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64–551 PDF 2011

GSE REFORM: IMMEDIATE STEPS TO PROTECT 

TAXPAYERS AND END THE BAILOUT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

FEBRUARY 9, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–2 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO R. CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

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 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 9, 2011 .............................................................................................. 1 

Appendix: 

February 9, 2011 .............................................................................................. 55 

WITNESSES 

WEDNESDAY, FEBRUARY 9, 2011 

Calabria, Mark A., Director of Financial Regulation Studies, Cato Institute .... 13 

Pollock, Alex J., Resident Fellow, American Enterprise Institute ...................... 17 

Randazzo, Anthony, Director of Economic Research, Reason Foundation .......... 15 

Wartell, Sarah Rosen, Executive Vice President, Center for American 

Progress Action Fund ........................................................................................... 19 

APPENDIX 

Prepared statements: 

Calabria, Mark A. ............................................................................................. 56 

Pollock, Alex J. ................................................................................................. 63 

Randazzo, Anthony ........................................................................................... 70 

Wartell, Sarah Rosen ....................................................................................... 86 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Letter to Hon. Timothy Geithner, Secretary of the Treasury, and Hon. 

Shaun Donovan, Secretary of HUD, from the American Bankers Association (ABA), dated February 9, 2011 ....................................................... 105 

Letter from the National Association of Federal Credit Unions (NAFCU), 

dated February 8, 2011 ................................................................................ 109 

Written statement of the National Association of Realtors (NAR) .............. 112 

Written statement of the National Multi Housing Council (NMHC) and 

the National Apartment Association (NAA) ............................................... 117 

Schweikert, Hon. David: 

‘‘Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market,’’ An American Enterprise Institute 

Policy White Paper, by Peter J. Wallison, Alex J. Pollock, and Edward 

J. Pinto, Preliminary draft dated January 20, 2011 .................................. 122 

(1) 

GSE REFORM: IMMEDIATE STEPS TO 

PROTECT TAXPAYERS AND 

END THE BAILOUT 

Wednesday, February 9, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:12 p.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Royce, 

Lucas, Manzullo, Biggert, Hensarling, Neugebauer, Campbell, 

Marchant, McCotter, Pearce, Posey, Fitzpatrick, Hayworth, Hurt, 

Grimm, Stivers; Waters, Ackerman, Sherman, Miller of North 

Carolina, Maloney, Moore, Perlmutter, Donnelly, Carson, Himes, 

Peters, Green, and Ellison. 

Ex officio present: Representative Frank. 

Also present: Representatives Gary Miller of California and Carney. 

Chairman GARRETT. Greetings. This hearing of the Subcommittee on Capital Markets and Government Sponsored Enterprises will now come to order. 

And we have just conferred with the other side. Maxine is on her 

way, but we thought that since we have the panel here, and a 

number of esteemed Members from both sides of the aisle, we 

would begin the proceedings. So we will begin, without objection. 

Also, without objection, all Members’ opening statements will be 

made a part of the record. 

And so we begin with opening statements. 

It was on September 7, 2008, that Fannie Mae and Freddie Mac 

were put into conservatorship by the Federal Government. Over 

$150 billion and 885 days later, the government-backed mortgage 

twins remain in conservatorship. The Federal Government now underwrites 95 percent of the housing market. And still the American 

taxpayer continues to hemorrhage billions of dollars every quarter 

to keep them afloat. 

So I am pleased to hear that the Department of the Treasury is 

getting closer with their much anticipated reform proposal, which 

I understand can be out here now. If I had known that simply 

scheduling a GSE reform hearing would facilitate such a swift response, we would have held one even sooner. 

2 

While I know a lot of attention has been given to the Treasury’s 

proposal and what the future of U.S. housing finance will look like, 

I believe that there are other areas of this debate that we can focus 

on right now. 

In particular, I believe the question we need to be asking ourselves is this: What are the immediate steps that Congress can 

take right now, this very instant, to protect taxpayers, to end the 

bailout, to get private capital off the sidelines, and to reduce the 

government exposures to the housing market? I believe it is these 

four objectives that should be the driving force behind our immediate reform efforts. 

And so I look forward to discussing a number of reform proposals 

in greater detail with our esteemed panel. As I can see from their 

written testimony, there are many ways to protect taxpayers and 

begin the end of the bailouts. 

Now, I say that on one hand. It is also unfortunate that some 

of my colleagues on the other side of the aisle have resisted any 

attempts, at least in the last Congress, to address the most expensive and explosive component of the Federal Government’s intervention during the financial crisis. But I assure you, it will be a 

top priority of mine, as chairman of this subcommittee. 

The Federal Government’s housing policy has been a monumental disaster, and we must find new ways forward. Secretary 

Geithner said just the other day that the new policy should leave 

us with a system that will not be vulnerable to the really tragic colossal failures of the past. I couldn’t agree with him more. 

Even in The Washington Post, they are on board, too, with 

wholesale changes to Fannie Mae and Freddie Mac. In an editorial 

this Monday, the Post wrote, ‘‘Homeownership does help instill 

thrifty habits and solidify communities, but it can be taken too 

far.’’ They said the national homeownership rate slipped back to 

1998 levels, according to the Census Bureau. 

So, in terms of building a community, etc., it is as if the last 13 

years have never happened, except, of course, for the catastrophic 

losses to the taxpayers and also to the home buyers. They conclude 

by saying, ‘‘It might be more accurate to say that the Federal housing policy has helped to destroy communities.’’ 

It will be the goal of this subcommittee to ensure that we put an 

end to this destructive and costly housing finance policy and then 

replace it with a system, going forward, that protects taxpayers 

and actually strengthens communities instead of, as the Post says, 

destroying them. 

I thank the witnesses for being here today, and I look forward 

to their testimony. 

And, with that, I recognize Mr. Miller. 

Mr. MILLER OF NORTH CAROLINA. I think Ms. Waters had allocated 2 minutes to me. So I will now take 2 minutes. 

Thank you, Mr. Chairman. 

The wrong lesson to draw from the financial crisis is that homeownership should not be a goal, a public policy goal. It undoubtedly 

can be taken too far, but the financial crisis was by no means 

caused by the goal of homeownership. Seventy percent of the people who got subprime mortgages were not getting those mortgages 

3 

to buy a home. They already owned their home, but they needed 

to borrow money. 

More than half, well more than half—the Wall Street Journal estimated 55 percent; other estimates have been much higher than 

that—of the people who got subprime mortgages qualified for prime 

mortgages. So it was not about making mortgages available to people who would not have qualified in ordinary circumstances. It was 

entirely about making as much money as possible as quickly as 

possible without regard to the consequences. 

Fannie and Freddie were certainly guilty of that, to some extent, 

but the private-label securitizers, their competitors, were also 

guilty of that and probably even more guilty of that. 

We do need to recreate, to reinvent our housing finance system. 

But a principal goal should still be to make homeownership available, on reasonable terms, for middle-class families. We got away 

from that in the last decade. And as we reinvent our housing finance system, that is what we need to get back to. 

I yield back my time. 

Chairman GARRETT. The gentleman yields back. 

The gentleman from California, Mr. Royce, for 1 minute. 

Mr. ROYCE. Thank you, Mr. Chairman. 

It appears, after months of preparing, we finally got to the point 

here where Treasury is set to release their proposal for GSE reform. But I think, for us, the vexing part is, instead of coming out 

with one definitive plan, they are going to provide three options: 

no government role in the secondary mortgage market will be their 

first option; government support only sometimes looks like their 

second; and permanent government support as their third. 

Unfortunately, three options doesn’t equal one plan. And I think 

the time for debating the merits of options is long past. Now is the 

time to act. 

A permanent government guarantee will inevitably lead to politicians and bureaucrats putting their proverbial thumb on the scale. 

Human nature is not going to change here. Politicians will insist 

that underwriting standards be relaxed, guaranteeing fees being 

lowered, and downpayments being waived, so just one more group 

can get into homes they otherwise could not afford if you were depending on the market. 

So this scenario has happened before, and it will happen again. 

And when it does, we will again face a boom-bust cycle in our financial markets, followed by a massive taxpayer bailout. 

I think we can do better. I think we should confront the reality 

of not putting in place that type of permanent government guarantee in the future. 

I yield back. 

Chairman GARRETT. The gentleman yields back. 

And before I yield the microphone to the gentlelady from California, I am pleased to be joined by her today and pleased to see 

her beside me as a ranking member, and I look forward to working 

with her on so many very important issues, issues that we worked 

on collaboratively in the past, in the area of housing finance and 

the area of FHA reform. So, obviously, there are commonalities in 

our interest in making sure that we can get the economy back on 

4 

track again. I look forward to your comments, but also our 

collegiality moving forward, as well. 

Ms. WATERS. Thank you very much, Mr. Chairman— 

Chairman GARRETT. I yield you 4 minutes. 

Ms. WATERS. —first, for organizing this first hearing of the Subcommittee on Capital Markets and Government Sponsored Enterprises for the 112th Congress. I, too, look forward to working with 

you. You are absolutely correct; we have worked together on issues 

in the past, and I think we can do that for the future. 

Today’s hearing is an opportunity to address one of the most critical questions facing our economy: How do we continue to move forward from the crisis and organize a secondary mortgage market 

that ensures access to sustainable homeownership at affordable 

rates for the American middle class? And how do we do this while 

protecting all taxpayers? 

For many years, we did a fairly good job of providing the opportunity for homeownership to the average American who worked 

hard and acted responsibly. But over the course of the last decade, 

we saw the creation and evolution of toxic financial products that 

pulled Americans further and further away from the mortgages 

that we grew up with—30-year, fixed-rate loans with sensible 

downpayments for homes we could reasonably afford. 

Now, what caused these products to develop was the subject of 

many fights in this committee during the last Congress. I continue 

to believe that an unregulated shadow banking system created the 

crisis and that casino-style betting magnified and lengthened it. 

Unfortunately, Fannie Mae and Freddie Mac, hungry for profits 

and market share, hopped on the bandwagon, albeit late. The result has been enormously consequential for American taxpayers. 

Our objective, moving forward, should not be to continue arguing 

over the facts that led us to this point. I sincerely want to begin 

the next phase, negotiating a plan for the future. 

I have not committed yet to any one proposal, and I am open to 

any plan coming from any Member or group or institution that can 

advance the following goals: Can the plan preserve the 30-year, 

fixed-rate mortgage, whose availability I believe is vital for American borrowers? Does the plan provide for stability and liquidity, 

particularly in times of severe credit constriction, as we experienced over the last few years? Are there features in the plan that 

allow for access for all qualified borrowers, as well as the small and 

community banks that seek liquidity? Does the plan ensure that 

there is a secondary market for multifamily loans and a market for 

individuals who seek affordable rental housing? Is there transparency for investors and regulators? Does the plan protect taxpayers and ensure that a small number of institutions don’t again 

become ‘‘too-big-to-fail?’’ 

So these are the criteria by which I will evaluate proposals, moving forward. 

I understand that some details of the Administration’s options 

paper were released to reporters last night. I am looking forward 

to reading the full report and studying the options they propose. 

But what I am more interested in hearing about are the principles 

the Administration thinks are important for GSE reform, such as 

5 

whether they think the preservation of the 30-year, fixed-rate 

mortgage is essential. 

While it is important that we get the technical details right as 

we develop a new housing finance system, I think it is more important that we make clear what values underpin our vision for the 

future. 

I look forward to working with the Administration and all of my 

colleagues in Congress on developing a plan that best meets the 

needs of all market participants. I believe that all of us need to seriously consider every option on the table. 

And, Mr. Chairman, I do thank you. And I yield back the balance 

of my time. 

Chairman GARRETT. I thank the gentlelady. 

And now, I yield 1 minute to the gentleman from Arizona. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman and fellow Members 

and, obviously, our witnesses. 

I know there is a certain frustration here because the Administration had an obligation to provide us their proposal, what was it, 

last week, and something for to us discuss and build around, and 

here we are blind once again. 

Having read much of the literature that is out there in regards 

to Fannie and Freddie and some of the distortions they may have 

created in the price of money and also the amount of debt and nonperforming assets they are currently holding, Mr. Chairman, witnesses, I desperately hope, as you testify, you give us some sense 

of how bad it is out there and how much we have in nonperforming 

assets that have to be unwound if we are ever going to see a recovery in our housing market. 

Thank you, Mr. Chairman. 

Chairman GARRETT. And the gentleman yields back. 

I yield now to the gentleman from Connecticut, Mr. Himes. 

Mr. HIMES. Thank you, Mr. Chairman. I join in welcoming our 

witnesses today. 

I am grateful for the opportunity to finally begin examining reasonably and seriously the future role of the GSEs in our housing 

market. This has been the subject of much demagoguery for a long 

time. And while there is no question that the GSEs meaningfully 

contributed to our financial crisis through irresponsibility and the 

way they went in the years beginning in the 1990s, there are some 

things that we can’t ignore. 

First, they operated for decades safely and soundly and helped 

to really bulwark and assist the creation of an American middle 

class. Secondly, a 30-year, fixed-rate mortgage may not exist without them, or if it did exist, it could perhaps be priced out of the 

range of American middle-class families. And third, multifamily 

lending, which is so important to smart growth and creating vibrant cities, might be severely damaged were Fannie and Freddie 

to not exist in any form at all. 

These are tough issues involving political decisions, and I hope 

that the panel today will address them and give us some guidance 

on how we can best secure our public policy goals without taking 

on the risks that were incurred in the 1990s. 

Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. And I thank the gentleman. 

6 

The gentlelady from Illinois, Ms. Biggert, please, for 1 minute, 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Fannie Mae and Freddie Mac have received the largest taxpayer- backed bailout to date, over $150 billion. They are responsible for 

over $5.4 trillion in outstanding mortgage applications and were at 

the root of the greatest financial crisis since the Great Depression. 

And yet the Administration has failed to meet its deadline to 

produce a required report on reform. Moreover, GSE reform was intentionally omitted in the Dodd-Frank Act. 

Fortunately, this is a new Congress, and housing finance reform 

is at the top of our agenda. Certainly, we must take care not to disrupt an already-fragile market. However, it is time to move toward 

a market with less reliance on government guarantees and more 

private-sector participation. 

I thank Chairman Garrett for convening today’s hearing, and 

next week, the Subcommittee on Insurance and Housing will hold 

a hearing to examine government barriers to the housing market 

recovery. 

The bottom line is that never again should taxpayers be on the 

hook for risky housing finance policies. I look forward to working 

with my colleagues to examine the future of housing finance. 

I yield back. 

Chairman GARRETT. I thank the gentlelady for yielding back. 

Two minutes to the gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank the witnesses, as well. 

This is about homeownership, it is about the American dream, 

but it is also about the economy. It is about what happens once we 

start to build housing and we have buyers. Because, once you lay 

that foundation, you know that at some point you will sell carpet 

or you will sell a washer, a dryer. 

This economy has been driven in great part due to the success 

of our housing market. So, as we move forward, we want to make 

sure that market is still in place such that we can utilize it to 

again help us with our economic recovery. 

I think that if we don’t consider the impact on the economy, we 

are making a mistake. So let’s be sure that, as we move forward, 

we don’t develop unintended consequences associated with our desire to make things right. 

I thank you for the time, Mr. Chairman. And I yield back. 

Chairman GARRETT. And I thank you. 

And the other gentleman from Texas, Mr. Hensarling, for 1 

minute, please. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

We all know that the classic definition of ‘‘insanity’’ is doing the 

same thing over and over and expecting a different result. Those 

who want to foster a system of continuing government guarantees 

in the secondary mortgage market certainly bear the burden of persuasion that somehow we can expect a different result—a different 

result than $150 billion of taxpayer bailout money, $8 trillion of 

debt that ultimately the taxpayer is responsible for. That is a 

strong burden of persuasion. 

For 2 years now, we have had the Administration, which has discussed, studied, ruminated, cogitated, and done everything but 

7 

acted upon the GSEs. I hope that very soon, they will release a 

plan. 

But I think the real question is, how do we transition to a competitive market without taxpayer guarantees and how soon can we 

get there? It is time for us, at three trillion-plus deficits in our Nation’s history in a row, to end the taxpayer bailouts. 

I yield back. 

Chairman GARRETT. Mr. Frank? 

Mr. FRANK. Thank you, Mr. Chairman. 

I have, actually, a question which will be addressed. 

Chairman GARRETT. For 2 minutes. 

Mr. FRANK. I have heard criticism of the Administration for 

missing its deadline. And I must say, this is a newly discovered attitude of deference towards the Obama Administration on these 

matters. I had not previously thought that the Majority was waiting around for the President to suggest to them what to do. I had 

thought that, frankly, the Majority knew what it wanted to do. 

Last year, in July, in the conference, an amendment was offered 

to the conference report that we were told, as I recall, resolved this 

problem, got rid of them. And I didn’t think it was germane; we 

ruled it was not germane. But when the election happened, I had 

assumed—in fact, I am surprised that we are now having a hearing 

on what the Administration hasn’t done. I assumed this would be 

a hearing on the amendment Mr. Hensarling offered last year. 

It did seem to me that the Majority knew what it wanted to do 

in July when it was in the Minority. And, apparently, there was 

something about transitioning from the Minority to the Majority 

that induces a kind of legislative amnesia. 

People on the Majority side were very sure what we should do. 

So I had expected to be coming to a hearing in which we would be 

considering the amendment. There was a great deal of unhappiness 

on the Minority side that we couldn’t vote on the amendment. The 

Majority is in charge of that, so I assumed we would go forward. 

And, again, I had not expected them to wait for the Administration. 

So my question is, why are we not—and I know it has been introduced as part of the RSC package, the amendment of the gentleman of Texas. So can we anticipate a legislative hearing on this 

and a markup of that legislation? And if not, what impediment intervened? Why was this a very good idea in July and not in February? 

Chairman GARRETT. Would the gentleman yield? 

Mr. FRANK. Yes. 

Chairman GARRETT. I appreciate that, and I appreciate the gentleman’s recollection of the history of what we had proposed in the 

past. And I assume the gentleman also remembers, as well, that 

we had also called on the Majority at that time to do what we are 

doing right now, and that is to call in the interested parties, call 

in the academics, call in the stakeholders to elaborate, to elucidate, 

and to explain what some of the ramifications of these proposals 

are. 

That was never done. And now we have a whole slew of new 

freshmen from—actually, we only have one freshmen new— 

Mr. FRANK. I take back my time to say, no, these aren’t new 

questions. There is nothing new here that wasn’t known then. In 

8 

July, people said, ‘‘Adopt this amendment. We know what to do.’’ 

And I am surprised that there was a certainty then and such uncertainty now. There aren’t any new questions about this. At least, 

there aren’t questions that weren’t there before. 

So, again, I am struck by the contrast between the certainty that 

was expressed when the Majority was the Minority and the uncertainty that has overtaken them in the Majority. 

And I yield back. 

Chairman GARRETT. And the gentleman yields back. I assume 

the gentleman will be interested in the contrast as we go ahead in 

the next 2 years, as well. 

And, with that, I yield to the gentleman from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. And thank you for 

holding this very important meeting. As has been said, we have 

been waiting for 2 years for some action to happen on this issue, 

and finally we are about to start down that road. 

One of the things that concerns me is, while we are in this very 

hearing today, Freddie and Fannie will take on additional taxpayer 

liability. And so, the time to act is not later but is now. We need 

to start to make sure that we are doing everything we can and the 

conservator is doing everything they can to minimize additional exposure while, at the same time, making space for private 

securitization to begin to take place immediately so that we can 

begin to reduce that exposure. 

There are a lot of things that should be discussed today, and I 

look forward to this important dialogue. 

Chairman GARRETT. And now for 2 minutes, the gentleman from 

Minnesota, Mr. Ellison. 

Mr. ELLISON. Thank you, Mr. Chairman and also Ranking Member Waters, for this important hearing. I am looking forward to 

this dialogue, and I would like to express a few ideas as we go forward. 

First of all, I think it is important to learn the right lessons from 

the recent housing market crisis. And these lessons point to the 

private sector’s role in creating private-label mortgage-backed securities as we start this new Congress. Let’s not forget that the 

subprime mortgage securities were created by Wall Street firms, 

not Fannie and Freddie. 

Now, I am not advocating that Fannie and Freddie were perfect 

actors during the housing bubble, but let’s be clear; Fannie and 

Freddie did not start this crisis, and Fannie and Freddie’s affordable housing mission did not cause the collapse. 

Let’s also be clear that the Community Reinvestment Act did not 

cause the housing collapse either. 

Reforming mortgage finance systems is a big responsibility because homeownership has sustained the middle class of this country. Calls to eliminate all government involvement in the secondary 

mortgage market are not responsible. We can’t go back to the predepression housing market when government played no role in 

housing finance and homeownership was restricted to the very 

wealthy. 

As this subcommittee addresses the important work of GSE reform, I also hope that equal attention is given to the important role 

9 

that Fannie and Freddie have played in the affordable rental housing market. 

So I look forward to the testimony of the witnesses here, and I 

thank all of you. 

I yield back. 

Chairman GARRETT. I thank the gentleman for yielding back. 

And now the gentleman from Illinois, Mr. Manzullo, for 1 

minute. 

Mr. MANZULLO. Thank you. 

It is very simple. Whoever came up with the great idea to allow 

people who couldn’t make the first mortgage payment to buy a 

house made the mistake. It took the Fed until, I believe, October 

of last year to come up with a simple rule that said, whenever you 

apply for a home mortgage, you must have written proof of what 

your earnings are. 

That is how we got in this mess. People bought homes, couldn’t 

make the first mortgage payment, everything got behind, and derivatives were soured because of the underlying securities on it. 

So now, we need to find our way out of this mess. Fannie Mae 

and Freddie Mac could have done it a long time ago. They simply 

could have passed a rule that said, we will not accept any loan unless there is written proof of what a person earns. 

I look forward to hearing from the witnesses. 

Chairman GARRETT. The gentleman from New Mexico, Mr. 

Pearce, for 1 minute. 

Mr. PEARCE. Thank you, Mr. Chairman. 

I appreciate the opportunity to take a little closer look at Fannie 

Mae and Freddie Mac. I hope that we are taking the first step 

today towards significant reform of these failed institutions. 

We are titling the hearing, ‘‘Immediate Steps to Protect Taxpayers and End the Bailout.’’ And it is time for someone to speak 

up for the taxpayers, who have now dished out $150 billion to save 

these institutions which were declared ‘‘too-big-to-fail.’’ It is reason 

enough to put the country on notice that servicing foreign obligations over obligations to American citizens will not be the norm any 

longer. 

While the priority of this committee is to protect taxpayers, the 

conservatorship that took over Fannie and Freddie created several 

other victims whose investments and, in some cases, financial 

health were destroyed by the manner in which the mortgage giants 

were seized. Prior to the conservatorship, about 1,000 community 

banks held an estimated $15 billion to $25 billion in Fannie and 

Freddie preferred stock. That stock was wiped out by the government when the GSEs were taken over and placed in conservatorship. 

Former Secretary of the Treasury Hank Paulson acknowledged 

in his book on the crisis, ‘‘On the Brink,’’ that the action constituted an ambush. More concerning, Secretary Paulson also mentioned in his book that the decision to wipe out preferred stockholders in this country was done in part to satisfy America’s debt 

obligations to the Chinese. 

As we move forward with proposals to reform the GSEs, it is 

time for Congress to do the right thing and prioritize the Federal 

Government’s obligations to the citizens in this country. 

10 

I look forward to the panel. Thank you, Mr. Chairman. 

Chairman GARRETT. And I thank the gentleman. 

The gentlelady from New York, Ms. Hayworth, for 1 minute. 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

The figures we are dealing with are stunning because, to date, the GSEs have consumed approximately $150 billion from our taxpayers, and most experts believe these losses will be much higher. 

The CBO says that if we do nothing to stem the lawsuits, the taxpayers will end up paying nearly $400 billion to bail out Fannie 

Mae and Freddie Mac. 

And as we wait for the Administration to come up with a plan 

to wind down the GSEs, and protect our taxpayers, we know that 

it becomes ever more urgent. So I want to commend our chairman 

for holding this hearing, and I look forward to hearing what you 

have to say. 

I can tell you that my constituents in the Hudson Valley of New 

York have become convinced that the more government intervenes, 

the less common sense prevails. So I submit that the task before 

us is to return common sense, in the form of free enterprise principles, to the mortgage and housing marketplaces. 

I yield back the remainder of my time. 

Chairman GARRETT. I thank the gentlelady. 

The gentleman from Virginia, Mr. Hurt, please. 

Mr. HURT. Thank you, Mr. Chairman. 

Mr. Chairman, thank you for holding this subcommittee hearing on this important issue. With $150 billion in taxpayer funds already spent propping up Fannie Mae and Freddie Mac, and hundreds of billions more a possibility, it is clear that this will be the 

most expensive Federal bailout in response to the financial crisis. 

As it has been said, we must end the limitless bailouts of Fannie 

and Freddie and effectively reform them in order to protect the 

American taxpayer and give true stability to the marketplace. 

The previous Congress failed to address GSE reform while passing one of the most sweeping regulatory overhauls of the financial 

services industry. Today’s hearing makes it clear that this committee and this new Congress are prepared to act. 

I look forward to hearing from the witnesses, and I thank them 

for their appearance. 

Thank you, Mr. Chairman. I yield back my time. 

Chairman GARRETT. I thank the gentleman. 

The gentleman from New York, Mr. Grimm, for 1 minute. 

Mr. GRIMM. Thank you, Chairman Garrett. Thank you for calling 

this hearing. 

And thank you to those testifying. 

This is obviously one of the most important issues facing this 

committee and our entire Nation. Ending the enormous and ongoing taxpayer bailout of Fannie Mae and Freddie Mac is, in my 

opinion, an absolute must. 

And this conservatorship started in September 2008. These two failed firms have cost the American people over $150 billion. And 

this sum is almost guaranteed to go higher in the coming months 

and years. And, shockingly, the recently-passed 2,300-page DoddFrank financial reform bill did not address these two firms, and 

they are continuing to hemorrhage money. 

11 

So, as we move forward on deciding what the future of housing 

finance will look like in the United States, there are certain points 

that we should keep in the forefront of our discussion. 

For many years, homeownership has been considered the cornerstone of the American dream and has led Congress to support 

homeownership through various initiatives. I know that back in my 

district in Staten Island in Brooklyn, the ability to own your own 

home is unbelievably important to my constituents for them to 

build a strong financial foundation to improve the lives of their 

families. 

And with that being said, we must give serious consideration as 

to how to continue to make homeownership affordable to middleclass Americans while, at the same time, ensuring that the American taxpayer is never again left to shoulder a burden the size of 

Fannie Mae and Freddie Mac. 

Thank you, Mr. Chairman, for holding this hearing. 

I yield back the remainder of my time. 

Chairman GARRETT. I thank the gentleman. 

The gentleman from Ohio, Mr. Stivers. 

Mr. STIVERS. Thank you, Mr. Chairman. I would like to thank 

the chairman for calling this hearing today. 

The gentleman from New Mexico focused his comments on the 

American taxpayer, and I think that is appropriate because these 

GSEs should be an issue for all American taxpayers across the 

country. The gentlelady from New York mentioned that the taxpayers are already on the hook for $150 billion and counting. 

So finding a solution where the American taxpayer is not left 

holding the bag for these gigantic losses while, at the same time, 

continuing to ensure that home loans are still available and accessible is a priority for me. I hope we act quickly and prudently as 

we propose and implement reforms. 

I look forward to hearing the panel discuss ideas on the way forward for GSE reform. I would like to thank the chairman, and I 

yield back the balance of my time. 

Ms. WATERS. Mr. Chairman, I have an unanimous consent request. 

Chairman GARRETT. What is your request? 

Ms. WATERS. I request that Mr. Carney be allowed to participate, 

to sit in on the subcommittee hearing today. 

Chairman GARRETT. Without objection, it is so ordered. 

Ms. WATERS. Thank you. 

Chairman GARRETT. Mr. Miller from California? 

Mr. GARY MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

Over 10 years ago, we tried to reform Freddie and Fannie. We 

worked on it for years. We tried to put a strong regulator in place. 

We tried to create strong underwriting standards. And, as you 

know, it all got killed in the Senate. 

I have read some of the testimony, and I agree we all need to 

protect taxpayers, and a $150 billion loss is outrageous. There is 

just no excuse for that. But 66.5 percent of the families in this 

country own their homes, and many of those are two-taxpayer 

homes also. 

So we need to look and say, what do we have to do? And when 

we look at the overall marketplace, I think we need to look at the 

12 

marketplace and say, what is wrong with the marketplace and how 

do we reform everything? 

If you look at the default rates on subprime loans, it is 38.7 percent—38.7 percent. The default rate on Fannie and Freddie is 3.1 

percent. If you look at the default rate on subprimes, it is 26.5 percent. The all-loan seriously delinquent rate is at 8 percent and 

Fannie Mae is at 4.2 percent. So are the default rates on Fannie 

and Freddie high at 3.1 and 4.2 percent? They are high, but they 

are better than the private sector. 

So how do we address that? And we need to get to the bottom 

of it. We can’t put taxpayers at risk. I am not arguing with that. 

But what is wrong with the overall marketplace? 

I know some data says we need to eliminate high-cost areas. But 

they are the best-performing loans with Fannie and Freddie. If 

there is data other than that, I would like to see it, because I have 

just not seen that. 

So I look forward to the testimony. And, Mr. Chairman, I thank 

you for the time. 

Chairman GARRETT. And I thank the gentleman. 

And, finally, Mr. Fitzpatrick from Pennsylvania for 1 minute. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

I believe the government has a role to play in encouraging homeownership, but this laudable goal has led to interference in the 

market, and now the taxpayers are writing checks to the tune of 

hundreds of billions of dollars. 

I believe that the government has overstepped its bounds, Mr. 

Chairman. The United States Government went from being a 

facilitator to now backing over 90 percent of all the loans in the 

United States. There is no question that Fannie Mae and Freddie 

Mac must be weaned off the government in a responsible way that 

protects our economy but gets the American taxpayer out of the 

bailout business. 

We can argue about how we got here, but the fact remains that 

Fannie and Freddie are now bloated with bad loans and toxic assets. And while too fast of a wind-down could damage our housing 

economy, we cannot allow prudence to be the enemy of progress. 

The system must be reformed, the system must be stabilized, 

American families protected, and the government be relegated back 

to its proper role. 

The path forward will not be easy, but we were sent to Congress 

to fix the system and to fight for the taxpayers. I look forward to 

the testimony and the solutions. 

And, Mr. Chairman, I yield back the balance of my time. 

Chairman GARRETT. I thank the gentleman. 

And I thank all of the witnesses. As you heard, we are all very 

much looking forward to your testimony. 

And we do have a great panel of esteemed witnesses, so let me 

just run through them. And then I will refer to each of you for 5 

minutes. 

On our left, Mr. Mark Calabria, director, financial regulation 

studies at the Cato Institute. Next to him, Anthony Randazzo, director of economic research at the Reason Foundation. Next, Alex 

Pollock, resident fellow of AEI, American Enterprise Institute. FolVerDate Nov 24 2008 17:46 Mar 23, 2011 Jkt 064551 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\64551.TXT TERRIE
13 

lowing, last but certainly not least, Ms. Sarah Wartell, executive 

vice president of the Center for American Progress. 

I welcome you all here today for our very first hearing. And I do, 

indeed, look forward to your testimony and your ideas and your expertise to help us solve this problem. 

Sir, 5 minutes. 

STATEMENT OF MARK A. CALABRIA, DIRECTOR OF FINANCIAL 

REGULATION STUDIES, CATO INSTITUTE 

Mr. CALABRIA. Chairman Garrett, Ranking Member Waters, full 

committee Ranking Member Frank, and distinguished members of 

the subcommittee, I thank you for the invitation to be here at today’s hearing. 

Given the central role of Fannie Mae and Freddie Mac in the financial crisis, the need for reform is beyond dispute. While I believe a major overhaul of our Federal mortgage policy should happen sooner rather than later, reform should be done in a deliberate 

and thoughtful matter. The need for deliberate and thoughtful 

process, however, does not preclude the necessity of taking immediate steps to protect the taxpayer. 

The most immediate and important step that can be taken to 

protect the taxpayer is to change the role of the Federal Housing 

Finance Agency from that of conservator to receiver. The Housing 

and Economic Recovery Act of 2008 establishes a resolution or reorganization process for the GSEs. 

It should be noted that there is little, if anything, that a conservator can do that a receiver cannot. There is, however, a considerable amount that a receiver can do which a conservator cannot, the 

most important difference being that a receiver can impose losses 

on creditors. 

Some might object to receivership on the basis that it would end 

the GSEs. Such a position would be mistaken. HERA specifically 

prohibits the receiver from revoking, annulling, or terminating the 

charters of an Enterprise. Quite simply, the charters of Fannie Mae 

and Freddie Mac would remain in place under receivership. 

Another potential objection to receivership would be that it forces 

a solution upon Congress before it has had sufficient time to deliberate. Such an objection would also be false. Again, under HERA, 

a limited-life regulated entity, essentially a bridge bank for the 

GSEs, has an initial life of 2 years, which can be extended by 

FHFA for 3 additional 1-year periods. This would give Congress 

and the Administration 5 years to arrive at a suitable solution to 

Fannie Mae and Freddie Mac. 

Another important feature of receivership is that it would help 

lessen the perception that certain entities, including our largest 

banks, are ‘‘too-big-to-fail.’’ The Dodd-Frank Act establishes a resolution process for both non-banks and bank holding companies. 

This resolution process mirrors, in many ways, the receivership 

provisions of HERA. 

Market participants have questioned whether the resolution powers of Dodd-Frank would ever be used to impose losses on creditors. 

Quite simply, if we are unwilling to take Fannie Mae into receivership, then most market participants will conclude that we are also 

unwilling to take Citibank or Goldman into a receivership. Moving 

14 

Fannie and Freddie into receivership adds credibility to the resolution process established in Dodd-Frank. 

In transitioning from a government-dominated to a market-driven mortgage system, we face the choice of either a gradual transition or a big bang. While I am comfortable with believing that the 

remainder of the financial services industry could assume the functions of Fannie and Freddie, I recognize this is a Minority viewpoint. Practical concerns as to the state of the housing market 

point toward a gradual transition. The question is then, what form 

should this transition take? 

One element of this transition should be a gradual step-rise reduction in the maximum loan limits for the GSEs. I would recommend an immediate reduction of the loan limit to $500,000, followed by annual decreases of $50,000. Of course, the details can 

differ. 

The hallmark of a private corporation is that its owners bear the 

benefits and costs of its activities. This situation no longer holds for 

Fannie Mae and Freddie Mac. Any revenue going forward will help 

reduce the size of the hole, while expenses will dig it deeper. 

Given that the taxpayer is now the residual claimant to these entities, it should be clear that the employees of Fannie Mae and 

Freddie Mac are working not on behalf of the shareholders but on 

behalf of the taxpayers. Accordingly, they should be paid like other 

government employees. I recommend that all GSE employees be 

transitioned to the GS pay scale as soon as possible. This should 

also include the executive officers. Quite simply, if FHA can adequately manage its mortgage risk by paying its employees on the 

GS scale, then I see no reason that Fannie Mae and Freddie Mac 

cannot do the same. 

Credit losses suffered by Fannie Mae and Freddie Mac have, in 

some instances, been caused by the violation of representations and 

warranties by the originating lender. While the GSEs have made 

some efforts to recover losses from the originating lenders, there is 

simply not enough public information to gauge the aggressiveness 

of these efforts. Congress should examine in detail the agreements 

reached between the GSEs and the banks in regard to loan repurchase and recovery for losses, both on private-label securities and 

on mortgages bought from these lenders by the GSEs. 

I believe a GAO audit of these agreements, along with detailed 

information by lenders, would help stem some of the losses. 

The TARP directed the President to submit a plan to Congress 

for recoupment of any shortfalls experienced under the TARP. Unfortunately, assistance to the GSEs lacked a similar requirement. 

Now is the time to rectify that oversight. Congress should establish 

a recoupment fee on all mortgages purchased by Fannie Mae and 

Freddie Mac. Such a fee could be used to directly reduce the deficit 

and structured to recoup as much of the losses as possible. I believe 

a reasonable starting point would be 1 percentage point per unpaid 

principal balance of loans purchased. 

It is important to note that the structural flaws in our mortgage 

finance system were not limited to Fannie Mae and Freddie Mac, 

but also included the treatment of GSE debt within the bank capital standards. One of the rationales for the rescue of Fannie Mae 

and Freddie Mac was the concern over the impact their failure 

15 

would have on the rest of the financial system. I believe we need 

to change the bank capital standards away from encouraging the 

holding of GSE securities over mortgages. So I believe Congress 

should direct the regulators to end this preferential treatment. 

Lastly, the bulk of losses suffered by Fannie Mae and Freddie 

Mac were the direct result of declines in credit quality. In order to 

limit future losses, Fannie Mae and Freddie Mac should be restricted to the quality of loans they can purchase. Under current 

law, Fannie Mae and Freddie Mac essentially set their own credit 

standards. Going forward, the GSEs should be limited to purchasing only those mortgages that meet the definition of a qualified 

residential mortgage as will be determined by regulations promulgated under Dodd-Frank. 

Each of these recommendations, as well as others, is detailed in 

my written testimony. I again thank the committee for holding this 

important hearing and look forward to your questions. 

[The prepared statement of Dr. Calabria can be found on page 

56 of the appendix.] 

Chairman GARRETT. I thank you for your testimony. 

And, Mr. Randazzo, you are recognized for 5 minutes. 

I should also add that, without objection, the written testimony 

of all of the witnesses will be added to the record as well. 

STATEMENT OF ANTHONY RANDAZZO, DIRECTOR OF 

ECONOMIC RESEARCH, REASON FOUNDATION 

Mr. RANDAZZO. Thank you. Chairman Garrett, Ranking Member 

Waters, and distinguished members of the subcommittee, thank 

you for the opportunity to join you in discussing the important 

matter of reforming the Nation’s mortgage finance system. 

My name is Anthony Randazzo, and I am director of economic research at Reason Foundation. 

It is important at the outset of this debate to frame the issue 

properly. Mortgage finance policy and affordable housing policy are 

two different things. Whether we should or how we should subsidize low-income Americans’ putting a roof over their heads must 

not cloud the analysis and the debate about the consequences of 

government policy distorting mortgage prices for nearly the entire 

housing market. 

That being said, now is the time for major reform of the government’s role in the mortgage finance market. Ideally, a fully reformed system would have no explicit or implicit government guarantee for mortgage finance. Such financial support only subjects 

taxpayers to high risks and eventual losses. 

Ultimately, the goal of housing finance reform should be to allow 

private investors to replace the government, i.e., taxpayers, as 

financers in the housing market while ensuring that any subsidies 

remaining in the system are explicit, direct, narrow, on-budget, and 

properly accounted for. 

Now, realistically, a robust overhaul of the housing finance sector 

will take time to accomplish. And in the near term, there is still 

a need to protect taxpayers from additional future losses while ending the ongoing bailout of the GSEs. The government’s role in 

housing must be reduced, and private capital must be allowed to 

return. 

16 

The following are 10 ideas that will help achieve these goals. And 

while they are focused on addressing short-term needs, they can 

also be extended beyond the near term as the basis for a robust 

overhaul. 

One, lower all conforming loan limits for Fannie Mae and 

Freddie Mac by 20 percent by the end of September 2011. A 20 percent reduction would still leave conforming loan limits above national average and median housing prices. And this would be a 

very modest reform to create room for private lenders and investors 

to begin re-entering the mortgage market as Congress debates how 

to reform the system as a whole. 

Two, increasing downpayment requirements for mortgages 

backed by government agencies to 20 percent over the next 3 years. 

This would decrease government, i.e., taxpayer, exposure to risky 

mortgages and prevent the government from supporting mortgages 

for those without the resources to become a homeowner right now. 

Both those who want to prevent future bailouts and those who are 

looking to protect consumers from loans that would hurt them in 

the future should support this idea. And Fannie and Freddie 

should also be prevented from buying or guaranteeing any loan 

originated outside the yet-to-be-established qualified residential 

mortgage guidelines. 

Three, instruct FHFA to begin slowly increasing the guarantee 

fee charged by Fannie Mae and Freddie Mac. Over time, this would 

increase the cost of doing business with the GSEs and create room 

for private capital to be more competitive with government agencies. And, in the meantime, the GSEs would be collecting more revenue to put back towards the cost of bailing them out. 

Four, end all affordable housing goals. Again, mortgage finance 

policy should not be considered the same as affordable housing policy. And as I outlined in my written testimony, while I would argue 

that we should have no subsidies for mortgages at all, it is possible 

that aid for low-income families can be pursued in more effective 

ways than affordable housing goals which distort the entire mortgage market. 

Five, raise capital requirements for Fannie and Freddie. 

Six, create a legal framework for covered bonds. 

Seven, cap expansion of Fannie and Freddie’s portfolios at a certain date and have the Treasury Department buy the combined 

portfolio to be run off over time. And having the GSE portfolios run 

down on the government’s balance sheet would allow Treasury to 

take advantage of Uncle Sam’s debt funding advantage and save 

the taxpayers money. 

Eight, p‘ut the staffs of Fannie Mae and Freddie Mac on the Federal pay scale. 

Nine, require the Treasury Department to formally approve new 

debt issuance by Fannie Mae and Freddie Mac. And this would 

help protect taxpayers by providing more accountability and transparency to the GSEs while their fate is being further considered. 

And, 10, wipe out the remaining stock of Fannie Mae and 

Freddie Mac. And it is also critical that mortgage finance reform 

be paralleled by FHA reform. 

To close, these 10 ideas should not be considered an adequate fix 

of Fannie Mae and Freddie Mac or as sufficient to reform the housVerDate Nov 24 2008 17:46 Mar 23, 2011 Jkt 064551 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\64551.TXT TERRIE
17 

ing market. They are merely a starting point, a first step towards 

a robust overhaul, and should open the door to further mortgage 

finance reform discussion. 

Thank you for the opportunity to discuss this important issue 

with you, and I look forward to answering any questions you may 

have. 

[The prepared statement of Mr. Randazzo can be found on page 

70 of the appendix.] 

Chairman GARRETT. I thank you for your testimony. 

Mr. Pollock for 5 minutes. Thank you. 

STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. POLLOCK. Thank you, Mr. Chairman, Ranking Member 

Waters, and members of the subcommittee. 

In the same lead editorial cited by the chairman, The Washington Post recently wrote about Fannie and Freddie, ‘‘Advertised 

as a new way to stabilize the housing market, the governmentbacked mortgage securitization ended up distorting and destabilizing the market.’’ The Washington Post is absolutely right about 

this. 

To avoid this distortion and destabilization, we should aim in the 

long run for a housing finance sector in which you can be either 

a private company or you can be a government agency, but you 

can’t be both. In other words, in the long run, there should be no 

GSEs. 

This is consistent with the GSE reform bill introduced by Congressman Hensarling in the last Congress, and also with the AEI 

White Paper recently published by Peter Wallison, Ed Pinto, and 

me. 

May I just remind us that the old GSE charters meant not only 

that Fannie and Freddie had a taxpayer guarantee, but also that 

they were granted many privileges and large economic subsidies. 

They were highly politicized, exercised duopoly market power, discriminated against small lenders, and transferred a portion of their 

taxpayer subsidies without appropriation to politically directed 

housing programs. 

They were accurately described as ‘‘masters of Beltway capitalism.’’ Fannie, in particular, was genuinely feared as a hardball 

political operator. Fannie and Freddie had especially low capital ratios because their real capital was known by the bond market to 

be the credit card of the U.S. Treasury. We certainly don’t want 

those GSEs back. 

My view is that, in the long run, Fannie and Freddie need to be 

restructured into a private company, a government agency and a 

liquidating trust, but this can’t be done just yet. There are, nonetheless, a number of focused, specific actions we could take now 

consistent with our long-term aim. My written testimony suggests 

a dozen of them, and I will touch on a number of these briefly. 

We should enable covered bonds as an alternate long-term mortgage funding option. A lesson everybody has learned from the bubble is the importance of whether mortgage lenders retain ‘‘skin in 

the game’’ for mortgage credit. With covered bonds, the issuing 

bank has 100 percent skin in the game for their credit responsiVerDate Nov 24 2008 17:46 Mar 23, 2011 Jkt 064551 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\64551.TXT TERRIE
18 

bility, and this is a major advantage over the GSE originate-andsell model. 

Granting perpetual charters to GSEs was a major historical mistake. We should set a 5-year sunset on Fannie and Freddie’s charters, thus having them expire in 2016. Before then, we will be 

ready for their long-term restructuring. 

Congress should instruct the GSE regulator to set Fannie and 

Freddie’s capital requirements at no less than those applied to national banks for the same assets and the same risks. 

We should mandate the runoff of the GSE’s investment portfolios, both loans and securities. As these assets run off, GSE unsecured debt will be correspondingly reduced, as will the complex derivatives activity and portfolios associated with these assets. 

As my colleagues on the panel have recommended, we should set 

a regular, predictable reduction in GSE conforming loan limits. 

We should mandate clear Federal budget accounting for Fannie 

and Freddie, as proposed in the Accurate Accounting of Fannie 

Mae and Freddie Mac bill introduced in 2010. 

We should eliminate all GSE affordable housing goals and transfer such goals to HUD. Public subsidies for affordable housing and 

non-market, higher-risk lending should be explicitly governmental 

activities. So all affordable housing goals, assets, and related funding should be ended for the GSEs and, as appropriate, become the 

responsibility of the housing finance operations of the Department 

of Housing and Urban Development. 

One of the big mistakes made by bank regulation was to encourage the banking system to increase the systemic risk of the GSEs. 

Congressman Pearce previously raised the issue of the preferred 

stock of Fannie and Freddie held by banks. It is essential for us 

to understand and to correct the risk interaction between the GSEs 

and the banking system. This interaction caused a hyperleveraging of mortgage risk for the financial system as a whole, as 

discussed in my written testimony. 

Something everyone agrees on is the need to provide clear, simply stated, straightforward key information to prospective mortgage 

borrowers. We should mandate that no loan can be guaranteed by 

Fannie or Freddie which has not provided the borrower with the 

appropriate one-page information form. 

And, finally, an outrageous part of the GSE bailout was the full 

protection, so far, at the expense of the taxpayers, of the holders 

of Fannie and Freddie’s subordinated debt. The investors in this 

subordinated debt should be put on a path toward market discipline. 

In sum, Mr. Chairman, there is a lot we could do now to move 

in the right direction. Thank you again for the opportunity to share 

these views. 

[The prepared statement of Mr. Pollock can be found on page 63 

of the appendix.] 

Chairman GARRETT. Thank you. 

And finally, Ms. Wartell for 5 minutes. 

19 

STATEMENT OF SARAH ROSEN WARTELL, EXECUTIVE VICE 

PRESIDENT, CENTER FOR AMERICAN PROGRESS ACTION 

FUND 

Ms. WARTELL. Thank you very much, Mr. Chairman, and thank 

you, Ranking Member Waters, and all of you, for the opportunity 

to share my thoughts on reform of housing finance. 

We all agree today that we find ourselves in an unsustainable 

situation. Government now bears the credit risk on the bulk of residential mortgage loans, and private capital must be attracted back 

into the market to bear as much of the load as possible in our housing finance system going forward. 

That said, our housing policy should have other goals, as well: 

decent and affordable housing rental options and homeownership 

so that American families have appropriate choices; access to 

homeownership for creditworthy borrowers who are ready to sustain the responsibilities of a mortgage; equitable and nondiscriminatory access to credit; the opportunity to rebuild, based on sound 

and sustainable lending principles, communities hard hit by the 

foreclosure crisis; and a diverse system not dependent on a handful 

of large financial institutions, but which includes local institutions 

that can meet the needs of the communities they know best. 

Those are all part of our goals. Thoughtful evolution, not overnight revolution, is the best way to reform the housing finance system, provide stability, and protect the taxpayers. So let me touch 

on just three topics that I mention in my written testimony. 

First, there are important conditions that must be in place if we 

are going to pull back government support from parts of the housing market in an attempt to try to crowd in private capital. 

Investors won’t return unless the rules of the game are clear. 

And given the mess that the private-label securities market made 

in the past, we shouldn’t want them to. Most will wait to see what 

regulators do in implementing the provisions of the Dodd-Frank 

Act regarding mortgages. And those who would delay these regulatory efforts undermine the certainty that they claim private markets need for investment. 

The return of private securitization also requires restoring confidence in servicing. Investors, as well as consumers, are deeply 

frustrated by the servicing standards of the lenders. A new servicing standard process is just beginning, and it should be a priority 

also for those who want to see private at-risk capital return. 

Withdrawing the GSEs from market segments before these steps, 

such as through loan-limit increases, risks a shock to the housing 

market already struggling from an inventory overhang and weak 

employment. We must ensure the private market is ready to pick 

up the slack or risk restarting the vicious cycle of falling home values, a shrinking economy, which would also leave taxpayer losses 

for its GSE obligations larger than is required. 

Second, I have concerns that accelerating the liquidation of the 

GSE portfolio may be directly counter to the taxpayers’ interest. 

Asset sales can sometimes yield higher returns, but it also can 

allow buyers to benefit from market recoveries, rather than the 

taxpayer, who is currently backing the GSEs. The sales should be 

dictated by maximizing expected recoveries and not a mandated 

schedule of sales. 

20 

Finally, a few quick reactions to some of the more radical privatization proposals that have been advanced about the end-state. 

These would take us to unchartered territories—truly unchartered—because, despite assertions to the contrary, no developed 

country has a purely private housing finance market without some 

government support in one form or the other. Moody’s Mark Zandi 

made this point in a paper that he released this week, as well. 

The oft-cited Canadian market has significant government insurance and support. In any event that purely private intermediaries 

were able to finance all of the U.S. mortgage market debt, their obligations would surely be considered systemically important, given 

the high degree of concentration in U.S. mortgage activity in a few 

financial institutions. 

So instead of a private system, we might create a new set of implicit but unmonitored and unpriced government guarantees—exactly the opposite of the solution that any of us seek. 

These problems would be exacerbated if we relied entirely on the 

covered bond model. While a useful product as a replacement for 

a mortgage finance system, covered bonds encourage the dominance of a few institutions, which receive the benefit of implicit 

government guarantees in Europe. I talk a little bit more about 

this in my written statement. 

While these privatization schemes are unlikely to protect the taxpayers and avoid moral hazard, they would result in some stark 

consequences for American households. The availability of mortgage finance would be sharply reduced, and middle-income households would be shut out of homeownership. To the extent that 

mortgage finance remained available for working households, it 

would be directed into loans of shorter durations, higher costs, and 

very high downpayments. Products that help families fix their 

housing costs over time like the long-term, fixed-rate mortgage 

would not be available at prices affordable to most families. 

Lack of long-term private finance would reduce the availability 

and raise the costs of rental housing, even as constrained homeownership access would create greater demand for rental units and 

upward pressure on rents. 

Finally, fewer families would have access to the forced savings 

that homeownership represents and the opportunity for economic 

mobility that is the American dream. After the sorry consequences 

of private-market innovation over the previous decade, we should 

think carefully before going down that path again, leaving American families who have already suffered the worst economy in our 

lifetime to once again pay the price. Thank you. 

[The prepared statement of Ms. Wartell can be found on page 86 

of the appendix.] 

Chairman GARRETT. Thank you. 

This is very interesting, so I will begin with the questioning for 

5 minutes. Mr. Pollock, you use the expression in your written testimony about double leveraging of the GSEs by the banking system. 

Could you give me just briefly, in about a minute or less, a little 

more detail on this and discuss what steps? You sort of touched on 

how we could curtail that double leveraging. 

Mr. POLLOCK. Yes. Thank you, Mr. Chairman. 

21 

As I mentioned, the interaction between the way that lending 

money and investing in the GSEs was encouraged by regulation in 

the banking system and the GSEs themselves resulted in double leverage or hyper-leverage. One example is with preferred stock. A 

large amount of the capital of the GSEs was in the form of preferred stock. Preferred stock could get leveraged 60 to 1, 60 in debt 

to 1 in stock by the GSEs. 

Among the biggest buyers of the preferred stock, and encouraged 

by regulation, were commercial banks. And the banks themselves 

owned that stock on a leveraged basis, or a margin basis, with a 

risk-based capital requirement of only 20 percent risk weighting, 

which is equivalent to 1.6 percent capital. In other words, they 

owned the equity of the GSEs on a 98 percent margined basis, like 

buying stock on 98 percent margin. 

So if you combine the banking system with the GSEs and think 

about that as a total system, there was virtually no real equity. 

You had a leverage of 60 squared, or over 3,000 to 1. That thinking 

about the interaction between the banks and the GSEs is, I think, 

critical. I will just mention quickly, if I may, that banks were also 

encouraged to hold GSE debt and mortgage-backed securities without limit, so that you got over-concentration in GSE risk by the 

banks. 

Chairman GARRETT. Thank you. 

And Ms. Wartell, right now we are trying to take actions. What 

can we do today? Looking at the GSEs today, they are in conservatorship, lots of money going out the door. A couple of things 

are going to be coming up. The FHFA is soon to announce that executive compensation is going to be due with the executives of 

Fannie and Freddie. 

What is your position on exec compensation packages that we 

have seen over there? Should the taxpayer basically be funding 

these quite high compensation packages in your view? 

Ms. WARTELL. I think what is important for the GSEs is that because they do represent a significant contingent liability, potential 

liability for the taxpayers, it is very important that they be able to 

continue to attract the talent to manage their obligations. And I do 

in their current situation believe that it is difficult for them—they 

are seeing a great deal of runoff already of their senior leadership 

into private institutions—and the ability to attract people, for example, to manage servicing and retain assets. So I don’t have a position particularly on the current compensation packages. I understand the difficulty that they present. I also think it is really important that we don’t let them lose talent to manage and protect 

the taxpayers’ ultimate outcomes. 

Chairman GARRETT. We have to be careful of that because over 

at Ginnie Mae and FHA, they are having to deal with the same 

problems over there, and they are not getting the same compensation package. So we may be getting a call for giving them bonuses 

if we are not willing do it here. 

Let me just ask you one other question. With them in conservatorship right now, is now a good time to address the issue or 

have them issuing affordable housing goals? Do you think that 

should be something they should be doing right now? 

22 

Ms. WARTELL. I think what is important, and what we would 

suggest for both the near term and the long term, is that the secondary market serve what the primary market is doing. 

Chairman GARRETT. How much is the near term? Because I am 

looking at what we could do for them. 

Ms. WARTELL. In the near term, the affordable housing goals, as 

written in the statute that the conservator is now still implementing, require the GSEs to lead the market. The rulemaking by 

the Bush Administration that really forced them to stretch out 

ahead of the market is where I think the goals really got out of 

bounds. Requiring the secondary market to continue to serve the 

primary market, the loans that lenders are making, and not cherry-pick those loans so that we end up with communities without access to capital, communities that are effectively credit deserts, 

seems to me an important ongoing obligation. We just don’t want 

to make them stretch in ways that have them make unsafe loans. 

Chairman GARRETT. Okay. And in my 30 seconds’ time, because 

someone is trying to keep the time here, Mr. Randazzo, Mr. 

Calabria, you both discussed variations of how to treat their outstanding debt. 

Mr. Randazzo, could you expound on your idea to bring that debt 

online with the Treasury and Treasury’s balance sheet, and the potential taxpayers’ savings there? Have you had any discussions, I 

should say, also with Treasury on this as well? 

Mr. RANDAZZO. You are speaking specifically to how to bring the 

debt of the GSEs in line? 

Chairman GARRETT. Right. And onto the Treasury’s balance 

sheet, and then the tax savings that results there—in 15 seconds. 

Mr. RANDAZZO. Sure. In short, the GSEs, because they are not 

technically government agencies right now, pay more to issue debt 

than the Treasury Department does. By bringing those portfolios 

onto the Treasury’s debt, you would have roughly 25 basis points 

cheaper borrowing when you reissue short-term debt. And given 

that over the next year, about 40 percent of their debt is going to 

come up for renewal, that has potential savings of anywhere between $4 billion and $12 billion for taxpayers just by having those 

portfolios run off on the Treasury’s balance sheet as opposed to in 

a separate holding company. 

Chairman GARRETT. My time has expired. Ms. Waters for 5 minutes. 

Ms. WATERS. Thank you very much. Let me direct my first question to, I believe, Mr. Pollock, of American Enterprise Institute. 

Could there be a 30-year fixed-rate mortgage product available on 

the market for the median-income family without any government 

involvement in the housing finance system? If so, how many basis 

points more expensive would it be compared to what borrowers pay 

now? 

Mr. POLLOCK. Congresswoman, there could certainly be one and 

would certainly be one. I guess it would be somewhat more expensive. I doubt that it would be very much more expensive. It is hard 

to say until we run the market experiment, of course. But that it 

would be available, I think is beyond doubt. 

Ms. WATERS. I would like to ask Ms. Wartell that same question. 

23 

Ms. WARTELL. I agree that it would probably be available. But 

I disagree that it would be available at a rate that would be competitive in the marketplace and that would be able to attract middle-income families. I think the reality is with the economic uncertainty people have, they are not going to pay one dime more than 

they can for their housing costs. And the reality is that we are adding economic volatility into the system by moving people to adjustable rate mortgages, as we saw during the crisis. And you are also 

I think putting limitations on central bank regulators’ capacity to 

manage interest rates if we know that so many families’ housing 

costs will vary up and down with adjustable rate mortgages. 

Ms. WATERS. Mr. Calabria, what do you make of the fact that 

William Gross, the co-founder and managing director of the investment firm Pimco, has said his funds wouldn’t buy pools of private 

label mortgages unless homeowners made a downpayment of at 

least 30 percent? I know that as an investor, he is not exactly an 

impartial party. He has an interest in there being a government 

guarantee. Do you think he is bluffing, or do you think his statement is an accurate picture of what investment firms would actually do? 

Mr. CALABRIA. I think he is doing what they call on Wall Street 

‘‘talking your book.’’ As you mention, Pimco is a very large holder 

of GSE securities. Were a government guarantee to end, his book 

of business would take a very large loss. I can’t blame him for trying to protect that. I think his statement as to the effect of 3 percentage points strikes me as absolutely ridiculous. I think that is 

outside of the realm of reason. 

We don’t see that kind of difference between—I think a more reasonable—I will be willing to guess, where Alex would not, and put 

an estimate, which is, I think, if we were to move our conforming 

mortgage market to resemble our jumbo mortgage market, we 

would see interest rates increase somewhere on the range of 30 to 

40 basis points at most, which I will note is not large enough to 

impact the homeownership rate. And while that might make mortgages more affordable, I think a constant theme that we need to 

keep in mind is that homeowners are also taxpayers. So taking a 

dollar out of one pocket just to put 90 cents back in the other does 

not make someone better off, and we need to look at the whole picture. 

Ms. WATERS. Thank you very much. 

Mr. Randazzo, I don’t know if your expertise extends to servicing. 

But given all of the expertise we have had over the past year or 

so in housing finance, can you explain why we are seeing a breakdown in the mortgage servicing industry? Today, the Veterans Affairs Committee is holding a hearing on improper military foreclosures by JPMorgan Chase. Do we need national standards for 

mortgage servicing? If so, what should be included in these standards? 

Mr. RANDAZZO. Thank you for the question. I will say my expertise is not mainly focused in the servicing market. I would say that 

there are a number of outside factors that have impacted the way 

that banks have put together their own specific servicing standards. Without the right incentives for private companies to track 

24 

their risk, things can get out of whack. And I think that has happened with a lot of these companies. 

I don’t know that national servicing standards are necessarily 

needed. But as long as there are misaligned incentives in the marketplace, it would be natural that that would be the route to go. 

I would say that— 

Ms. WATERS. Ms. Wartell, on the same issue of servicers, there 

is a big problem—robo signing, all of this we are coming up with. 

What happened? Do we need national standards? 

Ms. WARTELL. I think we absolutely need it, not only because 

consumers don’t have the ability to be dealt with fairly, but also 

because investors need to know how servicers are going to act and 

whether they are going to have an incentive to act in the investors’ 

best interests in trying to maximize returns in the mortgage. And 

they are, I think, without that confidence today. There are multiple 

ways of getting to an effective set of best practices that are applied 

across the entire market, either voluntarily or through legislation. 

But if we don’t see it happen voluntarily, then it needs to happen 

in another way. 

Ms. WATERS. Anyone else on servicing? Yes, Mr. Calabria? 

Mr. CALABRIA. I will make a comment and show that there are 

certainly some issues on which Sarah and I agree. And I think, 

given that the taxpayer is on the hook for much of the servicing 

industry, there certainly is a national interest. I would say the 

place to start is certainly with Freddie and Fannie’s book. They 

have a large amount that they are servicing. So there is definitely 

a Federal interest. There is definitely a reason do this. The details 

will differ, but I do think it is something worth looking at. 

Ms. WATERS. Thank you. I yield back. 

Chairman GARRETT. Thank you. The gentleman from New Mexico, Mr. Pearce, for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

I think I would go to Mr. Randazzo first. When we consider the 

preferred stocks that were basically allowed to not be exercised, do 

you know what the process was in which these were suspended? 

The banks were being encouraged to buy the stock; isn’t that correct? Do you know anything about that? Do you know anything 

about the process? 

Mr. RANDAZZO. In 2008, when the— 

Mr. PEARCE. Yes. In other words, prior to the government taking 

conservatorship, banks were encouraged to buy these—if it is not 

something you are familiar with, you can yield to Mr. Pollock. I 

think he might have— 

Mr. RANDAZZO. I think Mr. Pollock and Mr. Calabria could speak 

more to this. 

Mr. PEARCE. Okay. 

Mr. POLLOCK. Thanks, Congressman. I would be glad to address 

that. 

By the regulatory capital treatment, banks were certainly given 

an incentive to own this equity on a highly leveraged basis. And 

when the GSEs were put into conservatorship, the dividends on the 

preferred stock were suspended. That strikes me as an appropriate 

thing to do under the circumstances. But the valuation then of the 

stocks, looking forward to how much could be recovered ever, of 

25 

course, was extremely low. And the write-offs were very high. It 

troubled many banks and it put several banks into failure. 

The fault, as I see it, is the design of the system in the beginning, which encouraged the banking system running on what you 

might think of as double-dipping of the government guarantee. 

That is to say, you took government-guaranteed deposits and used 

them to leverage investments in equity of the GSE. That, in my 

view, was a big mistake. 

Mr. PEARCE. The term ‘‘preferred stock’’ means basically just 

that. Were there lower-level creditors who were given their value 

while preferred stockholders lost theirs? 

Mr. POLLOCK. No. There were common shareholders, of course. 

There still are legally common shareholders who saw the price of 

their stock go down more than 99 percent to pennies on a share. 

Then you have the preferred. Above the preferred you have the 

subordinated debt, which I mentioned in my testimony, which has 

been protected. And that is something I believe we need to fix 

going forward; that the subordinated debt holders should share in 

the realization of the risks which they knowingly undertook by 

buying subordinated debt. 

Mr. PEARCE. Ms. Wartell, you mentioned on page 17 that we 

need to bring people and families and home back into the conversation about housing finance reform. Would you kind of elaborate on 

that? In other words, when I hear that—I am not saying that everybody who took out a subprime mortgage knew that they could 

never pay a payment on it and they were being encouraged into it, 

but also they were willing participants. So when I hear that, I kind 

of hear that we need some personal accountability and responsibility. 

Is that what you intended in your comment, or did you have a 

different direction? I would like for you to expand on that just a 

bit. 

Ms. WARTELL. Sure. That was not what I intended by my comment, but I certainly agree with that. 

Mr. PEARCE. You would agree with it? 

Ms. WARTELL. I certainly agree that individuals who take out 

loans should have the ability to repay them. And I think we have 

a responsibility as individuals and as a society to ensure that lenders are making loans available to people who have the ability to 

repay them. Some of them were lured or tricked through predatory 

practices into taking on obligations they didn’t have the capacity to 

pay, and others were simply part of a crowd that—kind of a crazy 

frenzy. 

But what I had in mind by my comment was that I think there 

are serious economic consequences for American families if we 

don’t care about the stability of the housing market and the role 

that the housing market plays in creating economic opportunity 

and mobility for families. 

Mr. PEARCE. Okay. That is fair enough, as long as we take both 

sides of the equation. I mean that seems reasonable enough. 

Mr. Calabria, you mentioned on page, I think it is 3, that you 

do not think there is much—that we have experienced most of the 

risk in the financial sector; that if we start bringing accountability 

26 

in the system, there is not much downside risk. Am I reading that 

correctly? 

Mr. CALABRIA. For starters, yes, I believe we are past the point 

where you could say we are in a financial panic. And my point 

about I think it is time to consider start imposing losses on creditors. Now, the concern about, I think during the crisis the Treasury 

had, was there would be a run in these markets. And of course the 

bazooka that Secretary Paulson was given to back up Freddie and 

Fannie was to calm those markets and provide liquidity. We are 

past that point. 

We are at a point where I think we can start thinking about 

where should we allocate the losses. And in my opinion, they 

should be allocated on creditors. I do believe that creditors can bear 

those losses. As I indicated in my testimony, I think creditors 

would get at least 94, 95 cents on the dollar, which if the Chinese 

central bank is not happy with that, they can go invest somewhere 

else in my opinion. 

Mr. PEARCE. So all the instruments of risk, the MBS, CDOs, 

whatever you are talking about, you are saying that a large percent 

now resides in the U.S. Government to where there is not much 

left out there. We have bought most of the bad assets. Is that 

right? 

Mr. CALABRIA. There are still a number of bad assets. The concern is really if you start with the observation that 80 percent of 

the funding for Freddie and Fannie comes from the rest of the U.S. 

financial services system, so about a trillion of that, a little more 

than a trillion, trillion and a half of that is in the commercial banking system, so we do need to be concerned that if you impose losses 

such as were imposed on the preferred shares, what would happen 

to the banking system. 

Now, the FDIC has looked at this. And the number of banks that 

would actually fail is quite small. You have other things. The 

money market mutual fund system holds about a trillion in unsecured debt. We have to remember the priorities would be preferred 

shareholders get hit, subordinated debt would essentially get wiped 

out, and the unsecured debt would take a significant haircut. The 

MBS would largely, in my opinion, be whole. That would pose significant risk I think to the money market mutual fund. You would 

see dozens probably break the buck. 

We still at post-crisis do not have a solution, in my opinion, into 

the issue of money market mutual funds, even post-reserves primary. So I think that issue needs to be directly addressed, but I 

think we can allocate those losses. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Chairman GARRETT. Thank you. The gentleman from Massachusetts for 5 minutes. 

Mr. FRANK. Thank you, Mr. Chairman. 

I would like to ask all the witnesses if they have views on H.R. 

4889. That is the comprehensive bill for phasing out and reforming 

and then phasing out Fannie Mae and Freddie Mac. It was introduced by the gentleman from Texas, Mr. Hensarling, about a year 

ago. It has been offered on the Floor in the committee. And again, 

I had assumed that from what I had heard my Republican colleagues say, that they were ready to deal with legislation. They 

27 

had a fairly well-developed bill. It is been reintroduced this year, 

I understand, as part of the Republican Study Committee package. 

So I am wondering, the Majority having invited these witnesses, 

if they called your attention to H.R. 4889, to establish a term certain for the conservatorships of Fannie Mae and Freddie Mac, to 

provide conditions for continued operation and the wind-down, etc.; 

do any of the witnesses have views on this? 

Mr. CALABRIA. I will preface by saying I haven’t read the bill, but 

I understand— 

Mr. FRANK. You haven’t read it? 

Mr. CALABRIA. I haven’t read the bill. 

Mr. FRANK. Were you asked when the Majority invited you on 

this topic? Did they call your attention to the bill? 

Mr. CALABRIA. I was not asked. 

Mr. FRANK. Next. Did they ask you to read the bill and give your 

opinions on it? 

Mr. RANDAZZO. I have read the bill. And I read the bill when it 

was introduced last year. I think that it is a good basis for where 

we need to go in terms of comprehensive reform. I think that it is 

going to be difficult to get that specific piece of legislation passed 

through both Houses of Congress immediately, and so this hearing 

does have some value. 

Mr. FRANK. Okay. But let me ask you—I appreciate your view on 

the strategy. It sounds like you not only read the bill, but might 

even have been involved in it. You say it would be difficult. But do 

you think, would you urge us to pass this bill right now? The Majority controls the House. So would you urge that this 4889 be 

passed right now? 

Mr. RANDAZZO. I would not urge that the bill as it is currently 

written be passed. 

Mr. FRANK. Why not? 

Mr. RANDAZZO. I think that there are certain things that can be 

adjusted. I think that there needs to be a more comprehensive approach. I think that— 

Mr. FRANK. Can you tell me specifically? You obviously are familiar with this. Again, we were asked to pass it. If the Majority had 

its way, it would have been part of the financial reform law as is. 

But since they didn’t have their way, we have a chance. 

What changes would you make in this bill? You say it is a good 

general framework but not ready to be passed. What changes 

would you recommend in it? Because I like to think in legislative 

terms. 

Mr. RANDAZZO. I think the biggest thing that can be added to the 

bill, or can be an additional piece of legislation, is reform for rules 

with FHA. If we were to lower conforming loan limits by 20 percent 

over, say, 5 years— 

Mr. FRANK. I appreciate that. But that is the FHA. With regard 

to Fannie and Freddie, do you think it is ready to be passed now 

with regard to Fannie Mae and Freddie Mac? 

Mr. RANDAZZO. I think that the principal underlying issue of beginning a process of winding down Fannie Mae and Freddie Mac 

through all of the different pieces that are in there should be pursued. 

28 

Mr. FRANK. Okay. But that is not what I asked you. I appreciate 

that. Again, we were told, we were criticized for not passing this 

into law. And I just wonder why, if that was something that we 

should have done last year, the Majority wouldn’t do it now. So we 

can’t vote on—we don’t vote on general principles here, we vote on 

legislation. 

Would you recommend that with regard—you said separate stuff 

on FHA. I understand that. I hope we will get to that. We have 

some pending—in fact, Ms. Capito and Ms. Waters, they came to 

some good agreements on FHA. I hope we will pass the rest of that. 

So I agree with that. 

But with regard to Fannie Mae and Freddie Mac, do you think 

the bill as it now stands is ready to be passed? And if not, what 

changes would you recommend? 

Mr. RANDAZZO. Once again, I think that there are pieces and minutia that maybe we don’t want to spend 5 minutes to an hour 

going through and nitpicking. 

Mr. FRANK. Be my guest. I have nothing else to do this afternoon. There are no more votes. I appreciate your concern for my 

time. 

Mr. RANDAZZO. I was not a part of putting the bill together, so 

that I have a particular way that I think would be best to— 

Mr. FRANK. So you would not recommend that we pass this bill, 

as is, with regard to Fannie and Freddie? 

Mr. RANDAZZO. I would say not immediately. I think that there 

are some things that can be changed. It is a good base. 

Mr. FRANK. Thank you. Mr. Pollock? 

Mr. POLLOCK. Congressman, I did read the bill when it was introduced. I supported it then. As I said in my testimony, all of the 

points in my testimony are consistent with Congressman 

Hensarling’s bill. And when reintroduced, I will support it. 

Mr. FRANK. It has been reintroduced. Would you urge the committee then to just have a markup and vote on it fairly soon? 

Mr. POLLOCK. I think that would be a good idea. 

Mr. FRANK. Okay. Thank you. Mr. Hensarling is back in minority 

status on the panel of his invitees. It is one to two. But one out 

of three I suppose ain’t bad. 

Let me just—one other thing to say, and I do appreciate the 

point that was made about separating mortgages and affordable 

housing. And in my case, in my view what we ought to be doing 

is affordable rental housing primarily. The great mistake, I have 

consistently felt, was pushing people into homeownership when 

they weren’t ready. So I appreciate that separation. And I hope as 

we go forward, what I would hope would be we would find a way 

to get a revenue stream for affordable rental housing and separate 

that out from the decisions made on mortgages. 

So I appreciate that separation. Thank you, Mr. Chairman. 

Chairman GARRETT. And I appreciate those comments. Now for 

the rest of the story, the gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. And I certainly am 

fascinated by the ranking member’s fascination with my particular 

bill. I would wonder where the fascination was when he was committee chairman. He certainly had the ability to give a vote on the 

bill. I think I heard the gentleman say the bill has been reintroVerDate Nov 24 2008 17:46 Mar 23, 2011 Jkt 064551 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\64551.TXT TERRIE
29 

duced. As the author of the bill, I can say it has not been reintroduced. As with many pieces of legislation, it is being refined 

through the process. I do intend to reintroduce the bill. It will be 

quite similar to the one that was introduced in the last Congress. 

But at least, there will be a bill. 

I recall on September 29th, during a full committee hearing, 

where the now-ranking member, then-chairman, told us that he 

was disappointed that we were not dealing with, quote, a piece of 

legislation, but there is no point in rushing that pace. It is not 

going to be possible now, I know, until November when we come 

back, because we lost 7 days. Apparently, we are now in the process of losing 133 days. I don’t think I have seen the gentleman 

from Massachusetts introduce the bill that was committed in September. 

Mr. FRANK. Would the gentleman yield? 

Mr. HENSARLING. I would yield to the gentleman from Massachusetts. 

Mr. FRANK. The gentleman is not accurately representing me. I 

was not for passing it. I agreed with that. The gentleman said it 

needs to be refined. You know how important refinement is to me. 

I wouldn’t have wanted to pass something that was unrefined. 

Mr. HENSARLING. Reclaiming my time for one point, did the gentleman make a commitment that he was going to introduce legislation in the last Congress or have I been given an incorrect record? 

Mr. FRANK. I thank the gentleman for yielding. 

Chairman GARRETT. It is the gentleman from Texas’s time. 

Mr. FRANK. I thank the gentleman. I would ask unanimous consent that the gentleman have an additional minute since I have 

taken his time, Mr. Chairman. 

I would just say after the election, when control changed hands, 

it didn’t seem to me that there would be any chance of getting that 

done in the lame duck session. So I just want to say, no, I was not 

for passing this bill last year. I was being criticized for not being 

for passing it last year. And I am very sensitive, so I was just glad 

to have some support for my position for last year from your witnesses from this year. 

Mr. HENSARLING. Reclaiming my time, I am not sure I heard the 

answer on where the gentleman from Massachusetts’ bill is. 

Mr. FRANK. Would the gentleman yield 30 seconds? The answer 

is, I have not filed one because it is not my expectation that the 

Majority would pay any attention to it. And if I wanted to do academic exercises, I would go back to school. 

Mr. HENSARLING. Reclaiming my time, I appreciate that sentiment. I would note again, the gentleman certainly had time on his 

shift to introduce a bill before the House switched. 

Let me take time now to speak to the members of the panel. I 

think I heard Mr. Randazzo—maybe it was in your testimony, I am 

not sure. Let me ask the question this way. Do any of you believe, 

as we know what has happened to home price values, we know 

about the cratering, you can look at the Case-Schiller index, did 

Fannie and Freddie play a role in the housing bubble, in the housing price inflation? Mr. Pollock, do you agree with that? 

30 

Mr. POLLOCK. Without question, they played a significant role in 

inflating housing prices, inflating the bubble, and therefore in making the collapse worse. 

Mr. HENSARLING. Do others agree? Perhaps just a show of hands. 

At least, I see two nodding heads with Mr. Calabria and Mr. 

Randazzo. I don’t know about Ms. Wartell. 

Ms. WARTELL. Only a very small and— 

Mr. HENSARLING. Okay. All the panelists agree that Fannie and 

Freddie played some role in price inflation. So when I write out my 

mortgage check each month, I have principal, I have interest. In 

the studies that I have seen, the GSEs may have helped on the interest side anywhere from 7 basis points to 30 basis points. Now, 

granted, I think the 7 basis points is a several-year-old study from 

the Federal Reserve. I have seen a number of academic studies. I 

don’t know, maybe the median is 15 basis points, 20, I don’t know. 

So they helped me on the one hand by, say, a median of 15 basis 

points; but on the other hand, is my principal perhaps not higher 

because of the artificial demand? Meaning at the end of the day, 

as a consumer, was I really better off? Can we make the case? Can 

we make the case that I was better off? We know the taxpayer 

wasn’t better off. So Mr. Calabria, do you have a comment? 

Mr. CALABRIA. To start with, the outcome of any price is clearly 

the interaction of supply and demand. And what you are referring 

to are the demand factors. So my answer would be it really depends on the housing market. I think in housing markets with relatively tight supply, places like California, you ended up running 

up the house price. The seller was better off in those instances. 

Mr. HENSARLING. So the consumer, maybe he benefited, maybe 

he didn’t benefit. We know the taxpayer did not benefit. We have 

heard some discussion of the fact, or some have made the assertion 

that there would no longer be a 30-year fixed-rate mortgage in 

America without Fannie and Freddie. Yet were there not 30-year 

fixed-rate mortgages in subprime? Were there not 30-year fixedrate mortgages in jumbo? You gentlemen and lady have researched 

the market. Am I correct in that assertion? 

Mr. POLLOCK. You are correct, there were 30-year, fixed-rate 

mortgages without Fannie and Freddie in the parts of the market 

where they don’t exist. 

Mr. HENSARLING. So they have existed in America in parts of the 

market where Fannie and Freddie didn’t exist. Isn’t it also true, 

perhaps not common, but in OECD nations in Europe you can also 

find 30-year fixed? At least I think in Sweden and Denmark? I 

have tripped across a few other countries. Is it also true you can 

find examples of 30-year fixed overseas? 

Mr. POLLOCK. You certainly find it in Denmark. 

Ms. WARTELL. I think Denmark. 

Mr. HENSARLING. I see my time has expired. I thank the chairman. 

Chairman GARRETT. I thank the gentleman from Texas. The gentleman from California for 5 minutes. 

Mr. SHERMAN. Just responding to the gentleman from Texas, I 

think 3 to 30 basis points is absurd. The fact is that if you try to 

get a loan today that barely qualifies, and then you say, what is 

a loan going to cost that Fannie and Freddie won’t touch because 

31 

it is a little over that amount, the difference is hundreds of basis 

points, if it is available at all. 

The fact is that we would see a collapse in home prices if it 

wasn’t for Fannie and Freddie. And that means a collapse of our 

economy. We already had one mortgage/home value collapse of our 

economy. I am not looking for a second. And to say that in 2012, 

non-GSE financing is going to be just as available as it was in 2002 

assumes that all the lenders have been asleep with Rip Van Winkle 

over the last decade. The fact is almost nobody is willing to lend 

money to middle-class home buyers except if it qualifies for Fannie, 

Freddie, or FHA. 

The banks are not lending now because the future of mortgage 

financing is uncertain. Home buyers need a reliable flow of mortgage financing. GSE reform is needed. But eliminating all Federal 

involvement would harm this economic recovery, put the housing 

market at risk, and put the economy at risk. 

Today, private capital is nonexistent outside the GSE mortgage 

financing limits. And to assume that it will suddenly become available if we eliminate the GSEs because everybody will go back and 

do what they did in 2005 assumes a level of amnesia among investors that I don’t see. 

What we don’t need is a precipitous decline in housing prices. 

That is how we got the first dip. That would give us a second, or 

double-dip recession, if not a depression. And it is particularly important in regions like mine, where middle-class homes go for 

$600,000 to $800,000. Certainly, all the upper middle-class homes 

do. And without GSE financing, you would see not only a collapse 

of home values, but a collapse of the local economy. 

Ms. Wartell, under Dodd-Frank, when defining a qualified residential mortgage which is exempt from the Act’s risk retention requirements, regulators must take into account consideration, underwriting criteria that historically indicates a lower profile of risk 

and default such as mortgage insurance. To the extent that such 

insurance reduces the risk of default, the data seems clear that 

loans with PMI have lower default rates. 

Do you agree that mortgages should not have to meet the risk 

retention requirements in Dodd-Frank as long as they meet other 

underwriting criteria and PMI is also part of the loan? 

Ms. WARTELL. Congressman, I want to be careful not to speak to 

the precise regulatory question today. And if I could send you written comments on this, because I don’t have all the details in front 

of me. But I would agree with your general proposition that there 

are many ways to ensure that the borrower has adequate equity to 

protect the investors. And PMI is certainly one of the ways to do 

that. 

Mr. SHERMAN. Okay. We have Bill Gross, the co-founder of 

Pimco, saying that without a government guarantee, if he was 

going to invest in mortgages, he would demand a 30 percent downpayment. There are proposals to go for a 20 percent downpayment. 

Wouldn’t such a requirement push more business to FHA, further 

constraining that agency’s resources? And wouldn’t it have a dramatic impact on the ability of the average family to buy a home 

in many regions of the country? 

32 

Ms. WARTELL. Yes. I completely agree with you. And to your 

FHA point, I think it is important to understand that in the case 

of the GSEs when they were functioning, or some future system, 

it is possible to put private capital at risk ahead of the taxpayer. 

In FHA, we do not have that. So when you shift market to FHA 

by imposing high downpayment requirements like that, you actually are having the taxpayer stand at a much more extensive risk 

position than they would otherwise. 

Mr. SHERMAN. So it is worse for home buyers, worse for home 

sellers, worse for communities, and worse for the taxpayer. 

Ms. WARTELL. And unnecessary for us to take risks that the private sector could take on their own. 

Mr. SHERMAN. I yield back. 

Chairman GARRETT. All right. Thank you. The gentleman from 

California, Mr. Royce. 

Mr. ROYCE. Thank you. I think one of the vexing things for us 

is that the Federal Reserve has come to us in the past with concerns about the model that we have set up, especially since 1992, 

the GSE Act that passed the Congress here. Under that model, 

they were able to dive into the junk mortgage market, and they 

purchased over $1 trillion worth. They wracked up leverage of 100 

to 1. Part of the concern here is that once you establish a GSE, you 

have established a huge quasi-governmental monopoly that comes 

in and lobbies the Members. 

So the Fed came to us, they asked us to take some action in the 

Congress. I offered an amendment, endorsed by the Fed, that 

would authorize the regulator to rein in Fannie and Freddie on 

these mortgage portfolios based on the systemic risk that they 

posed. That was opposed by Fannie and Freddie, and of course it 

was defeated, as was Jim Leach’s amendment. 

Jim Leach, the former chairman of this committee, offered an 

amendment to strengthen the minimum capital requirements for 

Fannie and Freddie. And Ron Paul offered an amendment to eliminate the ability of Fannie and Freddie to borrow from the Treasury. Any one of these the Fed recognized would have helped the 

situation. 

But once we create these entities, they come in, they lobby 

against those kinds of reforms. And indeed, the only reform we 

ever passed out of the House is one that was opposed by the Treasury and the Fed. Why? Because it made the situation worse. It tied 

the hands of the regulators even more. 

So here is the problem. We now have the president of the Richmond Federal Reserve—and Mr. Calabria, I will ask you about 

this—he comes to us and he says, ‘‘We should phase out government guarantees for home mortgage debt.’’ Clearly, he doesn’t 

mean tomorrow. He means phasing it out over a long period of time 

in order to make sure that we bring private capital back into the 

market. And he says otherwise, financial stability will be elusive, 

and fiscal balance will be threatened by repeated boom-bust cycles 

in housing. 

I was going to ask you, do you think government guarantees on 

mortgages exacerbate or mitigate the boom-bust cycle that we have 

experienced in the market? 

33 

Mr. CALABRIA. I would 100 percent agree with the remarks of 

President Lacker. I think that our current system of mortgage finance is procyclical rather than countercyclical. And I think the 

point that you make, and I say this from having spent 7 years 

working on staff in the other body, I think any system we set up 

will erode over time. The reality is there will be another housing 

boom at some point in the future. We will all again think that 

housing is the best thing since sliced bread, and we will want to 

get everybody in, and we will push underwriting standards again 

down. It has happened time and time again. So I would 100 percent agree with that. 

While you could design a system today that, if it just stayed that 

way, might reduce the risk, I have very little confidence that it 

would stay that way over time. 

Mr. ROYCE. Let me ask you another question. In your testimony, 

you call for shifting the FHFA from conservator to receiver for the 

GSEs. Right? 

Mr. CALABRIA. Yes. 

Mr. ROYCE. And I think among the points that you make, your 

argument is that it could be an instrumental step in combating the 

perception that other entities out there are ‘‘too-big-to-fail.’’ I know 

some think we have solved the ‘‘too-big-to-fail’’ problem with the 

legislation passed last year, but a lot of economists think otherwise. 

And I would ask you to expand on that point and maybe explain 

to us how that transition process might occur, how you would envision us getting from point A to point B. 

Mr. CALABRIA. Sure. Let me start with a broader point about 

‘‘too-big-to-fail.’’ We have to recall that essentially every financial 

institution, whether it is Fannie Mae or Citibank, is primarily 

funded with debt. Ninety percent-plus of their funding is debt. And 

so it is all good and well to fire management and wipe out shareholders, but you will not have sufficient market discipline in that 

absence. 

So to me, to end ‘‘too-big-to-fail,’’ again whether it is Citi or 

whether it is Fannie, you have to set up a process where creditors 

take haircuts. And I think because we have not done that, and because in the last crisis under this Administration and the last Administration, the proposal was always to protect creditors, I think 

that has been a mistake. 

While you can argue maybe in a panic, I think going forward 

post-panic creditors need to take losses. And why? That is because 

as companies begin to take risk, whether it is incompetent management, whether it is a business strategy, those who provide funding 

will raise the cost of that funding and constrain them. I was always 

puzzled, working on GSE issues, that the more debt Fannie and 

Freddie issued, the lower their funding costs were. It is certainly 

contrary to— 

Mr. ROYCE. The bigger the share of the market they would 

take— 

Mr. CALABRIA. Exactly. 

Mr. ROYCE. And I would argue—during the conference, I actually 

had an amendment to sort of guarantee a larger haircut. That was 

defeated in the markup in the conference committee. I think we 

need to revisit that issue on the ‘‘too-big-to-fail’’ front. 

34 

Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. I thank the gentleman from California. The 

gentleman from North Carolina, Mr. Miller, please, for 5 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

There is no doubt that we would not have much of a mortgage market now without Fannie and Freddie. They are buying, the vast, 

vast majority, well more than 90 percent of mortgages. Five years 

ago, they certainly were not in a duopoly position. In fact, they 

were rapidly losing market share. 

What the three of you seem to imply is that the reason their 

market share is now so enormous is that they are crowding out the 

private securitization market somehow. I have talked to mortgage 

investors, and they don’t say that at all. The pension funds, the insurance companies that bought the private-label mortgage-backed 

securities 5 years ago, say there is no way they are going to buy 

that stuff again unless there is a serious reform of the private 

securitization market. They are not going to buy mortgages based 

on a AAA rating from a rating agency. Unless there is the kind of 

disclosure that an investor in a new stock issue gets, so they can 

actually do due diligence themselves and figure out what they are 

buying, they are not touching that stuff again. 

Do any of you have any basis, any evidence for the idea that the 

private-label securitization market is going to come back without 

reforms if we simply hobble Freddie and Fannie, limit what they 

can do, but don’t reform the private-label securitization market? 

Mr. CALABRIA. If I could touch on this, and this might be where 

I differ from some of my colleagues, while I would like to see the 

private securitization market come back, I don’t think that should 

be the ultimate objective. The vast majority of mortgage lending in 

this country can be funded by a portfolio of various financial services institutions, whether it is banks or insurance companies. And 

it is important to keep in mind, as I mentioned earlier, 80 percent 

of the funding for Freddie and Fannie—so when people ask me, if 

Freddie and Fannie aren’t going to fund it, who is? The parties 

that fund Freddie and Fannie. If the banking system can hold a 

trillion and a half in Freddie and Fannie securities, then the banking system can certainly hold a trillion and a half in mortgages. 

So it is just moving it around from different institutions. Are 

there problems with those other institutions? Absolutely. And we 

should address those problems. But I don’t think our objective 

should simply be let’s bring back the private securitization. I think 

it should be how do we set up a system that has substantially more 

capital? And it is important to remember the very existence of 

Freddie and Fannie is to a large degree a capital arbitrage, it is 

a massive subsidy for lenders. 

Mr. MILLER OF NORTH CAROLINA. My understanding is about 

half of all lending 5 years ago was the securitization market. And 

you are saying if we simply let that go away, it would be replaced 

by portfolio mortgages. 

Mr. CALABRIA. First, we need to remember that in 2005, 2006, 

40 percent of private-label mortgage-backed securities were bought 

by Freddie and Fannie. So if you add what they bought, what they 

originated, they maintained a majority of the market share, which 

was still very close to—they dominate what they can do. And if you 

35 

look at it today in terms of how much the housing stock is next to 

the jumbo market, they dominate what they can do. 

Mr. MILLER OF NORTH CAROLINA. That strikes me as a remarkable leap of faith upon which the entire economy depends. 

Mr. CALABRIA. I would be happy to sit down with you at any 

time. 

Mr. MILLER OF NORTH CAROLINA. Ms. Wartell? 

Ms. WARTELL. I would agree with you. I think that the capacity 

of our financial institutions, which right now with the new capital 

standards are already severely undercapitalized, to provide the 

kind of ongoing support for the housing market in the near term 

is an enormous leap of faith. 

I would also note that the durations that those—the big thing 

that the secondary market provided, by creating a market that was 

liquid, was it allowed longer term obligations to be made available 

into the capital markets. If you don’t have that mechanism, banks 

will not make long-term mortgages available, and we will have 

driven the entire housing market to an adjustable rate regime in 

which you will see people’s economic costs of living varying with interest rates. And that, in and of itself, will limit the ability of central bankers to be able to adjust interest rates as they need to for 

monetary policy purposes. 

Mr. MILLER OF NORTH CAROLINA. Let me move on to another 

topic. I am sorry. You certainly can supplement your answers. You 

are more than welcome to do that. 

I have raised many questions before about the conflicts of interest of having the servicers be affiliated with the securitizers. And 

I have talked to investors who say that the barriers they now face 

in pursuing their legal claims against the securitizers is like doing 

business in Russia and trying to bring a lawsuit against an oligarch. And they will not play unless that is reformed as well. 

I have talked to the small banks and the credit unions, and they 

say one of the reasons they did business with Freddie and Fannie, 

and not Wall Street, is they knew that their mortgages would end 

up being serviced by a big bank, and the big bank would try to use 

that relationship to steal their customers. 

When the servicers sat there a month or two ago, I asked them 

why on Earth, what is the reason for having a servicer be affiliated 

with a securitizer? And they said, ‘‘cross-marketing.’’ Which seems 

to support the concerns about the small banks. What possible reason should servicers—should they not be separate entities not affiliated with a bank? Is there a reason that has not occurred to me? 

Because I have been thinking a lot about it and been drawing a 

blank. 

Chairman GARRETT. I think what we will on that is do just what 

you said, to ask them to provide that answer in more detail not 

only to Mr. Miller, but to all of us as well. It would be interesting 

to see the answer to that. 

With that, I yield to the gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Again, thank you 

for having this hearing. One of the things I think we need to point 

out is that, prior to securitization, as Mr. Calabria said, is there 

were people who bought mortgages that didn’t go through Freddie 

and Fannie. In fact, I originated and actually was in the banking 

36 

business for a while, and we sold those loans to other financial institutions, the insurance companies. 

But securitization does provide a certain amount of liquidity opportunity for investors to hold those mortgages and some other 

ability to manage interest rate risk. And so, certainly, we don’t 

want to do away with securitization. 

Back to what I think Mr. Pollock has said and maybe Mr. 

Randazzo has said and the other panelists, probably where the big 

mistake is here is we have had the government setting the risk 

premium. And the government doesn’t have a very good record on 

setting the risk premium. All you have to do is look at our National 

Flood Insurance Program and realize we haven’t been charging the 

appropriate amount of money for the risk that the government is 

taking. 

And so there is really not much space for private market right 

now because the risk premium is so low that getting these loans 

sanitized by Freddie and Fannie makes more sense than doing it 

outside. 

So, isn’t it a way to make some space for private securitization 

or for private investment—I don’t want to get—is to lower these 

conforming loan limits and, at the same time, increase the risk premium that Freddie and Fannie are charging for buying those loans 

and securitizing them? 

At some point in time, the private market is going to say, I am 

not willing to give up 50, 75, 100 basis points, whatever that is; 

I would rather have that yield than go through that. If I knew that 

those loans were being underwritten in a fashion that gave me 

some sense that these are good-quality residential loans, good old 

underwritten residential loans is a good investment. 

Is there consensus that that has to be some of the initial steps 

if you are going to bring the private market in, is you have to take 

away the competitive advantage of Freddie and Fannie? 

Mr. Calabria? 

Mr. CALABRIA. I would say, absolutely. And, as I mentioned in 

my testimony, I do think you need to institute a fee to try to recoup 

some of the money we have put in. Obviously, one benefit of that 

is you recoup some taxpayer money. The other benefit is you reduce the competitive advantage that Freddie and Fannie have. 

I would also emphasize—and I know Alex has made this point— 

we really do need to change the incentives facing the banking industry. If you hold a Fannie Mae security, it is only a 20 percent 

risk rating, where if you are holding a whole loan, it is 50 percent. 

So, to some extent, the existence of Freddie and Fannie has reduced the capital behind mortgages by about 60 percent of the system. 

I don’t think a public policy objective should be how do we get 

less capital into the system behind mortgages. So making that a 

little more equal and treating Freddie and Fannie securities as if 

they were any other corporate securities, I think, would shift the 

incentives of banks. 

Mr. NEUGEBAUER. Mr. Pollock? 

Mr. POLLOCK. I think you make a very good point, Congressman. 

We might ask, looking back historically, why did a private 

securitization market for middle-class prime loans not develop? It 

37 

is a natural market. It doesn’t need a government guarantee. The 

reason it didn’t was because nobody could compete with subsidized 

providers, namely Fannie and Freddie, who effectively enjoyed tens 

of billions of dollars of taxpayer subsidy. 

And so, one way I have thought about the question of how could 

you make that move with guarantee fees is to consider that Fannie 

and Freddie, historically, had much lower capital than other people. Now they have no capital at all, literally zero, counting the 

government’s capital, and their own capital is very negative. 

So one might do a calculation and say, if Fannie and Freddie had 

to have the same capital as everybody else for a risk and they had 

to have a reasonable return on that capital, what would their price 

have to be? 

You remember, with the Federal Reserve some years ago, the 

Congress put in what they called the ‘‘private-sector adjustment 

factor’’ for the Fed (the Fed is kind of a GSE) in order to take away 

the Fed’s pricing advantage. You might think about that same kind 

of calculation for Fannie and Freddie. 

Mr. NEUGEBAUER. Kind of risk-based pricing basically is what 

you are saying? 

Mr. POLLOCK. Yes. 

Mr. NEUGEBAUER. And I think I agree totally, is that whatever 

we do over at Freddie and Fannie, we can’t make FHA the new 

subprime lender. And so we are going to have to go over there and 

determine what the lending limits and the credit underwriting 

standards are going to be over there, as well. Otherwise, we just 

move that market. 

Mr. Randazzo? 

Mr. RANDAZZO. The one thing I would add to what my colleagues 

have said is I think the approach that you mentioned, with a few 

other steps, addresses the concerns on the other side of the aisle 

that this is not jumping into privatization. You are not ending 

Fannie Mae and Freddie Mac tomorrow. You are incrementally 

dropping the conforming loan levels, and you are raising your G 

fees to let private capital begin to step in slowly over time. 

It is not this leap of faith and just trusting that capital is going 

to be there from the private sector. It is, we are going to take these 

short-term steps, and, along the way, the private sector can adjust, 

can look at the new rules of the game, and we can begin to back 

the government out slowly. 

Mr. NEUGEBAUER. Thank you. 

Thank you, Mr. Chairman. 

Chairman GARRETT. I thank you. 

And now, my good friend from New York, Mrs. Maloney. 

Mrs. MALONEY. Thank you. And I yield 30 seconds to the ranking 

member. 

Mr. FRANK. I thank the gentlewoman. 

I want to make it very clear, I did not think that we were ready 

to pass the bill last year, including the one, 4889, the Republicans 

offered. I thought it needed more time. My Republican colleagues 

said, ‘‘No, it is taking too long to get to it. We are ready. Here is 

the bill.’’ 

I mentioned earlier that it had been introduced this year and I 

was surprised that the witnesses weren’t asked to talk about it. 

38 

The gentleman from Texas said it hadn’t been introduced, but I 

was not hallucinating. It was introduced. It was introduced as part 

of a package, the Spending Reduction Act of 2011, introduced by 

the prime sponsor, Mr. Jordan. The chairman of the subcommittee 

was a cosponsor. 

So 4889, the late, lamented 4899, which was so popular last year 

but has withered on the vine of popularity, was, in fact, introduced. 

And I only stress that to say, yes, I did think it was more complicated and needed more time. It was my Republican colleagues 

who were very critical of that, said, ‘‘No, let’s move now; we can’t 

wait.’’ And I am, therefore, surprised at this change of heart and 

their lack of enthusiasm for the bill they were ready to have enacted last year. 

I thank the gentlewoman. 

Chairman GARRETT. Mrs. Maloney? 

Mrs. MALONEY. Reclaiming my time, we have been discussing 

how to restructure, what to do in the future. But irrespective of 

any future policy, how should we address the literally trillions of 

dollars of existing debt from the GSEs that are in the mortgagebacked securities and in corporate bonds that were purchased with 

the expectation that there was an implicit government guarantee? 

Much of this debt is now in pension funds, it is in 401(k)s, it is 

in assets that benefit the overall American public. And I have read 

in some press reports that many central banks across the world are 

also holding large packages of these mortgage-backed securities. 

So my question, really, to Ms. Wartell and then to Mr. Pollock 

and just down the line is, how do we address what is there now? 

And are these bonds government-guaranteed, at this point? It is always an implicit guarantee? Are they guaranteed or not? 

Many of my constituents are holding them in their 401(k)s, and 

they are very anxious to find out what the future holds for them. 

Ms. Wartell? 

Ms. WARTELL. I understand that the Treasury Department has 

been very careful not to say that they are a full-faith-and-credit obligation of the United States Treasury. That said, I believe it has 

been the policy of this Administration and the former to treat them 

as if they were—that the outstanding debt—many of us talk about 

that, in a system in the future when we have a new design, most 

of us would agree that the debt of any future institutions should 

not be guaranteed, that any liquidity backstop ought to be on the 

MBS. 

But for the outstanding obligations, much like our discussion 

about the debt ceiling in this country, it seems to us very important that we give investors here at home and around the world confidence that the United States stands behind those obligations. 

Mrs. MALONEY. Mr. Pollock? 

Mr. POLLOCK. Congresswoman, the question you raised focuses 

on an essential point. Bond salesmen all over the world, when they 

sold Fannie and Freddie unsecured debt and Fannie and Freddie 

mortgage-backed securities, said to the investors something along 

these lines: ‘‘You have nothing to worry about. This is a government debt. But it has a higher yield, it has more spread, as we say. 

But it is a government credit. Don’t worry.’’ 

39 

Legally, as a technicality, that wasn’t true, but, in fact, the bond 

salesmen were absolutely right. It always was really guaranteed, 

and it is guaranteed. Many of us could agree in a theoretical world 

it shouldn’t be. But I think we are stuck with that on the existing 

debt. 

In my view, that existing debt should, on the restructuring of 

Fannie and Freddie, go into a liquidating trust, in a very similar 

way as to what was done with the privatization of Sallie Mae, and 

that debt be honored by the U.S. Government as it runs off. 

Mrs. MALONEY. Mr. Randazzo? 

Mr. RANDAZZO. This is where I disagree with one of my colleagues, is technically, legally, this debt was not guaranteed by the 

U.S. Government. And just as there has been a lot of discussion in 

this Chamber and previous Congresses about the importance for institutions that take on too much risk to be able to fail, I believe 

that investors should also be able to fail. 

They knew, or they should have known, that, by law, they were 

not explicitly guaranteed by the U.S. Government. And we should 

not extend this explicit guarantee to honor what was an implicit 

guarantee. It would be bad for the taxpayers. 

Mrs. MALONEY. Mr. Calabria? 

Mr. CALABRIA. I would also add, I think an important part is, not 

only by statute—and this was not changed in HERA—that not only 

is it not guaranteed, it is explicitly rejected. The Federal law says, 

you will not be paid. 

And so, any commitments that Treasury Secretaries, previous or 

current, or that bond managers or that GSE CEOs made, they had 

no authority to. And they were making those commitments in contradiction of statute. 

And so, to me, a very important principle we should always carry 

with us is the rule of law. It is not what a Treasury Secretary says; 

it is what the statute says that should be important and that 

should govern here. 

Mrs. MALONEY. Thank you. 

My time has expired. 

Chairman GARRETT. Thank you. 

I yield now to the vice chair of the subcommittee, the gentleman 

from Arizona. 

Mr. SCHWEIKERT. Mr. Chairman, fellow Members, and witnesses, 

first off, in my opening remarks, I hope I didn’t cause a little bit 

of fussing when I complained that the Administration hadn’t met 

its obligation. Being a freshman Member, I have actually really, 

really been killing myself to read everything I get my hands on, 

Mr. Chairman. And, with that, I was trying to be fair-minded and 

read stuff that was coming from all directions. And, apparently, I 

annoyed the ranking member with my fairness. 

Mr. Pollock, I absolutely love this. Having now read binder after 

binder after binder, yours is one of the best white papers I have 

read so far. But one of your premises in there is that Fannie Mae 

and Freddie Mac distort the true price of risk. Am I fair in that 

assumption or in that interpretation or of what am I reading out 

of that? 

Mr. POLLOCK. That is exactly right. It is what we say, and I 

think it is quite indubitably the case. 

40 

Mr. Chairman, may I request that the white paper that the Congressman refers to be entered in the record, if that is all right? 

Chairman GARRETT. Does the vice chair wish to— 

Mr. SCHWEIKERT. Mr. Chairman, I would actually be elated. 

There are some terrific items in there. 

Chairman GARRETT. Without objection, it will be entered into the 

record. 

Mr. POLLOCK. Thank you. 

So when you push credit at an asset, at a market, the credit flow 

gets capitalized into the prices in that market. And when you separate the risk of the providers of the funds by telling them they are 

guaranteed by the government so they don’t suffer the results of 

their putting a large flow of money into a real estate market and 

driving up the prices, I think the only fair way to describe that is 

as a distortion of prices. The result will always be unhappy. 

Mr. SCHWEIKERT. Mr. Chairman, I know I have very limited 

time, and I have a handful of questions, so can I bounce on to the 

next one? This one is for all the witnesses. 

In also reading your white paper, the belief that if we were to 

move to a much more true either private market or some sort of 

bifurcated, that we would also have to reach out and touch FHA 

and Ginnie Mae and those, so we didn’t create a push from one 

side of the bubble to the other. 

Mr. Chairman, witnesses, is there an agreement that if we are 

going to approach a GSE government-insured market that we have 

to do something holistic? 

Mr. POLLOCK. I think we all agree on that. 

Mr. RANDAZZO. I do. 

Mr. CALABRIA. I agree, absolutely, with that. And I think we 

should keep in mind that a lot of that already is happening. FHA 

is about half of new homebuyers now. So it is already a considerable push of risk on to FHA as it is. But we need to avoid that further erosion of credit quality on FHA. 

Mr. RANDAZZO. It would be very irresponsible to just look at 

Fannie and Freddie and not address all the components that impact housing in the United States. 

Ms. WARTELL. I would agree that we need to—one of the reasons 

I would argue against a fully private market is because, in fact, it 

will push and create enormous pressure for us to keep FHA taking 

on risks that I think otherwise the private sector could be bearing 

if the government were standing behind with a limited liquidity 

backstop. So we are taking on more risk than we need to. 

Mr. SCHWEIKERT. Mr. Chairman, you actually hit an issue. I am 

concerned that if we are going to do something, we need to be looking at everything together. 

Mr. Chairman, witnesses, do I have a prediction on the total loss 

in Fannie and Freddie? When we look back a decade from now, 

how much taxpayer money will have bled? 

Mr. POLLOCK. It is very hard to know, even if you are inside and poring over the numbers. But informed estimates range from $180 

billion to $300 billion or $400 billion. It is highly uncertain, of 

course. 

Ms. WARTELL. I agree with that; like he said, it is highly uncertain. But the one thing I would say is that our actions now can 

41 

very much affect the size of that obligation, both in how quickly we 

liquidate their portfolios—if we sell at fire sale prices, that actually 

potentially increases the amount of the losses. 

And, similarly, the GSEs have an obligation to repay the taxpayers, in effect, in the form of these dividend payments. And if 

we, sort of, withdraw them from the market too quickly, their ability to continue to make those payments might be mitigated. 

Mr. SCHWEIKERT. Okay. Mr. Chairman—and it is, Ms. Wartell? 

Ms. WARTELL. Yes. 

Mr. SCHWEIKERT. Forgive me. To that point, if I am holding huge 

amounts of nonperforming paper and I am waiting for the market 

to come up to sell it, don’t I perpetuate a 5-year real estate depression to last a decade? Because when do you hit bottom? If prices 

move, and the expectation—and there is always an expectation of 

this huge overhang. And, Mr. Chairman and Ms. Wartell, maybe 

it is because I come from the Phoenix area, where there are 50,000 

foreclosures in process, and a year ago, there were 50,000 foreclosures in process, and the year before, 50,000, there is no change 

in expectation. 

I almost wish we would take our lumps, process through those. 

We may come down substantially more, but at least we start to 

build a base back up. 

Give me your comment. 

Ms. WARTELL. My comment is, I guess, the question of, who gets 

the benefit of the upside and having taken the losses on the taxpayers? If we sell them at fire sale prices, then private investors 

will get the market when it comes up, and we will end up having 

larger obligations. It seems to me that the taxpayers ought to be 

able to make a sensible, staggered sale. 

And the other thing I would say is, not all those assets they hold 

are nonperforming. In fact, the majority of them are performing assets. 

Mr. SCHWEIKERT. Mr. Chairman, Ms. Wartell, I was only speaking to the nonperforming portion of the portfolio. And being at foreclosure central, I don’t know how you get the chicken and the egg. 

We are going to wait until it gets better to sell, but it never gets 

better to sell because I always have an anticipation of all these 

foreclosures that are in process that never go to the actual sale. 

Chairman GARRETT. And, with that— 

Mr. SCHWEIKERT. Sorry, Mr. Chairman. Does that mean I am beyond my time? 

Chairman GARRETT. Just a smidge. 

Mr. SCHWEIKERT. Thank you. 

Chairman GARRETT. And I thank the gentleman. 

The gentleman from Colorado. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

Mr. Pollock, you and I have had a chance to talk about this subject on a couple of occasions. And so my first question to you is, 

when was Fannie Mae created? 

Mr. POLLOCK. Fannie Mae was created in 1938. 

Mr. PERLMUTTER. Okay. When was Freddie Mac created? 

Mr. POLLOCK. By the Emergency Housing Finance Act of 1970. 

Mr. PERLMUTTER. Okay. And just so we understand that we are 

all talking the same language, we are not talking about Federal 

42 

Home Loan Banks? Are any of you? When we talk GSEs, you are 

not talking about the Federal Home Loan Banks, are you? 

Are you, Mr. Pollock? 

Mr. POLLOCK. Congressman, I understood the hearing to be 

about Fannie Mae and Freddie Mac. 

Mr. PERLMUTTER. Okay. But it also says ‘‘GSEs,’’ and the Federal 

Home Loan Banks are GSEs, are they not? 

Mr. POLLOCK. That is true, Congressman. 

Mr. PERLMUTTER. Okay. What about—we are not talking Ginnie 

Mae here? 

Mr. POLLOCK. Ginnie Mae is not a GSE. It is a wholly owned 

government corporation whose credit is the full faith and credit of 

the United States. 

Mr. PERLMUTTER. Okay. But your premise is that Fannie Mae 

more or less has been treated as something that is backed by the 

full faith and credit—rightly or wrongly, it has been promoted as 

being backed by the full faith and credit of the United States, 

right? 

Mr. POLLOCK. That is correct. I don’t think there is any doubt 

that is the way the markets looked at them. 

Mr. PERLMUTTER. Okay. So here is my question. Initially, was 

Fannie Mae simply government owned and then it became partially 

privatized? 

Mr. POLLOCK. That is correct, Congressman. Fannie Mae originally was a 100-percent government-owned corporation. It was actually owned by the Reconstruction Finance Corporation when it 

was first set up. It had an extremely limited function; it was to buy 

FHA loans. That is all it was allowed to do for a portfolio. 

Mr. PERLMUTTER. Right. 

Mr. POLLOCK. Probably the original sin was the 1968 restructuring, which most people think was done in order to get Fannie 

Mae off the Federal budget because President Johnson was running outsize deficits at that point and he wanted Fannie’s debt off 

the budget. That unleashed the much wider activity of GSEs, and 

we are now living with the results. 

Mr. PERLMUTTER. Okay. And so, I guess the thing that concerns 

me is that from—and I am to not going to be their defender, but 

I want to understand really what is going on here. You all have 

given us several proposals. We can do an FDIC kind of a proposal 

and have a guarantee fund if everything fails. We can have a 

Ginnie Mae, Fannie Mae kind of proposal, which is you just go out 

and buy these mortgages, and you provide liquidity in that fashion. 

Or you can do nothing at all. I think there are sort of three—there 

is a guarantee, there is the buy, there is just let the market handle 

it. 

Given the history, what I see—and, I have my apple, and I 

have—it really was a crash of the housing market starting in really, oh, the end of 2007, beginning of 2008. It is about as big a picture of a crash as you could have. 

Prior to that, was the full faith and credit of the country being 

called upon in Fannie Mae or Freddie Mac? Had it ever occurred 

before? 

Mr. POLLOCK. Congressman, the answer to that is ‘‘yes.’’ In fact, 

Fannie Mae was in serious trouble in the early 1980s, 1981–1982, 

43 

just as the savings and loans of the day were. They were losing 

tens of millions of dollars. But they were always able to keep borrowing because their debt was viewed by the market as government debt. 

Mr. GARY MILLER OF CALIFORNIA. Would the gentleman yield on 

that question? 

Mr. POLLOCK. Sure. 

Mr. GARY MILLER OF CALIFORNIA. The first time they lost money 

was 1985. 

Mr. PERLMUTTER. Okay. In 1985 though 1990, the model that 

was used as a guarantee model, the Federal Savings and Loan Insurance Corporation—which is one of the proposals here, something like that—failed, and the government had to pick it up 

through the RTC. 

So, I harken back to Mr. Oxley and the effort of the Republican 

Congress in 2005 to put some limits on Fannie Mae and Freddie 

Mac. And, I have said to you his quote. He was upset because the 

House passed it, and the Senate wouldn’t. He said, ‘‘All the handwringing and bed-wetting is going on without remembering how 

the House stepped up on this. What did we get from the White 

House? We got a one-finger salute.’’ 

Okay? The White House, under the Bush Administration, opposed any limitations on Fannie Mae and Freddie Mac because it 

is my opinion, whether it was because of the government-backed 

guarantee being promoted or that real estate only goes up in the 

United States, we were repatriating a lot of money that had gone 

overseas. 

And so, Mr. Calabria, or Doctor, you said that China was one of 

the owners of this debt. So in a perfect world those creditors should 

just get hammered. Why did Mr. Paulson not want to take that 

step? 

Mr. CALABRIA. I think, to some extent, Secretaries Paulson and 

Geithner were both concerned about, if you impose haircuts on foreign holdings of GSE debt, then there would be questions about 

how that would bleed over to the response by Treasuries, so that 

you might see an increase in Treasury costs. 

Now, I don’t think that was ever explicitly made, but that is an 

important part of it. So I do think it is looked it as the credibility 

of the American public. 

Mr. PERLMUTTER. Thank you. 

Chairman GARRETT. I thank the gentleman. 

I now turn to the gentleman from Virginia, Mr. Hurt, for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

This is for Mr. Pollock. I was wondering, going back to, kind of, 

the history of Fannie Mae and Freddie Mac, if you look back at the 

time that it was established and formed, how come, since that 

time, we haven’t seen a private market for these mortgages develop 

over that time? 

And it sounds like from the question that was just asked that, 

from its founding in 1938 to 1968, that, really, it had a very narrow 

mission. Why didn’t the private sector step in during that period? 

And how does that inform us as we go forward? 

44 

Mr. POLLOCK. Congressman, that is a very good question. And 

the answer is, of course, the private sector was acting in the market all during that period. 

If I could put in a historical footnote, as I think one of the other 

Congressmen said, there always was a secondary mortgage loan 

market. Going back to the 1920s, there was a channel of mortgage 

bankers who placed loans with insurance companies, for example. 

So that is a classic idea. 

But as the GSEs developed in their post-1968 form, which was 

really the invention of the GSE form, wherever they could operate 

they dominated the market, because no one could compete with 

their government advantages and subsidies. 

So, as I said a little bit ago, the market where it would be most 

likely to have a private securitization market in addition to a private portfolio lending market didn’t develop. It didn’t develop because it was dominated by the subsidies given to Fannie and 

Freddie. Of course, the subsidies include the government guarantee—real, though not formal. 

Mr. HURT. Thank you. 

I yield back my time. 

Chairman GARRETT. Mr. Green? 

Mr. GREEN. Thank you, Mr. Chairman. 

Just as a follow-up to the questions that were asked about the 

private loan market in the 1920s, is it true that market had balloons? And is it true that market had interest-only loans? Is it true 

that market was very much akin to what we just went through, 

with what we are calling ‘‘exotic products’’ now? 

Is that true, Ms. Wartell? 

Ms. WARTELL. Yes, Congressman, that is absolutely true. 

Mr. GREEN. So you had a private loan market in the 1920s, but 

did it make homes available? Let’s not talk about affordable, since 

that has become a negative term now. I marvel at how ‘‘affordable’’ 

can be negative for middle-class people. 

But did it make those homes available to middle-class people? 

Were middle-class people able to buy homes and fulfill the American dream to the extent that they were before the bubble and before the crash? 

Ms. WARTELL. In that period, most people who were able to buy 

homes had been able to accumulate very significant amounts of 

savings, sometimes up to 50 percent. And so the availability of 

homeownership was very limited compared to modern— 

Mr. GREEN. Seems like somebody ought to say that, that we had 

that problem—that it was a circumstance. Let’s not call it a problem, but it was a circumstance. And we have metamorphosed. It is 

no longer a circumstance. 

But let’s move forward to something else. Ms. Wartell, you indicated that all governments, I believe, have some kind of government involvement in the loans. Is that correct? 

Ms. WARTELL. Either explicitly or implicitly. In many of the European countries, which are often cited as a comparison, there are 

a relatively small number of financial institutions that serve those 

markets that benefit very significantly from an implied ‘‘too-big-tofail.’’ And, in fact, many of them have been supported by their 

countries as they have gotten in trouble. 

45 

Mr. GREEN. Let me intercede because I have limited time. 

My assumption is that the three other persons at the table—all 

of whom I have great respect for, by the way; I appreciate your 

commentary—but that all of you are in favor of no government involvement at all. Is that a fair statement, or did I miss something? 

Mr. POLLOCK. I will speak for myself, Congressman. 

My long-term objective for American housing finance is a market 

that is principally a private market. I estimate about 85 percent. 

And about 15 percent— 

Mr. GREEN. Mr. Pollock, you know I love you. We have been together before here. And, I have a deep, abiding affinity for you. 

But the three of you, in essence, would have no government involvement. 

Now, let me ask you, Mr. Pollock, do you speak for the banks 

when you say this? 

Mr. POLLOCK. No, sir. I speak only for myself. 

Mr. GREEN. All right. Let’s go to your next colleague. 

Do you speak for the banks, sir? 

Mr. RANDAZZO. No, I do not speak— 

Mr. GREEN. Do you speak for the banks, sir? 

Mr. CALABRIA. I only speak for myself. 

Mr. GREEN. Okay. Is it not true that, generally speaking, we consider what those in the industry have to say about this? Does 

someone have some plethora of evidence, empirical evidence, if you 

will, connoting that the banks entirely support this type of circumstance that you have called to my attention? 

Mr. CALABRIA. I will react— 

Mr. GREEN. Is it yes or no? 

Mr. CALABRIA. It is no. I put— 

Mr. GREEN. No. Okay, here is why I bring this up. We put a lot 

of thought on this committee into what those who actually have to 

do what we say will be done, what they think about it. 

It seems to me that, given that you are talking about what is 

revolutionary—and I think Ms. Wartell said that we should be 

thoughtful and have a resolution, not an overnight revolution. 

Is that your phrase? 

Ms. WARTELL. Evolution, not revolution. 

Mr. GREEN. Evolution, not revolution. 

It seems to me that the banks ought to have some say in this 

process, as well, since they had a pretty good say in all of the other 

aspects of things and since they are going to do the lending, they 

will do the lending. 

How is it that we conclude that banks will do all of these things 

that you say and not what they are saying they will do? 

Because the bankers who talk to me, they tell me they would like 

to see a Federal backstop. That is what the bankers talking to me 

say. And if you tell me that you speak for them and that is not 

what they are saying, I will put that into my computer and let that 

be a part of my processing of this intelligence. 

One more thing before we go, and I have to do this. I apologize 

to you. But you indicated that it would be bad for taxpayers—I believe this was indicated by Mr. Randazzo—bad for taxpayers, but 

you didn’t say what it would be like for the economy to allow the 

default. 

46 

‘‘Bad for taxpayers.’’ Taxpayers have to be a part of the economy. 

What is it going to be like for the economy if we just allow the collapse? What would it be like if we allow all of this bad paper to 

just go under? 

Ms. Wartell, would you respond, please? 

And I thank you, Mr. Chairman. I know that will be my last 

question. 

Chairman GARRETT. Was that Mr. Randazzo’s question? 

Mr. GREEN. No. It is to Ms. Wartell, please. 

Chairman GARRETT. Okay. If you will keep that to 10 seconds, 

because we are over time. 

Ms. WARTELL. Too rapid a withdrawal of support from the housing market could cause us to take the fragile economic growth we 

are currently seeing back in the wrong direction. 

Chairman GARRETT. And I thank you. 

The gentleman from Ohio, Mr. Stivers, for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. 

I would like to thank the panelists for coming today. 

The thing that I was struck by is that there does seem to be 

some similarities, commonality, that all of you agree on at least 

some of the steps that we might want to consider moving forward, 

or at least there is a consensus among you. And I know that there 

are clearly some differences. 

My first question is for Ms. Wartell. You talked about a yield 

spread analysis, and you used that to conclude that investors in 

Europe view covered bonds as having essentially a government 

guarantee. But I guess the part I am trying to understand is that 

yield spread was actually smaller than the yield spread between 

U.S. Treasuries and the Fannie and Freddie debt, which does have 

a government guarantee. 

Isn’t it really a statement by those investors that they are admitting that there is less risk in those covered bonds because the 

banks that originated them have continued to have skin in the 

game, and they believe when somebody who originates a mortgage 

has skin in the game, they are not going to let themselves lose 

money, versus the system we have, where you can originate and 

sell off 100 percent? Isn’t that another way to look at the view? 

And, obviously, there is no—it is all speculation, too, because we 

are just looking at a yield analysis instead of really interviewing 

investors who have invested in these. 

Ms. WARTELL. It is my—let’s put aside the analysis of the 

spreads, because I think obviously different people can interpret it 

different ways. But I do think that it is safe to say both, as you 

said, that there is particular collateral behind the covered bonds, 

and the investors understand they have that, and that they believe 

that those institutions in most of those countries benefit from an 

implied government guarantee 

Mr. STIVERS. Thank you. Do you think, Ms. Wartell, that the retention of risk leads to less risky behavior by those institutions 

that have skin in the game? 

Ms. WARTELL. I generally have supported that lending institutions should retain risk, have skin in the game, in their loans, as 

the Dodd-Frank legislation also would require. 

Mr. STIVERS. Sure. Thank you. 

47 

And the second question I have, also for Ms. Wartell, how do you 

explain the 30-year, fixed-rate mortgage in Denmark if you think 

that a covered bond won’t lead to a fixed-rate mortgage here in the 

United States? 

Clearly, it seems that it is a market requirement that consumers 

in Denmark, consumers in the United States, have demanded those 

products, and, therefore, the market has provided them. 

Ms. WARTELL. Actually, I think there are two different arguments that I have made that are being conflated in this case. Denmark has provided, through the covered bond mechanism, longterm, fixed-rate mortgages. 

My point is that I think that if you have a purely private market, 

the appeal of covered bonds for most of our financial institutions 

under the U.S. regulatory scheme is very different. It won’t likely 

be the primary mechanism of funding. And I also think that here 

we will end up with short-term debt. 

But it is not the covered bond that I argue won’t produce 30-year, 

fixed-rate mortgages. It is the fact that if we have— 

Mr. STIVERS. The problem with the FDIC. 

Ms. WARTELL. If we don’t have the backstop for the investments. 

Mr. STIVERS. Okay. Thank you. 

Could the other panelists comment on their thoughts, quickly, on 

retention of risk and what that would mean for the marketplace? 

Mr. POLLOCK. Congressman, I have worked on introducing credit 

risk retention into the mortgage markets for 15 years. I think it 

is an extremely useful and important idea. It is one of many ideas, 

but it is a very useful one. 

I think the advantage of the covered bond, which you cite, is that 

there is 100-percent credit risk ‘‘skin in the game’’ for the covered 

bond issuer. This is also extremely important in understanding 

how these bonds work. 

Mr. RANDAZZO. I would just echo the comments of my colleague. 

Mr. STIVERS. Thank you. 

Mr. CALABRIA. And I would say, I think retention of risk is an 

important thing in the marketplace, but I also believe there was 

considerable retention of risk prior to the crisis. In fact, most of the 

400-some subprime lenders that went out of business were because 

they were forced to buy back the piece that they had. So skin in 

the game is important, but it isn’t a cure-all. 

Mr. STIVERS. Sure. 

Mr. CALABRIA. I would also argue that one of the things that 

should be considered going forward, if we are going to keep a 

Fannie and Freddie model, is to get them out of the guarantee 

basis, where they simply sell off the MBS, they don’t guarantee the 

credit risk, because three-fourths of their losses have come about 

because they retained that risk and the investor did not take it. 

So we have lots of retention of risk. It hasn’t always worked that 

well. Sometimes it has; sometimes it hasn’t. But it is not a cureall. 

Mr. STIVERS. Thank you. 

Now for the whole panel, just going across, the focus of a lot of 

your testimony was on covered bonds. Are there approaches somewhere between what we are doing today and covered bonds? Are 

there other approaches that people are talking about, reinsurance 

48 

or any other approach outside of just the two approaches that we 

have heard today? 

And I know that we don’t have much time, so— 

Chairman GARRETT. Ten seconds. 

Mr. CALABRIA. I will say very quickly that I think that you can 

have a large amount of money that is portfolio-based not in a covered bond way, even though that is portfolio-based. 

Mr. POLLOCK. My answer is yes. 

Mr. STIVERS. Thank you. 

Thank you, Mr. Chairman. 

Chairman GARRETT. Thank you. 

The gentlewoman from New York. 

Dr. HAYWORTH. Thank you, Mr. Chairman. I will make this brief. 

I was thinking about the comments that Ms. Waters made regarding the PIMCO chair reflecting his comments about how increasing the downpayment on houses might be burdensome for 

homebuyers. But isn’t it true that it would also help to, if you will, 

rationalize home prices? I would appreciate the panel’s assessment 

of that. 

Mr. CALABRIA. Yes, it largely would. I do think that we need to 

get back to a point where housing prices reflect fundamentals rather than availability of credit driving prices, necessarily. There 

should be credit there. 

I do want to note, as well, there was an earlier discussion about 

very large downpayments in the 1920s. And I will note that the 

homeownership rate for working males aged 55 to 64 in 1920 was 

66 percent. So in no way was the 1920’s homeownership limited 

only to the wealthy. That is false. 

Mr. POLLOCK. Congresswoman, I would say I have spent a lot of 

time around bond markets in my career. The head of PIMCO’s 

comments have been widely cited. I never take too seriously what 

bond traders say. 

When it comes to downpayments, there is no doubt—and this is 

just an unquestionable regularity of housing finance—that size of 

downpayments or, inversely, the extent of the loan-to-value ratio, 

is one of the most reliable indicators of credit performance, either 

good or bad. 

Ms. WARTELL. I think that it is true that downpayment is a relevant factor, but I think we overemphasize it in the conversation. 

In the late 1990s, there was a great deal of very positive experimentation that was going on, demonstrating positive ways to mitigate the risk of low-downpayment lending. And all of those good 

practices were wiped out by the abusive practices in the subprime 

market. 

And there are enormous disparities of wealth in our society, and 

communities with low homeownership rates have other social costs. 

So if we go to a system where we mandate very high 

downpayments, there will be consequences that I think we will all 

be very sorry to see. 

So we need to make sure that there are ways to mitigate risk, 

but downpayment should not be our only measure. 

Dr. HAYWORTH. Is it fair to ask, on a very fundamental level, 

whether or not all that these GSEs have done and all that the Federal intervention in the housing and mortgage markets has done, 

49 

is it fair to conclude that those most vulnerable have actually benefited from these interventions? Because, certainly, the state of our 

economy would suggest otherwise. 

Mr. RANDAZZO. I would say, in large part, no. And if you just look 

at the waves of foreclosures that have basically been besieging the 

United States over the past several years, any gains that were established turned out to be faulty and have been wiped away. And, 

in large part, there are a number of individuals who seemingly 

thought that we were helping that are now worse off than when 

we started. 

Mr. CALABRIA. If I could make a comment, I have worked on 

housing policy and mortgage finance policy for a very long time. 

And one of the things that has constantly puzzled me is that proposals that have the aim of running up housing prices are presented as enhancing affordability. That kind of confuses me. Usually, that is a transfer to the seller. 

I look at it as, housing is a basic necessity of life. Everybody 

needs shelter. And when housing becomes more affordable—that is, 

when prices come down—I think that is a great thing. 

Now, currently, the impact of that certainly helps the poor, hurts 

maybe the middle class and the rich, but that is a policy outcome 

I can live with. 

Ms. WARTELL. I think it is important, as we look backwards, 

though, not to conflate the role that the GSEs played in the housing market with the consequence of the subprime crisis that we 

had. 

The reality is, if you look at the Financial Crisis Inquiry Commission report and others, the preponderance of the evidence here 

is that there was an intervening factor. There was this unregulated 

market, the shadow banking that was accelerated with the Wall 

Street inventions. The result of that was chasing horrible loans. 

And it is those lending practices, and not the lending practices of 

the GSEs. They reacted to those; they joined in the party. They 

have cost a significant amount of money to the taxpayers. 

I have no book to protect their record. But I think we should be 

very careful here not to conflate the role the GSEs played in the 

housing market prior to the year 2000 with the consequences of the 

subprime crisis. 

Dr. HAYWORTH. May I have 30 more seconds, Mr. Chairman? 

Chairman GARRETT. No, I am sorry, no. Your time has expired. 

Dr. HAYWORTH. Thank you. 

Chairman GARRETT. Your colleague from New York is up next. 

If he wants to yield you— 

Mr. GRIMM. I will yield my time. 

Dr. HAYWORTH. Oh, thank you, Mr. Grimm. 

I would simply submit to you that there were, as we all know, 

dissenting opinions regarding that Financial Crisis Inquiry Commission report. And the clear message that someone like me would 

take from it is that it is, in fact, the implicit Federal guarantee, 

indemnification of bad risk, that created the impetus for all of 

these risky investments. 

Thank you. 

50 

Mr. GRIMM. On that note, I think, Mr. Pollock, if you would like 

to comment on the last comments, please, I will give you a minute 

to do so. 

Mr. POLLOCK. Thank you very much, Congressman. 

I want only to make two points. One, when it comes to subprime 

mortgage-backed securities, of course Fannie Mae and Freddie Mac 

were among the biggest buyers and the richest bids for subprime 

securities. 

But on a more general point, having to do with credit policy and 

housing finance policy everywhere, the worst thing you can do for 

somebody is to make them a loan they can’t afford. 

Ms. WARTELL. No disagreement. 

Mr. GRIMM. I think we are getting ready to wrap up, and I will 

be very brief. 

Overall, I think to bring this all together at where we are at, the 

Federal debt stands at $14 trillion. GSE debt stands at $8 trillion. 

I will ask Mr. Pollock, what are the implications of this 

unsustainable debt load, in a nutshell? 

Mr. POLLOCK. Unsustainable debt can’t be sustained, and it has 

to be addressed and adjusted to. It usually involves finding ways 

to reschedule, restructure, or inflate your way out of it. We are 

faced with a really tough problem, as you suggest, Congressman. 

Mr. GRIMM. My last question: Mr. Calabria, you have proposed 

that Congress establish a recoupment fee on all mortgages purchased by Fannie Mae and Freddie Mac to reduce the deficit and 

to recoup as much of the losses as possible. Just very briefly, how 

would that work? 

Mr. CALABRIA. Essentially, it could be a fee that the GSEs charge 

to any lender that sells them the mortgage, and then that fee is 

recovered just like the way the guaranteed fee structures work 

now. Essentially, you would layer it on top of the guarantee fee 

that the GSEs already require from lenders, and then you put it 

off to pay down the amount of money we put in. 

So I certainly would not suggest that we charge them any more 

than we have already put in, but just as an attempt to recoup what 

we have put in. 

Mr. GRIMM. Okay. 

And, in closing, I would just like to say that we have heard both 

sides and that, on one hand, we need the government to make sure 

that we still have mortgages. And, without it, there will be the collapse of our economy and the collapse of home housing. My inclination innately is always that, where there is a need, the market will 

fill that need and that this country was founded on private-sector 

principles that have really risen to the occasion time and time 

again. 

And if the government were to, say, step aside and move out of 

the way of our free market, it would thrive. And a lot of the answers to this insurmountable debt is that free market, the enterprise, the entrepreneurial spirit that has made us great and will 

continue to make us the greatest nation in the world. 

And, with that, I yield back the rest of my time. 

Chairman GARRETT. The gentleman yields back, but the 

gentlelady from New York could have 1 minute left of his time to 

use for any other questions that she has. 

51 

Dr. HAYWORTH. Would the panel agree that, in fact—and I thank 

you, Mr. Chairman. I am sorry. 

Would the panel agree that the mobility issue created by the 

challenges that mortgage holders face because of the bad risks they 

undertook with Federal help, if you will, actually affects our unemployment rate materially today? 

Mr. POLLOCK. Many economists, Congresswoman, have pointed 

out the labor mobility problem entailed by having houses that are 

underwater on their mortgage. 

There is something else we should point out. For all the advantages of a 30-year, fixed-rate mortgage, there are also disadvantages to it. For example, if you are underwater and you have what 

is now a high-rate mortgage, you can’t refinance it. I call that the 

‘‘dark side of the 30-year, fixed-rate mortgage,’’ and we have to 

take that into account. It relates to this mobility problem. 

Mr. CALABRIA. Responding to the Congresswoman’s question, 

there are a number of empirical studies that have looked both 

across countries and across States and have reached the conclusion 

that the higher your homeownership rate, the higher structural unemployment you have. And this is something that is very wellfounded, in peer-reviewed journals. 

My back-of-the-envelope is that at least a percentage point of the 

unemployment rate we are seeing today is due to the high homeownership rate we had going into the crisis. 

Chairman GARRETT. Thank you. And the gentlelady yields back. 

The gentleman from California. 

Mr. GARY MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

This has been a very interesting hearing. I have heard so many 

different sides. 

I heard one of my good friends from the other side of the aisle 

say that the Bush Administration did not support reforming GSEs. 

That is fallacious. I met with the President many times on this 

issue. We probably sent the bill to the Senate 3, 4, maybe 5 times. 

And there was a filibuster that occurred, and it wasn’t by the Republicans, that stopped the bill from being heard. So that is the 

fact on there. I corrected one thing on you earlier, but that was just 

wrong on that. 

And I am having trouble with a lot of facts out here. I am not 

taking sides on the issue. No doubt we have serious, serious problems. But I am hearing a lot of the debate that doesn’t make sense 

when it is applied to reality, in some way. 

Mr. Calabria, you made a great statement on mortgage-backed 

securities because the only mortgage-backed securities worth a 

darn are GSEs out there. The alternative, when the market got 

really good in 2004, 2005, and 2006 was the private sector. Countrywide did come in and be major players in the marketplace. Now, 

if we had defined predatory versus subprime, they would have 

never been in the marketplace. But they played a huge part in the 

marketplace, made a tremendous number of loans to people who 

could never pay them back, sold them off to the private sector. And 

the way those loans are bundled, they can’t be debundled. 

Now, GSEs—I will say that if you buy a mortgage-backed security from the GSEs, you will get what you are promised. Because 

they bundle them in a way where a nonperforming loan is removed 

52 

and replaced with a loan that is performing. And many of the loans 

that the GSEs are eating today is because they are taking those 

loans out and replacing them. 

The problem we have is—let’s go back to 2008. When you look 

at the total losses in the marketplace in 2008, the lending sector 

lost about $2.7 trillion in losses. Now, understanding at that point 

in time that Fannie and Freddie represented 70 percent of the marketplace, or 31 million loans, Fannie lost $117 billion, Freddie lost 

$67 billion—a lot of money, but let’s put it in perspective. They had 

70 percent of the marketplace. Out of $2.7 trillion lost, they lost 

less than $200 billion of it. Unacceptable numbers, no argument. 

There have been statements made that the problem is that we 

made loans to people with low downpayments. But VA and FHA 

do that today. Let’s look at the reality. In my district alone, LA 

County, VA and FHA loan defaults are 2.6 percent; Freddie and 

Fannie are 3.9; the jumbos, 10.1. Obviously, VA and FHA are doing 

very well making low-downpayment loans. 

In Orange County, the FHA/VA default rate is 1.4 percent; 

Freddie and Fannie, 2.1 percent; the jumbo private sector is 2.89 

percent. San Bernardino County—a high default rate in San 

Bernardino County overall. VA and FHA is 3.5 percent; Freddie 

and Fannie, 7.8 percent; jumbo is 18.4 percent. 

So if the logic is that a low downpayment means necessarily a 

high default rate, the numbers don’t verify that argument. 

To make a loan to somebody that they cannot repay, it doesn’t 

matter what they put in, they are going to default. If they can’t 

make the payments and they put 20 percent down, they are still 

going to lose the house. If they put zero down and they can’t make 

the payments, they are still going to lose the house. 

So if we would have taken at some point in time and said, let’s 

define predatory versus subprime—which I know I put in at least 

five bills going to the Senate, and my good Democrat friends filibustered it—a matter of record, not fallacious—we would probably 

not have some of the problems we have today. 

And if you look at the chart, a great example of that is delinquencies today. Had we taken and fixed the problem in 2000 when 

we tried to fix predatory versus subprime, the subprime ARMs had 

a default rate of about 5 percent. Now, you go from 2000, when we 

did not fix it, to 2008; they had a default rate of 38.7 percent. Why? 

Because nobody bothered to define predatory versus subprime. 

The default rate also, if you look at the middle-range market, an 

average in 2000 was about 2 percent. An average in 2009 was 8 

percent. The default rate for Freddie and Fannie in basically 2000 

were nonexistent. They had no default rate. It rose in 2009 on the 

Freddie side to 3.1 percent and the Fannie side to 4.2 percent. It 

is too high. But the average market is 8 percent. Subprime is 26.5. 

The better subprime, the ARM subprime, is 38.7. 

So when you look at the numbers, you say, is there a problem? 

A serious problem with the entire industry. I remember when I 

was a young man in my 20s, if I went to borrow money from a 

lender for a construction loan, if I didn’t meet conforming standards, they would not make me the construction loan. Why? Because 

at the end of the day, there was probably not going to be a lender 

53 

to make them the loan to do the takeout on the house I had just 

built. 

So, Freddie and Fannie were basically created to provide liquidity to the marketplace. Had Freddie and Fannie not been there in 

2007, you could not have given a house away, period. Wall Street 

was shut down. Private sector was shut down. Wells Fargo, Bank 

of America didn’t know if they could survive the next day. 

So what did we do to the taxpayers in this country who own a 

home? Sixty-five percent of the families own a home. Many of those 

homes have double—I ran out of time, didn’t I? 

I hate this when I am preaching. I love to preach. I should have 

been a preacher. If I was a Baptist, I would be a preacher today, 

but I am not. 

But, in closing— 

Chairman GARRETT. Was there a question in there? 

Mr. GARY MILLER OF CALIFORNIA. Yes, there was. I never got to 

the question. 

My question was, I heard a lot of great information today, but 

I heard it from a lot of different perspectives. And when you put 

it together in reality, you see there are some basic problems that 

should have been corrected. Was low downpayment the problem? 

According to FHA and VA, no. Were underwriting standards a 

problem? Absolutely. And guidelines were a problem. Predatory 

versus subprimes were a problem. 

And, Mr. Chairman, I hope we have a lot of these because there 

is so much we need to get on the table, because I know you have 

a passion on this issue, and so do I and many other Members. But 

we have to figure out what we are going to do to fix the housing 

market in this country without destroying it. And if Fannie and 

Freddie don’t make sense, let’s get rid of them. If they can make 

sense with modifications, let’s look at that. But let’s just don’t 

make assumptions based on an entity that has 70 percent of the 

marketplace and is performing better than any lender sector out 

there today other than FHA and VA. So when we move into getting 

an answer for this, let’s move with that understanding and move 

cautiously. 

I yield back the balance of my time. 

Chairman GARRETT. I appreciate that. 

Mr. GARY MILLER OF CALIFORNIA. Thank you for your generosity. 

Chairman GARRETT. And I will seek unanimous consent to allow 

the witnesses, even though it is over time, just to give a short— 

Mr. GARY MILLER OF CALIFORNIA. —answer to my question. 

Chairman GARRETT. Yes, answer his global, and then they will 

be our last— 

Mr. CALABRIA. There was an awful lot there, but let me first 

react to—in 2007, Fannie and Freddie were actually pulling back. 

And one of the reasons that Secretary Paulson gave for taking the 

conservatorship was to get them to make more lending. Now, the 

fact is today that the reason they are making lending is because 

their losses and their debt are essentially backed by the government. And I would put it this way: You cover all my losses, guarantee all my debt, and I will go out and buy a whole lot of mortgages, too. So we have to remember what is the important part 

here that is keeping them together. 

54 

I 100 percent agree that downpayment alone is certainly not the 

determinative factor. I think FICO score is far more predictive of 

default than downpayment. So, certainly, that could be a tradeoff. 

I do think we need to keep in mind the vintages of loans that 

we are looking at. As you are very well aware, in about 2005— 

Mr. GARY MILLER OF CALIFORNIA. Can I ask one question? 

Mr. CALABRIA. Sure. 

Mr. GARY MILLER OF CALIFORNIA. Yes, on Freddie and Fannie’s 

making loans today, but the underwriting standards are tremendously different than they were 3 or 4 years ago. 

Mr. CALABRIA. Yes. 

Mr. GARY MILLER OF CALIFORNIA. Especially in the high-cost 

areas, they are very stringent. 

Chairman GARRETT. Yes. Let’s let the panel complete, because 

otherwise we will— 

Mr. CALABRIA. So, but what I was going to say, in comparing 

FHA to jumbo or any other part of the market, you do have to look 

at vintages. As you are well aware, FHA’s market share in California in 2005 was about 2 or 3 percent. So there was very little 

lending, where they have picked up since when the loan limits 

were raised. So my point would be, you have to make sure you are 

comparing 2005 to 2005 loans. And that is an important part of it. 

I do think you can offset the downpayment if you put other factors in the require good credit quality. 

Mr. RANDAZZO. I would be happy to submit comments in writing. 

Chairman GARRETT. All right. 

Mr. Pollock? 

Mr. POLLOCK. Mr. Chairman, I look forward to the discussion of 

this at another hearing, should you ever want to invite me back. 

Chairman GARRETT. Oh, okay. 

Ms. WARTELL. Thank you very much, Mr. Chairman, for having 

us. 

Chairman GARRETT. Thank you. 

And I thank all the witnesses and the members here today. 

I seek unanimous consent to enter into the record the statements 

of the National Association of Realtors, the American Bankers Association, the National Multi Housing Council, and the National 

Association of Federal Credit Unions. 

And, with that, the Chair also notes that some members may 

have additional questions for this panel, which apparently they do, 

which they may wish to submit in writing. Without objection, the 

hearing record will remain open for 30 days for members to submit 

questions to these witnesses and to place their responses in the 

record. 

This hearing is thereby adjourned. 

[Whereupon, at 4:50 p.m., the hearing was adjourned.] 

(55) 

A P P E N D I X 

February 9, 2011 

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