reduce exposure to their customers and they, in explaining that to their customer, they frankly often say, it wasnt us, its the supervisors who
wont let us lend, forcing us to raise capital requirements.
As I said earlier, part of whats happening is supervisors are
being tougher than they were. And that is making these problems
worse. I think part of the solution is to try to make sure that
Chairman Bair and Chairman Bernanke and Comptroller Dugan
and their colleagues as supervisors are sending a more balanced
message to their examiners across the country.
Mr. DONNELLY. And that is the message I would like to leave
with you and those folks is, we want to make good loans. We dont
want to make bad loans.
Secretary GEITHNER. Exactly.
Mr. DONNELLY. But at the same time, we want to have supervisors who are understanding the entire economic picture here that
there are good loans that dont have to be extraordinary loans. And
it is really choking the lifeblood out of a number of jobs that are
available.
And when we get these jobs back, people will be buying homes
again.
Secretary GEITHNER. I agree. I think there are businesses who
see growing demand for their products now across the country. As

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you start to see growth spread across the country, and they say
they cant meet that demand because they cant get credit to add
more equipment, add back payroll. So, youre absolutely right. It is
a critical problem, but Congress has a chance to do something
about it now and that would help alongside what the supervisors
are trying to do, to send a more balanced message to their examiners.
Mr. DONNELLY. And I would suggest that the message is really,
thats the best jobs program of all, because those are the jobs that
were there before, that can come back, but they cant do it without
the capital to run the business.
Secretary GEITHNER. And its not expensive.
Mr. DONNELLY. No.
Secretary GEITHNER. Its the highest return on a dollar of taxpayers money of, I think, any of the programs we have put in place
over the last 15 months.
Mr. DONNELLY. And thats our small business guys making it
happen instead of it having to happen out here.
Secretary GEITHNER. I agree.
Mr. DONNELLY. Thank you, Mr. Chairman.
Mr. KANJORSKI. [presiding] Thank you very much, Mr. Donnelly.
We will now hear from the gentleman from California, Mr. Miller.
Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. Secretary
Geithner, its good to have you here again today. A lot of people in
this country dont realize that Fannie and Freddie even hold their
loan, which is interesting. And I come from a history in the real
estate industry, being a builder and a Realtor myself, and 92 percent of the loans in this country are made by Freddie, Fannie, and
FHA today. Im looking at what would occur in this country in the
housing market if they were not there.
Im not here to defend them, but Im looking at reality. Fannie
and Freddie have made some tremendous mistakes, theres no
doubt about it. But Im looking at the serious delinquency rates in
this country: Fannie has about 5.38 percent; Freddie has about
3.87 percent, but the private sector jumbo has about 9.6 percent.
Fannie and Freddie are performing much better than the private
sector in my district, the 42nd Congressional District. In LA County, Fannie and Freddies delinquency rate is 3.9 percent; the jumbo
market is 10.1 percent; and FHA and VA are 2.6 percent. In Orange County, Fannie and Freddie are 2.1 percent delinquent;
jumbo is 8.9 percent; and FHA and VA are 1.4 percent. In San
Bernardino County, Fannie and Freddie are up to 7.8 and thats
alarming, but the jumbo market is 18.4 percent.
And I guess my question is, I have had arguments presented to
me that we need to allow the private sector to completely control
the secondary marketplace and get Fannie and Freddie out of it.
But Im concerned if there was a viable alternative to a GSE,
where was it at in 2005, 2006, 2007? It wasnt there. At the same
time the mortgage-backed security markets were blooming at that
point in time, but the blooming part of the mortgage-backed security market was a group that sold terrible, terrible bundles to the
private sector.
Many of Fannie and Freddies losses today, in fact a majority of
them, are because when they sell mortgage-backed securities, if

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you have a nonperforming one, they take that nonperforming loan
out and eat it themselves and replace it with a performing loan.
Nothing Countrywide or anybody else ever did matches that because the way they bundle their securities, when investors bought
them in good faiththese are not just rich people, these are people
who have a moderate income, but they invested in the market
they bought absolutely worthless mortgage-backed securities.
So my concern is, if were looking for a private sector alternative,
might we be where we were with the mortgage-backed securities?
I would appreciate an answer to that.
Secretary GEITHNER. I think youre exactly right. If you look at
the record of what happened, the most appalling damaging erosion
underwriting standards happened outside Fannie and Freddie,
happened outside banks, happened in thrifts, mortgage finance
companies, specialized finance companies. Fannie and Freddies
prime portfolio has better quality today than the average across the
market, as you said, your statistics are absolutely right.
So I think youre right in the basic emphasis, and right now
youre right to emphasize that the only games in town are Fannie
and Freddie and the FHA. And it is very important again that they
in this transition period, and its not going to go on indefinitely, but
for a period of time, they need to be able to continue to provide
mortgage finance if were going to heal whats still very damaged
across the country, including in California.
Now I have not seen a ideal model yet for what to replace this
current system, but as I said earlier, I think theres going to be
were going to have to take a careful look at how to design a better
form of guarantee and support than take the same risk
Mr. MILLER OF CALIFORNIA. And Im open to that. Im notsay
we have to have Fannie and Freddie. I want to know what we do
if we dont have them. In fact, 9 years ago, the argument about
conforming loan limits in high-cost areas has risen, and we talked
about some oppose that. I started fighting for that 9 years ago, and
Im the one who always had the amendments out there that said
we need to raise conforming in high-cost areas, and a few of my
colleagues, including Mr. Hensarling, disagreed with me. But as I
understand it, FHA and Fannie and Freddie, the best performing
loans theyre making today are in high-cost areas. Is that not true?
Secretary GEITHNER. I dont know if thats true, but I would be
happy to check on that.
Mr. MILLER OF CALIFORNIA. The FHA told me it was true that
they are best for loans. I guess Im toothe question of what are
the key structural improvements Treasury thinks are necessary to
prevent government from distorting, and Im saying distorting the
marketplace because some have said that theyre distorting the secondary marketplace as Fannie and Freddie have done. What can
do you think theres a distortion because of them? And if there is,
what can we do to resolve that?
Secretary GEITHNER. Well, again, this is an unfairthis is a
much more complicated problem than my answer will suggest, but
there are two things that happen that we can prevent in the future, and we should prevent. One is, we should not allow institutions that operate with the expectation of government support to
build up a huge retained portfolio.

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Mr. MILLER OF CALIFORNIA. And I agree.
Secretary GEITHNER. With a lot of risk in it with no capital to
support it.
Mr. MILLER OF CALIFORNIA. I agree.
Secretary GEITHNER. Its also true that I think, although economists disagree on the extent of this mistake, that Fannie and
Freddie over time did provide guarantees for lower-quality mortgages without charging appropriately for that guarantee fee. Both
those mistakes were consequential. The first, I think, was a much
greater mistake. But whatever we do in redesigning the system, we
need to avoid those two errors.
Mr. MILLER OF CALIFORNIA. And in closing, Mr. Chairman, I
want to point out the fact that the only time Fannie and Freddie
ever lost money other than this round was the year of 1985. Other
than that, they were profitable, and maybe Congress did things to
distort their mission and get them headed in different directions
and we may need to go back to a time when that mission wasnt
distorted, where they were making true conforming loans that met
the criteria that they specified. I thank you for your patience, Mr.
Chairman, and I yield back the balance of my time.
Mr. KANJORSKI. Thank you very much, Mr. Miller. And we will
now hear from Mr. Posey of Florida.
Mr. POSEY. Thank you very much, Mr. Chairman. Mr. Secretary,
during, I believe it was this committees last meeting, we heard
breaking news that said Fannie and Freddie executives received
millions of dollars in bonuses all the while this meltdown was continuing. And I just wondered if you had any part in signing off on
those bonuses when the FHFA met on December 24, 2009?
Secretary GEITHNER. The FHFA, as you said appropriately, is responsible as conservatorship for approving the compensation packages of these executives. They reached that decision in consultation
with Ken Feinberg, whom I appointed to help establish stronger
compensation standards across other institutions that were beneficiaries of the TARP.
Mr. POSEY. Is that a yes or a no?
Secretary GEITHNER. That gesture was made by the
Mr. POSEY. Is that a yes or a no? Did you have any hand in that?
Secretary GEITHNER. I was not involved. It was
Mr. POSEY. Thats all I need. I dont have much time, so Im
going to ask my questions, and if you dont have time to answer
them, Im going to ask with the chairmans permission that you respond in writing. It seems like every time I ask somebody a question here, if I ask them what time it is, they start describing a
clock, and we never get an answer.
Im wondering why were never able to get an answer from you
on a comprehensive recovery plan. We have testimony. We hear the
same old rehashing of what went wrong.
Secretary GEITHNER. For the GSEs?
Mr. POSEY. But we never have any real plan, comprehensive plan
for recovery. I wonder how much longer were going to have to wait
for a plan, what information anybody could possibly still be waiting
for to come forth with a plan. Clearly, the Administration has some
serious credibility problems. They broke promises on space, they
broke promises not to raise taxes, not to take over personal sov-

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ereignty. The stimulus has failed to do what you said it would do.
You said
Secretary GEITHNER. I dont agree with that.
Mr. POSEY. if the stimulus is passed, your words, it would not
exceed 8 percent unemployment
Secretary GEITHNER. Thats not true.
Mr. POSEY. Its now over 10 percent.
Secretary GEITHNER. Thats not true, Congressman.
Mr. POSEY. Its your chart, not mine. There are so many fair and
legitimate questions that we just cant get answered, for example,
when will Freddie and Fannie Maes conservatorship end? I think
there ought to be a legitimate estimate on that. I think a professional ought to say, with your experience and guidance, I think
this is today. This ought to be the target, and this is how were
going to go there. I dont think those are out of bounds at all. And
Im curious about to what extent our creditorsChinaare worried
about the failures of Fannie and Freddie. And of course I think it
has been asked before, how do we prevent too-big-to-fail Freddie
and Fannie, going forward? These are questions Congress has to
know, and we cant wait forever to find out.
Secretary GEITHNER. You wont have to wait forever. And again,
were starting today the necessary process of figuring out what
Congress and the Executive Branch would like to do to reform the
housing finance system. But as you know, this is an enormously
complicated question. We need to do it carefully, but were beginning that process now and we look forward to working with you on
how to fix whats broken in the system.
Mr. POSEY. What about the last year; what did they do?
Secretary GEITHNER. What did who do?
Mr. POSEY. Well, we have had a year to come up with a plan.
Secretary GEITHNER. Well, weif you worry we have been idle,
I would just point out that we inherited the worst financial crisis
in 75 years since the Great Depression. We have been working
Mr. POSEY. Who inherited it?
Secretary GEITHNER. This Administration did and this Congress
did.
Mr. POSEY. This Congress has been run by the same Majority for
3 years. Im sick and tired of hearing that we inherited it.
Secretary GEITHNER. Lets look forward. We are looking to move
forward.
Mr. POSEY. Were looking to you for answers.
Secretary GEITHNER. Im happy to move forward. We will work
with you on how to reform the GSEs and our very damaged housing market, and I look forward to doing it.
Mr. POSEY. But no answers.
Secretary GEITHNER. Congressman, again, we have laid out a
comprehensive, detailed set of objectives and principles. We laid
out a comprehensive diagnosis of what was broken and what
caused this housing crisis, and that is a good foundation on which
to build and thinking about reforms. If we dont agree on what was
broken, we cant begin the process, and were going to go through
a process with this committee to consult with people in the private
sector, in the academic community, among Republicans and Demo-

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crats. Well look at alternative models, and well figure out the best
way forward.
Mr. POSEY. So the reality is, we still dont have a plan.
Secretary GEITHNER. Congressman, again, youre asking us to design in the midst of again the worst financial crisis in generations.
Mr. POSEY. Listen, every business
Secretary GEITHNER. Comprehensive reform.
Mr. POSEY. Every business in this country is suffering right now,
and theyre working on some kind of a plan for recovery. Theyre
not doing it on a crisis
Secretary GEITHNER. And were working hard too, Congressman.
We have been working hard too and we have done extraordinary
things, and this economy is growing, and if you just want to go
back, you say you dont want to go back to history, but when we
came into office, when this Congress came into office, the economy
was shrinking at a rate of 6 percent a year and three-quarters of
were losing their jobs every month. And today, because we actually
acted as a country, the economy is now growing.
Things are dramatically better today than when we took office 15
months ago because of the actions we took and this House of Representatives has passed the most sweeping set of financial reforms
contemplated since the Great Depression. Were on the verge of enacting those kind of reforms, and today, fortunately, we have a
chance to begin the conversation about how were going to reform
the GSEs. And again, we look forward to working with you, and
look forward to seeing your ideas. I expect you guys will have some
ideas on your side of the aisle, and well take the best ideas on both
sides and well propose something that we think will meet the test
of reform.
Mr. KANJORSKI. The gentleman from Texas, Dr. Paul.
Dr. PAUL. I thank the chairman. Today, were talking about reforms in the housing financial markets, which I think is crucial
and very, very important. My concern is that there hasnt been a
full explanation or an understanding of how we got into this mess.
And from what I hear, the little bit we do hear, is that we will deal
with the problems with more technical solutions and more regulatory solutions rather than looking at the fundamental causes.
To me, the fundamental causes are well understood by the Austrian free market economists because they predicted early on exactly what was going to happen, and it did. And they put the blame
on three things. Fixing interests rates, price fixing, interest rates
too low for too long, and also the line of credit that waswith the
Federal Reserve, which was something the Congress did, even
though it was $2 billion, it created a lot of moral hazard because
even Mr. Greenspan admitted that there was probably about a $14
billion indirect subsidy to Fannie and Freddie which also encouraged the distortion. And on the books, it was legal for the Federal
Reserve to buy mortgage debt. And, of course, there were no restrictions at all because it was done in secret about exactly how
much credit will be created.
Because of my concerns and understanding of what was happening, in July of 2002, I was convinced that we were working on
a financial bubble, and I introduced legislation that would have removed the line of credit from the Treasury as well as prohibited

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the Fed from buying mortgage debt, which most people would object to: No, we need them for the emergency. But thats what
caused all the moral hazard. And I think it also existed for the benefit of us selling debt overseas. This encouraged foreigners to buy
it, knowing the Treasury stands behind this, and the Federal Reserve stands behind this, and the whole cycle continues.
But when I introduced that legislation back in 2002, I said by
transferring the risk of widespread mortgage default, the government increases the likelihood of a painful crash in the housing
market. And the system could stave off the day of reckoning by
purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing
market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable.
Now thats not so much my statement coming about that on my
own but because I endorse free markets, I endorse Austrian economics, and I dont see any understanding of that coming from our
leadership in the Congress or the Fed or the Treasury, and I think
it is so crucial that there is this understanding. So my question is,
are you familiar with the explanation of the Austrian economist of
the business cycle, how bubbles are formed and what we should do?
And you shake your head, yes. If so, if you do understand that,
which part of it dont you like, and why dont we look more carefully at those economists? They were right 10 years ago. I believe
theyre right now. Why arent they consulted?
Secretary GEITHNER. Congressman, I agree with much of what
you said. And as you and I have talked about in this hearing room
before, I think youre right to point out that a long period of low
real interest rates around the world played a major role in contributing to this financial crisis, this real estate boom, this credit
boom. Youre also right that moral hazard played a very important
role, most dangerously in Fannie and Freddie. And those institutions were allowed to grow to enormous size, take on enormous
risk, without capital to support those commitments, because of the
expectation that the government would come in and protect them
from the failures. I completely agree with you.
Dr. PAUL. Since my time is running out, I want to see if I can
get one answer. My bill that was suggested years ago, would that
be a proper thing to do now, to make sure that line of credit and
this inevitable purchase of this kind of debt from the Fed, we
should restrict that or remove it? Would you agree that was a good
suggestion back then?
Secretary GEITHNER. I would have to go back and look at your
bill, but as I said in my statement, I think when you think about
what system should replace our current system, a critical part of
that is to make sure you dont have institutions with private shareholders taking advantage of a subsidy from the government that
leaves the taxpayer exposed to the risk of substantial losses.
So I agree that a centerpiece of future reform will be dealing
with the moral hazard in the current framework.
Dr. PAUL. But doesnt the monetary system breed into the system
the moral hazard? The Fed is designed to be the lender of last resort.
Secretary GEITHNER. No. I dont think that was

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Dr. PAUL. Thats what it says. They are to be there to pick up
the pieces.
Secretary GEITHNER. NotGSEs were different, as you said, because there was a credit line and because this expectation built
over time that the government would be there. That had nothing
to do with the Fed. In fact, the Fed is
Dr. PAUL. Our concerns bore out because thats what exactly happened. The government did pick up the pieces, and now were in
a bigger mess.
Mr. KANJORSKI. The gentleman from Illinois, Mr. Manzullo.
Mr. MANZULLO. Thank you, Mr. Chairman. Mr. Secretary, Hank
Paulson, the former Treasury Secretary wrote in his book, On the
Brink, that in September of 2008, the Treasury issued, as you referred to on page 10 of your testimony, the preferred stock purchase agreements, encouraging banks to purchase these. And that
this was done at the same time to help satisfy the Chinese government, which owned billions of dollars in Fannie and Freddie bonds,
which were paid off in their entirety. And so now we have these
banks that were intentionally misled, intentionally deceived to buy
Fannie and Freddie preferred holdings, and then after the government said buy these, its going to help out, the government just defaulted and stuck all those banks, big time.
At the same time, you mentioned theres a new $30 billion capital program being considered for community banks, and my question to you is, when I look at the objectives of reform, and this is
a guideline, I dont see anything in there that addresses whether
or not these community banks should be treated the same as the
Chinese and be made whole when they were intentionally misled
by the U.S. Government to buy these bonds that turned out to be
worthless.
Secretary GEITHNER. Congressman, I cannot speak adequately to
the judgments my predecessor made at that timeI cannot.
Mr. MANZULLO. I understand. Im asking you, do you have a solution for these banks that got stuck?
Secretary GEITHNER. Well, again, I think that one of the most
powerful things we could do to help community banks get through
the challenges still ahead is to put in place a capital facility that
gives them the ability to come to the Treasury and apply for capital
support, small business lending. I believe that would help make a
big difference.
Mr. MANZULLO. I understand that. But if theyre made whole on
their bonds, theyre just getting backif theyre made whole in
their preferred stock purchases, then theyre simply getting back
the money they paid in the first place and dont have to worry
about another exotic program coming from the Federal Government.
Secretary GEITHNER. Again, I understand those concerns, but
small banks across the country face a lot of challenges, not just
those who held Fannie and Freddie preferred stock. And thats one
of the reasons why small businesses across the country are still
having a hard time getting credit, and I think it is a
Mr. MANZULLO. Well, that, and the fact that the regulators have
really tightened up the screws, even though the regulators say they

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have not, and I believe them, but the people in the field have done
that, to make what credit is available even tighter.
Secretary GEITHNER. Youre right. I think
Mr. MANZULLO. Here we have a situation where my question is,
is the Treasury as part of its reform program interested or willing
to treat the community banks in the same manner in which it
treated the Chinese by making sure that they were indemnified on
their bonds?
Secretary GEITHNER. Well, again, I would be happy to spend time
with you, Congressman, in looking in more detail at that particular
Mr. MANZULLO. Can you give me at least the basis of an answer
on that?
Secretary GEITHNER. Congressman, we have put forward a very
detailed
Mr. MANZULLO. If you dont know, I would accept that.
Secretary GEITHNER. No. As I said, we think the most effective
thing Congress could do to help small community banks now
Mr. MANZULLO. I understand that. Im asking, what can you do?
Secretary GEITHNER. What I can do is administer a program like
that with authorization from the Congress, but I need authorization from the Congress for it to work.
Mr. MANZULLO. You need authorizationwould you need authorization in order to honor those preferred stock purchases?
Secretary GEITHNER. I
Mr. MANZULLO. That were issued in September of 2008?
Secretary GEITHNER. I would have to think about that and get
back to you.
Mr. MANZULLO. Okay. Thats fair enough. Thank you.
The CHAIRMAN. The Secretary is now dismissed. Well, excused,
I guess, is better than dismissed.
[laughter]
The CHAIRMAN. With our thanks. The hearing has been useful.
I thank the members. I think we had a very serious set of questions asked in a perfectly reasonable way, and we will now call the
second panel.
People leaving, please leave. The panel will sit down. What are
you running around the table for? Theres no music. The hearing
will begin. This is obviously a continuation of the hearing on the
future of housing finance, and Im going to be very clear. We are
not talking only about the GSEs.
This is now the first of two hearings well be having because Secretary Donovan will be testifying, and I should note that there are
some organizations and others, and groups and individuals who
have a lot of relevant things to say. They will be in the next panel.
I will just say that I think this is one of the most interesting intellectual issues that we have before us, and it obviously has a lot of
policy implications. Some of those are more easily done than others. But getting right what the successor set of institutions should
be in housing finance is very important.
We will begin with Sarah Rosen Wartell, who is the executive
vice president of the Center for American Progress. I would just
make one point. Please do not lean into the microphones. Move the
microphone closer to you.

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STATEMENT OF SARAH ROSEN WARTELL, EXECUTIVE VICE
PRESIDENT, THE CENTER FOR AMERICAN PROGRESS (CAP)

Ms. WARTELL. Thank you, Mr. Chairman, and Representative

Capito. I applaud you, and I appreciate the way you framed the
purpose of this hearing for beginning this conversation. I should
say my testimony benefits from 18 months of conversation with the
Mortgage Finance Working Group, which is a group of affordable
housing finance experts sponsored by CAP, although my remarks
are mine alone.
I ask the Chair if my full statement and a statement of principles and a draft whitepaper that the working group has prepared
could be included in the full record.
Let me leave you with just six points. First, the new systems
goals should include liquidity, stability, and affordability. These objectives have served us well since the 1930s. The mistakes that led
to the current crisis represent not the failure of this vision, but the
failure to keep those objectives paramount.
The system also must better balance rental and homeownership,
offering appropriate options for all kinds of families. Unfortunately,
history suggests that the private market alone will not meet these
objectives.
Second, the crisis stemmed from the unchecked growth of a shadow banking system of unregulated and irrationally priced private
label MBS or private label securities. As investor demand for PLS
grew, issuers demanded more subprime loans, and good lending
practices would yield, driving down standards and distorting markets. The only cops on the street were the rating agencies, and they
had an incentive to keep the party going.
An analogy may be helpful here. Imagine that there was suddenly great demand for hamburgers in the United States. Facing
a shortage of Grade A meat, USDA inspectors would face pressure
to let older, less healthy cows receive that Grade A designation. If
we had a system in which they were paid by those whose meat
they graded and there was no transparency on the standards, we
might find ourselves waking up one day realizing that what we
were eating in our hamburgers had changed. Thats basically what
had happened with the PLS market. Our investors were eating the
equivalent of horse meat.
Figure 1 in the package of chartstheres a package of charts
that I believe is on your table with the CAP logoshows how dramatically credit quality declined with early delinquencies, growing
from 5 to 25 percent in only 4 years. Going forward, we must not
reproduce a bifurcated system, as the Secretary mentioned earlier,
in which unregulated capital in one part of the market drives a
race to the bottom. Our working graph proposal argues that the
same system of rules must apply to both whatever receives government backing and the private market.
Third, we look at the GSEs role in the crisis. They were followers, not leaders. They made poor decisions with costly consequences for taxpayers. They came to the party late, were drawn
in to the subprime market to regain lost market share, and chased
what seemed like higher returns. And Figure 2 in that set of charts
shows how their market share dropped as the private label securities share grew.

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As others left that market, the GSEs stayed, and inexplicably
doubled down while credit quality collapsed. The regulators also
made significant errors in risk oversight and in awarding goals
credit for unsustainable subprime purchases. While both the GSEs
and the regulators made the problems worse, neither was the primary cause of the junk mortgages or the larger global financial
meltdown.
Fourth, lending to low- and moderate-income and minority borrowers didnt cause this crisis, nor was it the result of longstanding
policies like CRA and the housing goals that encouraged serving
creditworthy borrowers. Figure 3 in your package shows how the
MBS market followed the same bubble burst pattern as other
asset-backed securities markets that had no affordable housing
goals. If the GSE goals drove the subprime business, these patterns
would diverge.
Fifth, while recent subprime lending was more detriment than
benefit, we do know how to do affordable homeownership right.
With sound lending practices, research shows, comparable borrowers are 3 to 4 times more likely to sustain homeownership as
the fourth figure in the package shows. Communities have been
stripped of equity by this foreclosure epidemic. It would be obscene
if we first failed to prevent harmful subprime lending and then we
let the hardest-hit communities be denied the fair and sustainable
lending needing to recover. That must be a priority in reform.
Sixth, while we should not preserve the governments greatly expanded role any longer than necessary, policymakers must move
cautiously. Even simple statements about the future might move
markets, affect home values, and make domestic and overseas investors wary of agency securities, representing trillions of investment in the U.S. economy. And housing market deterioration could
increase the taxpayer exposure from its existing obligations.
Over time, we must reduce the Federal role to one focused on
serving the historical goals of liquidity, stability, and affordability,
and creating the conditions in which private capital can better
serve the market. The Federal backstop should be more target than
it is today. Private and public capital under explicit rules and rigorous oversight can be paired to ensure that all appropriate Americans have access to long-term, fixed-rate homeownership opportunities and affordable rental housing.
Thank you.
[The prepared statement of Ms. Wartell can be found on page
178 of the appendix.]
The CHAIRMAN. Thank you, Ms. Wartell.
Next, Mr. Michael Berman, who is the chairman-elect of the
Mortgage Bankers Association.
STATEMENT OF MICHAEL D. BERMAN, CHAIRMAN-ELECT, THE
MORTGAGE BANKERS ASSOCIATION (MBA)

Mr. BERMAN. Thank you, Mr. Chairman, and Representative

Capito, for the opportunity to testify.
I live in Newton, Massachusetts, and I have been in the real estate finance industry for over 25 years. I currently oversee all of
my companys national loan programs, including multifamily programs with Fannie Mae, Freddie Mac, and the FHA. My company

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has also been active in the commercial mortgage-backed securities
arena as an investor, lender, issuer of securities, servicer, and special servicer.
Since the creation of Fannie Mae in the 1930s, the Federal Government has played a key role in providing stability to the secondary mortgage market. The current housing crisis has tested
that role and led to calls for fundamental rethinking of the part
played by the government in the housing finance system. To spearhead this thinking, in October 2008, the Mortgage Bankers Association formed the Council on Insuring Mortgage Liquidity, which
I chair. This 23-member council is made up of industry practitioners from single family, multifamily, and commercial sectors of
the real estate finance industry. Its mission has been to look beyond the current crisis to what a functioning, secondary mortgage
market should look like.
Let me identify three principles that lie at the heart of our discussions. First, the secondary mortgage market transactions should
be funded with private capital. Second, to promote uninterrupted
market liquidity for the core mortgage market, the government
should provide an explicit credit guarantee on a class of mortgagebacked securities backed by core, single family and multifamily
mortgage products. This guarantee should not be free but should
be financed with risk-based fees. And, third, taxpayers and the system should be protected through limits on the mortgage products
covered, limits on activities, limits on portfolio size and purpose,
strong risk-based capital requirements, and risk-based payments
into a Federal insurance fund.
The centerpiece of MBAs plan is a new line of mortgage-backed
securities. Each security would have two components: a securitylevel, Federal Government guaranteed wrap which would be
backed by loan level guarantees from privately-owned, governmentchartered, and regulated mortgage credit guarantor entities. The
government guarantee would be similar to the one provided by
Ginnie Mae, guaranteeing timely payments of interest and principal to bondholders and explicitly carrying the full faith and credit
of the U.S. Government.
This government wrap will help provide affordable financing
rates. These guarantees will be supported by a Federal insurance
fund, capitalized by risk-based fees charged on the supported securities, which could also be a vehicle for an affordable housing fund.
In supporting these loan level guarantees, the private entities
would rely on their own capital as well as risk retention from originators, issuers and other secondary mortgage market entities such
as mortgage insurers. MBS investors would not face credit risk, but
would take on the interest rate risk from the underlying mortgages.
Its important to note that while MBS in this model would be
guaranteed by the government, the companies backing these securities would not. The debt in equity issued by these entities would
be purely private. As with other firms, investors would accept the
potential risk of failure and loss. For this reason, we recommend
that regulators charter enough entities to establish a truly competitive secondary market and to overcome issues associated with too-

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big-to-fail. At least initially, the number of entities should be two
or three, and that number could increase as the market develops.
The framework we proposed is not intended to be the entire market. Its meant to focus on a narrowly defined set of core mortgage
products that are essential to have available through all market
conditions. Our proposal recognizes the need for a wider array of
products through a re-emergence of the private market, including
private label securities and covered bonds. We must also ensure
that the transition from the current system to a new model is as
seamless as possible.
Measures such as focusing the GSEs on a narrow range of mortgages and winding down their portfolios can be undertaken now.
Additionally, the use of a good bank/bad bank strategy would help
retain the best people, processes, and infrastructure from the
GSEs. Identifying a clear path that will move forward to remove
uncertainty and ensure that GSEs resources are of service now
and in the future is essential.
Mr. Chairman, MBAs recommendations combine an acknowledgment that only a government guarantee can attract the depth and
breadth of capital necessary for the market with a reliance on private capital and insistence on multiple layers of protections for taxpayers and a focus on ensuring a competitive, efficient secondary
mortgage market. Our recommendations represent a clear and
workable approach to ensuring liquidity in the mortgage market.
These proposals were developed by industry practitioners who have
been working on these issues for their entire careers.
We understand that capital markets have perspective on what
will work. We welcome your thoughts and comments on our ideas.
Thank you.
[The prepared statement of Mr. Berman can be found on page 75
of the appendix.]
The CHAIRMAN. Next, Mark Calabria, who is the director of financial regulation studies at the Cato Institute.
STATEMENT OF MARK A. CALABRIA, Ph.D., DIRECTOR,
FINANCIAL REGULATION STUDIES, THE CATO INSTITUTE

Mr. CALABRIA. Chairman Frank, distinguished members of the

committee, I thank you for the invitation to appear at todays hearing.
Before offering specific reform proposals, I think its useful to
start with a set of principles that I think should guide any restructuring of our mortgage finance system. The first and foremost of
those principles is that I believe private, at-risk capital should
serve as the foundation of our mortgage finance system. We simply
must put an end to privatized profits and socialized losses.
Second, government policy should be structured to act in a countercyclical manner. Too much of our current structure magnifies
the booms and busts in our housing markets, and we certainly
should make every effort to dampen our housing cycles, we are unlikely to avoid them. So we should structure our housing finance
system, keeping in mind that we will have booms and busts and
our system should be robust to those booms and busts.
Just as we have booms and busts, we will have companies that
fail, and we should structure our mortgage finance system with

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that in mind so that our mortgage finance system is robust to the
failure of a small number of companies. I think its also important
that the costs and benefits of that system should be transparent,
understandable, and credible. All subsidies and contingent liabilities should be on budget. I believe the American public has a right
to know what theyre on the hook for. I also think policy should be
tenure-neutral. Renting should be a respectable alternative, and to
the extent that we encourage homeownership, it should be sustainable. And, additionally, I believe all homeownership policies should
focus on housing as shelter and not housing as a speculative investment.
We should also reduce the current levels of leverage, the use of
debt in our mortgage finance system, both on the part of financial
institutions and on the part of households. Additionally, the level
of maturity mismatch in our financial system should be reduced.
But, with those principles in mind, Im going to give a set of recommendations for reforming Freddie and Fannie. These recommendations should also apply to any entities that succeed
Freddie and Fannie.
First and foremost, I think whatever entities we have funding
our secondary mortgage market, we should have a lot of them. Concentrating the risk of our mortgage market into a few entities is
simply a recipe for disaster. If we were to keep some version of
Freddie and Fannie, I believe we need to break them up into at
least a dozen pieces. Anything else would be viewed as implicitly
backed by the government.
In keeping with the principle of transparency, if private sector
debt is used to fund the secondary mortgage market, such debt
should be explicitly not treated as government debt, should be subject to 33 and 34 Act disclosures, and we should remove references
and statute treating it as government debt. I would emphasize the
part of Freddie and Fannie that provided the substantial amount
of liquidity for the mortgage market is essentially securitization of
mortgages. Future activity should be limited to issuing mortgagebacked securities and prohibiting the holding of an investment
portfolio.
Additionally, any securitization should be a true securitization
where Freddie and Fannie or their successor entities transfer all
the risk, including credit, to the holder of the MBSs. This would
imply that their guarantee business be ended. We should also reduce the extent to which Freddie and Fannie debt and mortgage
debt generally permeate our financial system. For instance, prior
to the financial crisis, FDIC-insured depositories held GSE securities equal to over 150 percent of their tier 1 capital.
Investment banks and mutual funds were similarly full of
Freddie and Fannie debt. There should be explicit concentration
limits on financial holdings of GSE securities and such debt should
be treated no better than commercial paper for the purposes of capital adequacy. But we must also recognize that the rescue of
Freddie and Fannie was as much a foreign policy decision as it was
an economic one.
If we were not going to let foreign governments or central banks
such as the Chinese take losses on their GSE holdings, then we
need to either have that reflected on budget or we need to prohibit

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the sale of GSE securities to foreign entities. We should also consider a new ownership structure for Fannie and Freddie. I believe
reconstituting Freddie and Fannie as a lender-owned cooperative
could reduce the risk-taking and lower potential cost to the taxpayer. I say that, well aware of the many problems facing the Federal Home Loan Bank System.
But, despite those problems, I believe the Federal Home Loan
Bank System has come through this crisis in better shape than
Freddie and Fannie. I also believe its appropriate to set minimal
underwriting standards and loan requirements for whatever GSEs
look like, such as requiring reasonable downpayments on the part
of borrowers in addition to requiring all GSC loans to be full recourse.
At the core of any discussion of the U.S. mortgage market,
stands the 30-year, fixed-rate mortgage. We must start with the
very simple observation that someone must bear that interest rate
risk. It will never simply go away. In normal times, the borrower
or the lender bears some or all that risk, and in extreme market
events, the taxpayer gets hit. I believe we should ultimately let the
market decide where that falls.
In wrapping up, as the committee moves forward, I would strongly encourage the committee to hear from experts from other countries on the functioning of their mortgage markets. Despite the
rhetoric during the bubble, our mortgage market is clearly not the
envy of the world nor do we have the highest homeownership rates
in the world. Several countries had even bigger housing bubbles
with less ramifications, while other countries largely avoided a
bubble, yet still maintain ownership rates similar to our own.
For instance, the Canadian system requires significant
downpayments, full recourse, sizable prepayment penalties, and
leaves significant share of the interest rate risk with the borrower.
Yet, Canada has ownership rates similar to our own without the
recent bubble.
I thank you, and wrap up there.
[The prepared statement of Dr. Calabria can be found on page
103 of the appendix.]
The CHAIRMAN. Next, Vincent ODonnell, who is vice president of
the affordable housing preservation initiative of LISC.
STATEMENT OF VINCENT F. ODONNELL, VICE PRESIDENT, AFFORDABLE HOUSING PRESERVATION, LOCAL INITIATIVES
SUPPORT CORPORATION (LISC)

Mr. ODONNELL. Thank you, Mr. Chairman, and distinguished

members of the committee for the opportunity to testify about
where we go with our housing finance system.
I lead LISCs national efforts in supporting the preservation of
affordable rental housing, but I speak today from the perspective
of LISC as a whole. We work through partnerships with the private
sector, including banks and GSEs and insurance companies, mostly
through generating loans and investments. And we have seen at
close hand in this work the best and the worst elements of the
housing finance system and how it affects low-income, metropolitan, and rural communities and their residents.

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We have seen effective public-private partnerships that foster the
production and preservation of affordable rental homes and sustainable homeownership, fed by a fixed-rate, 30-year mortgage and
prudent underwriting and innovation. Even in distressed urban
and rural communities that were previously written off, private interest served the public interest safely, profitably, and successfully,
not out of luck, but as a result of careful public policies that blended responsibility, opportunity, prudence, capacity, and accountability.
But we have also seen predatory lending ravage families and
neighborhoods and we have seen public policies that oversell the
genuine virtues of homeownership and ignore and neglect or even
denigrate rental housing where a third of American households
live. We have learned from this work that the long-term interests
of consumers, lenders, investors, and communities in the financial
system must fundamentally align rather than conflict. And we also
must bring all communitiesdistressed, rural, and minorityinto
the mainstream of the financial system.
I want to set some context, but first state some basic guiding
principles: first, the elements of the housing finance system should
be better integrated in a number of ways; and second, private institutions that receive public benefits should also help address public
objectives.
Just for perspective, our role is that of a community development
financial institution. In that capacity, we make loans and equity investments to benefit people in a variety of circumstances. And,
therefore, the functioning of the long-term housing finance market
is critical to our success, because otherwise the investments we
make will not pay off either in terms of financial return to us and
recovery of our funds, or in the success of our mission. Our written
testimony goes into some detail about how this interplay works. In
particular, we use the example of affordable rental housing preservation to discuss the interplay between housing subsidies and the
housing finance system, and the community development financial
institutions like us that get these useful developments jump-started.
I do want to say that other parts of the system are addressing
this interplay. Secretary Donovan is looking at the relationship between rental assistance and stable financing, and this committee is
also doing that. I want to commend H.R. 4868, the Housing Preservation and Tenant Protection Act of 2010, which was filed last
week by Chairman Frank and a number of cosponsors on the committee.
Now going back to the system, any reconsideration of the GSE
role should note their current centrality to the housing finance system in the broad context. System fragmentation has increased risk,
created unlevel playing fields, and reduced access to responsible
credit. Any new system must assume the functions and capacities
that the GSEs have developed and deal with transitional issues.
We need coordination between primary and secondary markets. We
need system-wide regulation, including regulation of the secondary
markets, which are powerful drivers of the primary market. The
painful subprime home mortgage crisis is evidence of how this can
happen.

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Both homeownership and rental housing are important. We need
a balanced policy between both. We need policies to address both
market rate and affordable housing, and we think its a false dichotomy to suggest that the capital markets should address market
rate housing and only the government should address affordable
housing. We also need the system to understand and support both
debt and equity. The secondary markets have been crucial to the
equity market with low income housing tax credits, for example,
and there needs to be a place for that.
The public policy objectives that we want to support, and we go
into more detail in our written testimony, are that: we need liquidity in all economic conditionsupmarkets and downmarkets; we
need long-term, fixed-rate mortgages for both homeowners and for
rental housing; we need capital access for all communities, including economically distressed, low-income, rural, and minority communities on a fair and sustainable basisnot a return to redlining;
and we need some approach to support the housing trust fund and
the capital magnet fund. We recommend a small millage fee; by
broadening the base, the impact on the taxpayers is reduced. I just
want to say in conclusion that there will be an enormous, farreaching consequence coming from this. Our perspective is that the
system needs to serve all communities in this country, including
low- and moderate-income families. And we thank you for your
support.
[The prepared statement of Mr. ODonnell can be found on page
159 of the appendix.]
The CHAIRMAN. Thank you.
Mr. DeWitt?
STATEMENT OF ROBERT E. DeWITT, VICE CHAIRMAN, CHIEF
EXECUTIVE OFFICER, AND PRESIDENT, GID INVESTMENT
ADVISERS LLC, ON BEHALF OF THE NATIONAL MULTI HOUSING COUNCIL AND THE NATIONAL APARTMENT ASSOCIATION

Mr. DEWITT. Chairman Frank, Ranking Member Capito, and distinguished members of the committee, I am Bob DeWitt, chief executive officer of GID Investment Advisers, testifying on behalf of the
National Multi Housing Council and the National Apartment Association.
Its important to draw a clear distinction between the performance of the single family and multifamily sectors. The multifamily
finance system has been an unqualified success for over 2 decades.
As Congress crafts solutions to fix the single family problems, you
should be mindful not to do so at the expense of the much smaller,
less understood, but vital multifamily sector.
Since the early 1990s, apartment developers and owners have
had access to reasonably priced capital throughout all economic cycles as a result of the secondary market. This has allowed them to
produce millions of apartment units affordable to working families,
those households at or below area median income in communities
all across the country. We didnt overbuild, and those apartments
produced within the system came at virtually no risk to the taxpayer. The two GSEs have had to foreclose on fewer than 100
apartment properties over the past 20 years.

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Today, their delinquency and defaults remain under one-half of
one percent, a tenth of the size of the delinquency and default rates
plaguing single family. In normal times, GSEs finance approximately a third of the capital going to apartments. Banks, insurance
companies, conduits, and other private players have made up the
other two-thirds. However, the past 18 months have not been normal times. Those purely private players abandoned the market and
have not and cannot yet return. As a result, Fannie and Freddie
currently finance some 90 percent of the debt capital for apartments.
Clearly, this is not sustainable, nor desired; but, neither is the
uncertainty regarding what role the private market can play in financing apartments. The apartment industry urges you to consider
the following key points for inclusion in any reform measures.
Number one, mission: the public mission of the federally supported secondary market needs to be clearly defined and should be
focused primarily on using the government guarantee to provide liquidity to the multifamily mortgage market. This liquidity will
help meet the current and growing need for workforce housing.
Access to a steady stream of capital promotes affordability. Affordable housing is one of the Nations most pressing needs and
multifamily housing is inherently affordable. Fully 90 percent of
the apartment units financed by the present system over the past
2 decades, literally millions of apartments, were affordable to families at or below area median income. This includes an overwhelming majority of market rate apartments with no direct Federal subsidy.
The Harvard University Joint Center for Housing Studies estimates that we already have a shortage of some 5 million units of
affordable rental housing. Our industry cannot meet the Nations
current or future housing needs, or refinance the approximately
$200 billion in mortgage debt coming due over the next 2 years
without a fully functioning, secondary mortgage market.
Number two, the private market simply cannot meet 100 percent
of the multifamily demand for capital. Any new or revised secondary market system must recognize the unique needs of the multifamily sector and create a capacity to fill the gap left by the private sector. There are structural impediments facing banks, insurance companies and conduits that preclude them from financing
more than they traditionally have. As the GSEs shrink their overall presence in the markets during this transition, we expect them
to continue to be the primary source of the apartment sectors
mortgage capital.
Number three, private capital is preferable to federalization of
the secondary market or the creation of a new Federal entity. Federalization will limit the broad range of finance products required
to maintain a healthy and changing multifamily market. Attracting
private capital based on the Federal Government guarantee allows
for needed innovation and flexibility.
Number four, explicit guarantee: we believe that the transition
to any new system should provide access to explicit Federal guarantees for multifamily mortgage securities and loan. We support a
fee structure to support this backstop. Such a risk-based guarantee

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on the underlying mortgage would provide reserves against mortgage losses, thus protecting and insulating the taxpayer from loss.
Number five, portfolio lending: securitizing multifamily loans is
not always the best way to manage credit risk. Unlike single family
loans, they are not easily commoditized, and therefore any new system should permit the ability to hold loans in portfolio.
And number six, secondary market infrastructure: during these
transition years, we believe it is critical to retain many of the resources and capacities of the existing GSEs. The two firms have extensive personnel and technology expertise, and established third
party relationships that are critical to a well-functioning, secondary
market.
If I can leave you with one message today, it is that a government-supported secondary market is absolutely critical, at least
during an appropriate transition period to the multifamily industrys ability to continue to meet the demand for safe, decent, and
affordable rental housing. I thank you for the opportunity to be
with you today to present the views of the apartment industry, and
I look forward to your questions.
[The prepared statement of Mr. DeWitt can be found on page 110
of the appendix.]
The CHAIRMAN. Next, Janis Bowdler, who is the deputy director
of the wealth-building policy project at the National Council of La
Raza.
STATEMENT OF JANIS BOWDLER, DEPUTY DIRECTOR,
WEALTH-BUILDING POLICY PROJECT, THE NATIONAL COUNCIL OF LA RAZA (NCLR)

Ms. BOWDLER. Good morning. Thank you. I am the deputy director of the National Council of La Razas wealth-building policy
project, and I would like to thank Chairman Frank, Mrs. Capito,
and others for inviting NCLR to share a perspective on this issue.
Record foreclosures in communities of color have taught us painful lessons on the consequences of predatory lending. For decades,
qualified borrowers of color have struggled to gain access to the
same loans as their White peers. During the bubble years, many
believed their homeownership dream came true, only to learn that
they were sold second class products. As we consider how to revive
our housing finance market, it must be shaped by the lessons of
the past and built on principles of fairness and inclusion.
In my remarks, I will review important lessons from the old system. Then, Ill lay out a series of principles to create a system that
promotes true ownership opportunities for communities of color.
Let me start with the lessons. The bubble years have become infamous for a glut of inventive but devastating financial products;
however, we cant lose sight of those innovations that really move
the ball forward. As the housing counseling intermediary, NCLR
has helped more than 135,000 families purchase their first home.
Based on our experience, there are three areas from the old system that we must incorporate moving forward. The first is housing
counseling. Research has shown that families who attend counseling are less likely to default. With significant support from both
sides of the aisle, and this committee in particular, the field of
housing counseling has become increasingly sophisticated. The sec-

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ond is flexible underwriting. The mortgage industry has learned
how to underwrite various borrower characteristics without jeopardizing the bottom lines of banks or families. And the third is
non-traditional credit. We also learned how to profile credit using
data from rent, utility, and other monthly bills. Doing so opened
the door for a whole new segment of borrowers. All too often, however, this work was overshadowed by risky yet profitable loans.
Under the old regime, industry players had little incentive to
think past the commission they would earn at origination or
securitization. Building on these lessons, NCLR has two primary
goals. The first is to ensure that qualified Latinos can access a
home loan at fair, equal, and affordable rates. And the second is
to ensure that home will develop into an asset they can share with
their children.
With that in mind, we would like to share with you six principles
to guide the shaping of our housing finance market. The first is
that there is a role for the Federal Government in providing liquidity and innovation. Whether directly or through quasi-public agencies, the government can help facilitate the flow of adequate capital. As a rule, they should bolster and not replace the private market and they should set a high standard for lending, secondary
market credit, and rental financing. The second is that mortgage
credit must be equally accessible and available to all qualified borrowers. Moving forward, policymakers must be careful not to exacerbate the tendency of the market to favor the easiest-to-serve borrowers. One way to do this would be to invest in lending tools that
are unattractive to the private market, but for which there is
strong public purpose.
The third is that sound and affordable mortgages should be the
norm. The rise of subprime mortgages was driven by Wall Streets
appetite for risky loans, not by borrowers demand on the ground.
We need to restore balance so that the system reflects true demand
from the bottom, not from the top.
The fourth is that diverse delivery and outreach channels must
be incorporated. A key lesson from the financial fallout in 2008 is
that prime banks did not compete well against more agile and less
scrupulous competitors. Congress should look at how to maximize
and reward those that are offering sound and sustainable loans.
The fifth is that predatory lending should be eliminated. Much
of the best developments in the last 10 years were blocked from the
borrowers who needed them most, and abusive lending routinely
beat out the slow and steady practices on the ground that would
have created sustainable ownership opportunities. And finally, our
sixth principle is that affordable rental housing and ownership opportunities are linked. Unfortunately, these goals of creating affordable rental and helping low-income families achieve homeownership have been pitted against one another. Yet, families can build
savings or prepare for a homeownership when their rent is too expensive.
Rental and ownership policy must be connected to create a clear
national housing strategy. On a final note, NCLR strongly urges
Congress to be data-driven. With unparalleled access to GSE portfolio data, we have the information we need to identify the strong
tenants of affordable lending. There is a strong public demand for

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a robust housing finance market that delivers a steady flow of affordable credit on fair terms to all corners of the country. History
has shown that this is not likely to happen without targeted investment from the Federal Government.
We look forward to working with you to determine that role.
[The prepared statement of Ms. Bowdler can be found on page
94 of the appendix.]
The CHAIRMAN. Next, Professor Anthony Sanders from George
Mason University.
STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED PROFESSOR OF REAL ESTATE FINANCE, SCHOOL OF MANAGEMENT, GEORGE MASON UNIVERSITY

Mr. SANDERS. Thank you, Mr. Chairman, Ranking Member Capito, and members of the committee.
The Federal debt at the end of 2009 stood at $8 trillion, but the
Fannie Mae, Freddie Mac, and Federal Home Loan Bank debt and
MBS stands at $8 trillion as well. This combined debt load for the
United States is $16 trillion and represents 110 percent of our
gross domestic product. This Grecian formula of debt issuance to
fund housing goals is not sustainable. We simply have too much leverage in the housing finance system. To make matters worse, the
Federal Government controls 95 percent of residential mortgages
made with FHA insurance or Fannie Mae or Freddie Mac loan purchases. Stated differently, our financial institutions will not originate residential loans unless the Federal Government ensures or
purchases them.
We need to take immediate action to get the financial institutions and the investment community back in the game and wind
down the Federal Governments involvement. We have affordable
housing missions at HUD and at Freddie and Fannie through affordable housing goals, and at financial institutions through the
Community Reinvestment Act and numerous other State and local
programs. Given the massive supply of vacant housing on the market, the shadow inventory of foreclosed homes at financial institutions, and the multifamily vacancy rates, perhaps it is high time
that we consolidate the affordable housing missions under one tent.
Historically, the Nations affordable housing mission has been
under HUD. Hence, I would recommend that any Federal affordable housing mission be housed there.
But the FHA, our low- to moderate-income mortgage insurance
entity, is woefully antiquated in terms of technology, and is in desperate need of modernization. Thus, my first recommendation is a
dramatic overhaul and modernization of the FHA. My second recommendation is to slim down Fannie and Freddies role in the
housing market. We can begin by: one, removing the affordable
housing mission; two, unwinding the retained portfolios at an accelerated pace; and three, toughening the regulatory oversight of
Fannie and Freddie by moving it to a stronger FHFA.
My third recommendation is to pass legislation governing a covered bond market similar to the market that exists in Denmark,
and begin with the jumbo mortgage market as an experiment. Covered bonds potentially provide an excellent vehicle to fund the residential and commercial mortgage markets going forward.

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My fourth recommendation is to repair the securitization model
that is already in existence. Having lenders retain skin in the game
of at least 5 percent of the loans originated is a good start. Our recent downturn in housing teaches us that 5 percent would have
been grossly insufficient to cover the future downturns in housing
prices. On the other hand, a private securitization market should
be a buyer-beware market, so skin in the game would be pointless.
Lastly, we have to return to a 10 to 20 percent down or more
downpayment standard for mortgage lending, and 10 percent in
FHA programs. The housing bubble of the last decade was fueled
mostly by low interest rates combined with low downpayment
mortgages and exotic mortgages such as pay option ARMs. The
much maligned subprime market was a convenient scapegoat for
this crisis. Had lenders and GSEs adhered to 10 to 20 percent
down standards, there would not have been a bubble in the first
place and the subprime borrowers would not have defaulted in such
numbers had the bubble not burst.
Mr. Chairman, I thank you for letting me share my comments
and suggestions with you and the committee. Thank you.
[The prepared statement of Professor Sanders can be found on
page 167 of the appendix.]
The CHAIRMAN. And our final witness, Mr. Vince Malta from the
National Association of Realtors.
STATEMENT OF VINCE MALTA, 2010 VICE PRESIDENT AND LIAISON TO GOVERNMENT AFFAIRS, THE NATIONAL ASSOCIATION OF REALTORS

Mr. MALTA. Chairman Frank, and members of the committee,

thank you for holding this hearing today. I am Vince Malta, the
2010 vice president of the National Association of Realtors. I am
a third generation Realtor, and I am here to testify on behalf of
more than 1.2 million Realtors who are involved in all aspects of
the real estate industry.
As our members began exploring the question of how to improve
the U.S. housing finance sector, and developing recommendations
on what to do about Fannie Mae and Freddie Mac, there were a
couple of significant issues for which they sought a solution. First,
Realtors want to ensure that in all types of markets, there is always mortgage capital available for the creditworthy housing consumer. Second, and equally important, Realtors want to ensure
that taxpayer dollars are optimally protected.
Among the models that our members considered were to make
the secondary mortgage market entities either fully private or fully
Federal. However, we believe neither option effectively addresses
these two critical issues. Full privatization is not an effective option because a private firms business strategy will focus on optimizing its revenues/profit generation. As a result, such an entity
would foster mortgage products that are more aligned with business goals rather than the Nations housing policy or consumers.
Such a model could lead to the elimination of long-term, fixed-rate
mortgage products and increase costs. We have also learned in the
last few years that in extremely difficult markets, private lenders
have not been willing to make loans without government backing.

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On the other hand, full nationalization has its own share of problems. Either converting Fannie and Freddie to fully Federal agencies or merging them with Ginnie Mae would place taxpayers at
significant risk. Realtors want to eliminate as much as possible any
scenario that would place the taxpayer fully on the hook to protect
these entities. Additionally, having only one secondary mortgage
market entity would remove competition in the secondary market
space and remove any incentive for innovation. Further, we fear
that a combined secondary mortgage market entity could lose focus
on its mission to serve low- and moderate-income families and to
maintain liquidity in the mortgage markets.
Realtors believe that to ensure the flow of capital into the mortgage market regardless of the state of the housing market or the
overall economy, Fannie Mae and Freddie Mac should become government-chartered, non-shareholder-owned authorities. These new
entities should be subject to tighter regulations on product, profitability, and minimal retained portfolio practices in a way that ensures the protection of taxpayer monies. The new authority should
focus on standard mortgage products that are the foundation of our
housing finance market.
While such a focus may curtail some private participation in alternative products in this portion of the market, over time we believe private market participants will offer innovations that meet
consumer needs. With the new entities focusing on standard, safe
mortgage products, including 15- and 30-year, fixed-rate mortgages
and traditional adjustable rate mortgages, we believe private capital will be free to compete for opportunities outside of that product
window.
Finally, Realtors believe that regardless of the secondary mortgage market model selected, there is a place for the utilization of
covered bonds. Our members do not believe that they can replace
the liquidity tools of our existing system, but should be encouraged
as an additional product to provide liquidity to the secondary mortgage market. Realtors recognize that this is but the first of many
conversations regarding how we mend and improve a housing finance system that had served us well for many years. We believe
that our recommendations, along with some key elements that we
mentioned today, will help Congress and our industry design a secondary mortgage model that will serve Americas best interests
today and in the future.
I thank you for this opportunity to present our views. As always,
the National Association of Realtors is ready to help you as you
work to sustain the housing and national economic recovery.
[The prepared statement of Mr. Malta can be found on page 143
of the appendix.]
The CHAIRMAN. Thank you. I want to begin with an observation
from before. There was a comment about the pressures of the Federal Reserve in warning about Fannie and Freddie, and that is
true, but it should be coupled with a recognition that the Federal
Reserve was given by the Congress in 1994 the responsibility for
preventing irresponsible lending, whether it was inside or outside
the banking system. And Mr. Greenspan, as he later acknowledged,
refused to do it on ideological grounds.

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So yes, the Fed was worried about Fannie and Freddie buying up
mortgages, but the Fed was worried about Fannie and Freddie buying up mortgages that the Fed should have prevented from being
made in the first place. It is important to remember that Fannie
and Freddie were in the secondary market and they would not
have, as a matter of fact, been impacted if there had not been problems in the primary market, although they may have encouraged
it. So the Feds record here is indeed a very mixed one.
Mr. DeWitt, I want to acknowledgeyou made explicit the importance of separating out multifamily and single family, and that
is relevant. Several people here talked about the importance of
rental housing which was, I think, ignored, and part of the problem
was a failure to understand that, and I agree with that. We will
be very careful, and we ask you all to work with us, to make sure
that it is not a failure to recognize that.
Let me just ask Mr. CalabriaI was struck, and I appreciate
that you stated, I think, a very important point, that our policy
shouldnt be based on the form of tenure, whether it is a rental or
ownership. Im just wondering if you would care to speculate
aboutand I would ask Mr. Malta to stay calmthe question of
the home interest deduction on home mortgages. Would you change
that at all?
Mr. CALABRIA. I would. I would ultimately, in a budget neutral
way, get rid of it. I think our tax code in general encourages excess
leverage on the part of households and corporations, so without a
doubt, we should be phasing out the mortgage interest deduction.
The CHAIRMAN. Thank you. And Mr. Sanders, I appreciated your
comments on a number of areas. On downpaymentsand I was
just checkingwhen you say having borrowers have skin in the
game in subprime, would you mandate that in some way? I certainly agree with that. Should we mandate that?
I will tell you one of the things we did do with regard to
securitizationand I will get to that in a minute on your comments
therewe called for 5 percent as the norm, with the regulators
going to 10 percent if it is a particularly risky thing. But it had
gone down to zero, and we had in mind if they had a 30-year, fixedrate mortgage with a 20 percent downpaymentnot to mandate,
but to incentivize. But would you go further? I very much agree on
the desirability of the downpayment. Is there some way in public
policy we should follow through on that?
Mr. SANDERS. There is no doubt about it. I think having the 3.5
percent down FHA, which was brought down to zero, is aagain,
public policy viewpoint, I understand that side of it. On the other
handagain, in my report, you will see that the FHA insurance
fund is suffering greatly
The CHAIRMAN. I agree, and we are in fact in conversations now,
and we will have a bill when we come back that I think is going
to raise that. But the question is, what about non-FHA, would you
do anything about that?
Mr. SANDERS. Well the non-FHA, and from a financial stability
viewpoint, I thinkas I put, 10 to 20 percent makes a lot of sense.
Going back

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The CHAIRMAN. I understand that. Should public policy try to
force that, to incentivize it? What should we do about it other than
say it is a good thing?
Mr. SANDERS. I would actually include it as a requirement for financial institutions, yes.
The CHAIRMAN. Thank you. That is important, and that is in the
private market.
A query here on the other thing, securitization. I wasnt sure if
you said the 5 percent is a good start, but then you said a private
security market should be buyer-beware, so skin in the game would
be pointless. Im not sure I fully understand what your recommendation is with regard to securitization.
Mr. SANDERS. Yes, there are two sides to it. First of all, skin in
the game, which I have discussed with some people sitting at this
table, is good in theory. On the other hand, on the securitization
market, particularly the private label, I disagree with some of the
characterizations that everyone was misled by it. I think in many
cases, we have so many information systems and databases out
there that investors in the market knew full well what was going
on. So again, Im not sure that would make that much difference.
The CHAIRMAN. Would you be for it or against it? If it doesnt
make a difference, does it do any harm?
Mr. SANDERS. To have 5 percent down?
The CHAIRMAN. Correctno, not down. Securitization on the
lender now. Downpayment is on the borrower. I was assuming we
were talking about a 5 percent requirement on the seller of the
loan, who was the originator.
Mr. SANDERS. And again, Chairman Frank, that is a two-sided
issue. We could ask for 20 percent. Then we would end up drying
up
The CHAIRMAN. Im just asking for your recommendation. I dont
mean to be intrusive, but you did come here as a witness.
Mr. SANDERS. You are
The CHAIRMAN. What would your recommendation be?
Mr. SANDERS. 5 percent.
The CHAIRMAN. On the lender?
Mr. SANDERS. On the lender.
The CHAIRMAN. And 10 to 20 percent on the borrower. That is
perfectly reasonable.
The gentlewoman from West Virginia.
Mrs. CAPITO. Thank you, Mr. Chairman.
Mr. Berman, from the Mortgage Bankers Association, correct?
Mr. BERMAN. Yes.
Mrs. CAPITO. You talk a lot about how MBA has suggested a
framework for single and multifamily mortgage markets. The centerpiece would be for the Federal Government to support the secondary mortgage market through a new line of mortgage-backed
securities. Do you think it is possible to have a fully functioning
private secondary market without government support? This sort of
is a theme I have heard from others as well, but what is your opinion on that?
Mr. BERMAN. The issue really is, how do we survive in terms of
creating a liquid market through downturns? And it is the position
of the MBA and the practitioners that were part of this council that

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the depth of the market is not sufficient without this government
wrap, Ginnie Mae-type wrap, in times of illiquidity such as we
have today. And we have these 100-year floods about every 10
years, so this is not an uncommon event.
Mrs. CAPITO. Does anybody else have an opinion on that? Yes,
Mr. Calabria?
Mr. CALABRIA. I would make two quick points. We largely actually had a private label securitization market in the 1920s, and
granted we had a big housing bubble then too, so that is not a way
to get out of it. But I would note that if we are going to accept the
role of the Federal Reserve as a backer of asset markets in terms
of the mess like we had with the asset-backed facilities in theyou
could certainly have the Fed be the lender of last resort and buy
mortgage-backed securities when you are hit with your 20-year
flood. So if you are going to keep that, that is there, and we should
recognize that is part of it.
Mrs. CAPITO. Mr. Malta?
Mr. MALTA. Yes, thank you. We couldnt get around the issue.
When we first looked at this, we were hoping that the private sector could pick up what was needed in the marketplace. And as evidenced by the last 18 months, we have seen that the private side
does not perform or does not provide the needed capital when the
markets are as stressed as we have been experiencing. If it had not
been for Fannie and Freddie and the FHA, where would this market have been if we had just relied on the private sector?
Ms. WARTELL. Yes, I think there are two different roles that we
ought to be distinguishing here. The first is, what do you do when
there is stress in the market, and when private capital loses confidence in housing? I hope we will not see ourselves back in the circumstance we are in now, but you do need a backstop.
The second is a different role, which is really to deal with the
mismatch in durations, and Mark mentioned this in his policy, although I think we probably come to a different place on this30year, fixed-rate financing allows people to have a predictable level
of their own expenses devoted to housing. It allows middle-class
families to plan for their own financial futures. Investors are rarely
willing to commit dollars for that period of time, and that mismatch is what the Federal intervention or some other mechanism
is designed to provide. And it is thatif we want to have longterm, fixed-rate financing available, that seems to be where we
ought to focus a Federal backstop.
Ms. BOWDLER. I just wanted to add that having a government
provide some liquidity through whatever form is also very important for areas where the private market doesnt find the borrower
attractive, and they dont find all borrowers equally and universally
attractive. So rural areas, urban cores, moderate-income families
dont always have access and may not get it if it isnt for some form
of government intervention.
Mr. BERMAN. I would also just like to add that the MBA proposal
is designed to continue to have the mortgage credit guarantor entities to have 100 percent skin in the game, if you will, throughout
all the market variations. So in what we have proposed, we have
this consistent alignment of interest. And again, the government

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wrap is really to encourage bond holders to come into the market
at those times.
Again, the emphasis we have is on private sector. We want to get
privatewe really dont want the Fed to come in if we can avoid
that. We want to encourage private investors to come in, and we
think that government guarantee of credit will enhance that probability through the downturns.
Mrs. CAPITO. Thank you.
The CHAIRMAN. The gentleman from North Carolina.
Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman.
We have looked a lot in this committee at how to revive bank
lending, but securitization was roughly half of all lending before
the financial crisis or before the foreclosure crisis really set in. And
I understand that with respect to issues of stock, there are fairly
elaborate rules for standardized disclosures, periods of time, waiting periods so that potential investors can do due diligence, they
can take their own look at what they are getting, and that the
standards or the rules for issuing mortgage-backed securities or
any securitizationany securitized debts, but mortgage-backed securities in particular, were just starkly different.
Instead of having a period that investors couldinstead of having standardized disclosures and allowing investors to sample the
mortgages in the pool, it usually was the case that investors got
a call saying, We are going to market in 3 hours, are you in? And
not surprisingly, one of the reasons the securitization market has
not bounced back, I understand, is that investors are leery of going
back to that. They would like to know a little bit more about what
they are buying. But the securitization industry has resisted greater disclosure.
Mr. Calabria, I am always surprised when a witness from the
Cato Institute says something I agree with, but when you called for
the requirements of the 1933 and 1934 Securities Acts to apply to
GSEs, is that what you were calling for, and would you extend that
call to private label securitizers as well?
Mr. CALABRIA. I would, and I would extend that as well to the
Federal Home Loan Banks. I think it is very important that if we
have the security disclosures, you have to get that with the MBS,
and I think that is an important part of it.
I want to touch on something very related that Sarah mentioned,
which is the credit rating agencies, and I think we need to go very
far in forcing regulators and the market to do due diligence. We do
need to end that quasi-monopoly status that the rating agencies
have, but I would focus on that as a part of it. So yes, the 1933
and 1934 Acts, or whatever is coming forward in the future.
Mr. MILLER OF NORTH CAROLINA. I have never seen so many
heads nodding from what is largely an industry panel to questions
that I have had in this committee before.
Any other thoughts on this issue? And do you think that the SEC
has the statutory authority now to issue rules to require this?
Mr. CALABRIA. Currently, under Freddies and Fannies charters
and the Federal Home Loan Banks, they are exempt. I know that
the recent reform act put them under the 1934 Act. They are still
exempt from the 1933 Act. So that would take a change. And as
I mentioned in my testimony, there are a variety of pieces through-

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out Federal law where they are treated as government securities.
That would need to be changed.
Mr. MILLER OF NORTH CAROLINA. How about all the private
labelwell, there are perhaps not so many anymore, but we obviously want to return to the day when there are, but with better
standards.
Mr. CALABRIA. Most of the private label was subject to the 1933
Act. They had gone through shelf registrations, and certainly I
think it merits re-evaluating the shelf registration process to see
whether that provided sufficient information to investors.
Mr. MILLER OF NORTH CAROLINA. Mr. Berman?
Mr. BERMAN. I think there are a number of issues here. One is
transparency, which clearly is something that the Mortgage Bankers Association is in favor of. But it is not just transparency with
respect to the entities or the securities, it is also transparency with
respect to the rating agencies, and clearly the only reason that investors at the time were willing to make such quick decisions was
their reliance on the ratings. I think it is important for the SEC
to take a close look at how the rating agencies function, the transparency of their models, the transparency of their ratings. Restoring confidence is what it is all about, and without confidence in the
rating agencies, we have a long way to go.
Mr. MILLER OF NORTH CAROLINA. Ms. Wartell
Ms. WARTELL. Sure, go ahead.
Mr. MILLER OF NORTH CAROLINA. Im kind of accustomed to having the Center for American Progress agree with me, but go ahead.
Ms. WARTELL. The only thing, I just wanted to emphasize your
point, which is that our ability to attract private capital back into
these markets will depend upon us giving markets confidence in
the quality of private label securities. So the idea of looking at
these proposals for comparability, whatever the government-backed
market and the private market, really need to have rules that are
consistent.
Mr. MILLER OF NORTH CAROLINA. I yield back, Mr. Chairman.
The CHAIRMAN. Let me use your remaining time briefly just to
say, with regard to the rating agencies, I would like to make them
better. Some of us are skeptical. And one thing I think was very
important that Mr. Garrett and I collaborated on was to repeal all
the statutory requirements that people rely on the rating agencies,
because if we cant make them better, we can at least tell people,
you are on your own, and dont hide behind them, and I think that
was a very important, simple thing.
Further, I guess I would say to Mr. Calabriaand it is nice that
we have had this agreementdo I take it from what you said that
if Cato had been in existence 70 years ago, it would have supported
the 1933 and 1934 Acts?
Mr. CALABRIA. Im not certain that we would have. I would say
that I think those standards need to be applied uniformly if you
are going to have them.
The CHAIRMAN. If you are going to have them. Thank you.
Mr. Hensarling?
Mr. HENSARLING. Thank you, Mr. Chairman.
I appreciate the testimony of all the panelists. Frankly, it was
helpful. It was illuminating. Particularly, Mr. Berman, and Mr.

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Malta, on behalf of your respective organizations, I applaud you
for, frankly, bringing a plan to the table, something the Administration hasnt done. Mr. Berman, I found your plan particularly interesting and comprehensive. I want to study it a little more. I still
dont agree with it all. Mr. Malta, you have a thoughtful plan. I
agree with it less, but it is a thoughtful plan nonetheless, and you
should be applauded for bringing one to the table.
I believe we have to have a plan. The status quo is simply
unsustainable, and Im disappointed in the Administration for really maintaining the status quo. And I believe, Mr. Sanders, you
pointed out that the exposure of the taxpayer to Fannie and
Freddie after the Secretary of Treasury earlier today told us that
it is not sovereign debt, but we are going to stand behind every
penny of itthat is a paraphrase, not a quotenot sure howI
guess that was particularly illuminating. But when you think
about the debt being at roughly $8 trillion and Fannie and Freddie
exposure of roughly $8 trillion, it is really a staggering amount.
I also picked up this Bloomberg report that the gentleman from
New Jersey alluded to earlier which stated, The bond market is
saying that it is safer to lend to Warren Buffett than Barack
Obama. Two year notes sold by the billionaires Berkshire Hathaway in February yield 3.5 basis points less than Treasuries of similar maturity according to data compiled by Bloomberg. And we
know already that Moodys is threatening to lower our AAA rating.
I find all of this quite staggering myself, and so again, to have the
Administration proffer no plan I believe is simply inexcusable.
The first question I would like to ask the panelI have been trying to study other housing markets, because I personally would like
to see a GSE future for America. I havent convinced myselfalthough I have come to this debate with an open mind, it is not an
empty mind. But as I look around, I see countries like Ireland, the
U.K., and Portugal that seem to have no GSEs, a high rate of
homeownership to our own. Denmark, no GSEs, and although they
have had a housing bubble themselves, there has been no surge in
delinquencies and foreclosures. Certainly, there have been some.
I forget who it wasmaybe it was you, Mr. Sanders, or maybe
it was you, Mr. Calabria, who commented upon the Canadian system, which also has no GSEs, and frankly has a higher rate of
homeownership there. Some of them use covered bonds. I do believe Canada has an FHA-like structure. I believe in Canada, you
said that mortgages are fully recourse. I think there is a larger
downpayment. I dont know if that is simply due to market forces
or the government. I dont know the answer to that.
So the question for those of you who believe that ultimately we
must have some form of GSE, which I believe includes you, Mr.
Maltaam I missing something in these international examples?
Im sorry, I was calling to you, Mr. Malta. I thought you advocated
we needed some, essentially, government-backing to our
securitization market. I dont see that overseas, and so am I missing something?
Mr. MALTA. The United States and Denmark are the only two
countries that have the 30-year, fixed-rate mortgage. And you look
at Canada, for instance, their mortgages reset every 5 years.

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Mr. HENSARLING. So you would advocate, then, that these are
neededyou do not believe ultimately that the market would
produce a 30-year, fixed-rate mortgage, and you believe in order to
achieve your goal in homeownership that we would have to see the
30-year, fixed-rate mortgage, is that what you are advocating?
Mr. MALTA. That is correct. I think market incentives would say
that we would have something less than the 30-year, fixed-rate or
15-year, fixed-rate mortgages. It would reset.
Mr. HENSARLING. I dont knowlisten, I respect the opinion. You
may or may not be right. I dont know the answer to that. I know
that I have certainly seen a study from the Federal Reserve that
says that ultimately at the end of the day, Fannie and Freddie provided 7 basis points advantage for homeowners given that the taxpayer is already out $125 billion, given that they are on the tab
for much more, particularly trillions. It just reminds meand I
just think the American dream is not to buy a home, the American
dream is to keep a home. And Im not sure for 7 basis points increase in the interest rate that it was worth all the human misery,
all the foreclosures. So Im not completely sure that achieved our
goal.
Mr. Calabria?
The CHAIRMAN. Quickly.
Mr. CALABRIA. The median life of a mortgage tends to be about
7 years. Few people live in their house for 30 years or keep that,
so even a mortgage that has a 5-year, fixed-rate mortgage and
resets like in Canada covers most of that risk. I do think the reason we would still seeand I touch on this in my testimony30year mortgages out thereif they werent subsidized, we would
just see the spread between adjustable and then higher, and maybe
that is appropriate, that it reflects the full price of it.
The CHAIRMAN. Thank you. Having lived in this House for 30
years, I dont find that Im getting to be able to pay anything off.
[laughter]
The CHAIRMAN. The gentleman from New Jersey.
Mr. LANCE. Thank you, Mr. Chairman.
Mr. Calabria, your testimony suggests breaking up the GSEs, as
I understand it, into about a dozen equal-sized entities. Could you
explain in a little more detail how that would work?
Mr. CALABRIA. Sure. You could goand I will prefacemy back
of the envelope is certainly that comes with a cost, and I think
mortgage rates would probably go up about 6 or 7 basis points if
we reduce
Mr. LANCE. How much would they go up, in your opinion? Six or
seven
Mr. CALABRIA. Basis points.
Mr. LANCE. Six or seven basis points.
Mr. CALABRIA. If we reduce the scale of the GSEs. There is certainly a cost to that. So what I would do is I would randomly take
one every other 12th loan and theand I think you need to set up
a good bank, bad bank model. Take the bad loans, take the good
loans, just randomly set them up in 12 different spots. The things
I would avoid to do is I would not
Mr. LANCE. Not geographic, I trust?

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Mr. CALABRIA. Not geographic. I would not reproduce that part
of the Federal Home Loan Bank System, nor would I make them
cooperatively owned or jointlyI would make them just 12 independent entities.
As I touch on in my testimony, I think you need to allow the
charters to be issued by the regulator, and if this is a model that
works, and other entities want to come in and charter in that
model, they should be allowed to. I would just as well say if this
is a model that doesnt work, those entities should be able to apply
their charters, go the OCC, and try to get a bank charter.
So I think it is important to let the number of these entities grow
and let the market determine that. But I would emphasize if you
only have two or three, the market is going to look at these as toobig-to-fail regardless of what we say.
Mr. LANCE. And then how would you wind down the current
GSEs?
Mr. CALABRIA. Well, as I mentioned, I would set up a good bank/
bad bank situation, which I will note the current receivership
structure in the bill that was passed in 2008 allows the separation
into a good bank/bad bank. So I would say you just have to set that
up like a modern day RTC that resolves those bad assets.
Certainly, you want to ask a broader question, which is do we
want to set up something like the REFCORP bonds where the Federal Home Loan Bank pays us back for some of the costs of the savings and loan crisis, whether in the future or these new entities
pay us back for some of the losses from Freddie and Fannie. But
all of that can be structured very similarly to what was set up with
the Federal Home Loan Banks.
Mr. LANCE. Thank you. Is there anyone else on the panel who
would like to comment on that proposal? Yes?
Mr. BERMAN. Yes, Congressman. The MBA proposal would agree
with what Mr. Calabria said with respect to good bank/bad bank
resolution of Fannie and Freddie in order to help leverage the important good assets that we have there, not just the physical assets, but the intangibles.
I think that the transitionand we have all agreed, I think, that
transition is criticalmight take a long time to get to 12. And
again, Im not suggesting that 12 is a good number or a bad number. But our thought is that creating two at the beginning is probably an easier way to a smooth transition. We have databases,
origination systems, underwriting systems, and so on
Mr. LANCE. Wouldnt that be too-big-to-fail if there were only
two?
Mr. BERMAN. Well, again, two wouldnt be the end game, but Im
speaking about the transition. I think it would be very hard to
wave a wand and create
Mr. LANCE. And how long would you presume the transition
should be?
Mr. BERMAN. I think that would be market determinative, which
I agree with Mr. Calabria. It wouldand up to the regulator to
charter those. So we agree on those pieces.
Mr. LANCE. Thank you. Mr. Sanders, in your proposal regarding
a covered bond approach, some have said that covered bonds are
simply another complex financial instrument. Do you think we

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should be cautious in facilitating the creation of such a market in
the United States?
Mr. SANDERS. The answer to that is, of course, we would probably do it on a trial basis to begin with. But no, actually I think
they are much more straightforward and clear cut. The banks
make loans, they keep them on their balance sheet. If you have
transparency, you have bondholders that will be receiving the cash
flows from it. I think it is so straightforward it is shocking, and
there is actuallyas long as there is transparency, let me make
that clear.
Mr. LANCE. And how would you assure transparency?
Mr. SANDERS. Again, you can write in what the average LTV interest rate, maturity of the mortgages are. Whatever product you
are doing, making sure they are verifiable, that it is what the actual collateral looks like.
Mr. LANCE. Thank you. And to continue, Professor Sanders, how
would you manage the GSEs retained portfolios?
Mr. SANDERS. What I recommend in my report was, at this point,
wind them down as soon as possible, which in this market is a little more cumbersome than normal. But I would start with having
three tiers of loans.
I would start off with the bad performing loansnot like a bad
bank, but split them off into a securitization structure where we
throw them out there and say, here is some risky paper, what are
the bids on it? I would have a second tier, and the second tier
would be all the loans that Fannie and Freddie probably shouldnt
have purchased, such as the Alt-A mortgages, some subprime
paper, bundle those as a second tier. And then the ones we can
keep a little longer are the conforming loan pools, the way we used
to do it a long time ago. That would be less
The CHAIRMAN. The gentlemans time has expired.
Mr. LANCE. Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from California.
Mr. ROYCE. Yes, I was going to ask Mr. Calabria a question. You
were on the Senate Banking Committee at the time. Some of these
issues that came up over the GSEs, Fannie and Freddie, and those
were really the boom years when you were over there, in housing.
And I would just ask you a question on the logic of what would
have happened had the Fed come in and cracked down on Alt-A
loans and subprime loans. How would that have been received on
the Senate side? You had a chance to interact there with Members,
and some of them, like Chris Dodd, werent exactly in favor of
clamping down on Fannie and Freddie, especially with respect to
affordable housing. What do you think the reaction would have
been in the Senate?
Mr. CALABRIA. I think there sure would have been some skepticism. I would certainly say one of the things that I think was constantly heard in efforts to reform Freddie and Fannie was that the
housing market was carrying the economy, which it was. Certainly,
the housing market was a very large part of the economy in 2004,
and we certainly heard common refrain that we should not do anything to take the air out of the housing market.
I think, in my mind, it opens up a broader question, which is
and Sarah has said this, other people have said thiswe need to

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kind of make our mortgage finance system countercyclical, and part
of that is a very real problem, which is we all love bubbles when
they are going on. So how do you set up an incentive system that
leans against that when the pressure is to keep a bubble going
rather than to avoid the bubble in the first place?
Mr. ROYCE. Yes, I think a lot of this was viewedI have my own
view of this, but I think for a lot of members, they viewed this as
a way to get people with less than perfect credit into a home. That
is the way they were viewing the activity over there.
But since the failure of Fannie and Freddie, several former executives have explained that the GSEs entered into the subprime
and Alt-A market to send a signal to the broader market, which
was these were in fact safe loans. You and I might have considered
them junk loans, but the perception or the intent was to send that
signal, according to Fannie executives. I was going to ask you do
you care to comment on this.
Mr. CALABRIA. It is important to start with two different distinctions, which is even on the loans that Freddie and Fannie bought
directly as whole loans that I think most of us would say were
subprime, they did have a variety of standards set to those. They
did not apply those standards until very late in the game, after the
bubble had already burst, to the mortgage-backed securities, the
private label that they pushedthat they bought. So they had two
different standards.
I think it is also important to look atthat if you look at the vintages of subprime loans that have performed the worst, which are
2005, 2006, 2007, that is the time when Freddie and Fannie entered the market in force and there were larger sources of liquidity
for that market. So I think they were the marginal buyer during
that time, and really ended up lowering the standards that we saw
in the marketplace.
I would note that one of the things that I think would have been
helpful if the secondIm a little biased by saying itbut if the
second Shelby bill with the portfolio restrictions had taken place,
they would not have been able to buy those mortgage-backed securities that were subprime, and I think that is half the problem in
terms of Freddie and Fannies losses.
Mr. ROYCE. Thank you, and here is my last point. Both regulatory reform bills endorse the creation of a resolution process for
failed or failing systemically important firms, and both bills label
a group of institutions as too-big-to-fail. They create a resolution
fund and they draw a line from that fund to the U.S. Treasury. Is
there an assumption here that creditors and counterparties will be
on the receiving end of something more than what they would receive in the case of a liquidation process through bankruptcy?
In other words, are we recreating the moral hazard problem with
Fannie and Freddie by allowing for the possibility that creditors
and counterparties will be bailed out by the Federal Government?
Because I think regardless of whether it comes from the industry
or the taxpayer, there will be a breakdown in market discipline,
and that is the fatal flaw in this approach. That is what has to
change, or else we will repeat another mistake made in the Fannie
and Freddie debacle.

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Mr. CALABRIA. And I think it is very important to emphasize the
market discipline role on the part of creditors. Any financial institution, it is 90 plus percent of their fundingis from the debt markets. For Fannie and Freddie, it was essentially 99 percent of their
funding on a mark-to-market basis. So the market discipline has to
come from creditors, and I do believe as long as there is a fund
there, there will be a perception by creditors that they will be
bailed out, and I think that is problematic.
I think you also have to look at what sort of discretion that the
regulator has. For instance, in the most recent Senate billand I
remember we spent lots of time on the Hill arguing about may
versus shall. It says the FDIC may, so I do think you need to
set some certainly so that the marketplace knows they will be
Mr. ROYCE. Thank you, Mr. Calabria.
The CHAIRMAN. The witnesses are thanked, and the hearing is
adjourned.
[Whereupon, at 1:40 p.m., the hearing was adjourned.]

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APPENDIX

March 23, 2010

(73)

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