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50–416 2010

S. HRG. 110–1014 

TURMOIL IN THE U.S. CREDIT MARKETS: 

EXAMINING RECENT REGULATORY RESPONSES 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON 

THE STEPS THE REGULATORS HAVE TAKEN TO IMPLEMENT THE HOPE 

FOR HOMEOWNERS ACT, WHICH PASSED AS PART OF THE HOUSING 

AND ECONOMIC RECOVERY ACT (HERA), AND THE TROUBLED ASSETS 

RELIEF PROGRAM (TARP), WHICH WAS AUTHORIZED AND FUNDED BY 

THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 (EESA), 

BOTH WITH REGARDS TO PROVIDING CAPITAL AND LIQUIDITY TO 

THE FINANCIAL SYSTEM AND PREVENTING FORECLOSURES 

THROUGH THE EXERCISE OF THE AUTHORITIES PROVIDED 

THURSDAY, OCTOBER 23, 2008 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

AMY S. FRIEND, Chief Counsel 

MARK OSTERLE, Republican Counsel 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 


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C O N T E N T S 

THURSDAY, OCTOBER 23, 2008 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 4 

Senator Johnson ............................................................................................... 5 

Senator Schumer .............................................................................................. 5 

Senator Menendez ............................................................................................ 7 

Senator Corker .................................................................................................. 9 

WITNESSES 

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation .................... 10 

Prepared statement .......................................................................................... 61 

Response to written questions of: 

Senator Dodd ............................................................................................. 105 

Senator Enzi .............................................................................................. 112 

Neel Kashkari, Interim Assistant Secretary for Financial Stability, and Assistant Secretary for International Affairs, Department of the Treasury ....... 12 

Prepared statement .......................................................................................... 77 

Response to written questions of: 

Senator Dodd ............................................................................................. 113 

Brian D. Montgomery, Federal Housing Commissioner, and Assistant Secretary for Housing, Department of Housing and Urban Development ............ 14 

Prepared statement .......................................................................................... 82 

Response to written questions of: 

Senator Dodd ............................................................................................. 123 

James B. Lockhart, III, Director, Federal Housing Finance Agency .................. 16 

Prepared statement .......................................................................................... 86 

Response to written questions of: 

Senator Dodd ............................................................................................. 137 

Elizabeth A. Duke, Member, Board of Governor of the Federal Reserve System ......................................................................................................................... 18

Prepared statement .......................................................................................... 99 

Response to written questions of: 

Senator Dodd ............................................................................................. 149 

Senator Enzi .............................................................................................. 160 

Senator Menendez ..................................................................................... 161 


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(1) 

TURMOIL IN THE U.S. CREDIT MARKETS: 

EXAMINING RECENT REGULATORY 

RESPONSES 

THURSDAY, OCTOBER 23, 2008 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:08 a.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. 

Let me, first of all, thank our witnesses and my colleagues for 

being here, and thank the audience that has joined us here this 

morning for this hearing. This hearing is entitled ‘‘Turmoil in U.S. 

Credit Markets: Examining Recent Regulatory Responses,’’ and I 

am very grateful to all of you for taking the time out. I know you 

have other matters to be doing, so we are going to try and move 

along as rapidly as we can. I particularly want to thank Sheila 

Bair and Neel Kashkari. We have got you working overtime, obviously, and so we don’t want to tie you up all day here with this. 

We will try and move along as quickly as we can. 

With that in mind, I am going to make a quick opening statement, turn to Senator Shelby for any opening comments, and then 

I would ask my colleagues if they could be very brief in their opening comments. Sheila Bair has her board meeting today in town, 

and so we want to be able to get her back to that meeting, and I 

understand that, but we have some very important questions. 

Senator SHELBY. It could be an important meeting. 

Chairman DODD. It could be important. So I will ask my colleagues if they could be very brief or reserve their opening statements for the questioning period when they get to it as a way to 

get right to our witnesses and have a chance to hear from them, 

which is critically important to all of us. 

With that, let me begin with some brief opening comments and 

then turn to Senator Shelby. 

This morning, we consider the recent regulatory responses to the 

ongoing turmoil in our national and global credit markets. Those 

responses have included a series of measures that are in many respects without precedent in our Nation’s history. These measures 

began, for the most part, with the decision in March of this year 


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to commit $30 billion in taxpayer-backed funds to facilitate the acquisition of Bear Stearns by JPMorgan Chase. 

They also include the decision by the Federal Reserve through 

the spring, summer, and fall to establish various facilities and initiatives to promote liquidity in the markets, including in the commercial paper markets. They include the takeover of the Nation’s 

largest insurer, AIG, committing over $120 billion to this effort 

thus far. They include the decision to put Fannie Mae and Freddie 

Mac into conservatorship and provide them with $200 billion in 

Federal backstop. 

They include the decisions to guarantee non-interest-bearing deposit accounts at insured depository institutions and to guarantee 

senior unsecured bank debt for a period of 3 years. And, most recently, they include the decision to invest $250 billion into lending 

institutions, including some $125 billion in just nine large lenders, 

in an effort to promote financial stability and liquidity. 

According to one report, decisions taken or implemented by Federal regulators in the past 7 months have committed no less than 

$5 trillion in taxpayer money to stemming the tide of the credit crisis. Five trillion dollars—that is an astounding sum, equivalent to 

roughly one-third of our annual economy. Taken together, these decisions have made the American taxpayer a guarantor, owner, and 

shareholder in the financial sector of our economy to a degree 

never before seen in our Nation’s history and rarely seen in any 

free market economy. 

Certainly in recent months, no one can accuse Chairman 

Bernanke, Secretary Paulson, Chairman Bair, and others of timidity in the face of this crisis. Nearly 15 months ago, Chairman 

Bernanke pledged to me that he would use all of the tools at his 

disposal to maintain order, in a meeting we had in my office in August of 2007, in order to maintain order, stability, and liquidity in 

our capital markets. He has been true to his word. Likewise, Secretary Paulson, Chairman Bair, and Chairman Cox have all acted 

aggressively in recent weeks. And while the jury is still out regarding the ultimate impact of their actions, few if any doubt that those 

actions have forestalled the worst-case scenario of a complete seizure in the financial markets. 

Nevertheless, one cannot escape hard truths about these regulatory actions. First and foremost is the truth that they have largely addressed the symptoms of the credit crisis rather than its 

cause. For nearly 2 years, since I became Chairman of this Committee, I have urged forceful and definitive action to reverse the 

rising tide of foreclosures that began to wash over our economy in 

2007. I have not been alone in this call. Colleagues on both sides 

of the political aisle here have been sounding that same note for 

almost the same period of time. So have economists and analysts 

from across the political spectrum, including such distinguished individuals as former Carter and Reagan Fed Chairman Paul 

Volcker, Nobel Prize winners Joseph Stiglitz and Paul Krugman, 

former Reagan Chief Economic Adviser Martin Feldstein, and 

Chairman of President Bush’s Council of Economic Advisers Glenn 

Hubbard, and American Enterprise Institute Resident Fellow Alex 

Pollock. 


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These and other experts all agree that the key to our Nation’s 

economic recovery is the recovery of the housing market, and that 

the key to the recovery of the housing market is to reduce foreclosures. Without a solution to this central problem, the record-setting foreclosure rate, more Americans will continue to lose their 

homes and see the value of their largest asset plummet to the point 

where homeowners owe more on their mortgages than their homes 

are worth. Declining home values, vacant properties, and reduced 

revenues will destabilize more and more neighborhoods. As economist Mark Zandi noted in March of this year, and I quote him, 

‘‘Only if more homeowners are able to remain in their homes will 

the negative cycle of foreclosures begetting house price declines begetting more foreclosures be short-circuited. This in turn is necessary to ending the downdraft in the housing market that is 

weighing so heavily on the economy and financial system.’’ 

Without addressing the cause of the crisis as swiftly, aggressively, and decisively as the administration has tackled the symptoms of the crisis, house prices will continue to fall or stagnate, and 

the value of assets based on mortgages, trillions of dollars of which 

are on the books of our major financial institutions, will continue 

to be virtually unknowable. To date, with few exceptions, we have 

not seen, in my view, the required dedication. 

The longer we allow foreclosures to erode family wealth, neighborhood stability, and financial market liquidity, the longer our 

economy will take to recover from this crisis. The result will be the 

continuation of volatility and paralysis that our regulatory leaders 

are working so feverishly to address today. 

A number of us have been working very hard on this problem. 

The Hope for Homeowners Initiative that we created in the Housing Economic Recovery Act was a good start. Ultimately, it holds 

the promise of helping as many as 400,000 to a million more Americans obtain safe, secure, affordable mortgages. Similarly, the 

Emergency Economic Stabilization Act, which was signed into law 

October 3rd, obligates the Treasury to implement a plan to prevent 

foreseeable and avoidable foreclosures. Very importantly, Section 

109 of that legislation authorizes the Secretary to use loan guarantees and credit enhancements to facilitate loan modifications to 

prevent avoidable foreclosures. This slender provision alone could 

help countless deserving Americans escape the foreclosure trap set 

up by predatory lenders. 

This morning we look forward to asking our witnesses what steps 

they are taking to implement these and other provisions designed 

to stop the hemorrhaging in our housing markets that has bled out 

into the wider economy of our country and across the globe. 

We also look forward to asking them what steps they are taking 

to ensure that the American taxpayer is not just bankrolling the 

banking industry, but benefiting as well in the form of expanded 

lending activity. It is beyond troubling to read in recent news reports that those lenders who will be receiving billions of dollars 

from U.S. taxpayers are considering using those dollars not to 

make loans but, rather, to pursue some acquisition opportunities 

and to create a capital cushion, on which they will comfortably sit 

while the American consumer and small business person struggles. 

Reading such a report, it is no surprise that a majority of AmeriVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 E:\HR\OC\A416.XXX A416

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cans surveyed in a CNN/Opinion Research Corporation poll this 

past weekend disapproved of the regulators’ actions that focus on 

the banking industry. Doing more for homeowners is the one policy 

solution that a majority of those Americans said they would support. If there were ever a time that demanded that we think anew, 

this is it. Now that the administration has taken strong measures 

to stabilize financial institutions, it is absolutely imperative, in my 

view, that we apply the same sharp and urgent focus to help the 

individual homeowners whose plight is at the root cause of this crisis and to the small business owners who are valiantly struggling 

to stay afloat in these times. 

We are very fortunate, as I said at the outset, to have a very distinguished panel of witnesses with us this morning. We look forward, as always, to hearing their thoughts on what steps we can 

and must take to turn from the failed policies and flawed thinking 

of the past and instead turn to our hopeful and prosperous future 

for our country. 

With that, let me turn to Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. 

I believe today’s hearing provides an important opportunity for 

this Committee to conduct much needed oversight of the administration’s efforts to address the considerable problems in our financial markets. Foremost among these efforts is the Treasury Department’s Troubled Asset Relief Program, or TARP. When first announced, this program was to be used to purchase troubled assets 

from financial institutions. As market conditions have changed, 

however, the program has evolved considerably. 

On October the 14th, the Department of the Treasury announced 

that it was going to use $250 billion from the program to purchase 

equity stakes in financial institutions. Half of this amount has already been used to take positions in nine of the largest domestic 

financial companies. The remaining $125 billion, it is my understanding, has been set aside and is available for use by thousands 

of other smaller financial institutions. And while we all recognize 

that markets move with incredible speed and that circumstances 

can change dramatically, in purchasing equity stakes in publicly 

held companies Treasury has deviated significantly from its original course. 

We need here to examine closely the reason for this change and 

to understand how and why the nine specific firms were chosen to 

receive the initial $125 billion. We also need to understand here in 

this Committee how the remaining funds are going to be made 

available to the thousands of firms who may be eligible to receive 

them. Finally, we must also ensure, I believe, that the appropriate 

oversight scheme is in place because hundreds of billions of dollars 

of taxpayer money are at risk here. 

The hearing here also gives us an opportunity to examine other 

recent initiatives intended to address the troubled marketplace. 

Senator Dodd has already mentioned Hope for Homeowners, but I 

can tell you—I believe he is on point here—that unless we do something or can do something to address the underlying fundamentals 


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of dealing with the mortgage foreclosures and real estate, we are 

going to be wasting perhaps a lot of money. 

Mr. Chairman, I look forward to the hearing, and I appreciate 

your calling it. 

Chairman DODD. Thank you very much. 

Let me turn to Senator Johnson. 

STATEMENT OF SENATOR TIM JOHNSON 

Senator JOHNSON. Thank you, Chairman Dodd, for holding this 

important hearing. In addition to the passage of the Emergency 

Economic Stabilization Act, there has been a rash of other actions 

by the Treasury, Fed, FDIC, and others to stabilize our economic 

situation. Today, we will take a closer look at these actions. 

There is a common thread between all of the actions taken in recent weeks: they are temporary. While I believe the Government’s 

actions should be ‘‘emergency’’ measures, these are no small efforts. 

Within a few months, our country will have a new administration, 

and within a year these measures will expire. These actions make 

significant changes to our financial services regulatory structure, 

and this Committee needs to know what the end game is for these 

steps. 

Going forward, it is important to begin reviewing the structure 

of our financial system and developing regulation to create the kind 

of transparency, accountability, and consumer protection that now 

is lacking. I will continue fighting for good, effective regulation that 

balances consumer protection and sustainable economic growth. 

I am concerned we are not yet at the end of the road in terms 

of financial difficulties, but I am hopeful that the many actions 

taken in the past weeks will help stem our economic troubles. 

Chairman DODD. Thank you very much, Senator. 

Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. As you 

have requested, I will withhold until the question period. 

Chairman DODD. I thank you for that. 

Senator Schumer. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Thank you, Chairman Dodd, for holding this 

important hearing to focus on the financial crisis and the administration’s response. 

As we made clear in our negotiations with the administration 

over the Emergency Economic Stabilization Act, congressional oversight is essential in order to make sure the taxpayers’ money is 

being used well and wisely, and these hearings are a vital and important element of that oversight, and I salute you for having them 

in a timely way. 

The unfortunate truth is that the financial crisis we are facing 

today is not the result of an act of God or a natural disaster, some 

completely unforeseeable set of entirely unpredictable circumstances. It is the product of two completely avoidable failures: 

the failure of regulatory agencies to do their job and properly oversee the industries and firms under their purview, and the failure 

of banks, mortgage brokers, rating agencies, and other financial institutions to appropriately measure risk and to act accordingly. 


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The collapse of the housing bubble, which is at the root of all of 

this, as Senator Dodd has mentioned, was not the shock that many 

people want to make it out to be. There was plenty of evidence we 

were in the midst of a bubble and plenty of warning from a lot of 

smart people that it was going to pop sooner or later. But what it 

comes down to is that too many people were making too much 

money too easily and too quickly. Mortgage and financial firms 

started to behave like spoiled teenagers whose parents were on vacation. Once the party started, they didn’t want it to end. And if 

they trashed the house in the process, well, maybe the maid would 

come and clean it up tomorrow. And they were right about one part 

of it. Their parents weren’t home, because with the exception of 

Chairwoman Bair, who has been the adult voice in all of this, the 

regulators who should have put a stop to all of this nonsense before 

it got out of hand were nowhere to be found. 

This was not an accident. The problem at its root was the lack 

of regulation. Certainly the Government can overregulate and snuff 

out all entrepreneurial vigor for which this country is known. But 

that was not the problem of this administration. The explicit policy 

of this administration for the last 8 years has been the view ‘‘Deregulate, deregulate, deregulate.’’ The administration even appointed an SEC Commissioner and tried to elevate him to Chairman of the FTC who wanted to repeal New Deal regulations. And 

when that is not possible, the administration tries not to enforce 

the regulations that are on the books all too often. 

We need thoughtful, smart, tough, and more unified regulation, 

which I know under Chairman Dodd and Senator Shelby’s leadership we will endeavor to put in place early next year. 

Now, of course, we know who is stuck with the cleaning bill for 

this mess: the American taxpayers. If each of us was left to our 

own devices, each of us would have designed a different rescue 

plan. Unfortunately, when left with the choice between acting on 

this package or doing nothing, there wasn’t really a choice at all. 

We had to act. And Secretary Paulson, Chairman Bernanke, and 

Chairwoman Bair all deserve credit for not letting the ideology of 

do nothing, complete laissez-faire, get in the way of working to 

bring us back from the brink of absolute disaster. 

But that does not mean my colleagues and I are happy about 

what we have had to do, nor does it mean we do not have serious 

questions remaining about how we are proceeding. I applaud Secretary Paulson for recognizing, despite his initial opposition, that 

the best approach to this crisis is the direct injection of capital into 

banks. I have argued from the very beginning that this is clearly 

the most effective way to support the banks and the financial system more generally. The history of our own Depression Era agency, 

the RFC, as well as experiences of both Japan and Sweden in the 

past decades have shown that, when done properly, capital infusions provide the best bang for the buck. 

But doing it properly is the key, and I continue to have a number 

of serious questions about how this program is being implemented. 

I remain especially concerned that in the Treasury’s zeal to make 

the capital injection program easily digestible for the banks, we are 

feeding them a little too much dessert and not making them eat 

enough of their vegetables. 


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Though you and I have spoken about this, Mr. Kashkari—and I 

very much appreciate your position and your rising to take this job 

at this crucial time—I am still not convinced that it makes much 

sense for banks that accept capital from the Government to continue paying dividends on their common stock. There are far better 

uses of taxpayer dollars than continuing the dividend payments to 

shareholders. And the program will only be effective if it is put to 

good use. 

With that in mind, I, along with my colleagues Senator Jack 

Reed and Senator Menendez, have been urging the Treasury Department to issue guidelines—not hard rules, not legal regulations, 

but standards that will help guide institutions’ behavior now that 

taxpayer money has been invested. First and foremost, I believe 

there should be guidelines on the use of this capital. I would like 

the Treasury to set out goals, perhaps based upon an institution’s 

previous lending history, for the amount of lending that each institution that receives capital injection should be doing. This will help 

prevent institutions from hoarding Government capital against future losses and get the money quickly out to Main Street, which 

has been our stated goal all along. 

On the flip side of that coin, I think Treasury and the financial 

regulators should issue guidance to discourage institutions from 

using this funding to engage in the kinds of risky and exotic financial activities that got us into this mess. We are not investing in 

these institutions just to see the financial wizards go back to playing their high stakes game, this time with some taxpayer money. 

Third, and finally, stronger standards of care for loan modifications are needed. Chairman Bair has led the charge on this front, 

and the rest of the regulators and Treasury should follow her lead. 

There should be a requirement that any institution receiving assistance under the TARP should have to adopt a systematic and 

streamlined approach to loan modifications, modeled on the approach that the FDIC has utilized in institutions that it controls. 

Declining home prices are the root cause of this economic crisis, 

and avoiding foreclosures through loan modifications is perhaps the 

single greatest step we can take to alleviate the current situation. 

Finally, last but not least, I would like to see stronger guidance 

issued to companies with regard to executive compensation. Even 

under the rules issued by Treasury, in some cases a great deal of 

discretion is left in the hands of the compensation committees of 

each institution. The Treasury Department should provide clarification and oversight for the implementation of its own rules and 

also begin the process of determining compensation best practices 

on a broader scale. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. 

Senator Hagel. 

Senator HAGEL. No, sir. 

Chairman DODD. Senator Menendez. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. Thank you, Mr. Chairman. 

You know, Mr. Chairman, I woke up this morning and read a 

quote from Secretary Paulson that said, ‘‘I could have seen the 


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subprime problem coming earlier, but I am not saying I would have 

done anything differently.’’ 

Not done anything differently. 

As one of the Members on this Committee who in March of last 

year said at a hearing that you held we are going to have a tsunami of foreclosures and the administration said that was an exaggeration, I am concerned now that we are not dealing with this 

much differently. The spark that led to this economic fire was the 

housing market, and unless we attack it at its root, it is not going 

to stop the wildfire that we are in. 

In the month of August, over 9,800 homes entered foreclosure 

every day. If this statistic was that 9,800 Wall Street jobs were 

being lost every day, we would have ended this a long time ago. 

And today we learn that the number of foreclosure filings grew 

by more than 70 percent in the third quarter of this year compared 

with the same period in 2007. And, unfortunately, Mr. Chairman, 

in New Jersey the news was even worse. It rose to 95 percent in 

foreclosure filings in the same period. 

I believe, Mr. Chairman, we can no longer sit back and hope that 

lenders do the right thing. We can no longer simply encourage loan 

modifications. That clearly does not work. We cannot ask them 

nicely to do this. That does not work. I had one case in which a 

community development entity went to save a home of someone. 

There was $175,000 owed on it. They made an offer to the bank 

for $160,000. The bank turned it down. They went to the foreclosure sale with the $175,000 check, certified check to pay it off 

in full, and the bank bid it up to $180,000. 

The Securities and Exchange Commission expected Wall Street 

to regulate itself and got burned. Now we are expecting lenders to 

modify loans on their own. Do we really expect a different result? 

I do not believe Treasury is doing what is necessary to modify 

loans in exchange for the infusion of taxpayer dollars. And I think 

banks have to understand that these funds are not a gift. If they 

do not want to play by our rules, then they certainly do not need 

to cash the check. That is one set. 

And then, finally, Mr. Chairman, the other set is people and 

businesses on Main Street are counting on the banks to use their 

capital that we have infused to free up lending, to prevent foreclosures, and to stimulate the economy. If used correctly, they are 

going to help small businesses stay open, keep their employees on 

the payroll, help students get college loans, families get auto loans, 

and homeowners modify mortgages. But if, in fact, they do not use 

it as we hope and unless we give them direction, if they stuff it 

under the mattress, then ultimately we may have made a CEO’s 

sleep at night comfortable where we have done nothing about stimulating Main Street. 

Finally, Mr. Chairman, I do appreciate Mr. Kashkari’s efforts on 

minority participation here. I think it is critically important, and 

we are going to continue to monitor that. 

And, last, I am gravely concerned about a situation where banks 

are taking advantage of AIG’s low credit rating to make a windfall 

off of transactions they have with the Nation’s mass transit agencies. And we are asking Treasury—and we will submit a question 

for the record, but because of the urgency of it—to have someone 


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senior work with our Nation’s transit agencies to make sure that 

they and the taxpayers’ money are being protected. 

And with that, Mr. Chairman, I look forward to the witnesses. 

Chairman DODD. Thank you very much, Senator. 

Senator Corker. 

STATEMENT OF SENATOR BOB CORKER 

Senator CORKER. Mr. Chairman, I will honor the not making a 

long statement. I am troubled by some of the comments that I have 

heard. I do appreciate the way some of the witnesses have 

interacted with us over time, and I do not think we would be having these hearings if it was solely because the housing market had 

collapsed, which any reasonable person would have expected that 

to do. The exuberance here was ridiculous. I think it is because of 

the financial wizardry, and I hope that we will not move off of focusing on that and try to focus on the wrong things. 

I am very concerned about many of the statements that have 

been made, and I hope this hearing will shed light on the direction 

that we ought to be going. But thank you very much for having 

this hearing. 

Chairman DODD. I thank you, Senator. 

Let me thank our colleagues, by the way, on both sides of the 

aisle for making the effort to be here today, too, as well, only 12 

days away from our national election. The fact that people are back 

from their States and participating in this very important hearing 

is something I appreciate, taking time away from their campaigns 

in the case of several people, actually candidates on a ballot. So 

being here is something that I am deeply grateful to my colleagues 

for as well. 

With that, Sheila, we will begin with you, and let me just briefly 

introduce everybody so we can move quickly. Sheila Bair, as everyone knows, is the Chair of the Federal Deposit Insurance Corporation, no strange to this Committee at all. As Chair of the FDIC, 

she has taken a very proactive and very helpful role. I think several Members have made this point, and I want to add my words 

as well. Everyone has been working very hard, but in addition to 

hard work, you have been very creative and imaginative, I think, 

in terms of ideas that are coming forward, and I am going to be 

focusing my questions to you on the ideas you have, talking with 

Mr. Kashkari as well, about Treasury’s response, the legislation we 

adopted, the authorities given. So just to have you be thinking 

about this, there are a lot of issues, and Bob Corker is absolutely 

correct. That is not the only subject matter. But certainly in my 

view, dealing with foreclosure issues is a critical one, so we thank 

you very, very much for being here. 

Neel Kashkari is the Interim Assistant Secretary for Financial 

Stability and Assistant Secretary for International Affairs at the 

U.S. Department of the Treasury. That is a long title, for the fact 

that you have been asked to sort of handle this large issue and the 

Troubled Asset Relief Program, the TARP program. And I want to 

note that Mr. Kashkari played a very critical role in negotiating 

the details of these. We spent a lot of hours together over 13 days 

beginning on September 17th to October 1. The 13 days of September are ones that none of us will ever forget in terms of what 


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happened, and you were very influential and supportive of those efforts that Senator Schumer has talked about earlier this morning. 

Our next witness is the Honorable Brian Montgomery, again, no 

stranger to the Committee—Brian, we thank you for being here— 

the Federal Housing Commissioner and Assistant Secretary at the 

U.S. Department of Housing and Urban Development. Mr. Montgomery is currently responsible for the FHA program, which creates stable homeownership opportunities. He oversees FHASecure 

and Hope for Homeowners as well, designed to help families avoid 

foreclosure. I spoke yesterday to the Bristol, Connecticut, Chamber 

of Commerce, and several people stood up and had great reviews 

to say about the modernization of FHA and how FHA is working 

today. So people out in the street across the country are reacting 

to what has been going on. So we thank you for your work as well. 

Jim Lockhart is the Director of the Federal Housing Finance 

Agency, assumed that position with the signing of the Housing and 

Economic Recovery Act in July of this year; and prior to that, he 

was the Director of the Office of Federal Housing Enterprise Oversight, or OFHEO. I would be remiss if I did not mention that Mr. 

Lockhart is also a native of Connecticut. Politics is always local, 

Mr. Lockhart, right? I welcome you here. 

And our last witness, Elizabeth Duke, is the Governor of the 

Board of Governors of the Federal Reserve System. She took her 

office on August 5, 2008, and is serving out a term that expires on 

January 31, 2012, and we thank you as well, Ms. Duke, for being 

with us this morning. 

We will begin with you. All statements, all supporting documents 

will be included in the record, and we welcome your statements. 

STATEMENT OF SHEILA C. BAIR, CHAIRMAN, FEDERAL 

DEPOSIT INSURANCE COMPANY 

Ms. BAIR. Thank you, Mr. Chairman, Senator Shelby, and members of the Committee. I appreciate the opportunity to testify on recent efforts to stabilize the Nation’s financial markets and to reduce foreclosures. 

Conditions in the financial markets have deeply shaken the confidence of people around the world in their financial systems. The 

events of the past several weeks are unprecedented, to say the 

least. The Government has taken a number of extraordinary steps 

to bolster public confidence in the U.S. banking system. 

The most recent were the measures last week to recapitalize our 

banks and provide temporary liquidity support to unlock credit 

markets, especially interbank lending. These moves match similar 

actions taken in Europe. Working with the Treasury Department 

and other bank regulators, the FDIC is prepared to do whatever it 

takes to preserve the public’s trust in the financial system. 

Despite the current challenges, the bulk of the U.S. banking industry remains well capitalized. What we now face is a confidence 

problem, largely caused by uncertainty about the value of mortgage 

assets, which has made banks reluctant to lend to each other, as 

well as to consumers and businesses. 

Our efforts at the FDIC have been focused on liquidity. Last 

week, the FDIC Board and the Federal Reserve Board recommended that the Secretary of the Treasury invoke the ‘‘systemic 


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risk exception,’’ which he did, after consulting with the President. 

The FDIC Board then used the authority to create a Temporary Liquidity Guarantee Program. This program has two features. The 

first guarantees new, senior unsecured debt issued by banks and 

thrifts and by most bank and thrift holding companies. This will 

help the banks fund their operations. Both term and overnight 

funding of banks have come under extreme pressure in recent 

weeks, with interest rates for short-term lending ballooning to several hundred basis points over the rate for comparable U.S. Treasuries. The guarantee will allow banks to roll maturing senior debt 

into new issues fully backed by the FDIC. 

The second feature of the new program provides insurance coverage for all deposits in non-interest bearing transaction accounts 

at participating institutions. These accounts are mainly for payment processing, such as payroll accounts used by businesses. Frequently, they exceed the $250,000 insurance limit and many smaller, healthy banks had expressed concerns about major outflows 

from these accounts. This guarantee, which runs through the end 

of next year, should stabilize those accounts and help us avoid having to close otherwise viable banks because of deposit withdrawals. 

This aspect of the program allows bank customers to conduct 

normal business knowing that their cash accounts are safe and 

sound. This is the fundamental goal of deposit insurance, safeguarding people’s money, and it is vital to public confidence in the 

banking system. 

It is important to note that the new program does not use taxpayer money or the Deposit Insurance Fund. Instead, it will be 

paid for by direct user fees. 

We also remain focused on the borrower side of the equation. Everyone agrees that more needs to be done for homeowners. We need 

to prevent unnecessary foreclosures and we need to modify loans 

at a much faster pace. Preventing unnecessary foreclosures will be 

essential to stabilizing home prices and providing stability to mortgage markets and the overall economy. 

As you know, a number of steps have already been taken in this 

direction, but I think it is clear by now that a systematic approach 

is needed to help us finally get ahead of the curve. The FDIC is 

working closely and creatively with Treasury on ways to use the recent rescue law to create a clear framework and economic incentives for systematically modifying loans. The aim is for loan 

servicers to offer homeowners more affordable and sustainable 

mortgages. 

In sharing ideas with Treasury, we have drawn from the program that we are using for modifying loans at IndyMac Federal 

Bank since we took control of that bank in July. We have introduced a streamlined process to systematically modify troubled 

home mortgages owned or serviced by IndyMac. As we have done 

in some past bank failures, we initially suspended most foreclosures in order to evaluate the portfolio and to identify the best 

ways to maximize the value of the institution. 

Through this week, IndyMac has mailed more than 15,000 loan 

modification proposals to borrowers. More than 70 percent have already responded to the initial mailings in August. More than 3,500 


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borrowers to date have accepted the offers and thousands more are 

being processed. 

The hope is that our mortgage relief program can be a model and 

a catalyst to spur loan modifications across the country. It is a 

process that most servicers can use under existing legal arrangements. 

In conclusion, the FDIC is fully engaged in preserving trust and 

stability in the banking system. The FDIC remains committed to 

achieving what has been our core mission since we were created 75 

years ago in the wake of the Great Depression, protecting depositors and maintaining public confidence in the financial system. 

Thank you very much. 

Chairman DODD. Thank you very much. 

Mr. Kashkari. 

STATEMENT OF NEEL KASHKARI, INTERIM ASSISTANT SECRETARY FOR FINANCIAL STABILITY AND ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS, DEPARTMENT OF 

TREASURY 

Mr. KASHKARI. Chairman Dodd, Senator Shelby, and members of 

the Committee, good morning and thank you for the opportunity to 

appear before you today. 

I would like to provide you with an update on the Treasury Department’s progress implementing our authorities under the Emergency Economic Stabilization Act of 2008. My written testimony includes a much more detailed description of where we are, but I am 

going to give a summary right now. 

Every American depends on the flow of money through our financial system. They depend on it for car loans, for home loans, for 

student loans, and to meet their basic family needs. Employers rely 

on credit to pay their employees. In recent months, as you know, 

our credit markets froze up and lending became extremely impaired. 

Congress, led by this Committee and others, recognized the 

threat the frozen credit markets posed to Americans and to our 

economy as a whole. Secretary Paulson is implementing the Department’s new authorities with one simple goal: to restore capital 

flows to the consumers and businesses that form the core of our 

economy. 

The Treasury has moved quickly since enactment of the bill to 

implement programs that will provide stability to our markets, protect the taxpayers to the maximum extent possible, and help our 

financial institutions to support our consumers and businesses 

across the country. 

Since the announcement of our capital purchase program, we 

have seen numerous signs of improvement in our markets and in 

the confidence of our financial institutions. While there have been 

recent positive developments, our markets remain fragile. 

I would like to spend just a quick few moments outlining steps 

we have taken to implement the TARP. We have seven policy 

teams driving forward and they are making rapid progress. 

First, our mortgage-backed securities purchase program. We selected the Bank of New York Mellon to serve as a custodian and 

expect to hire asset managers in the coming days. A Treasury team 


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has been working around the clock to design the auction, identify 

which mortgage-backed securities to purchase, and to determine 

how best to reach the thousands of financial institutions who may 

be bidding. 

Two, whole loan purchase program. This team is working with 

bank regulators to identify which types of loans to purchase first, 

how to value them, and which purchase mechanism will best meet 

our policy objectives. They also expect to hire asset managers very 

soon. 

Third, insurance program. We are establishing a program to insure trouble mortgage-related assets. We have submitted a request 

for comment to the Federal Register and are seeking the best ideas 

on structuring options for that program. 

Four, equity purchase program. Treasury worked very closely 

with the four banking regulatory agencies to design and announce 

a voluntary capital purchase program to encourage U.S. financial 

institutions to raise capital to increase the flow of financing to U.S. 

businesses and consumers and to support the U.S. economy. Treasury will purchase up to $250 billion of senior preferred shares on 

standardized terms. This is an investment. The Government will 

not only own shares that we expect will result in a reasonable return, but will also receive warrants for common stock in participating institutions. 

The program is available to qualifying U.S. depository institutions. We are working very hard to publish the legal documentation 

required so that private banks can participate on the same terms 

as public institutions. We have allocated sufficient capital so that 

all qualifying banks can fully participate. 

Treasury and the banking regulatory agencies have announced a 

streamlined and systematic process to apply for the capital program. Financial institutions should first consult with their primary 

Federal regulator and then use the single standardized application 

form that’s available on their regulator’s website. Once the regulator has reviewed the application, they will send the application 

to the Treasury Department. Treasury will give considerable 

weight to the recommendations of the regulators and decide ultimately whether or not to make the capital purchase. All completed 

transactions will be announced to the public within 48 hours, but 

we will not announce any applications that are withdrawn or denied. 

No. 5, homeownership preservation. We have begun working 

with the Department of Housing and Urban Development and 

HOPE NOW to maximize the opportunities to help as many homeowners as possible while also protecting the taxpayers. We have 

hired Donna Gambrell, who is the Director of the Community Development Financial Institution Fund and former Deputy Director 

of Consumer Protection and Community Affairs at the FDIC to 

oversee this effort and serve as our interim Chief of Homeownership Preservation. 

When we purchase mortgages or mortgage-backed securities, we 

will look for every opportunity possible to help homeowners. 

No. 6, executive compensation. Companies participating in Treasury’s programs must adopt the Treasury Department standards for 

executive compensation and corporate governance. 


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And No. 7, compliance. Treasury is committed to transparency 

and oversight in all aspects of this program. We have been meeting 

regularly with the Government Accountability Office to monitor the 

program and GAO is establishing an office onsite at Treasury. The 

Financial Stability Oversight Board has already met several times 

and they selected Chairman Bernanke to serve as Chairman of the 

Oversight Board. The Administration is also working to identify potential candidates to serve as Special Inspector General. In the interim, Treasury is working with our own Inspector General to monitor our progress. 

Now let me spend just a moment on procurement. Our approach 

to procurement is based on the following strategy: first, in order to 

protect the taxpayers, we will seek the very best private sector expertise to help us execute this program. 

Second, to the extent possible, opportunities to compete for contracts and to provide services should be available to small businesses, veteran-owned businesses, minority, and women-owned 

businesses. 

And third, we are taking appropriate steps to mitigate and manage potential conflicts of interest. Firms competing to provide services must disclose their potential conflicts of interest and recommend specific steps to manage those conflicts. Treasury will only 

hire firms when we are confident in our ability and their ability to 

successfully manage those conflicts. Our Chief Compliance Officer 

will be responsible for making certain that firms comply with the 

agreed upon mitigation steps. 

Chairman, as you can see, we have accomplished a great deal in 

a short period of time, but our work is only beginning. A program 

as large and complex as this would normally take months or even 

years to establish. But we do not have months or years. Hence, we 

are moving to implement the TARP as quickly as possible while 

working to ensure high quality execution. 

Thank you. 

Chairman DODD. Thank you very much, Mr. Kashkari. 

Mr. Montgomery. 

STATEMENT OF BRIAN MONTGOMERY, FEDERAL HOUSING 

COMMISSIONER AND ASSISTANT SECRETARY, DEPARTMENT 

OF HOUSING AND URBAN DEVELOPMENT 

Mr. MONTGOMERY. Chairman Dodd, Senator Shelby, members of 

the Committee, thank you for the opportunity to address you this 

morning on the role of the Department of Housing and Urban Development and, more particularly, the Federal Housing Administration, in addressing the mortgage crisis. 

I would like to focus my brief remarks this morning on the recently launched Hope for Homeowners program, as well as a 

counter cyclical role that FHA plays in the market, starting with 

the latter. 

It was just 2 years ago that FHA was viewed as all but irrelevant. Subprime and Alt-A loans were the products of choice and we 

at FHA were left standing on the sidelines, hoping that the first 

time home buyers, who would have been better served by FHA, 

would find the means to survive the risky and costly products they 

chose instead. 


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As you well know, we voiced our concerns throughout this period, 

publicly asserting that families who could not qualify for prime 

rate mortgage products should access market rate financing 

through the FHA rather than paying more in their interest rates. 

As you know, unfortunately, the crisis overtook the market and 

FHA became important once again as a result of the overall tightening and private conforming and the evaporation of non-prime 

products. 

As a result of this contraction, in just the last 2 years FHA’s 

market share has grown from 2 percent to 17 percent of the mortgage market. That is overall mortgage market. Specific to new construction, our market is now 25 percent. Let me put this increase 

in perspective with real numbers. In fiscal year 2007, we endorsed 

about 425,000 single family loans, including purchase loans, by the 

way, and refis. In fiscal year 2008, we endorsed more than 1.2 million, including 632,000 purchase loans. If you think about it, in the 

middle of this turmoil, we did 632,000 purchase loans last fiscal 

year. 

In other words, our overall business has more than doubled this 

year. And we project that next year that number will be about 1.4 

million. In fact, we have pumped close to $200 billion of much 

needed liquidity into the mortgage market during that time. 

Let me just also say that our application rate is on a trajectory 

of 3 million applications a year, and these are levels that we have 

not seen in more than 10 years. 

A lot of this business has been coming in through the FHASecure 

product, which many of you are familiar with. I remember testifying before this Committee about a year ago that I thought we 

might reach 240,000 borrowers in fiscal year 2008. I was off with 

that estimate. Since we announced the FHASecure product a little 

more than a year ago close to 400,000 families have refinanced out 

of a burdensome mortgage into a safe, affordable FHA product. We 

think that number will push close to 500,000 by the end of the calendar year. 

Let me just talk briefly about what we have done to help our 

FHA-insured borrowers who are experiencing troubles. In fiscal 

year 2008, FHA servicers completed more than 100,000 loss mitigation actions. Of these, 96,500 are currently retaining homeownership. This is an 11.5 percent increase in homeownership retention 

over 2007. And overall the expected retention rate of these borrowers is 87 percent. In fact, our loss mitigation efforts by HUD 

have helped more than 300,000 families over the last 3 years. 

I am happy to say that we also now have the Hope for Homeowners refinance rescue product available. The Oversight for H4H, 

as we call it, composed of the agencies represented here today, accomplished the goal of getting this program up and running by October the 1st, only 60 days after passage of the law. 

As a result of this tremendous team effort, we now have the additional rescue program available to the lending community and to 

borrowers alike. 

I’m sure you are wondering when we will see the first loan insured, the first family saved, and another tool to help us see the 

beginning of the end of this crisis. Let me say that I know that all 

of us up here today testifying before you feel the same sense of urVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\A416.XXX A416

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gency. But it will take time for the lending community to get the 

program up and running. The unique statutory requirements make 

the program very different from any other FHA product and require lenders to take additional time and care to set up the program and the operations in a way that supports the program fully. 

We have devoted a lot of resources over the last 2 weeks, reaching out and educating the lending community and counselors about 

this program. This is what we have heard from them: while they 

are all very interested in offering the product, they need to be vigilant and want to be vigilant about the implementation process. 

Lenders and counselors alike need to train staff. They need to 

change protocols, modify systems, and take other steps to ensure 

that their companies are complying with the terms of the new program. 

In addition, lenders must modify their internal IT systems and 

protocols to ensure that they support the product fully before they 

move to full implementation. This kind of activity is time consuming and we should all embrace the efforts by the lending community to handle this program in a way that ensures its success. 

I feel very confident that FHA will continue to play a critical role 

in helping families in need of refinance loans to save their homes, 

and also families who need safe market rate financing to purchase 

a home. 

I thank you for the opportunity to testify here today. 

Chairman DODD. Thank you very much, Mr. Montgomery. 

Mr. Lockhart. 

STATEMENT OF JAMES B. LOCKHART, III, DIRECTOR, 

FEDERAL HOUSING FINANCE AGENCY 

Mr. LOCKHART. Chairman Dodd, Senator Shelby, and members of 

the Committee, thank you for the opportunity to testify on the Federal Housing Finance Agency’s response to the turmoil in the credit 

markets. 

I will begin by talking about our activities as the regulator of 

Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and 

then turn to TARP. 

There is no doubt that the mortgage market pendulum swung extremely widely toward easy credit, poor underwriting, risky mortgages, and even fraud. The market had to correct. But we need to 

prevent the pendulum from swinging too far in the other direction. 

Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks 

have played a critical role in dampening that pendulum swing. 

In mid-2006, their market share of all new mortgage originations 

was less than 40 percent. With the demise of the private label 

mortgage-backed security market, their share is now 80 percent. 

On September 6th, FHFA placed Fannie Mae and Freddie Mac 

into conservatorship. Market conditions, compounded by a weak 

regulatory capital structure, meant that they were unable to fulfill 

their mission of providing stability, liquidity, and affordability to 

the mortgage market. 

A critical component of the conservatorship was the three Treasury facilities that were put in place. The most important one is a 

Senior Preferred Agreement, which ensures that the Enterprises 

always will have a positive net worth. These $100 billion each faVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\A416.XXX A416

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cilities, which have not been withdrawn on yet, are well over three 

times the statutory minimum capital requirements and last until 

all liabilities are paid off. Effectively, it is a government guarantee 

of their existing and future debt in mortgage-backed securities. 

Both can grow their portfolios by over $100 billion, which will further support the mortgage market, as will Treasury’s mortgagebacked security purchase facility. 

Treasury has also provided the Enterprises and the Federal 

Home Loan Banks credit facilities to provide liquidity if needed. 

The Federal Home Loan Banks counter-cyclical capital structure 

has allowed them to play a critical role in supporting financial institutions and mortgage lending over the last year. Their secured 

advances to financial institutions have just reached $1 trillion, 

which is about 58 percent up from June of last year. 

The new legislation added the Enterprises affordable housing 

goals and mission enforcement to the responsibilities of the agency. 

I have instructed both CEOs to examine their underwriting standards and pricing. Earlier this month, Fannie Mae and Freddie Mac 

canceled a planned doubling of an adverse market delivery fee. I 

expect future changes to reflect both safe and sound business strategy and attentiveness to their mission. 

A critical component of stabilizing the mortgage market is assisting borrowers at risk of losing their homes by preventing foreclosures. Keeping people in their homes is critical, not only for the 

families and the neighborhoods, but for the overall housing market. Through August, the Enterprises have done $130,000 in loss 

mitigation activities, but they have to do a lot more. A more systematic approach to loan modifications is essential. Well before the 

conservatorship actions, we had asked the Enterprises to accelerate 

their loan modifications with features that included potential principal write downs and forbearance. We encouraged them to join the 

FDIC’s IndyMac loan modification program. I expect loan modifications to be a priority, both as a matter of good business and supporting their mission. 

During this difficult time in our financial markets, the FHFA has 

been working with the Treasury, the Fed, the SEC, and the Federal banking agencies to monitor market conditions and coordinate 

regulatory activities. We have been assisting the Treasury Department as it develops ideas for the TARP. I also serve as a Director 

on the Financial Stability Oversight Board. 

Foreclosure mitigation is an important objective under the TARP 

program. The objective applies to all Federal agencies that hold 

troubled assets, including FHFA as conservator of Fannie Mae and 

Freddie Mac. In support of the TARP, and as a Federal property 

manager, FHFA will work to ensure the successes of these foreclosure minimization programs. 

In conclusion, FHFA and the housing GSEs have a critical role 

in returning the mortgage market to stability and preventing foreclosures. It will take time but I believe the many steps that have 

been taken will provide a much more solid foundation for creating 

a stable future for the mortgage markets and, most importantly, 

American homeowners, renters, workers, and investors. 

I look forward to working with the Committee and all of Congress in achieving this goal. 


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Thank you. 

Chairman DODD. Thank you very much, Mr. Lockhart. 

Ms. Duke, welcome to the Committee. 

STATEMENT OF ELIZABETH A. DUKE, GOVERNOR, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Ms. DUKE. Thank you. 

Chairman Dodd, Senator Shelby, and other members of the Committee, I appreciate this opportunity to discuss recent actions taken 

to stabilize financial markets and foreclosure prevention efforts. 

My oral remarks today all focus primarily on actions taken by the 

Federal Reserve. My colleagues are all focusing on other important 

initiatives at their agencies. 

Financial markets have been strained for more than a year, as 

house prices declined, economic activity slowed and investors 

pulled back from risk taking. These strains intensified in recent 

weeks. Lending to banks and other financial institutions beyond a 

few days virtually shut down. Withdrawals from money market 

mutual funds and prospects that net asset values would fall further 

severely disrupted commercial paper and other short-term funding 

markets. Longer term credit became much more costly as credit 

spreads for bonds jumped and interest rates rose. 

These problems and increasing concerns about the economy 

caused equity prices to swing sharply and decline notably. Policymakers here and in other countries have taken a series of extraordinary actions in recent weeks to restore market functioning and 

improve investor confidence. 

The Federal Reserve has continued to address ongoing problems 

in interbank funding markets by expanding its existing lending facilities and recently increased the quantity of term funds at auctions to banks and accommodated greater demand for funds from 

banks and primary dealers. 

We also increased our currency swap lines with foreign central 

banks. To alleviate pressure on money market mutual funds and 

commercial paper issuers we implemented several important temporary facilities, including one to provide financing to banks to purchase high quality asset-backed commercial paper for money funds, 

and another to provide a backstop to commercial paper markets by 

purchasing highly rated commercial paper directly from businesses 

at a term of 3 months. 

On Tuesday of this week we announced another program in 

which we will provide senior secured financing to conduits that 

purchase certain highly rated commercial paper and certificates of 

deposit from money market mutual funds. 

The financial rescue package recently enacted by Congress, the 

Emergency Economic Stabilization Act (EESA), provides critically 

important new tools to address financial market problems. EESA 

authorized the Troubled Asset Relief Program (TARP), which allows Treasury to buy troubled assets, to provide guarantees, and 

to inject capital to strengthen the balance sheets of financial institutions. As provided in the Act, the Federal Reserve Board and its 

staff are consulting with Treasury regarding the TARP and Chairman Bernanke serves as Chairman of the Oversight Board for 

TARP. 


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Last week the first use of TARP funds was announced. The 

Treasury announced a voluntary capital purchase program and 

nine of the Nation’s largest financial institutions agreed to participate. A second complementary use of TARP funds will be used to 

purchase mortgage assets in order to remove uncertainty from 

lenders’ balance sheets and to restore confidence in their viability. 

Another objective is to improve the modification efforts of services on these loans to prevent more avoidable foreclosures. 

The Federal Reserve System is also working to develop solutions 

to rising foreclosures. For example, the Federal Reserve has 

worked with other agencies to put in place the standards and procedures for the new Hope for Homeowners program, and I serve on 

that Oversight Board. These loans can help borrowers who might 

otherwise face foreclosure because the new loan payments are affordable and the homeowner gets some equity in their homes. 

Lenders and servicers are analyzing their borrowers for good candidates for the H4H program. The FHA and its authorized lenders 

are poised to process applications. 

We do appreciate the additional flexibility provided in the program by Congress in EESA, in particular allowing up front payments to junior lien holders that agree to release their claims. 

In addition, the Federal Reserve System is strategically utilizing 

its presence around the country through its regional Federal Reserve Banks and their branches to address foreclosures. We have 

employed economic research and analysis to target scarce resources 

to the communities most in need of assistance. 

The Federal Reserve System has sponsored or cosponsored more 

than 80 events related to foreclosures since last summer, reaching 

more than 6,000 lenders, counselors, community development specialists, and policymakers. For example, we sponsored five ‘‘Recovery, Renewal, Rebuilding’’ forums this year in which key experts 

discuss the challenges related to REO inventories and vacant properties and explored solutions. 

We also cosponsored an event at Gillette Stadium in August that 

brought together more than 2,100 borrowers seeking help with 

servicers and housing counselors. 

In conclusion, the Federal Reserve has taken a range of actions 

to stabilize financial markets and to help borrowers and communities. Taken together, these measures should help rebuild confidence in the financial system, increase the liquidity of financial 

markets, and improve the ability of financial institutions to raise 

capital from private sources. 

Efforts to stem avoidable foreclosures, I believe, will also help 

homeowners and communities. These steps are important to help 

stabilize our financial institutions and the housing market and will 

facilitate a return to more normal functioning and extension of 

credit. 

Thank you. 

Chairman DODD. Thank you, Ms. Duke. 

We have been joined on the Committee by Senator Bob Casey of 

Pennsylvania as well. Bob, we thank you for being here this morning. 

I will begin the questioning here. I want to have the clock on for 

5 minutes, so we will try to be brief in our questions here so everyVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\A416.XXX A416

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one gets a chance to participate, knowing full well we have got a 

couple of people who are going to have some other demands. 

Let me begin. I want to pick up—Bob Menendez, I thought— 

whether anyone wants to agree with his conclusions or not, I think 

the fact that he has framed it well in terms of getting action, getting things moving. We have had a lot of strong rhetoric, a lot of 

urging. As my colleague from New Jersey will recall on this Committee, this is the 76th hearing, by the way, we have had, a third 

of which have been on this subject matter alone in the last 20 

months, but sitting here urging people to meet, having meetings, 

in fact, in this room with stakeholders, urging them to do workouts 

when it came to mortgage foreclosure issues. And as he points out, 

we have not seen as much as we would like. 

I appreciate the testimony that there still is some movement, and 

others may disagree. But I have felt for the last 20 months, since 

this effort began, that the foreclosure issue is still very much at the 

heart of all of this, that we have got to get to the bottom of this. 

Until you find that bottom, while credit is beginning to move, it is 

still going to be timid, to put it mildly. And so this is really an essential element, in my view, of this effort. 

So I want to focus a little bit on that. It is not the only issue, 

obviously, and there are other questions we have to get to. But I 

want to start with this one, if I can. And let me begin with you, 

Ms. Bair, if I can. 

You note in your testimony that EESA grants authorization to 

Secretary Paulson to use loan guarantees and credit enhancements 

to facilitate loan modifications. In fact, this is not just—this is Section 109 of EESA. We cannot always say this. I am familiar with 

it because we wrote it, you and I did. As the author of the language 

specifically, I know exactly what I intended with that language. 

One of the concerns we had at the time in writing the bill on 

September 20th, 24 hours after receiving the bill on September 

19th, was to make sure that, in addition to the accountability questions, dealing with the golden parachutes, dealing with taxpayer 

protections, was the foreclosure issue. What could we write in this 

bill that would give the authority to get more than just rhetorical 

response to the foreclosure issue? 

And so Section 109 was written to give that kind of power and 

authority, broad authority, which is what we intended with this 

bill. One of the things we all felt strongly about was to make sure 

we gave the needed regulatory agencies the broad authority and 

the resources they needed in order to respond, without Congress 

trying to write them for them. That certainly is beyond our capacity as an institution of 535 members to start dictating specifically. 

But wrote the language specifically for broad authority here. 

And so I feel very strongly about that language because I know 

how important you felt it was and I felt it was to include it as part 

of the bill. 

So I wonder if you might, first of all, since you have been talking 

about this over the last couple of days, just answer some very quick 

questions on this. One, could you describe briefly, if you can, how 

the program might work? Do you think the FDIC has the capacity 

to get such a program up and running quickly? And would the 

FDIC be willing to take on this task? 


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And then, Mr. Kashkari, I want to come back to you. I spoke 

with the Secretary of the Treasury this morning, as you may know, 

about this very matter, and, again, understanding there are some 

details to be worked on, but I certainly was left with the impression that Treasury likes this idea, would like to get it going. And 

I am going to make some comments about Section 102 in a minute 

because I know there is some pushback on that section of the bill, 

which I am also very familiar with. But the idea that Section 102 

relates to Section 109 of the bill is baloney, in my view. But, nonetheless, would you please respond to my questions? 

Ms. BAIR. Well, we are having very good discussions with Treasury, and I think Treasury is doing their due diligence, and we are 

sharing some ideas. And they are looking at some other things as 

well, and we want to respect that process and adhere to that process because, at the end of the day this would be a Treasury program, an Administration program. It would not be an FDIC program, though we are certainly willing to serve as contractor, under 

another provision of the bill. And, consistent with discussions we 

had earlier during the consideration of this legislation, yes, we 

think credit enhancements certainly should be looked at as a policy 

option because you can leverage them. With whole loan purchases, 

you have got to buy the whole loan. With some type of credit enhancement program, you can perhaps leverage your resources to 

reach a broader array—reaching a larger number of loans by providing incentives for modifications. 

We think, in looking at credit enhancements, one area to look at 

in particular is uncertainty regarding the redefault rate, and that 

gets a little bit into the weeds of the loan modification process. But, 

based on our experience at IndyMac, we are finding a lot of investor pushback, and some of the economic analysis that servicers do 

to justify loan modification is complicated by uncertainty about redefaults. So once they modify the loan, what happens if the borrower still defaults on payments subsequently? And then they have 

to try to liquidate, and the losses are greater. So I think that is 

one area where greater certainty could be provided, which would 

make the economic decision to modify a lot more powerful, if not 

irresistible. So that is one area. 

And I think this kind of authority should be coupled with a systematic infrastructure to do this. I think another impediment to 

private servicers doing these loan modifications is—they are just 

doing it ad hoc. They are doing it borrower by borrower. There is 

no industry-wide framework. I think with the IndyMac protocols 

we have helped that along, and the Countrywide-Bank of America 

agreement with the State Attorneys General is a protocol very 

similar to ours. So I think we have a workable model. 

Also, I think another reason to look at credit enhancements is because a lot of these loans are in securitization trusts. Under the 

REMIC rules, I am not sure you can buy the whole loan out. So 

for portfolio lenders, perhaps whole loan sales or purchases would 

be more of an option. For loans in securitization trusts, however, 

you can refinance them out, which is the FHA program, but this 

approach has got some limitations. You have to try to provide incentives to get these loans modified while they stay in the trusts. 

It is very difficult to buy them out. 


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So, those are the general areas we are looking at. Again, I think 

we are having very good discussions with Treasury. Treasury and 

the Administration want to be careful with this, but I know Secretary Paulson is very committed. And I do not want to speak for 

him. Neel can. But I know from my discussions with him, he is concerned about this as much as anybody. He wants to leverage resources to the extent he can to prevent unnecessary foreclosures. 

I think the entire Administration feels that way. So there is a policy process underway. I think it will happen quickly, and hopefully 

we will be able to make some public announcements in the not too 

distant future. 

Chairman DODD. You have the resources to do this, and FDIC is 

willing to do this. 

Ms. BAIR. Yes, we would be happy to serve as contractor, absolutely. 

Chairman DODD. Now, let me just—because I wanted to make 

that record. In talking about—I want to talk about 109 and 102. 

You can glaze over the eyes of people, but just to make it clear 

what we are talking about. Section 109 of the bill was to use loan 

guarantees and other credit enhancements to facilitate loan modifications. It is very separate and apart, in my view, from Section 

102. The 102 provision was intended to serve as a potential alternative to the old idea of purchasing toxic assets. The provisions of 

this section were not meant to apply to the authority provided in 

109. As the author of the loan modification provisions, I want to 

make it clear that this was not the intent of the law, nor do we 

read it as the letter of the law. So in terms of at least for legislative 

history, for those of us engaged in the crafting of it, those two sections were very separate. One came much later. Section 102 came 

afterwards, 109, in the order of how these were brought up. So I 

raise that with you. 

Now, Mr. Kashkari, let me—and, again, I do not believe in revealing details of conversations I have had with the Secretary, but, 

nonetheless, we talked about this, this morning at some length. 

And as I understand it—and you have heard Ms. Bair say this as 

well—it is the intent of the Treasury to get this program up and 

working. There are things you need to work through. I am not suggesting that is done yet. But is that the position of the Treasury 

Department? 

Mr. KASHKARI. Chairman, we are passionate about doing everything we can to avoid preventable foreclosures and encouraging 

loan modifications. We are, I would call us at this stage, in a policy 

process, understanding the proposal, understanding the details. As 

you know, this Committee played a real leadership role in the Hope 

for Homeowners program. We need to understand how this new 

proposal would interact, for example, with existing programs that 

are in place to make sure we have a thoughtful, comprehensive solution. 

So we are in a policy process. We are moving very quickly, and 

we are looking very hard at it at this point. 

Chairman DODD. We are still getting around 10,000 foreclosures 

a day, so every day we wait, another 10,000 families end up in 

tough shape. So I appreciate wanting to do it carefully, but there 


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is a sense of urgency that I think needs to be demonstrated here 

in order to get this really moving. 

I am not asking you not to be lacking prudence in all of this, but 

I hope there is a deep appreciation of what is happening far removed from this city alone, across this country, and we need to get 

moving on this to get to the heart of all of this. 

Mr. KASHKARI. Absolutely, Chairman. We share your sense of urgency. 

Chairman DODD. Now let me jump quickly to the issue of the— 

the banks issue. On October 20th, Monday, the Secretary said that 

the infusion of capital through preferred stock—talking about the 

equity investment here—‘‘to increase the confidence of our 

banks’’—I am quoting him now—‘‘so that they will deploy not 

hoard their capital, and we expect them to do so.’’ 

Many have assumed that this new capital would be used to make 

more loans which are necessary to enable business to operate. 

However, recently the press has reported that several banks receiving the taxpayers’ money intend to use it to buy other banks. The 

Washington Post reported, and I quote, ‘‘JPMorgan Chase, BB&T, 

and Zions Bancorporation have all said in recent days that they are 

considering using some of their Federal money to buy other banks. 

About 10 financial institutions belonging to the Financial Services 

Roundtable, which represents 100 of the Nation’s largest financial 

services firms, are also considering making acquisitions with the 

money.’’ 

Now, I don’t want to rule out acquisition as a step, and I think 

the word ‘‘hoarding’’ is the word that I sort of glomp onto. I appreciate the Secretary’s comments because I can just tell you there 

will be a vehement response up here if that is what is perceived 

with these dollars is hoarding this money, providing that kind of 

cushion. So I appreciate the comments, but I think Senator Menendez said it well. 

What can you tell us, what guarantees, what assurances, what 

commitments are Treasury going to extract from these lending institutions that they are not going to do this other than rhetorically 

begging them not to do it? I think we need more than just begging 

at this point. 

Mr. KASHKARI. Chairman, we share your view. It is a very important point. We want our financial institutions lending in our communities. It is essential. And so if you look at some of the details— 

terms around the preferred stock purchase agreement, there are 

specific contractual provisions on how they can and cannot use the 

capital. 

As an example, we are preventing increases in dividends because 

we do not think it is appropriate to take Government capital, the 

taxpayers’ money, and then increase dividends. That does not increase capital in the financial system, so that is prohibited. 

Second, share repurchases are also prohibited. We do not want 

to put Government capital in and then boost the stock price by 

buying back a bunch of shares. That is contractually prohibited. 

In addition, we have got other language in there focusing on commitments around increasing lending, working hard to help homeowners. Some of them are contractual provisions. Others are more 


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guidance in nature. But we share your view 100 percent. We want 

these institutions in our communities lending. 

Chairman DODD. Are we going to insist upon it, not want it? 

Mr. KASHKARI. Well, we are insisting upon it through all of our 

actions, through all of our—every dialog we have with these institutions. If you take the example of mergers and acquisitions that 

people have raised in the past week or so, we should look very 

carefully at that, because if we have a small bank, a failing bank 

in a community, that bank is not in a position to write loans for 

its small businesses, its homeowners. If a larger bank, a stronger 

bank, is able to acquire that and capital is put into that combined 

entity, that community is now better served. And so we have to be 

very careful about not discouraging prudent acquisitions because 

that can actually help us get through this troubled time that we 

are in right now. 

Chairman DODD. I agree. They said that. I am not ruling out acquisitions. The hoarding notion is the one that really is distracting. 

Senator Shelby. 

Senator SHELBY. Thank you. 

Secretary Kashkari, why did Treasury not attach a requirement 

to increase lending as a price for receiving the Government money? 

In other words, we are talking about lending to keep our economy 

going, are we not? 

Mr. KASHKARI. We are, Senator. Again, we completely agree with 

the spirit of that, and we want our banks to lend. But we also did 

not want to be in a position of micromanaging our banks. We wanted to create a program where thousands of institutions across our 

country would volunteer to participate, and if we came in with very 

specific guidance on ‘‘you must do this, you must do that,’’ we were 

afraid that we would discourage firms, discourage healthy institutions from participating. And it is the healthy institutions that we 

want to take the capital because they are going to be in the best 

position to lend. 

Senator SHELBY. One of the big rationales from Treasury in injecting this money into these nine large banks was to make them 

perhaps more solvent and have more capital to lend. Is that central 

to the whole scheme here? 

Mr. KASHKARI. It is central, Senator. 

Senator SHELBY. So if it is central to the whole scheme, why 

aren’t you insisting on in a macro sense that they not hoard the 

money, as Senator Dodd said? 

Mr. KASHKARI. I would return, Senator, to the provisions I talked 

about, about prohibiting share repurchases and increasing dividends. If you put a bunch of capital in a bank and they cannot return the capital through a share repurchase or dividend—— 

Senator SHELBY. We understand. 

Mr. KASHKARI [continuing]. The return on capital reduces. There 

are strong economic incentives for them to take that capital and 

put it to good use. Their own shareholders will demand it; otherwise, their own returns are going to come down. So we feel that 

the provisions we put into the agreements provide the economic incentives for them to lend. 


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Senator SHELBY. Another question. It is my understanding under 

the capital program nine banks will receive a total of $125 billion. 

Is that correct? 

Mr. KASHKARI. That is correct. 

Senator SHELBY. The remainder of the $250 billion that Treasury 

intends to spend on capital purchases is to be allocated among the 

thousands of other banks. 

Mr. KASHKARI. That is correct. 

Senator SHELBY. It has been suggested that some of the banks 

receiving funds under the program of the $125 billion do not need 

it and did not want it. Was requiring participation by the nine 

banks simply a symbolic gesture intended to mask the financial 

weaknesses of some of the banks? In other words, why would you 

want to push money on people that did not need it? In fact, if they 

did need it, that is what the program was about. 

Mr. KASHKARI. Well, Senator, if you will allow me to say a couple 

points, first of all, the terms for the first nine are identical for the 

terms for number 10, number 100, and number 1,000. There is a 

range of capital that a firm can take down, 1 percent of riskweighted assets up to 3 percent of risk-weighted assets. 

Senator SHELBY. OK. 

Mr. KASHKARI. So the 125 seems like a lot for nine institutions, 

but those nine institutions have 50 percent of the deposits in the 

country. So it is the same proportion for the first nine and number 

4,000. There is no preference, first of all. 

Second, again, this is a program, we want healthy institutions to 

use the capital. And we encourage the institutions to participate so 

that there would be no stigma. The healthy institutions who were 

in a strong position today can become even stronger and make even 

more loans. That is better for our system as a whole, Senator. 

Senator SHELBY. But the Comptroller of the Currency, FDIC, the 

Federal Reserve—we have Governor Duke here—these are all regulators of the banking system. When one bank acquires another one, 

you have to get approval from the regulator. So you still have that 

whip in there to deal with any acquisition of any bank, either kind 

of suggested, forced, or voluntary, do you not? All of you. Is that 

fair, Chairman? 

Allowing firms to fail, Mr. Secretary, over the past year, Treasury, the Fed, and FDIC have devised a broad array of programs to 

help prevent the failure of various financial institutions, including 

banks, money market funds, broker-dealers, and insurance companies. To what extent have these programs propped up insolvent 

firms and prolonged the current economic crisis by delaying their 

inevitable failure? Because some firms are going to fail whatever 

you do to them. How long can we—the Government, the taxpayer— 

continue to prop up so many institutions? And at what point does 

it become more cost-effective to allow firms to fail? Chairman Bair, 

you have to do that from time to time, and you have. First, you. 

Ms. BAIR. Well, we do, and it is always a difficult decision, and 

the primary federal regulator actually is one that makes the decision. We have back-up authority to close banks, but we almost always defer to the primary regulator. The primary regulator makes 

the decision. 


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I think banks are a little different than other sectors of the financial services system. I think it needs to be repeated, reiterated 

that banks overall are very well capitalized. Yes, we have some 

banks with some challenges, but the vast majority are well capitalized. This is not a solvency crisis along the lines of what we saw 

during the S&L days. We are dealing with liquidity issues right 

now, and liquidity issues are harder. Sometimes the liquidity issue 

is the market signaling a longer-term capital solvency problem. But 

as the confidence problem has grown and grown, irrational fear has 

overtaken us somewhat. So we see institutions that otherwise are 

viable being threatened with closure because they cannot meet 

their obligations. 

So that is the balancing act we are trying to strike here. With 

the additional liquidity guarantees and the additional capital infusion, we are trying to keep banks, that are otherwise viable, 

healthy and lending and to prevent unnecessary closures because 

of liquidity drains for institutions that otherwise have plenty of 

capital. 

Senator SHELBY. But there are still going to be plenty of failures 

out there—— 

Ms. BAIR. There will be. 

Senator SHELBY [continuing]. Whatever you do. Correct? 

Ms. BAIR. And we agree with you, Senator. When it is there and 

it is clear, we want them closed early, because if we wait it will 

increase our resolution costs. We absolutely agree with that. 

Senator SHELBY. Secretary Kashkari, as the Treasury moves assets from institutions by way of the TARP program, the participating institutions will have already taken out insurance on those 

assets in the form of credit default swaps. Will Treasury allow 

firms to retain the credit default swaps that they have used to 

hedge the securities that they sell to the Government? 

Mr. KASHKARI. Senator, at this point we do not have a firm policy on what to do with any hedges associated with the assets. I 

think that those are complex issues that we are working through 

with the regulators. Once we identify exactly which assets we are 

going to buy and the purchasing mechanism, those are important 

details that we are going to work through. 

Senator SHELBY. But the firms that sell their assets to the Government under the plan you are talking about, TARP, they would 

stand to profit if those assets default under the credit default 

swaps, would they not? 

Mr. KASHKARI. That is true in the credit default swap market 

broadly. Many participants are writing insurance contracts on assets they may or may not own. So I think that that is a very important issue that we are sensitive to. I think it is an issue that we 

all need to wrestle with more broadly. 

Senator SHELBY. Last question. What specific factors will the 

Treasury consider when determining whether it will make an equity purchase in a bank? What types of banks do you expect to be 

the best candidates for equity purchases? Those with solid balance 

sheets? Those with a high percentage of trouble assets? And will 

insolvent banks be prohibited from participating in your program? 

Mr. KASHKARI. Senator, we have spent a lot of time working with 

the four banking regulators for them to come up with a standardVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\A416.XXX A416

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ized process that they are going to be reviewing applications and 

then making a recommendation to the Treasury Department. The 

regulators in many cases have their professionals in these institutions and have been working with them for years. So the regulators 

are best positioned to judge the viability of an institution and how 

healthy it is. Ultimately, it will be the Treasury Department’s determination, but we are going to rely very heavily on the judgment 

of the regulators. 

Senator SHELBY. Thank you. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Senator Johnson. 

Senator JOHNSON. Ms. Bair, thank you for coming by my office 

to discuss deposit insurance issues yesterday. Throughout the next 

year, Congress will have to make some decisions on permanent 

changes regarding deposit insurance coverage. Should the new 

$250,000 level be made permanent? And will banks be able to afford the higher premiums? 

Ms. BAIR. That is a very good question. Congress sets our deposit 

insurance limits, and the base limit has been temporarily increased 

by Congress to $250,000 through the end of 2009. 

I think that we will need to gauge the situation at that point. 

I am concerned if we still are working through our challenges that 

we would not want to create a cliff effect where there would be a 

massive exodus of money because of the drop down. So I think that 

is an issue that is going to have to be handled very carefully. If 

Congress would like to take it back down perhaps it should be done 

in a phased approach. But certainly I think if you keep the higher 

limit it needs to be built into the premium structure, and we can 

do that over a period of time to ease the premium impact. While 

we are industry-funded, we do have wide latitude to borrow from 

Treasury for short-term liquidity needs if we need it. We have not 

had to do that, and I hope we will not have to do that. But I think 

to maintain the principle of industry funding, it should be built 

into the premium structure if Congress decides to make the 

$250,000 permanent. 

Senator JOHNSON. Continuing on, we have seen over a million 

loans reworked by HOPE NOW, and efforts are underway for the 

Hope for Homeowners program. But there are some concerns that 

these programs are not making a large enough difference for those 

facing foreclosure. How would you change what the Government 

and institutions are currently doing to make modifications more 

meaningful? 

Ms. BAIR. I think we have been having excellent discussions with 

Treasury and our fellow bank regulators and the housing authorities about this. I think there are lots of authorities to explore. One 

which Chairman Dodd mentioned earlier, using credit guarantees 

or credit enhancements, may be an additional tool we should use. 

But we are behind the curve. There has been some progress, but 

it has not been enough. We need to act, and we need to act quickly 

and dramatically to have wide-scale systematic modifications with 

standard industry metric applied across the board. And if economic 

incentives need to be provided to help make the economics of those 


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modifications work, especially for these loans that are in 

securitization trusts, then I think that is what we need to do. 

It can be done. I think we are showing at IndyMac it can be 

done. I am very grateful that the Bank of America settlement also 

uses a protocol similar to ours. The trick is to provide the appropriate incentives, the carrots and the sticks, if you will, to make 

sure it is done on a more industry-wide basis. 

Senator JOHNSON. This is a question for all the panel. Beginning 

to restructure the financial services regulatory structure is a complicated undertaking. What do each of you believe is the starting 

point for restructuring? What is the No. 1 structural regulatory deficiency in your opinion that needs to be corrected by Congress? 

Ms. Bair? 

Ms. BAIR. At the top of my list would be regulatory arbitrage, 

which I think has taken a number of forms. There is uneven regulation. And it is true with mortgage lending standards. We did not 

have across-the-board mortgage lending standards, and we ended 

up seeing negative competition, with non-banks being very aggressive with their loan originations and that created competitive pressure on the banks to start doing the same. 

I think another area is capital standards. We have had relatively 

strong capital standards for insured depository institutions, less so 

with other parts of the financial services sector. Where you are seeing the most profound distress at the institutional level is with the 

institutions that are most leveraged. So, again, ending that uneven 

regulatory treatment and having some consistency across the board 

and leverage constrained is another area that I hope Congress will 

be looking at next year. We need to have more even regulation applying to a wide range of institutions, and we also need to have resolution mechanisms—which we have for banks, but currently not 

for these other institutions. This is why Treasury and the New 

York Federal Reserve Bank had to develop a process for the Lehman Brothers and AIGs of the world, because the process for it 

right now just does not exist. 

Senator JOHNSON. Mr. Kashkari, can you add anything to that? 

Mr. KASHKARI. I agree with Chairman Bair and would add two 

things. One is, in March, the Treasury Department published a 

comprehensive proposal on how to restructure the regulatory system. It is a long-term approach. 

I would also add to what she said and comment on mortgage 

origination standards, not just in the banks but mortgage brokers, 

which right now it is not done on the national level and there is 

not consistency. And I think bringing some type of national Federal 

oversight and consistent would be helpful. 

Senator JOHNSON. Mr. Montgomery? 

Mr. MONTGOMERY. Yes, sir. While not a banking regulator, I can 

say going forward that reform of the Real Estate Settlement Procedures Act—RESPA, as it is known—which, after a 6-year effort, we 

are on the verge of getting that out in the next 2 to 3 weeks, I 

think that will bring more closely into the light of day what consumers pay at the closing table, what are the terms of their loans, 

what are the settlement costs, things of that nature. And we think 

that will definitely help the process going forward. 

Senator JOHNSON. Mr. Lockhart? 


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Mr. LOCKHART. I certainly support the Treasury blueprint and, 

actually, Congress in July, when they passed the law combining 

OFHEO with the Federal Housing Finance Board and also taking 

the HUD mission, it was a major step forward in the housing area 

of pulling the regulators together and having a much more comprehensive approach. 

One thing that was left off in that legislation, as it moved 

through, was we were going to be put on as a member or a participant with the financial regulators and their FFIEC activity. I believe that that should be added at some point. 

Senator JOHNSON. Ms. Duke? 

Ms. DUKE. I think I would echo the need to draw regulation more 

widely, to look at probably the business models as they will develop, because I don’t think the business model that we used in the 

past of originate to distribute will continue; but to make sure that 

all participants in the financial transaction chain are regulated in 

the same manner. Also, I think supervision and enforcement in addition to regulation are key pieces of it. And I would echo the need 

to have some resolution protocols for institutions that fall outside 

of the insured depositories. I think it is an important point that we 

have a mechanism for insured depositories, but we did not have 

anything for those that were outside of it. And the bankruptcy 

court did not seem to be the right place to try to deal with some 

of those issues. 

Senator JOHNSON. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Sheila Bair, I just could not resist that idea of that across-theboard regulation, and for those of us who were involved in 1994 

with the crafting of the HOEPA legislation, that legislation required all lenders—State-chartered, federally chartered institutions—to apply standards against deceptive and fraudulent practices. Not a single regulation was ever promulgated under that law 

for 15 years. And more than any other single thing I can think of, 

had that regulation been promulgated and someone enforcing them 

on lenders across the board, I think we would be in a very different 

place today. 

Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. 

Mr. Kashkari, I want to direct my first question to you, and I 

want to follow up on the line of questioning that our Chairman and 

our Ranking Member went into with regard to the $250 billion of 

liquidity that has been provided to the banks. Their focus there 

was to make sure that those dollars were not hoarded and that the 

actual result would be the lending that we would like to see happening. And I understand that, and I appreciate your answers with 

regard to that part of the program. 

The question I have goes to the toxic asset purchase issue. It 

seems to me that the plan to utilize these resources that Congress 

has provided for the purchase of toxic assets has the opposite impact. In other words, it creates an incentive for investors to stay 

on the sidelines for a while and watch what the Government is 

going to do and then maybe step in at some later date and either 

buy or finance purchases from the Government. And I just wonder 

what your thoughts are on that aspect of the proposal. 


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Mr. KASHKARI. Senator, thank you for the question. The question 

you ask is fundamental to the design of the program. The program 

is intended not only to buy troubled assets, but in doing so to provide price transparency to the market, because our view is that 

there is a lot of money on the sidelines who are interested in investing in our institutions and in these assets themselves. And our 

hope is that by the Federal Government taking the first step 

through a very open, transparent process, that will encourage private capital to come in. That is the exact intention of the program. 

So we agree with the spirit that you raise. 

Senator CRAPO. But isn’t the fact that the Federal Government 

is going to step in in such a major way going to create just the opposite result, namely that the private capital will sit back, stay on 

the sidelines, and watch for a while to see what will develop? 

Mr. KASHKARI. I think it is a very good question, and I think 

there is some merit to that point up until we get started. And that 

is why we are moving as fast as we can. But once we get started— 

and we are going to get started slowly, methodically, let people and 

let the markets see what we are doing. We expect them to understand it very quickly and then start to come in. 

Senator CRAPO. All right. Thank you. 

Chairman Bair, I also am concerned that the direction we are 

heading with this, particularly with the numbers of guarantees 

that we are now seeing put into place, has essentially driven us far 

down the road toward a situation in which financial institutions 

are basically becoming disconnected from the risk of lending. Could 

you address that? 

Ms. BAIR. I agree with you. These guarantees make me uncomfortable. We had a compressed timeframe to make a decision. We 

evaluated the pros and cons, the risks and the benefits. But at the 

end of the day, especially given what was going on in Europe, we 

did not think we had an alternative. We needed to move ahead. 

I am aware of the additional moral hazard, obviously, with expanded guarantees. We have in place a heightened supervisory 

process on the use of these, and very tight controls over weaker institutions using these, if they use them at all. So we can compensate through the supervisory process for some of the additional 

moral hazard. The other key is to make sure they are temporary. 

And, believe me, I am determined that these will be temporary. 

And we are charging a premium, I would hasten to add. This is not 

just something we are providing. We are charging a premium for 

it. 

Senator CRAPO. Your point on the temporary nature I think is 

very important. In fact, one of my questions was going to be, How 

do you take the guarantee away? 

Ms. BAIR. Well, we are. We are out there now saying that it is 

going away June 30th. And I understand there might be some pressure to continue it. I do not think anybody should assume it is 

going to be continued. It is not. My every expectation is that it will 

go away. 

There are things, if you needed to have some type of phased process as opposed to a clipped process, I think you can do that by reducing the cap, ratcheting up the premiums, so there are ways to 

ease out if we want to have a slower process. But I am resolved 


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to end these expanded guarantees because of the additional moral 

hazard that they create for us. 

Senator CRAPO. Thank you. 

And, Mr. Kashkari, back to you. With regard, again, to the toxic 

asset purchase—and I am focusing now on the underlying mortgages and the question I have is: How will the servicing of the 

loans be handled? Will it be handled by the current servicing managers? Or are we going to create a new system or a new—I was 

going to say ‘‘bureaucracy’’—a new set of managers and re-create 

the system that we have now? 

Mr. KASHKARI. At this point, Senator, our intention is, where 

possible, to keep the servicing with the existing servicer, but send 

to them very specific instructions, a plan on how we want them to 

conduct the servicing consistent with our objectives. 

Senator CRAPO. All right. Thank you. And another question I 

have is I appreciate the fact that Treasury has submitted a request 

for ideas on how we can establish the insurance program that was 

involved in the legislation that we had. And as you know, the liquidity crisis is not limited to the residential mortgage arena. It is 

expanding into a number of other areas, and the one I am thinking 

of right now is the commercial mortgage arena. 

Has Treasury considered using the insurance program to provide 

a Government guarantee or an insurance for the safest part of or 

for some part of the commercial mortgage market? 

Mr. KASHKARI. Senator, that is a very good point. We have heard 

a lot of the same perspectives that you raise, both from the banking regulators and from individual institutions. If you look out in 

the regional bank market, in particular, they have a lot of mortgages, whole loans, commercial mortgages on their balance sheets. 

So we think that the insurance program may well be applicable 

there, and these are just the very ideas that we are soliciting right 

now. 

Our initial focus is on residential, but we are very aware of and 

focused as a second step on commercial 

Senator CRAPO. All right. Thank you very much. And one last 

question I wanted to ask is you had talked a moment ago about 

credit default swaps and the fact that there are a number of those 

in which one of the swapping parties does not have an ownership 

interest in the underlying asset. That has been an issue that we 

have discussed in hearings in the Agriculture Committee on derivatives. And the question I have is: Is there no purpose for those 

types of swaps? I understand one of the arguments that is being 

made is that even though the swapping parties may not have an 

ownership interest, they may have a very strong financial interest 

in the outcome of—or in the strength of the company that is engaged in the underlying transaction, or some other type of reason 

for wanting to be sure that that transaction is insured. 

Mr. KASHKARI. Senator, I will say, first of all, I am not an expert 

in the credit default swap market, so let me just set expectations. 

But I think you are right. I think that there are many reasons why 

financial institutions or financial counterparties may want to hedge 

certain risks that they may or may not own directly the underlying 

asset. So I think that is right, and I think that we need to have 

the experts take a hard look at that. 


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Senator CRAPO. All right. Thank you very much. 

Chairman DODD. Thank you, Senator. Good questions. I appreciate it very much. 

Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman. 

My first question is for Mr. Kashkari. I would just like to follow 

up on my opening statement. I know Senator Dodd talked a little 

bit about this, to ensure that the capital that TARP provides to 

banks is effective in achieving the joint goals—stability in the financial markets, but also the unfreezing of the credit markets to 

deal with Main Street. So I have asked you for a while, and Senators Reed and Menendez joined me in this. What about the idea 

of setting some guidelines? If you have public guidelines out 

there—now, I realize you cannot do one size fits all, nor do I think 

you can mandate these things. But the idea of guidelines to help 

importune banks which are sensitive institutions to public—given 

that they are a regulated industry to public pressure would make 

sense. Can you please tell us if you intend or Treasury intends to 

put out such guidelines on, first of all, a general, a ballpark figure 

of how much of this capital should be lent out? You know, obviously, it would accelerate—there is a multiplier effect because for 

every dollar of capital you can, obviously, more than a dollar or two 

of lending. 

Mr. KASHKARI. Well, Senator, as you and I have discussed, we 

share the spirit of your question completely and want these institutions to lend and provide credit to our communities. In fact, it is 

not published yet, but when the final purchase agreement is put 

out there between the Treasury and the individual institutions, 

there is specific language in the purchase agreement about lending 

and about taking aggressive steps on foreclosure mitigation. It is 

not a legally binding contract. 

Senator SCHUMER. Right. 

Mr. KASHKARI. Neither would guidelines be. But it does considerably more—— 

Senator SCHUMER. Is it more than just a general exhortation? 

Mr. KASHKARI. Well, forgive me, I am not an attorney so I cannot 

tell you—— 

Senator SCHUMER. I am not asking you as an attorney. I am just 

saying if it says we encourage the banks to lend the money, it is 

not going to be much. If we say, you know, for every dollar of capital they get, we would expect there would be two or three or four— 

you know, something like that, we would expect, not mandate. 

Mr. KASHKARI. Again, we do expect, but we are hesitant to put 

a specific dollar figure because these financial institutions—again, 

as you know, Senator, we are talking about very large financial institutions and very small. One size fits all is—— 

Senator SCHUMER. What are you going to do for banks that do 

not increase their lending at all that take this capital? 

Mr. KASHKARI. Sure. As I mentioned previously, Senator, I think 

that the provisions on preventing dividend increases and stopping 

share buybacks provides very strong incentive for these institutions 

to want to lend again. 

Senator SCHUMER. But we have had a couple of leading executives talk about they think that the banks—and they were talking 


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not about their own specific institution alone—are going to just sort 

of hoard the money for a while, and they thought was in their best 

interest, and that worries me. 

Mr. KASHKARI. It worries us, too. We want these institutions to 

lend, absolutely, but also recognize the situation we are all in right 

now is the situation of unprecedented lack of confidence in the system. 

Senator SCHUMER. Understood 

Mr. KASHKARI. And so the immediate reactions may be more reserved. I think as things—as the markets begin to sort themselves 

out, I would expect to see these institutions lending. 

Senator SCHUMER. I would urge you to consider putting out these 

guidelines. And then there is one that may be easier. What about 

guidelines inveighing against new investments in these exotic financial instruments that brought so many of the institutions down 

to begin with? That is an easier one for you to write. 

Mr. KASHKARI. It is a very good point, and we certainly do not 

want institutions taking undue risks. But, candidly, Senator, I 

think that my banking regulator colleagues are probably in the 

best position to help guide their regulated entities in the actions 

and steps that they should be taking. 

Senator SCHUMER. Well, that is about all institutions. I am talking specifically about institutions that are benefiting from the capital injection. 

Mr. KASHKARI. Yes, and, again, I think our perspective has been 

we want as many institutions as possible to participate and not 

wanting to be overly prescriptive in keeping away the healthy—— 

Senator SCHUMER. I know. But as I said, I think you are leaning 

too far in giving them dessert and not enough in making them eat 

their vegetables. So I hope you will consider that. 

For Ms. Bair—you know, as I mentioned in my opening statement, I have tremendous respect for you. Here is something that 

befuddles me. We have for a year been sort of chasing our tail in 

terms of relieving the foreclosure problem with all these kinds of 

voluntary programs. And they just do not work, by and large. If the 

institution has the whole mortgage, they work. But for the majority 

of mortgages and the majority of subprime and all these that are 

chopped up in 40 pieces, you have the problem of one of the 

tranche holders—probably the riskiest piece—saying, ‘‘I am not 

going to participate.’’ And we have tried and tried—Secretary 

Paulson, I salute Senator Dodd and Chairman Frank for their efforts. But everyone will agree none of them are really going to 

work. And yet we still come back to this exhortation process, and 

then 3 or 4 months later, we are disappointed that it has not 

worked. 

Isn’t it really true—and help me understand this—that the only 

way we are going to make major, major progress in limiting foreclosures and getting refinancings is changing the bankruptcy law, 

which is the only constitutional way to require that 40th tranche 

holder to come to the table and say, ‘‘Hey, under bankruptcy, I will 

get zero, so I will negotiate for 5 cents on the dollar or 10 cents 

on the dollar,’’ or whatever. I am befuddled by the fact that that 

fact, which seemed so obvious to me, is not governing our actions 

on this. It seems almost—you know, I forgot who said, but it is 


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hope over reality if you do it the other way in any kind of voluntary 

way. 

Could you please address that for me? 

Ms. BAIR. Well, I would agree, I think some of the voluntary efforts have helped, but they have clearly not helped enough. We are 

falling badly behind. 

Senator SCHUMER. As you said. 

Ms. BAIR. And more needs to be done. I would agree with that. 

I think there are authorities in EESA that can be used with a carrot as well as a stick approach to get this done on a more broadscale basis. 

We have not taken a position on the Bankruptcy Code change. 

I do think, though, that whether that is or is not a good tool to 

put into the arsenal, hopefully we would also have a process that, 

prior to a borrower having to threaten bankruptcy or go into bankruptcy, we could get that loan modified. 

Senator SCHUMER. Do you have any hope for—I am sorry. My 

time is up. Just a last question. Do you have any hope for a voluntary model? I do not. 

Ms. BAIR. No. No, there needs to be a package of carrot and stick 

incentives. I agree with that. 

Senator SCHUMER. Thank you, Mr. Chairman. 

Chairman DODD. And let me say to my colleague from New York, 

I mentioned this before, but we may end up in a lame-duck session, 

and there may be various proposals. I think we have come to the 

point once again where I think legislatively we have to try this 

again as part of some other ideas. And so I am putting together 

a package of ideas that I will ask my colleagues to take a look at, 

obviously all of us here in November, as part of—whether it is a 

stimulus package or whatever else, but some steps we might take 

instead of waiting until after January to get back to maybe deal 

with some of these issues. And that is one of them. 

Senator Hagel. 

Senator HAGEL. Thank you, Mr. Chairman. 

Secretary Kashkari, in your statement you noted that Treasury 

announced recently a streamlined, systematic process for all banks 

wishing to assess the $250 billion infusion program. And you further noted that qualified and interested publicly held financial institutions will use a single application form. You talked a little bit 

about that. You will factor in the recommendations of the regulators, and you will publish the required legal documents so private 

banks can participate as well as the same economic terms as the 

public—on the same economic terms as public banks. And you talk 

about allocating sufficient capital, which you believe $250 billion is 

enough, so that all qualifying banks can participate. 

My question is, then: What is the criteria that you are going to 

use? Because as I understand it, it will get down to a final judgment, essentially an arbitrary judgment. You are factoring in qualifications to start with. You are factoring in input from the regulators. But, in essence, it will be yours or Paulson’s or someone at 

Treasury’s decision who gets the money and who does not. So here 

are a couple of the points that I would hope that you could address 

for me. 


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Do all the qualifying banks that apply, will they get into the program? If they qualify, will they get in? Is bank consolidation a factor when you start deciding who gets the money? For example, 

bank consolidation could be used as a lever, it could be used as a 

threat to force consolidation. Will you take those first two issues 

and give us what you can on this? Thank you. 

Mr. KASHKARI. Yes, Senator, thank you for the question. The regulators are going to be the first screen for institutions, so, for example, a bank may send an application to the FDIC as an example, 

and the FDIC may review that application and determine that this 

bank is not a good candidate for a capital purchase program and 

may send that back to the institution, and Treasury will never see 

that application. 

For the applications that we see with the recommendations of 

the regulators, in most cases I would imagine, we are going to take 

the guidance of the regulators because they are the ones who know 

these institutions very well. 

There could be other factors that are also considered. So, for example, if an institution had a private capital raising at the same 

time that they were also seeking public capital, that would also 

weigh into our analysis as we determine is this a good use of taxpayer resources. 

At the end of the day, this is a program that is meant for healthy 

institutions. We want them to lend. And so working very closely 

with our colleagues in the regulatory agencies, we think that that 

is the right approach. 

To the point of consolidation, I do not think we have any specific 

program focus on consolidation. Again, I think it will be a case-bycase analysis with our regulatory colleagues. The example I gave 

I think is a good one. If you had a small failing institution that was 

being acquired by a much healthier, stronger institution, the idea 

of putting Government/taxpayer dollars into that combined entity, 

we think that is a good use of taxpayer dollars because that community is well served now by that combined stronger institution. 

Senator HAGEL. Could you envision a scenario, with the regulator 

or without the regular, where you would offline in private conversations—because I suspect there will be some private conversations on these things. I have been told, as a matter of fact, that 

there have been by banks inquiring, checking in, how do we apply, 

on what basis are you going to make these determinations. Could 

you envision a situation where you say to a bank if you would be 

willing to seriously look at consolidation on whatever terms with 

whichever institutions, then we might well look favorably on your 

participation in the program? 

Mr. KASHKARI. I would imagine that those types of conversations 

may happen between the regulators and the entities, but I would 

defer to my regulatory colleagues more so than—— 

Senator HAGEL. Chairman Bair, can you help us on this? 

Ms. BAIR. Well, as Neel alluded to earlier, I think you need to 

distinguish between an acquisition that stabilizes a bank having 

some challenges versus using the additional capital to build your 

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ment for the Treasury, but on an acquisition basis, it might be very 

good. So I think that kind of healthy acquisition activity is something that should be encouraged. And, again, to the extent it would 

prevent failures or the risk of failure for institutions later on, that 

can help protect the deposit insurance fund. 

Senator HAGEL. When do you think that this program will actually be in place so that you will start to make some decisions? 

Mr. KASHKARI. It is in place now. 

Senator HAGEL. Aside from the nine big banks. 

Mr. KASHKARI. On Monday, the regulators posted application 

forms on their websites. 

Senator HAGEL. So the banks, the institutions are now filling out 

the application, three pages, is that right? 

Mr. KASHKARI. It is two or three pages. 

Senator HAGEL. Filling out applications, working through their 

regulators. They are now coming into your office. 

Mr. KASHKARI. And then the regulators have already begun submitting recommendations to us today on institutions that we are 

going to evaluate and make decisions. 

Senator HAGEL. Have you made any discussions beyond the nine 

big banks? 

Mr. KASHKARI. I do not believe at this point we have made any. 

Senator HAGEL. I have not seen any. Have you made any—when 

would you make the next group of decisions? 

Mr. KASHKARI. We are in the process within Treasury of formalizing our review process and procedures and finalizing those 

and begin processing those applications immediately. But I will 

also comment, the announcement that I talked about within 48 

hours is when the contracts are finally signed. An initial approval 

to an institution will not trigger the official announcement. It is 

only when we get further down the process and we are actually 

signing contracts with the institutions. That is what will trigger 

the formal announcement within 48 hours. 

Senator HAGEL. When would you think that the first additional 

banks beyond the first nine might be announced? A week? Two 

weeks? 

Mr. KASHKARI. Well, announcement, again, forgive me, announcements of the actual transaction—— 

Senator HAGEL. Well, just get me to where we need to be, and 

that is, money on the street. When will they get their money? 

Mr. KASHKARI. Our goal is to have the $250 billion out the door 

by the end of the year. 

Senator HAGEL. But give me a better answer than that. You tell 

me the process is already underway. You are accepting applications. When, then, can you tell this Committee that we will have 

some money in the hands of this next series of banks? A week? 

Two? You will make decisions. Contracts, whatever the process is. 

Not your intent, your hope. 

Mr. KASHKARI. Understood. 

Senator HAGEL. But where are we? 

Mr. KASHKARI. My expectation is a few weeks because it will 

take time for the banks themselves to do their work, work with 

their attorneys, meet with their boards as necessary, before they 

are in a position to sign the final contracts with Treasury. So we 


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are going to give them initial indications very quickly so they can 

do all the legal work they need to do on their end before we can 

fund these transactions. 

Senator HAGEL. But you are looking at a few weeks at best before the final deal is made. Then I assume that that means the 

bank gets the money? 

Mr. KASHKARI. Correct. 

Senator HAGEL. Over the next few weeks. 

Mr. KASHKARI. I think it will be a few weeks before the next 

batch are actually funded. 

Senator HAGEL. Thank you. 

Chairman DODD. Thank you for that, Senator. I appreciate it. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman, and thank you 

all for your service, and I hope you all understand the questions 

and the line—we all have a common goal here, and maybe some 

of us are trying to spur you to look at some things that either you 

are looking at but maybe not with the intensity that many of us 

think you should, in fact, look at it. And so I hope you are taking 

them in that spirit. 

Mr. Kashkari, you said in your statement you expect that all participating banks—expect all participating banks to continue to 

strengthen their efforts to help struggling homeowners avoid preventable foreclosures. We expect that, too, but that has not happened. And we have servicers who seem to be incentivized in a different direction. My office has been dealing with a whole host of 

people in foreclosure, and the servicers—you know, we have one 

case in which one servicer said, ‘‘Absolutely not, can’t do anything 

to help you,’’ and then we called back and got a different entity 

within that servicing entity, and they offered a deal that actually 

was something that could save the home. We have other that seem 

to be incentivized to go to foreclosure. 

So, you know, I have a real problem in saying that we expect as 

we are infusing large amounts of capital. What would be wrong 

with, for example, Treasury promulgating guidelines on loan modifications for institutions that are participating in the capital purchase program, you know, similar to what the FDIC’s existing loan 

modification program is? 

Mr. KASHKARI. Well, Senator, we share your concern and your 

focus on this issue. I personally have spent the past 14 months 

working with servicers and with counselors to try to reach homeowners and encourage loan modifications, and we have made a lot 

of progress. The industry is now at a pace of around 200,000 workouts a month, which is a huge increase from where they were when 

we started. But we agree with you, it is not enough. We need to 

do more. 

So I think that the actions that we have taken and we continue 

to take working with these companies and with servicers, we continue—we just need to press them and push them to do everything 

that they can. 

The hardest part about a loan modification is not the calculation. 

A first-year finance student could do the calculus of which is better. 

It is getting to the homeowner. It is getting them to pick up the 

phone and call. And we have worked very hard. 


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For example, if you will indulge me for a moment, if there is any 

homeowner out there that is concerned about losing their home, 

the worst thing they can do is do nothing. They should pick up the 

phone. We have got a hotline, a national hotline, 888–995–HOPE. 

They should call. 

Chairman DODD. Mr. Secretary, could I interrupt you 1 second? 

Why can’t the lender make that call, too? They know they have got 

a customer, a borrower in trouble. They know that. Why don’t they 

pick up the phone and call that borrower and try and track them 

down. Why doesn’t it work that way as well? 

Mr. KASHKARI. Well, they absolutely are, and we are pushing 

them to do that. In fact, over the summer—I believe it was in 

June—— 

Chairman DODD. Sorry, Bob. I didn’t mean to—— 

Mr. KASHKARI [continuing]. We worked with the servicers and 

the counselors together in HOPE NOW to create guidelines and 

standards for loss mitigation for the industry that said exactly 

that, Chairman. They need to be sending letters in advance of rate 

resets. They need to be making these phone calls in advance of borrowers going in delinquency. A lot of times what you will find is 

there is a real challenge we have. The bank is doing their duty to 

their investors by making calls saying, ‘‘You are behind in your 

payments. You are behind in your payments.’’ That is the collection—— 

Senator MENENDEZ. But what about—Mr. Secretary, I hate to 

have all my time eaten up by this, but let me just ask you this: 

What about the bank that I told you about? And this is—we have 

a lot of people coming to seek help. I tell you, my office is inundated. We have had five foreclosure clinics that I have conducted 

myself in the State of New Jersey. We have got a lot of people seeking help, so maybe there are some who are hiding or afraid and in 

the bunker. But we have got a lot of people seeking help. And so 

we have got Reverend Soaries in New Jersey who does a very good 

job through a community development financial institution, and he 

is trying to help constituencies to be able to keep their homes. He 

goes and offers the bank $160,000 out of $175,000. They say no. He 

goes to the foreclosure with a full certified check, and then the 

bank bids up. Tell me how that is in keeping with the spirit that 

we are trying to work out these mortgages. It is not. And so I do 

not quite understand what is wrong with issuing guidelines by 

Treasury, particularly for those participating in these programs, 

that does similar to the FDIC. 

And, second, you know, about hoarding the money, I am concerned about it. I know that you say that the inability to buy back 

shares or to issue dividends is enough an incentive. But, you know, 

they are going to pay—what?—5 percent dividend in the shares 

that we have purchased from them—I mean that we have lent to 

them. So I am not quite sure that that is the incentive to ultimately not sit on their money as they build their overall standing. 

I think you need to have some set of very clear guidelines. They 

are not mandatory. But it is the expectation. You know, I cannot 

judge an employee if I do not tell them what the standards are. 

And I cannot tell the banks whether or not they have fairly used 

the collective money of the people of the United States in achieving 


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the goal that we all want for them and to create liquidity in the 

marketplace, particularly for Main Street, if I do not give them a 

set of standards of what I am looking for to accomplish. I do not 

quite understand what the reticence of that is. 

Mr. KASHKARI. Senator, we share your perspective, and we want 

these banks to lend, and I do not think we have reticence to it. I 

think we will look at this with our regulatory colleagues. Ultimately, the regulatory—— 

Senator MENENDEZ. Why not set a standard, then? Why not set 

a set of standards by which people could judge by? 

Mr. KASHKARI. Again, I think a set of standards could be a very 

useful tool. We need to be careful not to be too prescriptive. Again, 

we are trying to strike the right balance, not just getting the big 

banks to participate, but getting the 1,000th bank, the 3,000th 

bank in our communities to participate. And setting a one-size-fitsall standard may not be the right approach, but we need to look 

at it. 

Senator MENENDEZ. All right. One last question. It goes to both you and Governor Duke. You know, we gave AIG $85 billion and 

then—lent it, I should say, not gave it. And then we further agreed 

to extend an additional $38 billion in credit. Now, our Nation’s 

public transit agencies are potentially liable in payments in the 

hundreds of millions of dollars to banks due to the downgrading of 

AIG through LILO and SILO leverages leases. 

Does the Treasury and the Fed think it appropriate for these 

banks to be in a position to make a windfall at the expense of these 

public agencies which ultimately would have a huge consequence— 

a huge consequence—to the ridership and to the States that ultimately operate these public agencies? Without action by the Treasury’s banks, you know, to intervene, they stand to gain all of the 

benefits the IRS has declared to be inappropriate and, you know, 

it seems to me that we have a very huge and pending challenge 

here. And I hope that both the Federal Reserve and the Treasury 

Department are going to look at this, or else we are going to see 

a very huge consequence to hundreds of public transit agencies 

across the country, and that would be devastating at a time in 

which we are seeking to move more people into the opportunities 

that exist today in the marketplace, that we are trying to do something about our energy questions, and at a time in which State entities would ultimately be faced with even greater amounts of moneys that have to come up front. I think it is wrong, and certainly 

the banks that we are lending to here should not take advantage 

at the same time that we are propping up AIG. 

Mr. KASHKARI. Senator, this is an issue that came to my attention very recently, and my colleagues and I at the Treasury are 

going to look at it. I would be happy to get back to you on it. 

Senator MENENDEZ. I appreciate it. If you would get back to me, 

I would be very interested. 

Mr. KASHKARI. Absolutely. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator, very much. 

Senator Corker? And let me just say for the record, too, I want 

to thank Bob Corker. During those 13 days, there were a number 

of people—obviously, everyone was involved, but some more adaVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 E:\HR\OC\A416.XXX A416

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mantly and directly than others, and Bob Corker was one of them. 

I just say, we would not have gotten to that final result without 

your help and support, so I appreciate it personally and I want to 

say publicly how much I appreciate your involvement. 

Senator CORKER. Thank you, Mr. Chairman. I very much enjoyed 

it and want to work with other Members of this Committee all the 

way through this process. I know the implementation is equally important to the legislation, and then coming back in January to regulate appropriately. We have a 20th century regulatory system and 

I think we understand that and we will be focused on the 21st. I 

look forward to being hopefully equally constructive, and I thank 

you. 

I do want to maintain the focus on the fact that certainly housing 

prices have shown problems in our financial industry. I think the 

exuberance, if you will, that we had in the housing industry for so 

many years, you know, most people could probably see that at some 

point, this had to fall. I mean, it was crazy, what was happening, 

especially in some of the States like California and others where 

people were paying three and four times just over a few years what 

they were paying before. 

We knew there was going to be a decline, and I hope we will 

maintain our focus on the fact that, really, this whole issue around 

foreclosures today has to do with the way financial markets work 

now. It is no longer the case of people going into their local financial institution and having a loan with their local banker that they 

see at the Rotary Club or other places and maintaining that relationship, and if they get behind, they have the opportunity to talk 

with them about that. That just doesn’t exist now, and so that is 

one of the frustrations, I know. 

The other huge issue, obviously, are these exotic derivatives and 

other kinds of things that exist that no one knew existed, and candidly, we wouldn’t be having this hearing today, I don’t think, if 

it weren’t for that. So that is really, when we are talking about the 

root of the problem, it is sort of the chicken and egg, I guess, but 

I hope that that is where we will maintain our focus over the next 

year or so. 

Now, having said that, this foreclosure issue, I listened to Senator Schumer’s comments, and candidly, in fairness, I do think 

most of what we are doing is hope. I mean, the way the disconnect 

exists right now between the borrower and the lender is so confusing that the average citizen who gets up every day having to 

work and raise kids, I mean, it is hope, and I understand that, and 

I think at some point we will be looking at this in a different way 

than we are right now. 

I appreciate so much your efforts, Ms. Bair. In the conversations 

we have had, I think you have addressed the FDIC insurance 

issues appropriately all the way through. I did hear you mention 

stabilizing. I think foreclosure is a problem and I think we need to 

figure out a way to deal with that. Stabilizing, I don’t know. That 

bothers me some. I think, unfortunately, there is a ways for that 

to fall now. We still have not hit bottom and I think anything we 

do that is stabilizing in ways that don’t make sense really just 

caused the market to be sluggish for a long, long time. 


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And I am wondering if just very briefly you might respond to 

that. Maybe you were just talking about foreclosures. Stabilizing— 

the word ‘‘stabilizing’’ bothers me some because I think we move 

into a prolonged time of sort of fictitious prices that don’t allow us 

to hit bottom as quickly as we should, and I wonder if you might 

expand on that. 

Ms. BAIR. Yes. The markets need to correct. We do need to find 

the bottom. And markets will eventually find the bottom. What I 

am concerned about is that we are going to overshoot because we 

are in this self-reinforcing cycle now where economic decisions to 

modify loans are not being made. It may be in everyone’s economic 

self-interest to modify that loan, but it is still going into foreclosure 

because of skewed economic incentives, in large part stemming 

from the different interests in the securitization trust. So loans 

that economically should not be going into foreclosure are, which 

is creating more downward pressure on home prices, which is creating more distress in the housing market, which is creating more 

need for foreclosures—— 

Senator CORKER. So it is really more on the foreclosure point—— 

Ms. BAIR. It is absolutely. 

Senator CORKER. OK. 

Ms. BAIR. That is exactly right. 

Senator CORKER. And I think we have had a lot of discussions. 

I know even Chairman Dodd alluded to some of the meetings we 

had. There are some politically—there have been in the past some 

politically unacceptable ways of dealing with that for both sides to 

come together, but I think at present, we all understand even prescriptive things are not going to solve this until we get to a point 

where the lender has some ability to quickly deal with this issue, 

and I don’t want to expand on that right now. We might do that 

some more privately. 

Ms. Duke, we are going to be dealing with a lot of unintended 

consequences. I mean, at the end of the day, any time there is government intervention, there are unintended consequences, and I 

think that is going to be one of the biggest issues we deal with during implementation and even beyond. 

I know you have already been asked one question about that 

from Senator Menendez, but we are having some issues where, let 

us face it, manufacturing is a very important part of our country’s 

employment. We have had stress on manufacturing for years now. 

We have actually had a little bit of a breakthrough over the last 

6 or 8 months just because the value of the dollar is changing some 

now. 

But at the end of the day, you all are doing some good things 

and you are taking A1/P1 paper here, I think, beginning very 

shortly. You have just set up a facility to do that. What that means 

is that manufacturers that have A2/P2 paper are getting nailed, 

and all of a sudden, they have got like a 500 basis point problem 

that they are dealing with. I have talked to Chairman Bernanke 

about that. 

I wonder if you could just bring us up to date as to what might 

be happening, because we have one manufacturer that has A1/P1 

and all of a sudden they are good because you are taking them. We 

have A2/P2, and all of a sudden they are at a 500 basis point disVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HR\OC\A416.XXX A416

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advantage and basically getting ready to lay people off. And I am 

sure you have some way of solving that very soon. I am looking forward to hearing what that is. 

Ms. DUKE. Senator, I wish I could tell you I had a way to solve 

it immediately. The objective behind the commercial paper programs and the A1/P1 are to get the markets for commercial paper 

moving again. The objective is that once they start moving, then 

that will move the other parts of the market, as well. But we are 

monitoring all parts of the financial markets and looking for ways 

to unclog the pipes, if you will, on all parts of the market. We are 

aware of A2/P2. We are aware of a number of different markets 

where they are having difficulty. 

The other thing I would say, unfortunately, for many years, risk 

was not priced, and so I think for all borrowers and all issuers, 

even when financial flows return to normal, pricing is going to be 

higher than it was a couple of years ago, but we are working—— 

Senator CORKER. For both A1/P1 and A2/P2? 

Ms. DUKE. For all borrowers. And as I said, we are watching 

them. We are operating within our own restrictions in terms of 

credit risk that we can take. We are addressing that in terms of 

collateral that we take at our discount window borrowings in every 

way that we can. 

Senator CORKER. We think you have the ability to take the A2/ 

P2. I hope that very soon you will figure out a way to deal with 

that appropriately, and I very much understand what you are saying about the risk and I think it is very good that you send that 

signal out now, that at the end of the day, risk wasn’t being priced 

and borrowing costs probably are going to have greater spreads in 

them than they have had in the past. 

Just briefly with Mr. Montgomery, I know we are running out of 

time and Ms. Bair has a board meeting. Mr. Montgomery, I think 

it is really great that we are increasing through FHA the amount 

of lending that is occurring. I hope that that is not occurring because banks are dumping their worst loans on the FHA and that 

we are going to have another hearing down the road dealing with 

that. I don’t know if you would take 15, maybe 10 seconds to respond to that, but I just want to throw that flag out there and 

thank you for your actions but hoping that you are not taking us 

down the road of other problems down the road. 

Mr. MONTGOMERY. Well, that is one of ten things that wake us 

all up in the middle of the night. The reason why FHA didn’t take 

part in the boom, there are a lot of them. One is we did not lower 

our underwriting criteria. We had this crazy notion that people 

should verify their income. They should produce tax returns. They 

needed to have at least 2 years with their current employer. And 

we have not lowered those standards. And our ratios, our front-end 

ratios, our back-end ratios exist for a reason. I think because of 

that, I think you will see FHA continue to perform admirably over 

here on the long term. 

If I could just interject one thing here real quick, sir, on the servicing, FHA, and I referenced this number before, the last 3 years, 

we have saved 300,000 FHA borrowers from foreclosure, 300,000. 

That is a number you have not read anywhere. You don’t see that, 

and it is because our loss mitigation program, which Congress put 


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into place 10 years ago, is working, and the main reason it works 

is because we require it. Lenders and servicers know this. The borrowers know this. The investors know this. They are required to do 

loss mitigation. If they don’t do that, they face treble damages from 

FHA and I think that is one of the keys to why this has been successful. You have not read about those borrowers going to foreclosure because they have not been. 

Senator CORKER. Thank you, and if I could just—we have all 

traveled a long ways to be here and we thank you for having this 

hearing. 

Mr. Kashkari, I have to tell you that the concern about the—first 

of all, thank you for what you are doing and I appreciate the conversations that we have had. I do think the concern about the loans 

is somewhat unfounded. I mean, at the end of the day, people are 

paying 5 percent for this money. I know it raises at some point to 

9 percent. At some point, the banks have to make a profit. I mean, 

they can’t just hoard cash. I mean, it is pretty self-evident, is it not, 

that the way that money is going to be made is lending that 

money, and while there may be an initial hoarding, at some point, 

this money has to go out. Otherwise, these enterprises are not 

making money. I mean, that is just sort of self-evident. 

I wonder if you could just take maybe 10 seconds to address that 

issue. It concerns me. Obviously, I supported this measure and was 

involved in it. One of the things in the back of my mind was, once 

the camel nose goes under the tent and you get a bunch of Senators and a bunch of House members involved in the business of 

banking, all of a sudden, we are telling the banks what to do, 

which, let us face it, part of our problem with Fannie and Freddie, 

and I don’t want to go into that now, we will deal with it after the 

election, but was that very thing, OK. And so I am very concerned 

about us making prescriptive arrangements with these banks. I 

don’t think you are going to get many participants in that regard, 

but we are going to destroy our banking system if we do that. 

I appreciate the balance you are trying to create, but is it not 

self-evident that with paying for these through dividends—it is basically a loan, let us face it, that they can show as equity—they 

have got to make loans to make money and be in business. Is that 

a yes or no answer? 

Mr. KASHKARI. Yes. I think the economic incentives are strong 

and clear. 

Senator CORKER. OK. So I understand it is nice to raise these 

concerns. Let me just, speaking of sort of the camel nose under the 

tent, and none of us know what is going to happen into the future. 

We don’t know who the next Treasury Secretary is. Hopefully, it 

will be someone who understands what derivatives are and mortgage-backed securities and all of that. 

But the allocation process today as you see it going forward, you 

are talking about $250 billion for senior preferred. Do you have any 

sense now—I know we talked 10 days or so, maybe a week or so 

ago about this—do you have any greater sense of the allocation of 

this $700 billion today? And the second part of the question, since 

I am way over time, how much of it do you think may be actually 

spent by January 20 or so? 


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Mr. KASHKARI. Senator, obviously, we have already allocated 

$250 billion. We have sent a notification to Congress for another 

$100 billion to take us to $350 billion. The allocation has not been 

determined between more equity or mortgage-backed securities or 

whole loans at this point. We are trying to design the tools and we 

will use them and adjust them as we go forward. And there has 

been no determination made on when any notification would be 

sent to Congress on the final $350 billion. We would work with the 

committee at the appropriate time to look at that. 

Chairman DODD. Thank you, Senator. 

Senator CORKER. Thank you. I think if I were in your case, I 

would probably be vague on that, too. I would, offline, like to get 

a better sense of what you think that may actually be. I will not 

repeat it publicly if you tell me that. 

Mr. Chairman, thank you for this hearing and thank you for letting me play a role in the shaping of this. 

Chairman DODD. Not at all, and let me just say to my colleague 

from Tennessee, we raise these issues about—the word ‘‘hoarding’’ 

was used by the Secretary of the Treasury. That wasn’t my word, 

it was his word, and I didn’t raise it to be nice. There have been 

articles about it. And I don’t disagree with the acquisition notion. 

I don’t want to prohibit that. But there is a concern, not to just sit 

on it—obviously, that is not going to happen—but how those dollars are being used. There are a number of ways you can use the 

dollars, and obviously lending is critical and that is what we are 

looking for here. But that is not the exclusive use of the money. We 

want to make sure we channel that to the extent we can encourage 

that is part of the goal in mind. 

Let me turn to Senator Casey. 

Senator CASEY. Mr. Chairman, thank you for calling this hearing 

in the midst of both an election and a financial crisis for the country. I want to thank our witnesses for your testimony and your 

work, your public service. 

There are a lot of ways to describe the challenge we have with 

regard to foreclosures. The numbers keep coming in. We saw today 

in one story that foreclosure filings for the third quarter are up 71 

percent. In Pennsylvania, the third quarter foreclosure filings were 

up 73 percent from the 2007 third quarter to 2008. Maybe the most 

difficult number for Pennsylvanians to look at with regard to this 

is Pennsylvania filings rose 18 percent from second quarter to third 

quarter of this year, whereas the national number was a lot lower 

than that, 3.5 percent. 

I was struck by a number of parts of the testimony. Chairman 

Bair, this probably describes this better than numbers, your statements about the impact of foreclosures, and these are descriptions 

that others have used and said in different ways, but I thought it 

was important to highlight them, and I am quoting from page 

eight. ‘‘Foreclosure is often a very lengthy, costly, and destructive 

process that puts downward pressure on the price of nearby 

homes.’’ Later on page eight, you say, ‘‘Foreclosures may result in 

vacant homes that may invite crime and create an appearance of 

market distress, diminishing the market value of other nearby 

properties.’’ Well said. 


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I guess in light of that problem that we have, which is a 

foundational problem for why we are all here, I wanted to ask Assistant Secretary Kashkari about Section 109 that our Chairman 

pointed to earlier. Section 109(a) of the Emergency Economic Stabilization Act has a ‘‘shall’’ and a ‘‘may.’’ The shall part says the 

Secretary shall implement a plan that seeks to maximize assistance for homeowners and use the authority to encourage the 

servicers of the underlying mortgages to take advantage of Hope 

for Homeowners, the program we have to modify mortgages. Section 109(a) also says the Secretary may use loan guarantees and 

credit enhancements to facilitate modifications. 

I am struck by the contrast between especially the mandatory 

language, the ‘‘shall implement a plan’’ language of 109, versus 

your testimony where—and I am being critical here, but I don’t 

want to be casual about this—your testimony is about four-and-ahalf pages. You cover what you have a responsibility to implement, 

principally the Troubled Asset Relief Program, and I realize that 

is a difficult challenge for anyone and any group of people. 

But the homeowner preservation section is one small paragraph. 

You talk about maximizing opportunities to help as many homeowners as possible. You talk about appointing an interim Chief of 

Home Ownership Preservation. That is good. We appreciate that 

you did that. And looking for other opportunities to help homeowners. I am summarizing a brief paragraph. 

But I am struck by the contrast between that seeming, at least 

in the testimony, the verbiage of the testimony, the seeming deemphasis or lack of detail on home ownership preservation versus the 

mandatory language of 109. I want to just get your reaction to my 

assessment of that. 

Mr. KASHKARI. Thank you, Senator. As I have said previously, we 

are very, very focused on this issue of avoiding preventable foreclosures. The testimony was written in a manner to give an update 

to the Congress, to this committee, and to the people on our 

progress, and different paths identified seven work streams, have 

made further progress, and others, there is a lot of work being done 

but we haven’t made major announcements yet. So most of the testimony is focused on the capital program because we have already 

announced that program and are executing it. 

We have a team of people working interagency on the home ownership preservation piece led by Donna Gambrell, and when their 

work product is complete, we are going to come out in just as much 

detail as we did on the capital program. 

Senator CASEY. Let me ask you this, a couple of very specific 

questions. The statute says that you shall implement a plan. Tell 

me when you think that plan will be completed and what progress 

you are making toward that, when the plan will be completed and 

when will it be implemented. 

Mr. KASHKARI. The plan is under development now with Donna 

and our team working with HUD, with the FDIC and others to look 

at these different alternatives. The first implementation of that 

plan is going to be put into place when we have bought mortgages 

and mortgage-backed securities as instructions that we are going 

to be sending to the servicers. So that is going to be the vehicle for 

implementing that plan. 


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Senator CASEY. And when would that be? 

Mr. KASHKARI. As soon—we are running—working around the 

clock to get these programs up and running. I think it is weeks, 

it is not days, but it is also not several months. So we are working 

very hard to get that up and running. 

Senator CASEY. So you are talking about weeks in terms of implementing the plan contemplated by Section 109(a)? 

Mr. KASHKARI. I think it is weeks in terms of when we are going 

to have mortgages and mortgage-backed securities, and then we 

will be submitting detailed instructions to the servicers of those 

loans on the aggressive loss mitigation techniques we want them 

to take. 

Senator CASEY. I want to get back to you in a second. I also want 

to ask Chairman Bair, with regard to the ‘‘may’’ section, may use 

loan guarantees, I am assuming that the language that is in 109— 

on page 11 of your testimony, you speak to, in the last paragraph 

under the foreclosure section, loan guarantees could be used as an 

incentive for servicers to modify loans. The government could establish standards for loan modifications. You go on from there. 

I am assuming you are saying, A, that there is authority under 

Section 109(a) to do this, and B, that you would recommend it, is 

that right? 

Ms. BAIR. Yes, our lawyers think there is authority to do it, and 

yes, we definitely think it is a policy option. We are in discussions 

with Treasury. There is a policy process underway. But yes, we 

think there are a number of advantages in combination with other 

tools, especially for loans that are in securitization trusts, to use 

a guarantee as leverage to get the loans modified. It is also advantageous to implement systemwide protocols to streamline this process and get it going on a much broader scale. 

Senator CASEY. And I think people around the country are happy 

that you are discussing this. Tell me—either of you can answer, or 

both—tell me, what is the time line for the completion at least of 

discussions which may lead to the implementation of a loan guarantee strategy? 

Ms. BAIR. Well, I understand—quickly. I think there are meetings and discussions actively going on right now and—— 

Senator CASEY. When you say ‘‘quickly,’’ do you mean weeks? 

Ms. BAIR. The Treasury Department is the implementor of the 

TARP program, so we are sharing ideas with them about this particular aspect. It is an Administration process and we want to be 

respectful of that, but I really think that Neel and Secretary 

Paulson are very committed to this and moving in a very timely 

way. 

Senator CASEY. Mr. Assistant Secretary, is that an accurate characterization of the Treasury Department’s position at this point, 

that you are in agreement with what Chairman Bair has proposed 

on page 11 of her testimony with regard to loan guarantees? 

Mr. KASHKARI. We are looking at it very closely and working 

with our colleagues around the administration to understand the 

plan, understand how it would be implemented, what effect we 

think it would have, and how it would interact with the other programs. And so it is something we are very seriously considering. 


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Senator CASEY. When will we know the results of your serious 

consideration? 

Mr. KASHKARI. It is hard to give a specific date, Senator. We are 

working on it, as the Chairman said, Chairman Bair said, in real 

time right now, and as soon as decisions are made and we are in 

a position to make any announcements, we will do so. 

Senator CASEY. So are we talking weeks in terms of this determination you have to make? 

Mr. KASHKARI. Again, Senator, I am not trying to be evasive. It 

is hard to predict the policy process. I don’t know if it is days or 

if it is weeks. It is something we are very focused on right now. 

Senator CASEY. Well, I would urge you and I would urge the administration to move with dispatch, because one thing, as Senator 

Dodd has said and others, is that there is a sense of a lack of urgency. I realize this stuff takes—this work, I should say, takes a 

lot of close examination and it is not easy to develop new programs. 

But when you juxtapose the foreclosure filing reality, the impact 

that is having on neighborhoods, the jobless rate numbers, which 

keep spiking up—we are headed to maybe a million job losses this 

year. In Pennsylvania, we have got 67 counties, almost half of them 

have unemployment rates above 6 percent. About 15 of them have 

unemployment rates above seven as of the last monthly county-bycounty number. 

And then you also have a lot of taxpayers looking to Washington 

and they don’t—and I am just saying this as an opinion of mine, 

but I think it is shared by a number of people—they don’t have a 

lot of confidence in the current President to be able to deal with 

this. We have two candidates for President, neither of which has 

the authority to deal with this. They look to the Congress and they 

are not sure they can identify one person there. 

So what Treasury does and what every institution represented at 

this table does is critically important in any context, but especially 

in the context of the juxtaposition of big problems in people’s lives 

and a vacuum or a lack of leadership that is focused on a singular 

person or a single institution. So your actions and your decisions 

and your sense of urgency is critically important to inspiring—I 

know you have got to worry about market confidence, but I think 

also taxpayer confidence has worn pretty thin. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Casey. 

Let me underscore the point that Senator Casey has made, and 

Bob, I think maybe before you walked in, this was the very first 

issue I raised, as well, in a conversation between Sheila Bair and 

Neel Kashkari, and I talked to the Secretary of the Treasury this 

morning about this, as well. And again, we don’t need to go back 

and forth on asking you specific questions and trying to get it, but 

I think you leave here—I hope you leave here—I left the conversation this morning, as I heard, without getting into the details of it, 

that the Secretary of the Treasury is determined to get this program up and running. Now, that is what I was left with. Again, 

I know there are things to work out, but I want you to go back, 

Mr. Assistant Secretary, and convey the reactions here about our 

determination to get this up. It is very important. 


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And I didn’t raise this earlier, but when you ran down your list 

of priorities, one through ten or 11 or whatever it was, No. 5 was 

foreclosure mitigation. I wrote it down here on my notepad. None 

of us want to sit here and go back and flyspeck, and this may seem 

trivial, but to people out there with that 10,000 a day losing their 

homes, it is not trivial at all. And the idea that that is No. 5 on 

our list—I understand you have got a lot of things to do. It would 

help a lot to have a heightened sense of urgency about this issue, 

and there is a plan. We wrote it into the law specifically. 

We worked hard to write 109 into the law. That was not just 

throw-away language. It was very specifically written. And I know 

where 102 comes from and I know what that was intended to do. 

I was involved in every dotted ‘‘I’’ and crossed ‘‘t’’ in that bill, as 

you know, and as Sheila Bair knows. And so when people come 

back to me and say, well, 102 impacts on 109, no, it doesn’t. I know 

the history of that. That is a ruse to delay the import of Section 

102, in my view. 

So I would really hope that having heard this, you will go forward. 

I have one question before we let both of you go, and then I have 

got a couple of questions for our remaining panelists. It was raised 

by Senator Corker—I will give you a chance to respond to my last 

point, Secretary, if you want to, as well—and that is this idea, the 

auction process and the taking equity position, and again, I am not 

going to ask you to give me an exact percentage, but I was sort of 

left with the impression as of the beginning of last week when 

there was a shift and it was the source of the major headlines in 

the country that we were moving toward the capital infusion idea 

and moving further away from the auction idea, not abandoning it 

at all. 

And, in fact, I know in my conversations with the Treasury Department, I think there was a deep appreciation that when we 

wrote the legislation, the EESA legislation, we wrote a lot of flexibility and broad authority. The original proposal which you sent up 

to us that Saturday on the 19th of September only allowed the auction process, the authority for that. And we responded by saying, 

that is not the only idea. There are others. We have other ideas. 

We ought to give you broader authority. That is where that language came from. 

I was left with the impression that there has been a major shift 

at least away from the auction process toward the equity side of 

this. Am I wrong in reading that, without apportioning a percentage to how the 350 gets used? 

Mr. KASHKARI. Mr. Chairman, we, first of all, agreed with you 

and worked very hard with you to design that flexibility, and I 

think that as the Secretary has said, we moved toward the capital 

program first because markets deteriorated much more quickly 

than we had expected, and putting in capital was a faster way— 

buying equity was a faster way to put capital in the system. 

Nonetheless, we think that there are multiple complementary 

tools to get at this fundamental capital problem and purchasing assets, whether it be through an auction mechanism or it is buying 

whole loans, is another important complementary tool, especially to 

attract private capital to come in and help capitalize our system. 


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So, again, as you said, we are not going to put percentages on 

each, but we are pushing very hard on all fronts so that we have 

all the tools available as we need and deem appropriate. 

Chairman DODD. I think the reason was raised—and, again, you 

have spent your adulthood working on these issues. But the old 

idea, in the auction process you are getting a dollar one for in, you 

buy an asset for one dollar, you get a dollar value out of it—or 

hopefully you do; whereas in the equity side you put that dollar in, 

you may leverage $10 or $100 off that. And so it seems like a more 

attractive idea if the goal is here to excite the capital markets to 

begin moving. And as between the two—and I understand the 

value of having the option of dealing with the auction process. But 

in terms of the overall goal to provide that kind of—that shock, the 

electro-shock to the system, to get that circulatory process working, 

the auction—excuse me, the equity position seems to be more designed to do that than the auction process. 

Mr. KASHKARI. Well, there is no question, Senator. A dollar of equity goes a lot further than a dollar of asset purchases. 

Chairman DODD. Right. 

Mr. KASHKARI. That is why we started there. But we think that 

they all have a complementary role to play. 

Chairman DODD. Yes, I agree with that as well. You both have 

been very, very—the last one I wanted to make to you on this, and 

it goes back to the question of Senator Menendez. I just want to 

read you something. This is from a lawyer in Staten Island. I 

should probably have let Senator Schumer read this because it is 

from his constituent. But we worked with this family regarding the 

mitigation problems, and this is just a quote. He said, ‘‘One of the 

biggest hurdles’’—this is a lawyer representing some people on 

foreclosure. ‘‘One of the biggest hurdles we encounter is the lenders’’ inability to respond to our requests in a timely manner. The 

other problem is the lenders assign new negotiators and loan mitigation specialists several times over the course of the negotiations, 

thereby starting the review process all over again. Our office has 

a staff working on these files 7 days a week, and it may still take 

us months to get any sort of response from lenders. It is virtually 

impossible for homeowners to deal with these negotiations on their 

own. The lenders are creating such a time constraint that by the 

time they issue the approval, the buyer has walked away from the 

deal. The system is designed to fail.’’ 

Now, again, this is one we worked on, and they spend their law 

firm doing this. Again, I just want you to take that kind of back 

with you, because I presume it is not an isolated case of what is 

going on, the practicalities of this. And that is why I think it is so 

important that that lender—you mentioned earlier—I did not mean 

to jump in a sense, but obviously the borrower should step up. I 

agree with you. But also that lender needs to understand that that 

borrower in that situation of a highly distressed mortgage probably 

has 20 other problems going on. They may be in the process of losing their job. They have got all sorts of other things occurring. It 

is not sort of a stovepipe; I have got just a foreclosure problem. I 

will almost guarantee you that family has a lot of other issues they 

are grappling with. 


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And so the idea that they are going to kind of pick up that phone 

casually as if somehow it is as if they need a new set of tires on 

their care I think is different. And I think the borrower—or the 

lender, rather, has to understand that. If we are really going to get 

at this, it seems to me there has to be a deeper appreciation of 

what is going on with that family that is about to lose their home. 

So I would hope you would just take that back and work on that. 

Let me ask, Tim, do you have any questions for either Sheila 

or—or, Bob, do you have any quick questions for either one before 

the—— 

Senator JOHNSON. For the entire panel, do you think our economy needs another economic stimulus? Yes or no. Sheila. 

Ms. BAIR. Well, that is a little bit outside my bailiwick. I think 

I will defer on that. It is really not a type of issue that the FDIC 

really weighs in. I think you probably have much greater expertise 

than I in making—— 

Senator JOHNSON. The President and the Fed Chairman have, as 

you know, said yes to the concept. Neel. 

Mr. KASHKARI. Respectfully, Senator, I also am not an expert on 

that. I am spending 100 percent of my time on implementing the 

TARP, so I would defer to some of my colleagues. 

Senator JOHNSON. Brian. 

Mr. MONTGOMERY. I assume we are going down the line here. A 

little out of my world. I can assure you we have our own economic 

stimulus that we are doing through FHA. You heard some of the 

numbers I referenced earlier. 

Thank you, sir. 

Mr. LOCKHART. What we need to me from the mortgage markets 

in particular is to get the capital markets working again, and that 

is the bank liquidity being put in. We need to be able to bring down 

mortgage rates. We need to be able to borrow longer term for some 

of these financial institutions. The key thing to me is to stimulate 

the financial institutions so they can start lending again. 

Ms. DUKE. And given that it is my turn to defer, I will defer to 

the Chairman of the Federal Reserve, who on Monday did express 

support. 

Senator JOHNSON. Mr. Lockhart, what guidance have you given 

Fannie Mae and Freddie Mac regarding loan restructuring? And 

what efforts are being made by Freddie and Fannie to restructure 

loans? 

Mr. LOCKHART. We have been extensively talking with—— 

Chairman DODD. Could I just interrupt just for 1 second? I promised Sheila Bair I would get her out an hour ago, and it is an hour, 

and I apologize to you. Also, Neel, we have held you up now. It is 

21⁄2 hours, and we are grateful for your being here. Let me underscore the points that were made by Bob Menendez. Our questions 

are not—if there seems to be an edge on them, it is only because 

that is what our constituents and the country are feeling. And so 

it is not pointed at anyone except a sense of urgency that people 

are feeling about all of this. But we are very grateful to all of you 

for the work you are doing and grateful to have you here this 

morning. 

Do you mind, Tim, if they—— 

Senator JOHNSON. Yes. 


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Chairman DODD. I promised them they could go. So thank you 

both very much. 

Mr. KASHKARI. Thank you, Chairman. 

Chairman DODD. Go ahead, Tim. I am sorry. 

Senator JOHNSON. Mr. Lockhart, that was the last question I 

had. 

Mr. LOCKHART. Do you want me to continue answering the question, Mr. Chairman? 

Fannie and Freddie have loan servicers working on their loans. They hold over $30 million loans in this country, so they have probably have the majority of the loans in this country. The good news 

is that their book of business is significantly better than the average book of business. Their delinquencies are less. But just because 

of the amount of loans that they have, there is a tremendous 

amount of activity going on in loan modifications and foreclosure 

prevention. 

We are continuing to work with them. Fannie Mae just announced a program earlier this week called ‘‘Second Look,’’ where 

the idea is to contact the people that are about ready to be foreclosed and give them one more chance to work it out. 

A key thing here is really to get to the people, and it may be 

more than a phone call. You may have to actually go to the door 

of the house to find these people. It really is critical to contact the 

people and work with them. They are going to continue to do that, 

and they will be cranking that effort up significantly. 

Senator JOHNSON. Thank you. 

Chairman DODD. Thank you very much. 

Let me ask just a couple of quick questions. Mr. Montgomery, I 

want to compliment you again as well. Keeping those underwriting 

standards may have been a painful process. Everyone was probably 

saying, ‘‘Why aren’t we doing more to get more of this business?’’ 

But we are all very grateful you stuck to the principles on that. 

And you are rightly proud as well to have been able to launch the 

Hope for Homeowners plan in such a short time. That is really 

rather amazing going from July to October 1, and I want to commend you for it. And I hope it is just more than hope as well, but 

we have plan here that could really make a difference with some 

people. 

In the end, of course, the goal is to help homeowners. Please just 

update us on what you are doing to maximize the use of this program. What steps have you taken to sign up lenders? What steps 

have you taken to ensure borrowers know about the program? And 

what impediments do you see in the use of this program? 

And let me just add anecdotally, again, going back to people we 

are hearing from, when they make that call, the first advice is 

‘‘Call your lender.’’ Now, I appreciate that, but too often what happens then is you get into that calling your lender and you end up 

along the lines that lawyer in Staten Island talked about, representing a number of people facing foreclosure. So would you 

please respond to those? 

Mr. MONTGOMERY. Absolutely. We are proceeding on a hundred 

different fronts as far as outreach, between our call center, between 

direct mail, homebuyer events across the country, working with our 

lenders. You know, certainly I suppose we could always use more 


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funds for it, but luckily the H4H program did give us some funds 

to do education and outreach, and I can assure you we are using 

those funds. 

As to the impediments, we hosted a roundtable on Monday with 

lenders, and they told us some of the impediments they are hearing 

about. I would say probably the one at the top would be the cost 

of it. The 3-percent up-front premium, the 1.5-percent annual premium, just to put that 1.5-percent annual premium in perspective, 

on a $180,000 loan that is about $225 a month. And by the time— 

the other concern they had is explaining the shared equity and explaining the shared appreciation. This is something a lot of them 

do not have experience in doing. They are concerned with consumers, and this is to my earlier point about the training. They 

take it very seriously. They want to get the training correct. But 

imagine sitting down with a consumer and trying to explain the 

shared equity, that they would owe 50 percent of that, and also explaining the shared appreciation that in year 7 and year 20 and 

year 25, you will still owe Uncle Sam at least 50 percent of the appreciation on that loan. 

That is not to say it cannot be workable. That is not to say that 

we do not want to continue to work with you on some fixes, because we do. But I am just letting you know from their perspective, 

this is what lenders are telling us. 

Chairman DODD. I appreciate that, and that is not easy and so 

we thank you. We want you to keep us—we will be working with 

you as well, and if you have these kinds of concerns, we ought to 

stay in close touch, the Committee staff and others, with you. 

Let me, if I can, Ms. Duke, let me ask you, we talked about all 

the other Federal entities that own a significant number of mortgages that are receiving resources and backing. In the financial 

rescue legislation that Congress passed, we require each of your 

agencies to actually work to modify mortgages here. Governor 

Duke, the Fed owns a significant number of these mortgages, many 

of which are subprime and delinquent as a result of the $30 billion 

of the assets that the Fed acquired from Bear Stearns back in 

March. And yet I notice that you do not mention those mortgages 

in your testimony. 

What specific steps has the Fed undertaken to conduct mortgage 

workouts of those loans that the Fed acquired as a result of the 

Bear Stearns issue? And how many of the loan modifications or 

workouts have been done? 

Ms. DUKE. Mr. Chairman, I am going to have to confess I do not 

know about the assets that are in that $30 billion portfolio. It is 

my understanding that they are pledged as collateral and that they 

would be actually mortgage-backed security assets. If I could respond to you in writing? 

Chairman DODD. I appreciate that, but I was a little disappointed that we did not get something on that. This is, again, 

one of these—that was the first step back in March, and that $30 

billion is out there. And, again, a lot of it is hope, and in the long 

term, there will be a payback on that. But in the meantime, it 

seems to me these loan modifications are critically important as 

well. 


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Last, I want to ask you about the oversight of AIG. Senator Martinez of this Committee and Senator Feinstein were the authors of 

a provision in the legislation dealing with the licensing of brokers 

as part of the bill. Last week, the Wall Street Journal reported, 

and I quote, ‘‘Even after receiving an emergency loan that gave the 

Government an 80-percent ownership stake, AIG is spending 

money to lobby States to soften new controls on the mortgage industry. AIG is currently working to ease some provisions in the 

new Federal law establishing strict oversight of mortgage originators.’’ 

Now, I presume they are referring to the provision here dealing 

with the licensing requirements in the bill that was passed in July, 

the Housing and Economic Recovery Act, signed into law in late 

July. 

So the question I have for you is this: Has the Federal Reserve 

taken any action to suspend AIG’s lobbying activities and other activities of the company, such as the spa trip, which was detailed 

in the press? And I want to ask the other panelists as well, what 

has been done to ensure that entities receiving Federal assistance 

and are continuing to lobby against—and I should have asked this, 

of course, of Mr. Kashkari, but I will ask him in writing—against 

the important protections for borrowers? And did we put any lobbying restrictions in all of these activities? 

This is the kind of thing that just sends the American public 

through the ceiling, the idea that they are using their tax money 

all of a sudden to turn around and undermine a provision in the 

law specifically designed to try and plug up a gaping hole that allowed an awful lot of these bad lending practices to go forward. 

And the idea that any part of taxpayer money is being used to undermine the very provisions which did not exist that contributed 

significantly to this problem is, to put it mildly, infuriating. 

Ms. DUKE. I absolutely understand that concern, and we have 

had conversations with management of AIG. We do not manage 

AIG day to day. We have had those conversations, and I believe 

yesterday or the day before, management of AIG has come out with 

a series of steps that they have taken to curb that sort of spending, 

to set up a special governance committee, and to limit their lobbying activities to monitoring of legislation rather than active—— 

Chairman DODD. Well, I appreciate what AIG—but what is the 

Fed doing? I need to know what you are doing. Are we insisting 

upon this? We do not have to have the stories come out, but it 

seems to me that rather than reading about this, why isn’t there 

some demand occuring even before that happens? 

Ms. DUKE. I understand that frustration. The loan to AIG came 

up very quickly. It is not something that we were accustomed to 

doing. We have had people inside AIG primarily monitoring the financial flows and the valuation of assets. In the last couple of 

weeks, we have actually stepped up our conversations with management, which is new management, as you know, and they are 

very much concerned about this as well, and take—— 

Chairman DODD. Well, staff reminds me that the second loan 

was made after the spa story. It would seem to me that that story 

might have been enough to provoke the Fed to take some action, 


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that second tranche was at least going to be conditioned better 

than it was. Well, I wish you would carry this back. 

Ms. DUKE. I will. I will 

Chairman DODD. Because this is really important, again. 

Ms. DUKE. Yes, sir. 

Chairman DODD. We are trying to build public confidence in the 

direction we are trying to head, and it doesn’t help—let me put it 

to you very bluntly here. The confidence of the American public 

that we are on the right track with all of us this is going to be critical. And if they hear their money is being used for these kinds of 

things, we lose that confidence, and that makes this all the more 

difficult to move forward on. 

Well, again, I thank you for—the GSE loan modifications you 

sort of addressed with Senator Johnson’s question, Mr. Lockhart. 

Did you want to add anything to that at all? What steps has FHFA 

taken to require enterprises to do these loan modifications? 

Mr. LOCKHART. It has been an ongoing activity. We are now putting out a quarterly report, which will move to a monthly report. 

This will put a lot of transparency around that. Everybody will be 

able to tell what is going on in their modifications. 

Up to now, it has not been as rigorous as we would have hoped. 

Now that they are in conservatorship, these activities will increase 

significantly. As I said in my testimony, they are working with the 

FDIC IndyMac program so that they are looking at that technique. 

They are actually running an experiment where they are doing 

some on their program and some on the FDIC program to see 

which are more successful. 

They have a whole series of different loan modification activities 

going on. It is critical to prevent those foreclosures. The new CEOs 

have made it a very high priority. As I said, Fannie Mae has this 

new Second Look program that before they move to foreclosure, 

they are opening up those files again, trying to contact the people 

in the houses, and seeing if there is anything they can do to prevent foreclosures. 

We will be working very closely with them. We are a Federal 

property manager under the legislation. We are going to be appointing people within the organization to have that specific duty 

to work in the conservatorship. 

Chairman DODD. I should have asked the others this question, 

too, but I will ask it of you and submit it in writing to the others. 

Are you lacking any authority that you would otherwise need from 

us here? Are there existing statutory or regulatory provisions you 

have that would make it possible for you to demand more accountability in this area? 

Mr. LOCKHART. In that we are the conservator now over Fannie 

and Freddie, we have the authority, yes, sir. 

Chairman DODD. Well, we are going to have you back up here 

in a few weeks. This is not the last time we are going to see each 

other on these matters. So when you come back up again, at least 

as one Member of the Committee, I want to hear more about what 

we are expecting and more of what is happening. 

Mr. LOCKHART. I will be more than happy to. 

Chairman DODD. I appreciate that. 

Senator Corker. 


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Senator CORKER. Mr. Chairman, thank you. I appreciate the opportunity to ask a few additional questions. 

Ms. Duke, on the AIG issue, I know there has been a lot of consternation about the fact that AIG is paying—look, by the way, I 

agree with all the concerns that have been raised about their behavior and think it is reprehensible based on where they are. But 

then on the flip side of that, as far as moving them away from Government, I know there has been a lot of speculation about actually 

this is a pretty usurious arrangement in some ways and that they 

might be better off, if you will, either in bankruptcy or seeking 

other ways out of this. 

Any sense of where we are? They are a public company. You are 

a public entity. I am sure you can talk about those pretty freely 

with us. Where are we as it relates to an exit strategy and moving 

them away from where they are today? 

Ms. DUKE. AIG has a plan and had from the very beginning a 

plan to sell assets to repay the loans from the Federal Reserve—— 

Senator CORKER. And let me just ask you, I mean, I understand 

about selling assets so, in essence, you end up with sort of nothing 

left. There is a growing concern there. I would love any editorial 

comments as to whether that is even the best result or whether 

seeking equity in other ways at this point, now that people can ascertain what the real risk is and have had time to do that, I would 

love editorial comments as to whether their plan is even the right 

plan. 

Ms. DUKE. Let me try to answer your question without getting 

into any non-public information about the company. We have been 

working with them ever since the loan was made. First of all, the 

reason the loan was made originally was a concern about systemic 

risk and risk to the financial markets. And we did not at that time 

fully know or understand exactly where all of those risks might be 

and what the magnitude of them might be. And so we are spending 

a lot of time trying to understand exactly what the risk is. If we 

are going to hold up the tent, if you will, we want to find out exactly what the risk is that we are protecting against. And then 

what steps it will take to get us to the other side. How quickly are 

those risks unwinding? And also what steps will it take to bring 

this to a conclusion to have AIG take the steps that it needs to 

take to repay the—— 

Senator CORKER. And is the best step for them to sell off all the 

parts? Or is the best step for them, now that people have a better 

sense of what the real risk is, a different type of equity injection? 

Ms. DUKE. I think our best effort is to make sure that the overall 

outcome to the public is the best outcome to the financial markets 

generally, not necessarily for the single institution. 

Senator CORKER. And I understand that, and that is why we are 

all up here. So I guess what you are saying is your are semi-agnostic in that regard, and if selling assets pays the $85 billion back 

plus the additional injection you just made, or the other, either 

way, that we get away from the immediate taxpayer risk, but then 

on top of that, maybe even more importantly, or equally important—I should not say ‘‘more’’—is the system risk. 


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Ms. DUKE. The systemic risk is the key to it, and while we are 

certainly mindful of having our loan repaid, it is not just a pure 

credit decision. This is also one of trying to monitor the—— 

Senator CORKER. And since you can’t give publicly some of the 

discussions that you are having, is there a sense that there is 

something working right now that will move them away from your 

institution and into a different scenario that does alleviate that 

systemic risk? 

Ms. DUKE. The sense is that there are an awful lot of people 

working toward that end, and the company is so large and there 

are so many subsidiary companies, and the markets in which they 

operate are so complex that I think it is going to take quite a bit 

of working through to that conclusion. 

Senator CORKER. Thank you. 

Mr. Lockhart, I just could not resist with you being here. How 

much time is left in your term? 

Mr. LOCKHART. The law passed in July made me the Director of 

FHFA until another Director was nominated and approved by the 

Senate. 

Senator CORKER. It could be long, could be short. 

Mr. LOCKHART. It could be long, could be short. 

Senator CORKER. It is my goal that—or it is my hope that you 

will work yourself out of a job pretty quickly. I know the biggest 

part of your portfolio is Fannie and Freddie; the others sort of lesser, if you will. 

Is there any need for—I have a strong prejudice in this regard, 

but is there any need for Federal involvement in Fannie and 

Freddie? My sense is absolutely not. I know we have had some conversations in our office about that, and I am just wondering what 

your answer to that might be. And if not, if the markets can deal— 

I mean, housing finance is not particularly complex. It really is not. 

Any sense as to how soon we might be out of the business, if you 

will, of having these Government-sponsored entities and you maybe 

being on the beach someplace? 

Mr. LOCKHART. That would be nice. Certainly, there needs to be 

Federal involvement from the standpoint of there needs to be supervision. 

Senator CORKER. No doubt supervision. I am glad you finally 

have the ability to supervise and have powers to do that. 

Mr. LOCKHART. Right, and we obviously did not, before the law 

was passed, have strong enough powers. Going forward, it is going 

to be up to Congress to make a decision about what the future of 

these companies should be. 

Senator CORKER. Of course, but is there any need for that—I 

know Congress likes to play in these things, and that is what has 

created the problem. 

Mr. LOCKHART. There is a need for a secondary mortgage market 

player in this country. There is a very significant need. Hopefully, 

it could be provided by the private sector. The private label security market failed in doing that, in fact. I am hopeful it will be recreated over time. 

Senator CORKER. And also the GSEs failed in that, too, right? So 

both the public and private sector failed, if you will—— 


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Mr. LOCKHART. The GSEs continued to provide liquidity in the 

secondary mortgage market. 

Senator CORKER. Because of us. 

Mr. LOCKHART. They failed because they had an inadequate capital structure and an inadequate regulatory structure. The law that 

set up our old agency was not strong enough. Their structure, no 

doubt, Senator, needs to be rethought going forward. Whether it 

should be a GSE structure or a purely private sector structure, I 

believe is a very important issue that should be addressed. 

Senator CORKER. Senator Dodd, Mr. Chairman, if you need to go 

to lunch or something, we need to close this out. Please let me 

know. Or I will chair the meeting for a while if you wish. [Laughter.] 

Senator CORKER. I would never do that. 

Chairman DODD. We are in a pro forma session. You may decide 

to do something here. I have got to keep an eye on you. 

Senator CORKER. Is there any need for the Federal Government 

whatsoever to be involved in the secondary market? It is a simple, 

easy—I mean, it makes our exotic derivatives look like, you know, 

elementary stuff. Is there any reason whatsoever for the Federal 

Government to be involved in the secondary market? 

Mr. LOCKHART. First, they are through FHA. My colleague to my 

right—— 

Senator CORKER. Through the GSEs. Through the GSEs. Is there 

any reason whatsoever for the Federal Government to be involved 

in—other than we like to be, some of us like to be. 

Mr. LOCKHART. The mortgage structure in this country is built 

around a 30-year mortgage. There needs to be some mechanism to 

bring a 30-year mortgage to the marketplace. That can again be 

through a GSE structure. It could be through a private sector 

structure. The secondary mortgage market is extremely important 

to get these mortgages off balance sheets of the banks so that they 

can relend money going forward and liquify themselves. There 

needs to be a mechanism to bring them off the banks’ balance 

sheets and spread them out to investors around the world. Again, 

that can be done through a private sector mechanism or a government mechanism. 

Senator CORKER. From what you are saying in your supervisory 

role, almost as a bystanding for some time because you did not 

really have the authority you needed; now you have it. And—— 

Mr. LOCKHART. We took some authority we did not have, actually, and we kept their capital requirements much higher than the 

law said. We kept their portfolios shrunk. 

Senator CORKER. Since, in fact, there are ways for the private 

sector to deal with 30-year mortgages, and since, in fact, there is 

a way for there to be a secondary market totally through the private sector, is there any real sense that the borrower has benefited 

really that much from the slightly lower rate, if you will, the GSEs 

get because of this implied backing—and as it has turned out, real 

backing—that the Federal Government has given? Has there been 

really enough of a benefit there for us to be mucking it all up by 

being involved in the way we are? 


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Mr. LOCKHART. There have been studies and there is back and 

forth in those studies, as most academic studies are. There is debate. I really haven’t seen the definitive answer on the question. 

Senator CORKER. Well, if you, the regulator and the supervisor 

and now the conservator—that is a pretty stunning comment to 

make, and I hope the world is listening to you at this moment. I 

understand there are some other interesting hearings happening, 

but that is a pretty stunning comment. 

Mr. LOCKHART. What they do do, and this is the important thing, 

is that they provide liquidity to the mortgage market. Without 

them, our mortgage market would be in total chaos. 

Senator CORKER. But they monopolize, and obviously if they were 

not in the business, somebody would be filling that vacuum. But 

the question I asked—— 

Mr. LOCKHART. In this market, I am not so sure. 

Senator CORKER. Well, maybe not in this market—— 

Chairman DODD. Who fills the vacuum? Where would it be today 

without this right now? You just said it. I would like to repeat that. 

What would happen if this did not—what condition would we be in 

today in the absence of that? 

Mr. LOCKHART. They are providing 80 percent of—— 

Chairman DODD. And in the absence of that, what would this be 

like? 

Mr. LOCKHART. In the absence of that, we would have an extremely, extremely serious problem providing liquidity. We would 

just have to buildup a much, much bigger TARP. 

Chairman DODD. So while theoretically talking about some alternative is a great idea, but, nonetheless, the suggestion somehow 

that we would be better off today without it I think needs to be emphasized. 

Mr. LOCKHART. They do hold over $5 trillion worth of mortgages 

in this country. There would have to be some other mechanism. At 

this point, it is not there. 

Senator CORKER. If I could, since the Chairman jumped in on my 

questioning—and I appreciate that. The fact is, though, that there 

is nothing to—there is no reason to believe that other private entities that were in the middle of this right now that were not, on the 

other hand, dealing with all these other issues we are talking 

about would not continue to be doing the same thing. There is no 

reason not to believe that. But I think the most stunning comment 

that has been made, if I understand it correctly, is the supervisor, 

the Director now of this new organization, does not—he cannot 

really tell whether there is any benefit whatsoever to the borrower. 

That is pretty stunning to me, and that the purpose of this was to 

allow these two GSEs to borrow money less expensively in order to 

make homeownership more affordable. And I guess—and this is, I 

am sure, an ongoing dialog we will have in the ensuing years. 

What worries me is that by having these organizations, we probably did encourage, because we were sponsoring them, if you will, 

we encouraged them to do things that were not good. And at the 

same time, we had that ability—excuse me, Congress had that ability, but really the borrower was not necessarily benefiting from 

lower rates. OK? We will talk about this at another time, but I 

thank you for—— 


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Chairman DODD. Well, in fairness to Mr. Lockhart, as I understood you to say, you were talking about the academics. 

Mr. LOCKHART. Right. 

Chairman DODD. There was division back and forth. And I think 

what you were saying and suggesting is that there has been a debate about that particular question. 

Mr. LOCKHART. That is what I was saying. 

Chairman DODD. That is the way I thought you answered the 

question. 

Mr. LOCKHART. Right. 

Chairman DODD. Is there any other—— 

Senator CORKER. Well, he himself has not been able to discern 

as to whether the borrowers had benefited in any way. That to me 

is a pretty strong—— 

Chairman DODD. That is called a diplomatic answer to your 

question. 

Senator CORKER. Well, I do not think it is diplomatic. We have 

had meetings in our office. I think it is a realistic answer. But I 

would love for him to answer for himself since we are doing a good 

job of answering for him. 

Mr. LOCKHART. I think the Chairman is right that there are 

some dueling academic studies on the issue and, frankly, I have not 

spent a lot of time on that issue. I have been really full out trying 

to regulate them and trying at this point to rehabilitate them. 

I believe it is critical at this point that we need to fix them up. 

We need to get them out of conservatorship. It is a very critical, 

important issue that you raise, Senator, what the future of these 

two companies should be. I feel that will be a debate in Congress. 

We will certainly provide all the information we can to help that 

debate. 

Senator CORKER. Well, I think—and I can tell by the body language of the Chairman out of the corner of my eye it is time for 

this meeting to end. But let me just say we have worked together 

on numbers of things very constructively. I know that on this issue 

in particular we probably have a philosophical difference—— 

Chairman DODD. Not necessarily 

Senator CORKER. But I do hope that as you are working through 

this and there is transition occurring, I do hope there is a vision 

in the very, very near future that these two organizations have 

nothing whatsoever to do with Government. And I hope that is at 

least one of the plans that we are working on. I know a lot of people like to attribute everything that is happening to this. That is 

obviously unfair. But the fact is that this is—as we move ahead, 

we have the camel’s nose under the tent here already, and obviously, the camel occupies the tent now because of where we are. 

We have the camel’s nose under the tent occurring right now with 

the—I guess we are calling it ‘‘the rescue plan’’ now. I hope that 

we will not edge into areas that we are not supposed to be edging 

into there, and I look forward to your leadership as hopefully we 

move these organizations off, cause them to be lofted on their own 

into the future and we figure out other ways for the private sector 

to deal with the secondary market. And I hope that finds you retired very soon. 

Thank you for your service. 


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Mr. LOCKHART. Thank you. 

Chairman DODD. Well, thank you. Let me just end on that note. 

As you point out, Mr. Lockhart, a lot of our problems was the private secondary market here that contributed significantly to bad 

lending practices. Clearly, we need to change this notion. But as 

I understand it, the only country in the world that has provided a 

30-year fixed-rate mortgage was the United States. I do not know 

of any example around the world. And to attribute all of the problems, in fact, as you point out, in the absence of the liquidity provided today by this, we would be in a very, very difficult, far more 

difficult situation than we are in. 

Now, clearly, we are going to change. We are going forward. 

What replaces this? That will be a debate. There are various ideas 

on how to do it. But one of the things I take exception to is the 

notion somehow that it has been a bad idea to take relatively poor 

people and make it possible for them to get into homeownership. 

We have greatly benefited as a country, what it has meant to a 

family, a neighborhood, what it has meant to our economy. And as 

long as you have got good, strong, underwriting standards that demand accountability by that borrower in the process, it has worked. 

And I hope we do not retreat from that. It has been a great wealth 

creator for many millions of people in this country over the years, 

and providing the means by which we do it. 

Now, there are a variety of means by which you can do it, but 

one of my fears will be, as we see here, the assumption somehow 

because there is a Government-sponsored enterprise of one kind, 

whether it is a utility idea, as Secretary Paulson has suggested, or 

others, clearly the present model does not work. And that has to 

change without any question whatsoever. And there is a legitimate 

debate about whether or not—which side you replace it with. But 

I just want to point out that we would not be in the mess we are 

in today were it not for the fact that there was an improper or lack 

of regulation in that private secondary market as well. So I want 

to be careful before people jump to that option without some serious considerations as well as the way we are headed. 

This has been a very worthwhile hearing, and we thank you. We 

are going to come back again and again, obviously, on this, and 

some of the issues involving foreclosure we want to continue to 

raise with you as well. But I am very grateful to all of you, and 

I appreciate the work that you are doing. 

The Committee will stand adjourned. 

[Whereupon, at 1:10 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 

FROM SHEILA C. BAIR 

Q.1. Please provide the legal justification for establishing the Temporary Liquidity Guarantee Program under the systemic risk exception in the Federal Deposit Insurance Act. 

A.1. The legal authority for establishing the Temporary Liquidity 

Guarantee Program (TLGP) is set forth in 12 U.S.C. 1823(c)(4)(G). 

Based on information regarding the unprecedented disruption in 

credit markets and the resulting effects on the ability of banks to 

fund themselves and the likelihood that the FDIC’s compliance 

with the least-cost requirements of the Federal Deposit Insurance 

Act (12 U.S.C. 1823(c)(4)(A) and (E)) would have serious adverse effects on economic conditions or financial stability by increasing 

market uncertainty, the Board of Directors of the FDIC and the 

Board of Directors of the Federal Reserve System made written 

recommendations to the Secretary of the Treasury that the FDIC’s 

creation of the TLGP program to guarantee bank depositors and 

senior unsecured creditors against loss under certain described circumstances would avoid or mitigate such effects. After consultation 

with the President, as required by the statute, the Secretary of the 

Treasury made the systemic risk determination that provided the 

FDIC with the authority to implement the TLGP. 

Q.2. According to press reports, the emergency actions taken by the 

FDIC to guarantee unsecured senior debt issued by FDIC-insured 

depository institutions has had the unintended consequence of driving up the costs of borrowing for Fannie Mae, Freddie Mac and the 

Federal Home Loan Banks (FHLBs). Was this taken into account 

as a possible consequence as you formulated this course of action? 

A.2. As noted in the press, the spread of debt issued by Government-sponsored enterprises (GSEs), including Fannie Mae, Freddie 

Mac and Federal Home Loan Banks (FHLBs), over Treasuries increased considerably in October and November although the overall 

cost of funding declined. According to Merrill Lynch data on U.S. 

bond yields, the spread between AAA-rated agency debt and Treasuries increased by nearly 40 basis points between September and 

November 2008. We believe these developments primarily reflect 

broad financial market uncertainty and a generally unfavorable 

market sentiment towards financial firms. In fact, the spread of 

debt guaranteed by the FDIC under the Temporary Liquidity Guarantee Program over Treasuries is larger than the spread on GSE 

debt. 

Financial firms, including those with a AAA-rating, saw their 

borrowing costs increase sharply, both in absolute terms and relative to Treasury yields, during the same two months, even as the 

Federal Reserve continued to lower the federal funds target rate. 

Merrill Lynch data show that the effective yield on AAA-rated corporate debt issued by financial firms increased by 140 basis points 

between September and October, before declining somewhat in November. Lower-rated corporate debt experienced even more significant increases over the same period of time. 

The primary purpose of the FDIC’s Temporary Liquidity Guarantee Program is to provide liquidity in the inter-bank lending 

market and promote stability in the long-term funding market 


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173 Fed. Reg. 63656. 

where liquidity has been lacking during much of the past year. 

While the FDIC’s action was focused primarily on helping to restore a stable funding source for banks and thrifts, we believe that 

such liquidity can, in turn, help promote lending to consumers and 

small businesses, which would have a considerable benefit to the 

U.S. economy, in general, and financial firms, including mortgage 

lenders and GSEs. Nevertheless, partly to mitigate any potential 

effect of the FDIC guarantee on funding costs for GSEs, the federal 

banking agencies have agreed to assign a 20 percent risk weight 

to debt guaranteed by the FDIC (rather than the zero risk 

weighting that is assigned to debt guaranteed by a U.S. Government agency that is an instrumentality of the U.S. Government 

and whose obligations are fully and explicitly guaranteed as to the 

timely repayment of principal and interest by the full faith and 

credit of the U.S. Government). 

Q.3. The FFIEC has proposed a rule that would lower the capital 

risk weighting that banks assign to Fannie Mae and Freddie Mac 

debt from 20 to 10 percent, but does not change the treatment for 

FHLB debt. Has any consideration been given to giving the same 

treatment to FHLB debt? Will FDIC-guaranteed unsecured bank 

debt have a comparable risk weight? 

A.3. On September 6, 2008, the Treasury and Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into 

conservatorship, administered by the FHFA. The next day, September 7, 2008, the Treasury announced the establishment of the 

Government Enterprise Credit Facility and entered into senior preferred stock purchase agreements (the Agreements) with Fannie 

Mae and Freddie Mac. These Agreements are intended to ensure 

that Fannie Mae and Freddie Mac maintain a positive net worth 

and effectively support investors that hold debt and mortgagebacked securities issued or guaranteed by these entities. 

On October 27, 2008, the Federal Deposit Insurance Corporation, 

Board of Governors of the Federal Reserve System, Office of the 

Comptroller of the Currency, and Office of Thrift Supervision (together, the Agencies) published in the Federal Register a Notice of 

Proposed Rulemaking that would permit a banking organization to 

reduce to 10 percent from 20 percent the risk weight assigned to 

claims on, and the portions of claims guaranteed by, Fannie Mae 

and Freddie Mac (the NPR).1 As proposed, the NPR would permit 

a banking organization to hold less capital against debt issued or 

guaranteed by Fannie and Freddie. The preferential risk weight 

would be available for the duration of the Treasury’s Agreements. 

The NPR requested comment on the proposed regulatory capital 

treatment for debt issued or guaranteed by Fannie Mae and 

Freddie Mac and whether the Agencies should extend this capital 

treatment to debt issued or guaranteed by other government-sponsored entities (GSEs), such as the Federal Home Loan Banks 

(FHLBanks). The comment period for the NPR closed on November 

26, 2008, and the Agencies received more than 200 public comments. Most of the commenters support lowering the risk weight 

for debt issued or guaranteed by the FHLBanks to narrow the credit spread between Fannie Mae and Freddie Mac debt and 


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2 73 Fed. Reg. 72244. 

FHLBank debt. The Agencies are reviewing the comments and determining whether a 10 percent risk weight is appropriate for a 

banking organization’s exposure to a GSE. 

On November 26, 2008, the FDIC published in the Federal Register a final rule implementing the Temporary Liquidity Guarantee 

Program.2 Under the Temporary Liquidity Guarantee Program, the 

FDIC will guarantee the payment of certain newly issued senior 

unsecured debt issued by banking organizations and other ‘‘eligible’’ entities. Consistent with the existing regulatory capital treatment for FDIC-insured deposits, the Agencies will assign a 20 percent risk weight to debt guaranteed by the FDIC. 

Q.4. I commend you for aggressively pursuing loan modifications of 

the IndyMac loans that the FDIC now services. Please elaborate on 

the following three points that you make in your testimony that I 

want to explore further: 

Q.4.a. You state that you have established a program to systematically modify troubled loans that IndyMac serviced. Please give us 

more details about this approach and how it differs from modifying 

loans on a case-by-case basis. Is there really such a thing as a systematic approach to loan modification, or do you have to touch 

every loan as you would on a case-by-case basis? 

A.4.a. The FDIC’s loan modification program at IndyMac provides 

a streamlined and systematic approach to implementing affordable 

and sustainable loan modifications. By establishing clear guidelines 

for loan modifications determined by an affordability metric based 

on mortgage debt-to-gross income, the loan modification program 

allows servicers to apply the model to thousands of mortgages 

quickly, while defining for each loan how to achieve the targeted 

DTI. By using a waterfall of three basic loan modification tools— 

interest rate reductions, term or amortization extensions, and principal deferment—it is relatively simple to run thousands of loans 

through a computerized analysis of the necessary combination of 

tools needed to achieve an affordable and sustainable payment. A 

standardized net present value analysis, also computerized, allows 

IndyMac to ensure that its modifications provide a better value to 

the FDIC or investors in securitized or purchased loans. All 

IndyMac modifications are based on verified income information 

from third party sources such as the Internal Revenue Service or 

employers. 

This is very different from the loan-by-loan approach used by 

most servicers, which seeks to gather detailed financial information 

from borrowers—usually based on verbal statements—and get the 

highest possible monthly payment while leaving the borrower with 

a set amount of ‘disposable income.’ While this approach may appear to offer a more customized approach, it has often meant that 

servicers relied on stated income and stated expenses to achieve a 

short-term solution that continued to place the borrower in a precarious and unsustainable payment. The difficulty with this approach is demonstrated by the high redefault rates reported by 

some servicers. 

The FDIC Loan Modification Program at IndyMac achieves an 

affordable payment through a three step waterfall process: 


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• Interest Rate Reduction: Cap the interest rate at the Freddie 

Mac Weekly Survey Rate for the balance of the loan term and, 

if needed to reach the DTI target, reduce the interest rate incrementally to as low as 3 percent and re-amortize the principal balance over the remaining amortization term. The interest rate charged will not be greater than the current Freddie 

Mac Weekly Survey Rate at the time of modification. The reduced rate remains in effect for at least 5 years. 

If the target debt-to-income ratio has not been achieved, proceed 

to the next step. 

• Extended Amortization Term: For loans with original terms of 

30 years or less, re-amortize the principal balance at the reduced interest rate (3 percent floor) over an extended amortization term of 40 years from the original first payment date. 

If the target debt-to-income ratio has not been achieved, proceed 

to the next step. 

• Partial Principal Forbearance: Defer a portion of the principal 

balance for amortization purposes, and amortize over a 40– 

year period at the reduced interest rate (3 percent floor). The 

remaining principal balance remains as a zero interest, zero 

payment portion of the loan. The repayment of the deferred 

principal will be due when the loan is paid in full. 

Of the loan modification offers made at IndyMac thus far, 73 percent required rate reduction only, 21 percent required rate reduction and term extension, and 6 percent required rate reduction, 

term extension, and principal forbearance. 

Q.4.b. Your testimony says that modifications are only offered 

where they are profitable to IndyMac or investors in securitized or 

whole loans. Are you finding that most modifications are profitable, 

and if so, please explain how you determine that they are more 

profitable than foreclosures? 

A.4.b. Yes. While there are always some proportion of delinquent 

mortgages where a modification will not provide the best alternative to preserve value for the mortgage, many mortgages can be 

modified successfully while gaining the best value compared to 

foreclosure. One illustration of this fact is the net present value 

comparisons between the modified mortgage and foreclosure for the 

more than 8,500 completed modifications at IndyMac. To date, on 

average, the net present value of completed modifications at 

IndyMac has exceeded the net present value of foreclosure by 

$49,918 for total savings compared to foreclosure of more than $423 

million. 

As conservator, the FDIC has a responsibility to maximize the 

value of the loans owned or serviced by IndyMac Federal. Like any 

other servicer, IndyMac Federal must comply with its contractual 

duties in servicing loans owned by investors. Consistent with these 

duties, we have implemented a loan modification program to convert as many of these distressed loans as possible into performing 

loans that are affordable and sustainable over the long term. This 

action is based on the FDIC’s experience in applying workout procedures for troubled loans in a failed bank scenario, something the 

FDIC has been doing since the 1980s. Our experience has been 


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that performing loans yield greater returns than non-performing 

loans. 

The FDIC’s Loan Modification Program at IndyMac is primarily 

based on four principles: 

(1) Affordable and sustainable modifications generally provide 

better value than foreclosure to lenders and investors, and to 

the IndyMac conservatorship and the FDIC’s Deposit Insurance Fund. Modifications that exceed the net present value 

of foreclosure generally are consistent with servicing agreements and protect the interests of investors in securitized 

mortgages. 

(2) Sustainable loan modifications must be affordable for the life 

of the loan. As a result, the Loan Modification Program is 

based on a first lien mortgage debt-to-gross income ratio 

ranging from 38 percent to 31 percent. The modifications use 

a combination of interest rate reductions, term extensions, 

and principal deferment to achieve affordable payments. The 

interest rate on the modified mortgages is capped at a prime 

conforming loan rate reported by the Freddie Mac Weekly 

Survey. The interest rate can be reduced to as low as 3 percent for five years in order to achieve an affordable payment 

followed by gradual interest rate increases of 1 percent per 

year until the Freddie Mac Weekly Survey rate is reached. 

(3) All modifications should be based on verified income information, not stated income. This is essential to establish affordability. 

(4) A streamlined and systematic modification process is essential to address the volume of delinquent mortgages in today’s 

market. The FDIC, along with many mortgage servicers, has 

adopted a more streamlined process focused on modifying 

troubled mortgages based on a simple debt-to-income ratio 

since it is easy to apply and avoids costly and unnecessary 

foreclosures for many more borrowers. 

The Program results in a positive outcome for investors and borrowers as investor loss is minimized and the borrower receives a 

sustainable long-term modification solution. The Program requires 

full income documentation in order to minimize redefault and ensure the affordability standard is uniformly implemented. The 

gross monthly income for all borrowers who have signed the mortgage note must be supported by either the prior year’s tax returns 

or recent pay stubs. 

Q.4.c. You state that securitization agreements typically provide 

servicers with sufficient flexibility to apply the modification approach you are taking for the IndyMac loans. Given this flexibility, 

why are so few loan modifications being made? 

A.4.c. While the securitization agreements do typically provide 

servicers with sufficient flexibility, many servicers have been reluctant to adopt the streamlined modification protocols necessary to 

stem the rate of unnecessary foreclosures due to concerns about 

challenges from investors, a tendency to continue prior practices of 

focusing on loan-by-loan customized modifications, and by staffing 

limitations. 


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At IndyMac, of the more than 45,000 mortgages that were potentially eligible for modification, IndyMac has mailed modification offers to more than 32,000 borrowers. Some proportion of the remainder do not pass the NPV test and others must be addressed 

through more customized approaches. So far, IndyMac has completed income verification on more than 8,500 modifications and 

thousands more have been accepted and are being processed and 

verified. 

As the FDIC has proven at IndyMac, streamlined modification 

protocols can have a major impact in increasing the rates of sustainable modifications. However, even there, challenges in contacting borrowers and in getting acceptance of the modification offers can inhibit the effectiveness of modification efforts. These are 

challenges that we have sought to address by working closely with 

HUD-approved, non-profit homeownership counseling agencies, 

such as those affiliated with NeighborWorks. In addition, we have 

sought to reach out to local community leaders and provide cooperative efforts to contact borrowers at risk of foreclosure. These efforts, which many servicers are starting to pursue, should be a 

focus of efforts by all servicers going forward. 

In addition, servicers’ concerns over challenges from investors 

makes adoption of a national program to provide incentives from 

federal funds a critical part of the strategy to achieve the scale of 

modifications necessary to address our housing crisis. To address 

conflicting economic incentives and fears of re-default risk, the 

FDIC has proposed that the government offer an administrative fee 

to servicers who systematically modify troubled loans and provide 

loss sharing to investors to cover losses associated with any redefaults. These financial incentives should make servicers and investors far more willing to modify loans. This proposal addresses 

the biggest disincentive to modify troubled mortgages—the potential for greater losses if a modified loan redefaults and foreclosure 

is necessary some months in the future in a declining housing market. As a result, the FDIC proposal is designed to cover a portion 

of the losses that could result if the modified mortgage redefaults. 

This will provide practical protection to servicers by allowing easier 

proof for the value of the modification and eliminate investors’ primary objection to streamlined modifications. We have estimated 

the costs of this program to be about $25 billion. To protect taxpayers and assure meaningful loan modifications, the program 

would require that servicers truly reduce unaffordable loan payments to an affordable level and verify current income, and that 

borrowers make several timely payments on their modified loans 

before those loans would qualify for coverage. This proposal is derived from loss sharing arrangements the FDIC has long used to 

maximize recoveries when we sell troubled loans. We believe this 

or some similar program of financial incentives is necessary to 

achieve loan modifications on a national scale to halt the rising tide 

of foreclosures and the resulting economic problems. 

Q.5. Each agency represented at the hearing has aggressively used 

the tools at their disposal in dealing with the crisis. However, 

sometimes the use of those tools has led to unintended consequences. For instance, when the Treasury Department guaranteed money market funds, it led to a concern on deposit insurance 


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and bank accounts. When the FDIC guaranteed bank debt, it had 

an effect on GSE borrowing costs, which in turn directly affects 

mortgage rates. 

Acknowledging that there is often a need to act quickly in these 

circumstances, please explain what steps and processes you have 

employed to inform other agencies about significant actions you undertake to ensure that there are not serious adverse unintended 

consequences and that your actions are working in concert with 

theirs. 

A.5. The FDIC’s Temporary Liquidity Guarantee Program was created during intensive discussions between the FDIC, the Department of the Treasury and the Federal Reserve over the Columbus 

Day weekend (October 11–13) and announced on October 14. Over 

the next several weeks, the FDIC adopted an Interim Rule, an 

Amended Interim Rule and a Final Rule. The FDIC’s Interim Final 

Rule adopted on October 23 specifically requested comments on the 

Temporary Liquidity Guarantee Program and the FDIC received 

over 750 comments, including comments from other government 

agencies. During this process, the FDIC had frequent discussions 

with the Treasury, the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision about 

various aspects of the program and its potential consequences. 

With regard to concerns that the actions by the FDIC to guarantee bank debt had an effect on GSE borrowing costs, as discussed above, the spread of debt issued by Government-sponsored 

enterprises (GSEs), including Fannie Mae, Freddie Mac, and Federal Home Loan Banks (FHLBs), over Treasuries increased considerably in October and November although the overall cost of funding declined. According to Merrill Lynch data on U.S. bond yields, 

the spread between AAA-rated agency debt and Treasuries increased by nearly 40 basis points between September and November 2008. We believe these developments primarily reflect broad financial market uncertainty and a generally unfavorable market 

sentiment towards financial firms. In fact, the spread of debt guaranteed by the FDIC under the Temporary Liquidity Guarantee Program over Treasuries is larger than the spread on GSE debt. 

Financial firms, including those with a AAA-rating, saw their 

borrowing costs increase sharply, both in absolute terms and relative to Treasury yields, during the same two months, even as the 

Federal Reserve continued to lower the federal funds target rate. 

Merrill Lynch data show that the effective yield on AAA-rated corporate debt issued by financial firms increased by 140 basis points 

between September and October, before declining somewhat in November. Lower-rated corporate debt experienced even more significant increases over the same period of time. The primary purpose 

of the FDIC’s Temporary Liquidity Guarantee Program is to provide liquidity in the inter-bank lending market and promote stability in the long-term funding market where liquidity has been 

lacking during much of the past year. While the FDIC’s action was 

focused primarily on helping to restore a stable funding source for 

banks and thrifts, we believe that such liquidity can, in turn, help 

promote lending to consumers and small businesses, which would 

have a considerable benefit to the U.S. economy, in general, and financial firms, including mortgage lenders and GSEs. Nevertheless, 


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partly to mitigate any potential effect of the FDIC guarantee on 

funding costs for GSEs, the federal banking agencies have agreed 

to assign a 20 percent risk weight to debt guaranteed by the FDIC 

(rather than the zero risk weighting that is assigned to debt guaranteed by a U.S. Government agency that is an instrumentality of 

the U.S. Government and whose obligations are fully and explicitly 

guaranteed as to the timely repayment of principal and interest by 

the full faith and credit of the U.S. Government). 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM 

SHEILA C. BAIR 

Q.1. I was happy to note in your testimony that you discussed the 

need to stop unnecessary foreclosures. You mentioned the FDIC’s 

work as conservator of IndyMac and your participation in the Hope 

for Homeownership program as recent examples of your effort. 

Does the FDIC plan to develop a new program to extend loan modifications to a broader pool of mortgages than those held by 

IndyMac? How would such a program work and what would its impact be on mortgage investors? Where would the FDIC derive authority for such a program? 

A.1. In mid-November, the FDIC announced a new proposal for 

loan modifications that is similar to the program we developed at 

IndyMac. Both target borrowers who are 60 days or more past due, 

and both seek to apply a consistent standard for affordable firstlien mortgage payment. The new FDIC proposal has a 31 percent 

debt-to-income ratio, whereas IndyMac modifications are designed 

to achieve a 38 percent debt-to-income ratio, but can go as low as 

31 percent. 

The FDIC’s proposal is designed to promote wider adoption of 

systematic loan modifications by servicers through the use of payment incentives and loss-sharing agreements, and thus reach more 

troubled borrowers. Specifically, to encourage participation, funds 

from the Troubled Asset Relief Program (TARP) would be used to 

pay servicers $1,000 to cover expenses for each loan modified according to the required standards. In addition, TARP funds would 

be used to provide guarantees against the losses that lenders and 

investors could experience if a modified loan should subsequently 

redefault. The guarantee would be paid only if the modification met 

all prescribed elements of the loan modification program, if the borrower made at least 3 monthly payments under the modified loan, 

and if the lender or servicer met the other elements of the program. 

The impact of this new proposal will be less costly than the 

lengthy and costly alternative of foreclosure, where direct costs can 

total between 20 and 40 percent of a property’s market value. We 

expect about half of the projected 4.4 million problem loans between now and year-end 2009 can be modified. Assuming a redefault rate of 33 percent, this plan could reduce the number of 

foreclosures during this period by some 1.5 million at a projected 

program cost of $24.4 billion. 

We believe that Section 109 of the EESA provides authority for 

this proposal. Section 109 provides that ‘‘the Secretary may use 


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loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.’’ 

Q.2. Has the FDIC given any further consideration to the FDIC’s 

own Home Ownership Preservation Loan program? I believe this 

program is a good way to avoid foreclosures and severe mortgage 

modifications at the same time. If this program is no longer being 

considered, why? 

A.2. When the FDIC proposed the Home Ownership Preservation 

(HOP) Loan program in May 2008, we noted that congressional action would be required to authorize the Treasury Department to 

make HOP loans. We believe that the HOP Loan program could be 

an important tool for avoiding unnecessary foreclosures in combination with other tools. As the housing market and home prices have 

continued to decline, we have suggested the loss guarantee approach discussed above as a way of streamlining and increasing the 

scale of loan modifications. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 

FROM NEEL KASHKARI 

Q.1. On October 20, 2008, Secretary Paulson said that Treasury’s 

infusion of capital in financial institutions through the purchase of 

preferred stock is intended ‘‘to increase the confidence of our banks, 

so that they will deploy, not hoard, their capital. And we expect 

them to do so.’’ I share that expectation. As I indicated at the hearing, I feel that Treasury should ask banks that receive these capital infusions provided by the taxpayers to make more loans to entities in the community and to not hoard the money. You said 

Treasury shares this view and that you ‘‘want our financial institutions lending in our communities.’’ Within our communities, small 

private colleges serve important roles and many of them have borrowing relationships with banks. The credit crisis has made some 

creditworthy schools concerned that the banks from which they 

have borrowed in the past will be unwilling to lend to them on reasonable terms in the future. 

Q.1.a. Does Treasury believe that banks which receive capital injections should be encouraged to continue to lend to the creditworthy customers, including small private colleges and universities, 

with which they have done business in the past? If so, will Treasury encourage such lending? 

A.1.a. Treasury believes that the banks that received investments 

from the Capital Purchase Program (CPP) should continue to make 

credit available in their communities. By injecting new capital into 

healthy banks, the CPP has helped banks maintain strong balance 

sheets and eased the pressure on them to scale back their lending 

and investment activities. However, we expect banks to continue 

their lending in a safe and sound manner and that institutions 

must not repeat the poor lending practices that were a root cause 

of today’s problems. To that effect, we firmly support the statement 

by bank regulators on November 12, 2008 to that effect. The statement emphasized that the extraordinary government actions taken 

to strengthen the banking system are not one-sided; all banks—not 

just those participating in CPP—have benefitted from the governVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00117 Fmt 6602 Sfmt 6602 E:\HR\OC\A416.XXX A416

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ment’s actions. Banks, in turn, have obligations to their communities to continue to make credit available to creditworthy borrowers and to work with struggling borrowers to avoid preventable 

foreclosures. 

Q.1.b. What specific conditions or assurances has Treasury required to ensure that banks do not hoard the capital? 

A.1.b. The Treasury has not imposed specific conditions on how 

banks can use funds obtained from the CPP. The purpose of the 

CPP is to stabilize financial markets and restore confidence, including by strengthening banks’ balance sheets so that they can better 

weather the deleveraging process associated with the current economic downturn. The CPP funds were not costless to the recipient 

institutions: the preferred shares carry a 5 percent dividend rate 

and the recipients will need to put those funds to a productive use 

or they will lose money. The banks will have strong economic incentives to deploy the capital profitably. Banks are in the business 

of lending and they will provide credit to sound borrowers whenever possible. They may also use the capital to absorb losses as 

part of loan write-downs and restructurings. If a bank doesn’t put 

the new capital to work earning a profit or reducing a loss, its returns for its shareholders will suffer. 

However, Treasury did design important features into our investment contracts to limit what banks can do with the money: one, 

Treasury barred any increase in dividends for 3 years; two, Treasury restricted share repurchases. Increasing dividends or buying 

back shares would undermine our policy objective by taking capital 

out of the financial system. 

In addition, Treasury has been working with the banking regulators to design a program to measure the activities of banks that 

have received TARP capital. We plan to use quarterly call report 

data to study changes in the balance sheets and intermediation activities of institutions we have invested in and compare their activities to a comparable set of institutions that have not received 

TARP capital investments. Because call report data are collected 

infrequently, we also plan to augment that analysis with a selection of data we plan to collect monthly from the largest banks we 

have invested in for a more frequent snapshot. 

Thus, Treasury does not believe that banks will ‘‘hoard’’ the capital, but rather utilize this additional capital in a safe and sound 

manner. We expect communities of all sizes to benefit from the investments into these institutions, which now have an enhanced capacity to perform their vital functions, including lending to U.S. 

consumers and businesses and promoting economic growth. The increased lending that is vital to our economy will not materialize as 

fast as many of us would like, but it will happen much faster as 

a result of deploying resources from the TARP to stabilize the system and increase capital in our banks. 

Q.1.c. What assurances have you received from these banks that 

they will employ the capital to prevent foreclosures? 

A.1.c. Treasury believes that banks will employ this additional capital in a manner that best benefits their communities. Some institutions may use the funds to continue lending to community institutions (such as private universities), while other institutions may 


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employ the funds to originate new residential mortgages or to restructure existing mortgages. In our private conversations with 

bankers receiving CPP funds, many institutions have stated that 

preventing foreclosures is a high priority for them. 

Q.2. In implementing the Capital Purchase Program (CPP), what 

steps has the Treasury Department taken to ensure that all financial institutions that participate will receive similar accounting 

treatment in the determination of the value of the institution’s risk 

weighted assets? 

Q.2.a. What specific steps is the Treasury Department taking to coordinate the assessments by the various primary regulators? 

A.2.a. The federal banking agencies, working in conjunction with 

the Treasury, developed a common application form that was used 

by all qualified financial institutions to apply for CPP funds. In addition, the Treasury worked closely with the bank regulators to establish a standardized evaluation process, and all regulators use 

the same standards to review all applications to ensure consistency. 

Applications are submitted to an institution’s primary federal 

regulator. Once a regulator has reviewed an application, it will 

take one of the following three actions: (1) for applications it does 

not recommend, it may encourage the institution to withdraw the 

application; (2) for applications it strongly believes should be included in the program, it directly sends the application and its recommendation to the TARP Investment Committee at the Treasury; 

(3) for cases that are less clear, the regulator will forward the application to a Regulatory Council, made up of senior representatives of the four banking regulators, for a joint review and recommendation. 

The Treasury TARP Investment Committee reviews all recommendations from the regulators. This committee includes our 

top officials on financial markets, economic policy, financial institutions, and financial stability, as well as the Chief Investment Officer for the TARP, who chairs the Committee. This is a Treasury 

program and Treasury makes the final decision on any investments. The Investment Committee gives considerable weight to the 

recommendations of the banking regulators. In some cases, the 

Committee will send the application back to the primary regulator 

for additional information, or even remand it to the Regulatory 

Council for further review. At the end of the evaluation process, 

Treasury notifies all approved institutions. 

Q.2.b. What lessons learned can you report from the assessment 

process for the first nine institutions which participated in the 

CPP? 

A.2.b. This process has worked well. Each institution that has received CPP funds has been thoroughly scrutinized. Although the 

process is very labor and time intensive, the Treasury believes it 

is necessary to fully protect the interests of the taxpayer. 

Q.3. A stated legislative purpose of EESA is that the Treasury Department use the funds’ in a manner that preserves homeownership and promotes jobs and economic growth.’’ What specific steps 


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has the Treasury Department undertaken to ensure that the funds 

are being used to accomplish this objective? 

A.3. The purpose of the EESA was to stabilize our financial system 

and to strengthen it. It was not a panacea for all our economic difficulties. The crisis in our financial system had already spilled over 

into our economy and hurt it. It will take a while to get lending 

going and to repair our financial system, which is essential to economic recovery. However, this will happen much faster as the result of TARP actions. 

The most important thing Treasury can do to mitigate the housing correction and reduce the number of foreclosures is to stabilize 

financial markets, restoring the flow of credit and increasing access 

to lower-cost mortgage lending. The actions we have taken to stabilize and strengthen Fannie Mae and Freddie Mac, and through 

them to increase the flow of mortgage credit, together with the 

CPP, are powerful actions to promote mortgage lending. Treasury 

is working actively to stabilize housing markets and reduce preventable foreclosures, and has succeeded by undertaking the following initiatives: 

• HOPE NOW: In October 2007, Treasury actively helped facilitate the creation of the HOPE NOW Alliance, a private sector 

coalition of mortgage market participants and non-profit housing counselors. HOPE NOW servicers represent more than 90 

percent of the subprime mortgage market and 70 percent of 

the prime mortgage market. Since inception, HOPE NOW has 

kept roughly 2.9 million homeowners in their homes through 

modifications and repayment plans, and it is currently helping 

more than 200,000 borrowers per month. 

• Stabilizing Fannie Mae and Freddie Mac: Treasury took aggressive actions in 2008 to stabilize and strengthen Fannie 

Mae and Freddie Mac, and prevent the collapse of two institutions with $5.4 trillion in debt and mortgage-backed securities 

held by investors and financial institutions throughout the 

United States and the world. The systemic importance of these 

two enterprises, and the systemic impact of a collapse of either, 

cannot be overstated. Treasury’s efforts to stabilize them by effectively guaranteeing their debt has increased the flow of 

mortgage credit and insulated mortgage rates from the rapid 

increases and fluctuations in the cost of other credit. 

• Hope for Homeowners: On October 1, 2008, HUD implemented 

Hope for Homeowners, a new FHA program, available to lenders and borrowers on a voluntary basis that insures refinanced 

affordable mortgage loans for distressed borrowers to support 

long-term sustainable homeownership. 

• Streamlined Loan Modification Program: On November 11, 

2008, Treasury joined with the FHFA, the GSEs, and HOPE 

NOW to announce a major streamlined loan modification program to move struggling homeowners into affordable mortgages. The program, implemented on December 15, creates 

sustainable monthly mortgage payments by targeting a benchmark ratio of housing payments to monthly gross household income (38%). Additionally, on November 20, Fannie Mae and 

Freddie Mac announced that they would suspend foreclosure 


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sales and cease evictions of owner-occupied homes from 

Thanksgiving until January 9th to allow time for implementation of the modification program. 

• Subprime Fast-Track Loan Modification Framework: Treasury 

worked with the American Securitization Forum to develop a 

loan modification framework to allow servicers to modify or refinance loans more quickly and systematically. Subprime ARM 

borrowers who are current but ineligible to refinance may be 

offered a loan modification freezing the loan at the introductory rate for five years. 

Q.4. If there were a troubled asset that threatened the viability of 

critically important public infrastructure systems, would EESA 

provide the Treasury Department the authority to purchase such 

a troubled asset? Would you interpret such a purchase to be consistent with the purposes of the Act? 

A.4. According to the EESA, the Secretary of the Treasury may 

purchase from a financial institution any financial instrument, that 

he determines, after consultation with the Chairman of the Board 

of Governors of the Federal Reserve System to be necessary to promote financial market stability. In such an instance, the Secretary 

must transmit such a determination to the appropriate committees 

of Congress. The Secretary will make those decisions on a case-bycase basis. 

Q.5. During the discussions leading to the passage of the Emer- gency Economic Stabilization Act of 2008, Treasury asked for $700 

billion primarily to purchase troubled assets at auction. Secretary 

Paulson testified that ‘‘This troubled asset purchase program on its 

own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy.’’ [Senate 

Banking Committee hearing on September 23, 2008.] Days after 

enactment of the law, Treasury changed its main focus from asset 

purchases and decided to first infuse capital in large financial institutions. Please describe the analysis that supported the initial 

Treasury plan and identify the assumptions that later proved to be 

inaccurate, causing Treasury to abruptly change the principle focus 

of the TARP to buying preferred stock. 

A.5. In the discussions with the Congress in mid-September during 

consideration of the financial rescue package legislation, Treasury 

focused on an initial plan to purchase illiquid mortgage assets in 

order to remove the uncertainty regarding banks’ capital strength. 

At the same time, Treasury worked hard with the Congress to 

build maximum flexibility into the law to enable Treasury to adapt 

our policies and strategies to address market challenges that may 

arise. 

In the weeks after Secretary Paulson and Chairman Bernanke 

first went to the Congress, global and domestic financial market 

conditions deteriorated at an unprecedented and accelerating rate. 

One key measure Treasury assessed was the LIBOR-OIS spread— 

a key gauge of funding pressures and perceived counterparty credit 

risk. Typically, 5–10 basis points, on September 1, the one-month 

spread was 47 basis points. By September 18th, when Treasury 

first went to Congress, the spread had climbed 88 basis points to 

135 basis points. By the time the bill passed, just two week later 


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on October 3, the spread had climbed another 128 basis points to 

263 basis points. By October 10, LIBOR-OIS spread rose another 

75 basis points to 338 basis points. During this period, credit markets effectively froze. The commercial paper market shut down, 3- 

month Treasuries dipped below zero, and a money market mutual 

fund ‘‘broke the buck’’ for only the second time in history, precipitating a $200 billion net outflow of funds from that market. 

Given such market conditions, Secretary Paulson and Chairman 

Bernanke recognized that Treasury needed to use the authority 

and flexibility granted under the EESA as aggressively as possible 

to help stabilize the financial system. They determined the fastest, 

most direct way was to increase capital in the system by buying equity in healthy banks of all sizes. Illiquid asset purchases, in contrast, require much longer to execute and would require a massive 

commitment of funds. 

Treasury immediately began designing a capital program to complement the asset purchase programs under development. Since 

launching the program on October 14, 2008, Treasury has invested 

$192.3 billion of the $250 billion Capital Purchase Program in 257 

institutions in 42 states across the country, as well as Puerto Rico. 

Following that, as Treasury continued very serious preparations 

and exploration of purchasing illiquid assets, scale became a factor; 

for an asset purchase program to be effective, it must be done on 

a very large scale. With $250 billion allocated for the CPP, Treasury considered whether there was sufficient capacity in the TARP 

for an asset purchase program to be effective. In addition, each dollar invested in capital can have a bigger impact on the financial 

system than a dollar of asset purchase; capital injections provide 

better ‘‘bang for the buck.’’ 

It also became clear that there was a need for additional capital 

for non-bank financial institutions and support of the non-bank financial market. A large contingency also arose that threatened the 

financial system, as Treasury had to restructure the Federal Reserve’s loan to AIG, using $40 billion of TARP funds. This action 

was taken to prevent the collapse of a systemically significant financial institution and the impact such a collapse would have on 

the system and economy. In addition, Treasury was required to use 

TARP funds to support Citigroup. 

Treasury also realized that it would have to take actions to support the non-banking market, a critical source of funds for consumers and small and large businesses, by supporting the 

securitization market. Such measures would help bring down interest rates on auto loans, credit cards, student loans and small business loans and could be achieved with a more modest allocation 

from the TARP. Therefore, Treasury committed to provide $20 billion of TARP resources in support of a $200 billion Federal Reserve 

facility—the Term Asset-Backed Securities Loan Facility (TALF). 

As such, Treasury’s assessment at this time is that the purchase 

of illiquid mortgages and mortgage-related securities is not the 

most effective way to use TARP funds. 

Q.6. The conservatorship of Fannie Mae and Freddie Mac has resulted in the unintended consequence of increasing the borrowing 

costs for the Federal Home Loan Banks (FHLBs) since the markets 

apparently now view them as having a more distant relationship 


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to the government than the GSEs in conservatorship. Additionally, 

the decision by the FDIC to guarantee senior debt of financial institutions has raised funding costs for Fannie Mae and Freddie Mac 

because the market apparently does not view the $200 billion backstop provided to the enterprises as an equivalent guarantee. Given 

the stated purpose of putting the enterprises in conservatorship— 

to ensure a stable housing market, to lower mortgage interest 

rates, and to make sure the enterprises could actively purchase 

agency MBS—what steps is the Treasury considering to address 

these problems? 

A.6. Treasury, working in concert with the Federal Reserve and 

FHFA, has been closely monitoring financial markets, particularly 

credit markets in terms of the impact and consequences of our actions. While the GSEs and not the Federal Home Loan Banks were 

placed into conservatorship with access to $100 billion through the 

senior preferred purchase agreement, all three entities have access 

to the GSE Credit Facility which Treasury established at the time 

of conservatorship. As a result, all three entities, including the 

FHLB, have access to enormous liquidity limited only by the 

amount of collateral which they have on their balance sheet. This 

credit facility was established specifically to level the playing field 

for the FHLBs. Furthermore, Treasury’s purchases of MBS of FRE 

and FNM since September, also set up after the conservatorship, 

have instilled confidence in the overall mortgaged-backed securities 

(MBS) markets. The recent actions by the Federal Reserve Bank of 

New York to purchase the debt and MBS of the GSEs have also 

added confidence, thus lowering borrowing costs across the board, 

including those of FHLB. In fact, since the conservatorship was announced, the spread on FHLB 2-year debt, a benchmark issue, has 

declined from nearly 86 basis points above the comparable two-year 

Treasury to less than 45 basis points—in line with that of FNM 

and FRE—an enormous difference in borrowing costs and a primary result of the joint actions of Treasury and the Federal Reserve. 

With regard to the FDIC guaranteed debt portfolio, while these 

securities have an explicit FDIC guarantee, they still do not possess the liquidity and depth of the GSE Agency or Treasury markets. Hence, some large institutions cannot be as actively involved 

in these markets since they need to purchase in very large size. As 

an example, about $115 billion of FDIC bank debt has been issued, 

while the agencies have over $3 trillion in debt outstanding. Partially as a result of this, the GSEs are able to borrow at a lower 

spread to Treasuries than FDIC backed debt. In fact, as mentioned 

above, 2–year benchmark FDIC backed debt on average trades 60 

basis points above comparable 2-year Treasuries while GSE debt 

trades about 45 basis points above such Treasuries—i.e. the GSE 

borrowing costs are cheaper. Moreover, the life of the senior preferred agreement is in perpetuity for any debt issued between now 

and December 31, 2009 and for any tenor, while the FDIC debt 

program is limited to debt issued out three years and expires June 

30, 2009—a major difference. 

Q.7. As you know, since it was rescued by the Federal Reserve, 

AIG was engaged in lobbying activities at the state level. SpecifiVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00123 Fmt 6602 Sfmt 6602 E:\HR\OC\A416.XXX A416

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cally, the company was lobbying against certain requirements for 

mortgage brokers. The company subsequently promised to stop 

these activities. What steps has the Treasury Department taken to 

make sure that the entities receiving federal assistance are not engaged in lobbying, particularly in lobbying against important protections for borrowers? Did the Treasury Department consider putting any lobbying restrictions on the entities that it funds under 

the TARP? 

A.7. As part of the agreement with AIG announced on November 

10, 2008, AIG must be in compliance with the executive compensation requirements of Section 111 of EESA. AIG must comply with 

the most stringent limitations on executive compensation for its top 

five senior executive officers, and Treasury is requiring golden 

parachute limitations and a freeze on the size of the annual bonus 

pool for the top 60 company executives. Additionally, AIG must 

continue to maintain and enforce newly adopted restrictions put in 

place by the new management on corporate expenses and lobbying 

as well as corporate governance requirements, including formation 

of a risk management committee under the board of directors. 

Q.8. I commend the Administration for following through with Section 112 of EESA by convening an international summit on November 15. In announcing the summit yesterday, the White House explained that leaders of the G20 and key international financial institutions will review progress on measures taken to address the financial crisis and to discuss principles for reform of regulatory and 

institutional regimes going forward. Please describe what the 

Treasury and Federal Reserve intend to accomplish through this 

summit and the subsequent working group meetings that will follow the summit—specifically, what types of principles for regulatory and institutional modernization will the United States pursue in the international community? Will these principles include 

protections for consumers and households which form the foundation of economic prosperity in our country as well as other countries? 

A.8. The international summit was extraordinarily successful. It 

resulted in a five-page statement by the participating leaders as 

well as a 47-point action plan of quite specific actions, both in the 

near term and in the longer term. There were six key takeaways 

from the summit. First, there was broad agreement on the importance of the countries of the G20 taking and implementing progrowth investment—pro-growth policies to stimulate our economies. Second, the leaders pledged to improve our regulatory regimes so to ensure that all financial markets, all financial products, 

and all financial market participants are subject to appropriate 

regulation or oversight. Related to this was a pledge of enhancing 

international cooperation among regulators and between regulators 

and international financial institutions. Third, one of the significant reforms that was agreed on was the need to reform international financial institutions to give greater representation to 

emerging market and developing economies. Fourth, there was an 

affirmation of free market principles, and, also importantly, the 

leaders expressly rejected protectionism. The final takeaway was a 

recognition and commitment to address the needs of the poorest, 


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both by honoring our aid commitments, and by ensuring that the 

World Bank and IMF are adequately resourced so that they can 

help developing countries through this crisis. And here note was 

taken of the new liquidity facilities of the IMF, as well as the recent very large package announced by the World Bank, to support 

needs for trade finance and promote infrastructure development. 

Q.9. The Treasury announced plans to invest $250 billion to 

strengthen the balance sheet of banks and the rest of the TARP 

money to provide relief to banks struggling with troubled assets. 

How much money will Treasury devote to provide relief for the millions of Americans struggling with troubled mortgages? 

A.9. The existing TARP programs have exhausted the $350 billion 

in TARP funds that already have been authorized by Congress. Not 

all of those funds have yet been disbursed, and given the unpredictability and severity of the current financial crisis, Treasury believes it is prudent to reserve some of our TARP capacity to maintain not only our flexibility in responding to unforeseen events, but 

also that of the next Administration. 

Separately from the TARP, Treasury has acted aggressively to 

keep mortgage financing available and develop new tools to help 

homeowners. Specifically, Treasury has achieved the following 

three key accomplishments: 

• To support the housing and mortgage market, Treasury acted 

earlier this year to prevent the failure of Fannie Mae and 

Freddie Mac, the housing GSEs that affect over 70 percent of 

mortgage originations. 

• October 2007, Treasury helped establish the HOPE NOW Alliance, a coalition of mortgage servicers, investors and counselors, to help struggling homeowners avoid preventable foreclosures. 

• Treasury worked with HOPE NOW, FHFA and the GSEs to 

achieve a major industry breakthrough in November 2008 with 

the announcement of a streamlined loan modification program 

that builds on the mortgage modification protocol developed by 

the FDIC for IndyMac. 

Q.10. What is your position on the use of funds by financial institutions under the CPP to acquire other institutions? Does your position depend on whether the other institution is healthy or failing? 

A.10. The Treasury believes that banks and their management and 

shareholders are in the best position to determine whether acquisitions or mergers make sense. Acquisitions and mergers in the 

banking industry are also reviewed by the appropriate Federal 

banking agencies, which must consider the impact on the relevant 

communities as well as financial and managerial information. As 

noted above, the purpose and the focus of the CPP is the stability 

of the financial system. The program is not designed to, nor does 

it focus on, encourage or discourage acquisitions or mergers. 

More generally, Treasury believes that when failing bank is acquired by a healthy bank, the community of the failing bank is better off than if the bank had been allowed to fail. Branches and financial services in that community are usually preserved. Costs to 

the taxpayers via the FDIC deposit fund are also lower than had 


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the bank been allowed to fail. Prudent mergers and acquisitions 

can strengthen our financial system and our communities, while 

protecting taxpayers. 

Q.11. We have received reports that insurance companies are in 

talks with Treasury to allow access to the TARP program. 

Q.11.a. Has any decision been made about whether insurance companies may take part in the TARP program, and what is the rationale for inclusion? 

A.11.a. The Treasury Department is analyzing the inclusion of insurance companies, including how to apply the CPP to bank holding companies and thrift holding companies with insurance company subsidiaries. 

Q.11.b. Given that insurance companies are not federally regulated 

(at least, not on their insurance business), what exact oversight 

will be done to ensure safety and soundness of the companies? 

A.11.b. Regulation of insurance companies is undertaken at the 

state level, not by the Treasury Department, and Treasury does not 

interfere in these regulatory-supervisory matters. Treasury also 

does not regulate the institutions which have chosen to participate 

in the voluntary CPP program, as they are regulated by their primary Federal regulators. 

Separately, in March of 2008, Treasury published an extensive 

Blueprint for a Modernized Regulatory Structure that proposes a 

framework and many specific recommendations for reforming our 

financial regulatory system, including in the area of insurance. 

However, Treasury is using TARP to stabilize the financial system 

today, while regulatory modernization will likely take several years 

to complete. 

Q.12. Each agency represented at the hearing has aggressively 

used the tools at their disposal in dealing with the crisis. However, 

sometimes the use of those tools has led to unintended consequences. For instance, when the Treasury Department guaranteed money market funds, it led to a concern on deposit insurance 

and bank accounts. When the FDIC guaranteed bank debt, it had 

an effect on GSE borrowing costs, which in turn directly affects 

mortgage rates. Acknowledging that there is often a need to act 

quickly in these circumstances, please explain what steps and processes you have employed to inform other agencies about significant 

actions you undertake to ensure that there are not serious adverse 

unintended consequences and that your actions are working in concert with theirs. 

A.12. Throughout the financial crisis, the Secretary has been in 

very close contact with the other members of the President’s Working Group on Financial Markets (the Federal Reserve, the SEC, 

and the CFTC) and the heads of the FDIC, OCC, and OTS. To the 

maximum extent possible, programs have been developed cooperatively among these different agencies. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 

FROM BRIAN D. MONTGOMERY 

Q.1. You are rightly proud to have been able to launch the HOPE 

for Homeowners plan in so short a period of time, and I thank you 

and the other agencies involved for your efforts. In the end, of 

course, the goal is to help homeowners. Please provide the Committee with information regarding your outreach efforts to lenders, 

housing counselors, and borrowers. What steps have you taken to 

sign up lenders? How many lenders are currently participating? 

What steps have you taken to ensure borrowers know about the 

program? 

A.1. FHA conducted the first national training session for lenders 

and counselors in Atlanta, Georgia, on November 13 and 14. Approximately 600 industry representatives attended the session. 

FHA staff provided a comprehensive overview of the program, explaining everything from borrower eligibility criteria to servicing 

requirements to FHA’s monitoring practices on HOPE for Homeowners loans. The attendees were very attentive, asking excellent 

questions and engaging in substantive dialogue. 

The next national FHA training session will be at the 

Neighborworks Training Institute, to be held in Washington, DC, 

from December 8th through December 12th. Additional counselorspecific training will be conducted in an on-line course offered by 

Neighborworks as well. Other lender and counselor training sessions will be performed on a smaller scale, at the local and regional 

level. 

FHA has posted a calendar of training and outreach events on 

the FHA.gov Web site, to provide consumers, counselors, and lenders with a tool to look up events by date, location, sponsor, and intended audience. The listing of events will be updated on a regular 

basis, as the Board agencies continue to work with industry partners to set up additional sessions. At each of the events, staff from 

one or several of the HOPE for Homeowners Board agencies will 

present information on the program. The Web-based calendar of 

events can be found at www.fha.gov. As of November 20, 56 sessions had been scheduled. The national training schedule and a description of the events held by headquarters staff are included as 

attachments. 

Recognizing that timely outreach from the lender community to 

struggling consumers is critically important, a form has been added 

to the Web site for FHA-approved lenders to sign up for the H4H 

program. There are currently more than 200 brokers included on 

the list, which is available for consumers on FHA.gov. Unfortunately, we have had very few originating lenders sign up for the 

program to date. The lending community not only needs time to 

understand the unique statutory requirements of the H4H Program 

but also to modify their protocols and practices, train their staff 

and update their technology systems before they can responsibly 

offer it to consumers. Consumers are strongly encouraged to contact their servicing lender and any subordinate lien holders since 

their participation is vital for a refinance into a HOPE for Homeowners mortgage. 

With regards to borrower outreach, FHA and our partner agencies are executing an integrated consumer advertising campaign 


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across a variety of media including radio, print, and the Internet. 

We are engaging HUD’s target audiences through various online 

channels, while maintaining the FHA.gov portal in support piece in 

a variety of our marketing activities communications channel. We 

have also leveraged HUD’s field network and industry partners to 

expand reach. Two online applications are being developed by the 

Federal Reserve to post on the FHA Web site. FHA also developed 

an online training course for housing counselors with 

Neighborworks that will be posted on the Web sites of both organizations. 

Q.2. What impediments do you see to the use of the HOPE for 

Homeowners program? 

A.2. There are a number of specialized requirements that make 

this program very different from, and more difficult than, any other 

mortgage product the lending community has offered and/or helped 

consumers to access. 

FHA fully recognizes the challenging policy decisions that the 

Congress and the Administration had to make to ensure that any 

program designed to serve homeowners in need did not place 

undue financial burden on American taxpayers. Nevertheless, the 

lending community has consistently cited several key shortcomings 

and expressed concern that the program was unnecessarily complicated. The primary concerns raised repeatedly are that the program: 

1. imposes excessive costs on consumers 

2. directs unfair payments to the Federal government, at the 

expense of both lenders and consumers 

3. restricts eligibility so severely that few homeowners in 

need can qualify 

In line with these general concerns, FHA makes the following 

specific recommendations for Congressional actions needed to modify the program to increase uptake. 

• Eliminate SEM and SAM altogether 

• Permit subordinate liens to be placed behind HOPE for Homeowners mortgages 

• Reduce 1.5% annual premium 

• Remove restrictive eligibility criteria, including: 

• No intentional defaults 

• No false information on previous loan 

• No fraud over previous 10 years 

• No ownership of other residential real estate 

• March 1, 2008 DTI affordability measure 

• Remove 1st payment default provision 

FHA looks forward to providing Congress with a full account of 

the concerns we have been presented to begin the dialogue about 

additional legislative changes that would improve program participation. 

Q.3. As you note in your testimony, FHA’s loan volume has skyrocketed over the past two years. Its market share has grown from 


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2 percent to 17 percent. Please explain how FHA has handled this 

huge increase in volume without compromising the quality of the 

loans it has insured. Please provide the Committee data on the 

types of loans insured (purchase money, term refinance, cash out 

refinance, and others); the characteristics of the loans (LTVs, 

sources of downpayments, terms, and other relevant data); characteristics of the borrowers (credit scores and other relevant data); 

and any other information you think the Committee could use to 

evaluate the new book of business. 

A.3. The attached report provides statistics on FHA’s increased 

loan volume. 


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Q.4. Each agency represented at the hearing has aggressively used 

the tools at their disposal in dealing with the crisis. However, 

sometimes the use of those tools has led to unintended consequences. For instance, when the Treasury Department guaranteed money market funds, it led to a concern on deposit insurance 

and bank accounts. When the FDIC guaranteed bank debt, it had 

an effect on GSE borrowing costs, which in turn directly affects 

mortgage rates. 

Acknowledging that there is often a need to act quickly in these 

circumstances, please explain what steps and processes you have 

employed to inform other agencies about significant actions you undertake to ensure that there are not serious adverse unintended 

consequences and that your actions are working in concert with 

theirs. 

A.4. Developing a risk-oriented business plan early in the H4H 

Program’s implementation was an essential element designed to assist the Oversight Board to ensure that the processes, procedures, 

and communication requirements are put in place to do what Congress has directed it to do. The H4H team has developed a business 

plan that builds on the considerable work already completed by the 

agencies to develop the Program. It is a living document with a key 

purpose to assist the Oversight Board and its member agencies to 

sufficiently: (1) identify and prioritize Program risks, and to (2) develop action plans and strategies to sufficiently mitigate the highest Program risks. 

In developing this business plan the agencies operated under the 

key assumptions: (1) HUD is operating the program, (2) there is a 

strong preference to leverage HUD’s existing processes, and (3) to 

appropriately assess risk and provide risk mitigation strategies, it 

is critically important to focus on elements that are unique to the 

H4H program as these areas may pose the highest risks to the Program and agencies administering the Program. This includes identifying the new or adapted business processes that will be required. 

The risk identification also includes externalities that may be outside of the agencies’ control. 

As the HOPE for Homeowners Program moves from its Startup 

Phase (July 30–October 1) into its Implementation Phase (October 

1–December 31), the staffs of the Treasury Department, FDIC, and 

Federal Reserve have less need for active involvement in the dayto-day matters of the Program. Other than resources contributed to 

unfinished implementation of the Program’s implementing regulations and mortgagee letters, these staff efforts will shift to a monitoring role over this transitional period. By the end of this Implementation Phase, FHA management and staff will be expected to 

operate the program, and the Oversight Board and its member 

agencies will together monitor program performance, make recommendations for refinements or enhancements based on feedback 

from the Program’s results and (if relevant) changes in the economic and housing market environment, and their own analyses. 

Staffs from the agencies will continue to communicate regularly 

and coordinate Oversight Board meetings and affairs, including required monthly reports to Congress. The Treasury Department, 

FDIC, and Federal Reserve will of course be responsive to requests 

for resources and assistance if needed, including but not limited to 


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possible exigent circumstances in the economy and/or housing market. 

To facilitate this transition and to put in motion the changed 

roles, the four agencies will initiate a more formal set of staff structures and processes aimed at fulfilling these responsibilities and 

maintaining attendant controls and information flows. The chart 

below summarizes these structures and processes. 


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Date Event Description Audience Number of attendees 

10/1 ................... FHA Conference Call Introductory conference call to 

announce program roll out.

Industry; Consumers 600+ 

10/1 ................... Inside Mortgage Finance.Conference call on FHA modernization included questions 

on H4H.

Industry .................... 300+ 

10/2 ................... Federal Reserve ....... H4H briefing .............................. Consumer affairs office and outreach 

staff.

12 regional banks. 

10/6 ................... National Council of 

State Housing Finance Agencies.

H4H briefing .............................. State Finance Agencies.30 states. 

10/7 ................... FHA Conference Call H4H briefing .............................. Counselors ............... 200+ 

10/8 ................... Housing summit ...... 2 sessions on H4H; general 

overview and more in-depth.

Government officials; 

lenders; counselors.

600+ 

10/14 ................. American Bankers 

Association (ABA).

H4H briefing .............................. ABA members .......... 250+ 

10/15 ................. FHA Conference Call H4H briefing targeted to top 30 

FHA lenders and FHA liaisons.

Industry; government 

officials.

500+ 

10/15 ................. FHA Conference Call H4H briefing and discussion of 

outreach efforts.

Counselors ............... 100+ 

10/16 ................. National Council of 

State Housing Finance Agencies.

H4H briefing .............................. State Finance Agencies.20 states. 

10/27 ................. FHA Field Briefing .... Field briefing for FHA and HUD 

staff who perform outreach 

activities.

Government officials 100+ 

10/30 ................. Inside Mortgage Finance.H4H briefing .............................. Industry .................... 200+ 

11/5 ................... FHA Conference Call H4H briefing .............................. Industry .................... 200+ 

11/6 ................... Federal Housing Finance Agency.H4H briefing .............................. Government officials 100+ 

11/13–14 ........... National H4H Training Conference.National 2-day extensive training program on H4H.Industry; Counselors 600+ 

11/19 ................. National Press Club 

Event.

Sec. Preston announces programmatic changes to H4H 

product.

Media ....................... 100+ 

11/20 ................. Mortgage Bankers 

Association.

Issues with implementing H4H Industry .................... 100+ 

12/4 ................... Independent Community Bankers of 

America.

H4H briefing .............................. Industry .................... 300+ 

12/5 ................... Neighborworks .......... Taped three hour online training course.Counselors ............... n/a 

12/8–9 ............... Neighborworks .......... Two day training event ............. Counselors ............... tbd 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 

FROM JAMES B. LOCKHART, III 

Q.1. There has been significant confusion in the marketplace regarding the status of debt offered by Fannie Mae and Freddie Mac. 

Specifically, there is confusion as to whether or not that debt is 

guaranteed by the federal government. Your revised testimony 

makes it clear that the federal government is not directly guaranteeing the debt. Rather, the government has provided a $100 billion capital backstop to each enterprise with which it can pay all 

its debts. 

However, the failure to extend this guarantee has had a number 

of unintended consequences in light of the government’s decision to 

explicitly guarantee senior debt for other financial institutions. For 


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example, the press reports that the cost of raising debt for both 

Fannie Mae and Freddie Mac has gone up significantly since the 

latter decision. In addition, the two enterprises have apparently 

been unable to raise anything but short-term funding. This leads 

to a number of questions: 

Q.1.a. Was FHFA consulted in the deliberations regarding guarantee of bank debt? If so, was any consideration given to the possibility that such a guarantee might undermine the ability of the enterprises to fund themselves effectively? 

Q.1.b. Is any thought being given, or are any discussions underway 

regarding providing the enterprises with the same guarantee as 

has been given to other financial institutions? 

Q.1.c. One outcome of these increased funding costs is an increase 

in mortgage interest rates. According to the Wall Street Journal 

(October 30, 2008; ‘‘Mortgage Plan Isn’t Cutting Rates’’), rates for 

30-year fixed rate mortgages have climbed to 6.64%, up from the 

prior week’s 6.24%. Given the fact that one of FHFA’s stated purposes for putting the enterprises into conservatorship was to support the housing market, including with increased purchases of 

agency MBS, what can be done about these higher funding costs? 

Is this funding problem undermining the ability of the enterprises 

to meet its mission of maintaining a stable and orderly housing 

market? 

Q.1.d. Please provide the Committee with data showing the change 

in funding costs for the enterprises from just prior to the conservatorship to the announcement of the guarantee for senior debt 

of financial institutions to the present. Please provide data on the 

associated mortgage rates over the same period of time. 

A.1.a–d Getting mortgage rates down more in line with declines in 

Treasury yields has the potential to provide significant benefit to 

troubled housing markets. As the attached chart and tables show, 

the establishment of the conservatorships was accompanied by a 

quick drop in mortgage rates of more than 40 basis points, and 

spreads of Enterprise yields above Treasury yields fell comparably. 

Those gains appeared to erode over the next few weeks, with continued bad news about financial institutions and the economy. The 

announcement of FDIC insurance for senior debt of insured depository institutions coincided with further widening of yield spreads 

and higher mortgage interest rates. However, it is important to 

note that yields on GNMA mortgage-backed securities (MBS), 

which are guaranteed with the full faith and credit of the U.S. Government performed comparably with yields on MBS guaranteed by 

the Enterprises. FHFA received a pre-announcement notification of 

the senior debt guarantees. We are unaware of any plans to extend 

those guarantees to the Enterprises, something that might require 

legislation. Subsequently, the Fed’s announcement of $500 billion 

of MBS purchases and $100 billion of GSE debt purchases caused 

a significant decline in Enterprise yields spreads and in mortgage 

rates, bringing interest rates on 30-year fixed-rate loans to their 

lowest level in the nearly 38 years’ history of Freddie Mac’s survey. 

Q.1.e. In addition, the funding for the Federal Home Loan Banks 

(FHLB) has also been rising. In fact, it is our understanding that 


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FHLB debt is even more expensive than debt issued by the enterprises. What is being done to address this problem? 

Q.1.f. All the housing GSEs are increasingly dependent on short 

term financing. What challenges will it pose if the GSEs are increasingly forced to depend on short-term financing to carry on 

their operations? 

A.1.e-f: Debt of the Federal Home Loan Banks initially benefitted 

similarly to that of the Enterprises following the establishment of 

the Enterprise conservatorships. Shortly thereafter, however, Bank 

yields rose relative to Enterprise yields. While debt yields of all 

GSEs had been very close, differentials of as much as 60 basis 

points opened up at 2, 3, and 5-year maturities. While HERA gave 

Treasury authority to buy unlimited quantities of debt from any of 

the housing GSEs, the preferred stock agreements were only made 

with Fannie Mae and Freddie Mac because the Banks did not need 

that kind of support. Nonetheless, the market seemed to view them 

as less protected. Since the Fed’s debt purchase plans were announced in late November, though, yields spreads among the different GSEs have tightened and returned to near normal amounts. 

All of the housing GSEs, and especially the Enterprises depend to 

some extent on their ability to issue intermediate-term debt. That 

was nearly impossible in the fall, but recently increased investor 

interest has permitted GSE issues of debt with maturities of as 

long as five years. Conditions are still far from satisfactory, but improving. In the meantime, purchases by the Treasury under its 

GSE MBS Purchase Facility have augmented those of the Enterprises and the Fed. 

Q.1.g. In a recent story, Business Week reported that FHFA was 

requiring enterprises to buy troubled mortgage assets. Is this true? 

If so, what is the policy rationale for doing this? 

A.1.g The story was unfounded. We did not require the Enterprises 

to buy troubled assets. We believe they can best serve the housing 

and mortgage markets primarily by using their resources to maintain a liquid secondary mortgage through purchasing and guaranteeing new loans. In addition, we have been encouraging them to 

reduce foreclosures and mitigate losses by aggressively modifying 

their own troubled loans and setting a standard for others. 

Q.2 Section 110 of the Emergency Economic Stabilization Act of 

2008 (ESA) requires FHFA to ‘‘Implement a plan that seeks to 

maximize assistance for homeowners’’ in order to avoid preventable 

foreclosures. Please describe in detail your agency’s plan in this regard, and any steps that have already been taken to implement 

this plan. 

A.2. 

a. FHFA Expertise: FHFA employs examiners and executives 

who have expertise and/or experience in default management, nonperforming loans, loss mitigation and REO management. These individuals provide supervision and oversight of both enterprises in 

these areas. 

b. Enterprise Internal Controls. For the last 18–months, FHFA 

has focused on the loss mitigation and REO management areas. 

FHFA has reviewed the enterprises’ internal policies and procedures, seller/servicer guides, bulletins and announcements, as well 


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as the internet sites and published materials to support servicers’ 

loss mitigation efforts, activities and reporting. 

c. Enterprise Reporting. FHFA consistently receives internal 

monthly and quarterly management reports for non-performing 

loans that include loss mitigation efforts. To compliment these internal reports, starting in 2008, FHFA required the enterprises to 

submit a monthly report on loss mitigation activities. Data from 

those reports are aggregated with results posted to FHFA’s 

website. FHFA’s Foreclosure Prevention Report (formerly, Mortgage 

Metrics Reports) provides the most comprehensive data on loss 

mitigation efforts (in comparison to HOPE NOW and the OCC/OTC 

reports), and continuously reports on the loss mitigation performance ratio. This ratio has clearly brought transparency to and focus 

on the enterprises’ efforts in assisting borrowers. 

For 2009 reporting, FHFA has enhanced reporting requirements 

effective with data for January loss mitigation actions. The additional data elements relate to expanded modification types ( as required by EESA), the reason/s for default, default status (e.g., 

bankruptcy, military indulgence, government seizures, probate), 

property condition, and occupancy status. 

d. FDIC Loan Modification Program. FHFA worked with the 

FDIC and the enterprises to pilot the FDIC/IndyMac loan modification program, announced August 20, 2008. FHFA initiated work on 

this effort in August 2008. Both enterprises initiated the pilot in 

October. 

e. Streamlined Modification Program (SMP). FHFA became actively involved with HOPE NOW Alliance members and the enterprises in October with the goal of rolling out a streamlined modification program. The program was announced November 11th and 

rolled out December 15th. To enhance the success of this program, 

both enterprises suspended the scheduling of and scheduled foreclosure sales on occupied properties for the period November 26th 

to January 31st. The suspension allows borrowers in foreclosure 

the opportunity to cure the serious delinquency with a loan modification. 

f. Loss Mitigation Programs. The enterprises, offer other loss 

mitigation programs to assist borrowers in saving their homes—forbearance plans, payment plans, a standard loan modification and 

a delinquency advance program (e.g., Fannie Mae’s HomeSaver Advance program.) For borrowers who are unable to make a payment 

at the most liberal modified terms, both enterprises offer short 

sales, deeds-in-lieu and charge-offs in lieu of foreclosure. 

g. Loan Modification Issues. FHFA has worked with both enterprises in reviewing accounting, trust and capital issues that may 

disincent the enterprises from being aggressive with modifications. 

Those issues have been addressed. The enterprises have a solid understanding of FHFA’s desired objective of keeping borrowers in 

their homes. In particular, Fannie Mae announced major changes 

to its trust that allow for more flexibility with loan modifications. 

h. Interagency Efforts. FHFA has continued to work with HOPE 

NOW Alliance members, the OCC, OTS, HUD, FDIC and Treasury 

to discuss industry issues and concerns, and the enterprises’ in particular. Results of this communication have allowed FHFA to obVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00144 Fmt 6602 Sfmt 6602 E:\HR\OC\A416.XXX A416

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tain third party views on how well the enterprises are doing, and 

what they could be doing better or differently. 

i. Non-Agency Investments. FHFA has taken an active role in 

communicating with PLS servicers, trustees and investors to encourage them to adopt the SMP program, or a comparable program 

acceptable to all PLS investors and in compliance with PLS pooling 

and servicing agreements. FHFA has supplemented these conversations with meetings with American Securitization Forum (ASF) officers. Doing so has not only helped borrowers whose loan are in 

PLS securities, but also the enterprises who own 20% of PLS securities. 

Q.3. Discussions with a number of entities, from major lenders and 

servicers to housing counselors, reveal that Fannie Mae and 

Freddie Mac are resisting efforts to do loan modifications. Please 

describe the efforts being undertaken by the two enterprises, and 

the FHLBs, to engage in loss mitigation. Specifically, what are the 

loss mitigation policies of the GSEs? What barriers do you see in 

these policies to moving toward a more systematic approach to loan 

modifications? 

A.3. 

a. Loan Modification Efforts. FHFA’s oversight and supervision 

of the enterprises doesn’t confirm the view that the enterprises are 

resisting efforts to do loan modifications. In fact, since the early 

1990s, both enterprises have been leaders in the loss mitigation 

area, and set the standards for what is best practice for the industry. 

In discussing this observation with both enterprises, two points 

were made. First, many servicers were unaware of the authority 

the enterprises had delegated to them to review and approve loan 

modifications in their behalf. Second, the enterprises strongly believed the proper way to assist a borrower and modify the loan is 

through the standard rather than the streamlined process. The 

standard process requires a customized approach to working with 

the borrower and his/her circumstances based on a cash-flow budget. The streamlined process requires an approach that is less borrower-specific, and makes assumptions about the borrower’s ability 

to pay at modified terms based on a ratio analysis. 

Initially, the enterprises resisted efforts to adopt a streamlined 

modification program, because it wouldn’t necessarily address the 

individual borrower’s unique situation. Because of rising delinquencies, the increase in properties in the foreclosure process, and 

servicers’ capacity limitations, the enterprises worked actively with 

HOPE NOW Alliance members, and agreed to SMP program guidelines. 

b. Communication from External Parties. When an external 

party has contacted FHFA regarding the enterprises’ actions, we 

follow up with the enterprise on the specific concern. As a result, 

either FHFA and/or the enterprise contacts the external party. In 

addition, FHFA will discuss the situation and circumstances, and 

determine if there is a more general or broader issue that requires 

attention. Recently, a housing counseling agency contacted FHFA 

regarding concerns around Fannie Mae’s decisions on loan modification requests. FHFA met with the counseling agency, and asked 


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it to provide specific examples (cases) where borrowers had requested modifications that were not approved by Fannie Mae. 

Fannie Mae was very open to this and agreed to do so. Generally, 

FHFA has found it to be more beneficial and productive to work 

with specific examples and instances, than to address broad generalizations. 

c. Loss Mitigation Performance. As reported in FHFA’s monthly 

and quarterly Foreclosure Prevention Reports through September 

2008: 

1. Loss Mitigation Performance Ratio. The enterprises’ loss mitigation ratio has fluctuated from 46.9 percent to 64.8 percent 

from January to September, and averaged 54.6 percent. That 

ratio measures the number of borrowers who were helped 

versus those who needed help (were destined for foreclosure.) 

FHFA’s 2009 performance goals target a 25 percent increase 

in loan modifications over 2008 actuals. 

2. Loss Mitigation—Borrower Retained Property. Loss mitigation 

actions that allowed the borrower to retain his or her property 

represented 93 percent of all loss mitigation actions—139,381 

in total. Of that number, 49,128 were completed payment 

plans, 45,179 were delinquency advances, and 44,458 were 

loan modifications. 

3. Completed Foreclosures. Completed foreclosures as a percent 

of new foreclosures initiated averaged 32.7 percent for the enterprises, but 41.5 percent for OCC/OTS servicers and 42.8 

percent for HOPE NOW servicers. 

d. Loss Mitigation Policies, Procedures and Processes. Both enterprises have internal policies and procedures, seller/servicer 

guides, and bulletins and announcements, as well as internet sites 

and materials to support servicers’ loss mitigation efforts and activities. To compliment those, the enterprises provide training materials and training (on-line and classes) in loss mitigation. 

e. Barriers. Reported barriers to effective loan modifications are 

not an outgrowth of enterprise policies. They are: 

1. Subordinate liens. There are a high number of loans with subordinate second liens. A successful workout often requires the 

cooperation of the second lien holder, who may/may not be 

represented by the first mortgage servicer. 

2. Unable to Contact/Locate. Servicers are often unable to assess 

the borrower’s financial position and/or get him or her to commit to a loan modification because the borrower can’ be contacted, is evading the servicer’s calls or letters, and/or has 

abandoned the property. In many cases, the properties were 

purchased as investment properties. The borrowers never intended to live in them. If the property looses value and/or the 

borrower has trouble renting the property, the borrower is inclined to walk away from a bad investment. 

3. Bankruptcy. Borrowers in bankruptcy cannot be contacted directly by the servicer for a workout—even though they may 

take this action in an effort to save their homes. Therefore, 

the population of borrowers who can be solicited for a loan 

modification is reduced. 

4. Fraud/Misrepresentation. Given that some loans were originated under low or no documentation programs, a review of 


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the defaulted borrower’s situation may reveal that the borrower never made the income to support the mortgage in the 

first place. Efforts to modify the loan may be unsuccessful as 

the borrower may have no ability to pay at even the most favorable terms. 

Q.4. Each agency represented at the hearing has aggressively used 

the tools at their disposal in dealing with the crisis. However, 

sometimes the use of those tools has led to unintended consequences. For instance, when the Treasury Department guaranteed money market funds, it led to a concern on deposit insurance 

and bank accounts. When the FDIC guaranteed bank debt, it had 

an effect on GSE borrowing costs, which in turn directly affects 

mortgage rates. 

Acknowledging that there is often a need to act quickly in these 

circumstances, please explain what steps and processes you have 

employed to inform other agencies about significant actions you undertake to ensure that there are not serious adverse unintended 

consequences and that your actions are working in concert with 

theirs. 

A.4. We meet frequently with other agencies to discuss policy 

issues and planned significant actions. HERA specifically provided 

for consultation with the Federal Reserve on implementation of 

new powers and sharing of information about the condition of our 

regulated entities. It also created the Federal Housing Finance 

Oversight Board, which meets at least quarterly and includes the 

Secretaries of Treasury and HUD, as well as the Chairman of the 

SEC. The Senior Preferred Stock Purchase Agreements signed between the Enterprises and Treasury ensure consultation or agreement with the Treasury on many aspects of the Enterprises activities. The EESA created the Financial Stability Oversight Board, 

which includes the same members as the FHFA Oversight Board 

plus the Federal Reserve Chairman. It has met seven times, and 

staff have met frequently. In addition, we have met informally with 

these agencies and others numerous times in the past few months 

to discuss issues, policies, and planned actions. We worked closely, 

for example, with the Treasury and HUD, and consulted with the 

FDIC, in developing the Streamlined Modification Program adopted 

by the Enterprises and a majority of the portfolio lenders participating in the private sector alliance HOPE NOW to reduce foreclosures. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 

FROM ELIZABETH A. DUKE 

AIG 

Q.1. Former AIG CEO Hank Greenberg recently wrote a letter that 

was reported in the Washington Post as saying, ‘‘Unless there is 

immediate change to the structure of the Federal loan [to AIG], the 

American taxpayer will likely suffer a significant financial loss.’’ 

(Washington Post, November 3, 2008). However, in the Federal Reserve Board’s report to the Senate Banking Committee about the 

Fed’s actions with respect to AIG under Section 13(3) of the Federal Reserve Act, the Board told the Committee that it does not expect the loans to result in any losses to the Federal Reserve System 

or the taxpayer. Can you please explain why Mr. Greenberg is incorrect? 

A.1. Outstanding advances to AIG under the credit facility initially 

provided to AIG on September 16, 2008 (the Revolving Credit Facility) are secured by the pledge of assets of AIG and its primary nonregulated subsidiaries, including AIG’s ownership interest in its 

regulated U.S. and foreign subsidiaries. AIG has announced a comprehensive and global divestiture program to raise funds to repay 

the Revolving Credit Facility. These dispositions will include subsidiaries that rank among the largest and most prominent businesses in the industry. 

As part of our oversight activities arising from our role as a lender to AIG, Federal Reserve staff, assisted by expert advisers that 

we have retained, reviews this divestiture program and closely 

monitors the company’s progress in implementing the divestiture 

program’s objectives on an ongoing basis, as well as cash flows and 

financial condition. The Federal Government’s restructuring of its 

financial relationship with AIG announced on November 10, 2008, 

which includes the acquisition of $40 billion in newly issued Senior 

Preferred Stock of AIG by the U.S. Treasury, and the modification 

of some of the initial terms of the Revolving Credit Facility, should 

enhance AIG’s ability to repay the Facility by, among other things, 

providing additional time to execute its asset disposition plan. 

Given the substantial assets of AIG and the senior and secured position of the Revolving Credit Facility, the Board expects that the 

Revolving Credit Facility will not result in any net loss to the Federal Reserve or taxpayers. 

Advances to Maiden Lane II LLC (ML II) and to Maiden Lane 

III LLC (ML III) under the credit facilities established to partially 

fund the acquisition of certain AIG-related assets by these special 

purpose vehicles are secured by a lien on all of the assets held by 

ML II and ML III respectively. Given the expected amounts to be 

realized from the cash flows produced by these assets as well as 

the proceeds from disposition of these assets over time, and the 

subordinated positions of AIG in ML II and ML III, the Board does 

not expect any net cost to the taxpayers as a result of the failure 

to repay the credit extended by the Federal Reserve to ML II and 

ML III. 

Q.2. What is the total sum of money the Federal Reserve System 

has lent to AIG through any and all actions undertaken by the 

Federal Reserve, including the Commercial Paper Funding Facility 


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(CPFF)? What process was used to determine AIG’s eligibility to 

participate in the CPFF? Did the Federal Reserve consider the fact 

that AIG was already subject to special Fed lending when deciding 

AIG’s eligibility to participate in the CPFF? 

A.2. As initially structured in September 2008, the Revolving Cred- it Facility allowed AIG to borrow up to $85 billion. From inception 

of this Facility to November 5, 2008, the total aggregate amount 

of borrowings were approximately $77.0 billion, of which approximately $16.0 billion was repaid on or before that date. In connection with the U.S. Treasury’s announcement that it would acquire 

$40 billion in AIG Senior Preferred Stock in November, the proceeds of which were used to repay amounts outstanding under the 

Facility, the total amount of credit permitted to be outstanding 

under the Facility was reduced to $60 billion. As of December 31, 

2008, AIG had approximately $38.9 billion in advances outstanding 

under the Facility. 

Four AIG affiliates, AIG Funding, Inc., International Lease Finance Corporation, Curzon Funding LLC, and Nightingale Finance 

LLC, have borrowed from the CPFF. Under the terms of the CPFF, 

these four affiliates may borrow an aggregate amount of up to approximately $20.9 billion from that Facility. As of November 5, 

2008, these four affiliates had borrowed an aggregate amount of 

approximately $15.2 billion under the CPFF. By its terms, the 

CPFF is available to any U.S. issuer of commercial paper that 

meets the eligibility requirements of the Facility. Among other requirements, the commercial paper financed through the CPFF special purpose vehicle must be rated A–1/P–1/F–1 by a major nationally recognized statistical rating organization. The fact that a particular issuer may be eligible to borrow under; or be affiliated with 

an eligible borrower under, other credit facilities established under 

section 13(3) of the Federal Reserve Act does not disqualify the 

issuer under the terms of the CPFF. For example, affiliates of primary dealers that have access to the Primary Dealer Credit Facility are not ineligible to borrow under the CPFF. The four AIG affiliates that are borrowers from the CPFF meet the eligibility criteria of that Facility. 

The Federal Reserve Bank of New York (FRBNY) is authorized 

to provide up to $22.5 billion in senior secured credit to ML II to 

partially fund its acquisition of approximately $40 billion (par 

value) in residential mortgage-backed securities from AIG. As of 

December 31, 2008, the FRBNY had lent $19.5 billion to ML II. As 

a result of the ML II credit facility, on December 12, 2008, the Securities Borrowing Facility for AIG, through which the FRBNY 

could lend up to $37.8 billion in cash to AIG in exchange for collateral in the form of investment grade securities that were being returned by AIG’s securities lending counterparties, was terminated. 

On November 5, 2008, before the Securities Borrowing Facility was 

terminated, AIG had borrowed approximately $19.9 billion under 

that Facility. All borrowings under the Securities Borrowing Facility were repaid in full when the facility was terminated on December 12, 2008. 

The FRBNY is authorized to provide up to $30 billion in senior 

secured credit to ML III to partially fund its acquisition of approximately $69 billion (par value) of multi-sector collateralized debt obVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00154 Fmt 6602 Sfmt 6602 E:\HR\OC\A416.XXX A416

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ligations (CDOs) protected by credit default swaps (CDS) and similar contracts written by AIG. As of December 31, 2008, FRBNY had 

lent $24.3 billion to ML III. 

Q.3. What is AIG’s market capitalization? Is the present value of 

AIG’s equity and assets (using mark-to-market accounting) greater 

than AIG’s liability to the Federal Reserve? 

A.3. As explained in response to Question 1, advances under the 

Revolving Credit Facility are to be repaid with the proceeds of 

asset sales by AIG, including the disposition of many of its major 

U.S. and foreign insurance subsidiaries. The shares of the insurance subsidiaries of AIG are not themselves publicly traded or valued on a mark-to-market basis. Based on its recent common stock 

price, as of year-end 2008, AIG’s market capitalization was approximately $4.2 billion. However, current market capitalization is 

not necessarily a reliable indicator of the value that the purchasers 

of AIG’s businesses, which rank among some of the most prominent 

in the industry, will pay for these assets and thus the amount of 

proceeds that will be received from the disposition of these businesses. As stated above, in light of the substantial assets of AIG 

and the senior and secured position of the Revolving Credit Facility, the Board expects that the Revolving Credit Facility will not 

result in any net loss to the Federal Reserve or taxpayers. 

Q.4. How has AIG used the funding the System has provided, and 

what analysis have you done to conclude that the loans will be repaid? 

A.4. Consistent with the terms of the Revolving Credit Facility, 

AIG has used the proceeds of advances under the Revolving Credit 

Facility for general corporate purposes, including as a source of liquidity to pay obligations as and when they become due. Since the 

establishment of the Facility, a significant portion of the Facility 

proceeds has been used to meet continued cash requirements associated with AIG’s securities lending program and for collateral calls 

related to its portfolio of CDS and similar contracts AIG had written on multi-sector CDOs. In the future, draws on the Revolving 

Credit Facility are not expected to be used for these purposes to a 

significant extent because the credit facilities provided to ML II 

and ML III are designed to address the liquidity pressures on AIG 

related to these factors. Draws on the Facility going forward may 

continue to be used for other general corporate purposes, such as 

to repay maturing debt obligations and provide operating funds, 

loans or capital to the company’s subsidiaries. 

See the answer to Question 1 for a description of the steps Federal Reserve staff is taking with regard to assessing whether outstanding advances under the Revolving Credit Facility will be repaid. 

Q.5. Has the Federal Reserve put any restrictions on the lobbying 

activities of AIG? 

• Have any other restrictions been placed on AIG’s business or 

other activities? 

A.5. As is usual in commercial lending transactions involving distressed borrowers, the Federal Reserve has certain rights as a creditor under the loan documentation relating to the Revolving Credit 


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Facility, such as the right to require that overall corporate governance be acceptable to the Federal Reserve. Other provisions in the 

loan documentation include a prohibition, while the Federal Reserve Facility is outstanding, on making certain types of shareholder distributions, such as payment of dividends on common 

stock, and a requirement to submit to the Federal Reserve as lender a significant number of financial statements and reports that address a broad range of topics relating to the financial condition and 

future prospects of AIG. Regarding restrictions on its business, AIG 

may not make material changes to its business activities without 

the consent of the Federal Reserve, and may not enter into new 

swap transactions except under policies approved by the Federal 

Reserve or to hedge or mitigate risks. 

Although the Federal Reserve loan documentation does not specifically address AIG’s lobbying activities, as a condition of the 

Treasury’s acquisition of $40 billion in Senior Preferred Stock 

under the Troubled Assets Relief Program (TARP), AIG must maintain and implement a written policy on lobbying, governmental ethics, and political activities that, among other things, applies to AIG 

and all of its subsidiaries and affiliated foundations. This policy 

may not be materially amended without the prior written consent 

of the Treasury. 

Q.6. While financial problems in AIG Financial Products have been 

detailed by the Federal Reserve and the press, specifically regarding credit default swaps, Board staff has indicated that the life insurance company held by AIG may also have financial problems. 

Please detail these financial problems. Please indicate whether any 

of the loans, and if so, what amount, has been spent in the life insurance, and other insurance companies. 

A.6. During the first three quarters of 2008, AIG reported significant losses arising primarily from other-than-temporary-impairment charges on its investment portfolio, which was the result to 

a significant extent of declines in the market values of mortgagebacked securities AIG held in connection with the securities lending program operated by AIG’s regulated insurance subsidiaries. To 

address the losses from this activity during the period from inception of the Federal Reserve’s Revolving Credit Facility to November 

5, 2008, AIG had used about $19 billion of advances from the Facility to make capital contributions to its insurance companies or to 

repay obligations to the securities lending program. The ML II 

credit facility was designed to help AIG address these positions. 

ML II acquired from AIG’s insurance subsidiaries, in return for 

cash, the residential mortgage-backed securities that these subsidiaries held as part of the securities lending program. These actions 

allow ML II to manage and realize the underlying value of these 

securities over the longer term, and relieve AIG and its insurance 

subsidiaries from the short-term volatility in the mark-to-market 

value of these assets in the current economic environment. These 

actions also were designed to enhance the safety and soundness 

and overall financial condition of the insurance companies. 

Q.7. In return for the Federal Reserve loan, the federal government 

now controls almost 80 percent of AIG. 

• What federal entity is/will control this large share of AIG? 


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• What decisions have been made about how this control will be 

exercised? 

• How many Federal Reserve or other federal staff are currently 

on-site at AIG? Please detail the roles of these staff. 

A.7. Under the terms of the Revolving Credit Facility as amended, 

AIG will issue shares of perpetual, non-redeemable convertible preferred stock to a trust that will hold the stock for the benefit of the 

U.S. Treasury. The preferred stock is convertible into 77.9 percent 

of AIG’s outstanding common stock. Decisions regarding the exercise of any voting rights associated with this preferred stock and 

regarding any disposition of the stock to third parties will be made 

by the independent trustees of the trust. In addition to this equity 

interest, the Treasury Department, in connection with its acquisition of $40 billion of senior preferred stock of AIG under the TARP, 

also received warrants to purchase 2 percent of the common stock 

of AIG. Control over these instruments is exercised by the Treasury 

Department in compliance with the rules and conditions applicable 

to the TARP. 

A team of approximately 10 Federal Reserve staff, led by a Senior Vice President of the FRBNY, has primary responsibility for 

managing and implementing the oversight of AIG provided for in 

the loan documentation relating to the Revolving Credit Facility. 

Federal Reserve staff are on-site at AIG to monitor the company’s 

funding, cash flows, use of proceeds, and progress in pursuing its 

divestiture plan. Federal Reserve representatives are also in regular contact with AIG senior management and attend all AIG 

board meetings and board committee meetings. 

Q.8. Board staff has indicated that the Federal Reserve has not 

taken a close look at the solvency of the insurance companies held 

by AIG because those activities are regulated at the state level. Is 

this correct? Has the Federal Reserve done a thorough analysis of 

AIG’s insurance companies, including their solvency? 

A.8. Under the existing statutory framework, the relevant state insurance regulatory authorities have the primary responsibility for 

determining the financial condition of AIG’s insurance company 

subsidiaries. This includes the authority to take action to resolve 

regulated insurance companies that fail to meet the state regulator’s capital, solvency, and other regulatory requirements. As a 

lender to MG, the Federal Reserve closely monitors the cash flow, 

earnings, and general financial condition of the company on a consolidated basis, which includes reviewing financial information on 

all of the company’s major subsidiaries, including the insurance 

subsidiaries. In carrying out this oversight responsibility, the Federal Reserve coordinates on an ongoing basis with the appropriate 

state insurance authorities. 

EESA 

Q.9. What actions has the Board taken to implement a plan under 

Section 110 of the Emergency Economic and Stabilization Act of 

2008 with respect to foreclosure mitigation for mortgages or mortgage-backed securities held, owned, or controlled by or on behalf of 

a Federal Reserve Bank? 


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1Maiden Lane LLC is the limited liability company to which a portfolio of assets was transferred in connection with a loan by the Federal Reserve Bank of New York, which facilitated 

the acquisition of The Bear Stearns Companies Inc. by JPMorgan Chase & Co. 

A.9. Section 110 of the Emergency Economic Stabilization Act directs Federal property managers, to the extent that they hold, own, 

or control mortgages, mortgage-backed securities, and other assets 

secured by residential real estate (residential mortgage assets), to 

‘‘implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the servicers of the underlying mortgages, and considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program 

under section 257 of the National Housing Act or other available 

programs to minimize foreclosures.’’ Section 110 generally provides 

that the Federal Reserve Board (Board) is a Federal property manager with respect to any mortgage, mortgage-backed securities, or 

pool of such securities (residential mortgage assets) held, owned, or 

controlled by or on behalf of a Federal Reserve Bank other than 

residential mortgage assets that are held, owned, or controlled by 

or on behalf of a Federal Reserve Bank ‘‘in connection with open 

market operations under section 14 of the Federal Reserve Act (12 

U.S.C. 353), or as collateral for an advance or discount that is not 

in default.’’ 

The Board is currently not a Federal property manager for any 

residential mortgage assets within the scope of section 110. To the 

extent that residential mortgage assets are held, owned or controlled by the Federal Reserve Banks, these assets are held, owned 

or controlled in connection with open market operations or as collateral for advances or discounts that are not in default, such as 

the credit extended to Maiden Lane LLC.1

Nonetheless, the Board is in the final stages of developing a foreclosure mitigation policy for use by the Federal Reserve Banks. In 

addition to applying this policy in situations required by section 

110, the Board will consider whether there are situations in which 

it is appropriate and feasible for the Board to apply the policy voluntarily. 

In developing this policy, the Board has consulted with the Federal Deposit Insurance Corporation, the Federal Housing Finance 

Agency, and other governmental and industry representatives, and 

has carefully considered recent developments and changes to industry protocols relating to foreclosure mitigation. The Board expects 

to finalize and vote on this policy soon and will promptly submit 

a copy of its policy once approved to Congress. The goal of the policy will be fully consistent with the requirements and goals of section 110 to offer distressed homeowners a sustainable loan modification when such action would result in a higher expected net 

present value (NPV) than would be expected through foreclosure. 

• Specifically, what goals has the Board established for the number or percentage of mortgages that should be modified to comply with the Act? 

Any portfolio that becomes subject to the Board’s foreclosure 

mitigation policy will contain unique characteristics, such as the 

number of whole residential mortgage loans versus residential 

mortgage-backed securities, the percentage of senior mortgage 

loans versus subordinate mortgage loans, and the number of perVerDate Nov 24 2008 01:46 Apr 02, 2010 Jkt 050416 PO 00000 Frm 00158 Fmt 6602 Sfmt 6602 E:\HR\OC\A416.XXX A416

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forming loans versus non-performing loans. To account for these 

variables, the Board does not expect to establish a pre-set number 

or percentage of loans that must be modified under its policy. 

However, as noted above, the Board’s over-arching goal under the 

policy will be to try to keep consumers in their homes by offering 

sustainable loan modifications when the expected NPV of a loan 

modification would be greater than the expected NPV of the net 

proceeds to be received through foreclosure. • What process has the Board established to communicate the 

plan, including modification goals, to Maiden Lane or the regional Federal Reserve Bank that would serve as the agent for 

the Board in carrying out its duty under the law? 

As noted above, the Board is in the final stages of developing a 

foreclosure mitigation policy to guide the Federal Reserve Banks in 

the event that the Board becomes a Federal property manager. The 

Board will transmit that policy to the Reserve Banks and require 

that the Reserve Banks, and any agents they may hire to assist in 

the management or servicing of the mortgage portfolios subject to 

section 110, abide by the policy. • How many Bear Stearns loans have been modified to date and 

what were the terms? 

Wells Fargo & Company (Wells Fargo) and EMC Mortgage Corporation currently act as the servicers of the whole residential 

mortgages that serve as collateral for the loan to Maiden Lane 

LLC. Both Wells Fargo and EMC Mortgage are members of the 

HOPE NOW Alliance and utilize industry standard protocols for 

loan modifications that are consistent with the standards and 

guidelines established by the HOPE NOW Alliance. Loan modifications for mortgages that serve as collateral for the loan to Maiden 

Lane LLC have been offered to delinquent borrowers who are facing other-than-temporary economic hardships, but who may have 

the capacity to perform on the loan following a modification of 

terms that provides an expected NPV greater than what would be 

expected through foreclosure. Workout plans, which are not formal 

loan modifications, are offered to borrowers with temporary problems and need assistance bringing their account current through 

short-term modifications to their payments. 

The ability to offer loan modifications and workout plans for 

loans that serve as collateral for the extension of credit to Maiden 

Lane LLC is contingent on whether the subject assets are whole 

mortgage loans rather than mortgage-backed securities. Because 

mortgage-backed securities are pools of mortgages in which the 

Federal Reserve Bank only holds a fractional interest along with 

other investors, the Reserve Bank does not have direct control over 

the servicing of those residential mortgage assets. The majority of 

residential mortgage assets that serve as collateral for the loan to 

Maiden Lane LLC are in the form of residential mortgage-backed 

securities. Moreover, all of the residential whole loans in the portfolio were performing as of March 14, 2008, when Maiden Lane 

LLC acquired the portfolio. 

As of November 30, 2008, slightly more than 11 percent of the 

residential mortgage whole loans that serve as collateral for the 

loan to Maiden Lane LLC and that were both nonperforming and 

more than 60 days past due had been permanently modified 


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through a reduction in interest rate, an extension of term, a deferral or reduction in the principal balance, or a combination of such 

actions. Typically, permanent loan modifications initially are considered when borrowers become 60 days or more past due. 

The number of permanent loan modifications is expected to increase in the coming months. A significant portion of the loans currently 60 days or more past due only reached this stage recently 

and, as you know, the loan modification process, even under the 

best of circumstances, can take time, as the borrower must be contacted and appropriate analysis conducted to confirm that a modification is both appropriate and sustainable. Moreover, the loan 

modifications currently offered to borrowers for the loans backing 

the credit extension to Maiden Lane LLC become permanent only 

after a borrower makes three timely payments under the modified 

terms. Therefore, the number of permanently modified loans is expected to increase as more delinquent borrowers are contacted and 

finish the negotiation process and as borrowers that are in their 

three-month verification period fulfill their obligations and receive 

permanent loan modifications. 

In addition, many delinquent borrowers are receiving flexible 

terms and assistance that may lead to loan workouts in forms 

other than formal loan modifications—for example, short sales or 

in the case of borrowers facing temporary financial hardships, a repayment plan. These workouts are not included in the stated percentage of loan modifications. 

Q.10. I commend the Administration for following through with 

Section 112 of EESA by convening an international summit on November 15th. In announcing the summit, the White House explained that leaders of the G20 and key international financial institutions will review progress on measures taken to address the financial crisis and to discuss principles for reform of regulatory and 

institutional regimes going forward. Please describe what the Federal Reserve and Treasury Department intend to accomplish 

through this summit and the subsequent working group meetings 

that will follow the summit—specifically, what types of principles 

for regulatory and institutional modernization will the United 

States pursue in the international community? Will these principles include protections for consumers and households which form 

the foundation of economic prosperity in our country as well as 

other countries? 

A.10. In a statement released following their November 15 meeting, the G–20 Heads of State articulated five key principles that 

will govern efforts by the official sector to reform the global financial system. These principles include strengthening transparency 

and accountability of financial markets and financial institutions, 

enhancing sound regulation, promoting integrity in financial markets, reinforcing international cooperation, and reforming international financial institutions. These efforts are constructive and 

should help to make the global financial system more robust and 

resilient. The Federal Reserve is working with its counterparts in 

the G–20 to identify and implement specific measures that will contribute to achieving these five principles. Initiatives to protect consumers and households are central to these efforts. The statement 


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from the G–20 Heads of States emphasized that bolstering consumer protection is an essential step toward protecting the integrity of global financial markets. Consumers and households benefit 

both directly and indirectly as the financial system becomes stronger, better regulated, and more transparent. 

Commercial Paper Funding Facility 

Q.11. What real assets are securing loans made under the CPFF 

to special purpose vehicles? 

A.11. The loans made under the CPFF to the special purpose vehicle (SPV) are collateralized by the highly rated commercial paper 

purchased by, and the fees collected by, the SPV. 

Q.12. What has the Federal Reserve done to clarify the effect of the 

CPFF on the daily rates reported in the Board’s H–15 data release? 

• What has the Board done to make clear that the support provided by the CPFF has altered the overall commercial paper 

rate? 

• Does the H–15 data still represent an actual market rate, 

without credit enhancement by the CPFF or any other recent 

government action? 

A.12. On November 5, 2008 we added the following footnote to the 

H–15 release: 

Financial paper that is insured by the FDIC’s Temporary Liquidity Guarantee Program is not excluded from relevant indexes, nor 

is anyfinancial, nonfinancial, or asset-backed commercial paper 

that may be directly or indirectly affected by one or more of the 

Federal Reserve’s liquidity facilities. Thus the rates published after 

September 19, 2008, likely reflect the direct or indirect effects of 

the new temporary programs and, accordingly, likely are not comparable for some purposes to rates published prior to that period. 

The commercial paper rates published on the H–15 release have 

and continue to be a reflection of actual transactions that take 

place in the U.S. commercial paper market. We have never 

screened out transactions with third-party credit enhancements. 

Q.13. What analysis has the Federal Reserve undertaken to determine which markets usually use the 90-day commercial paper rate 

in conducting their business? 

• Which of the markets, if any, did the Fed determine use this 

rate regularly in their business operation? 

• What steps, if any, has the Federal Reserve taken to assure 

that the actions to lower the costs of issuing commercial paper 

are not having an adverse impact on other markets which are 

pegged to the 90-day financial commercial paper? 

• Was a similar analysis conducted with respect to possible implications for markets that use other short term (under 365- 

day) commercial paper as a result of the establishment of the 

CPFF? 

• What steps, if any, has the Federal Reserve taken to assure 

that the actions to lower the costs of issuing commercial paper 

is not having an adverse impact on those other markets? 

A.13. By law, the reimbursement rates on student loans are tied 

to the 90–day financial CP rate. In addition, dealers report that 


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some financial contracts (e.g., derivatives) settle on certain CP 

rates published by the Federal Reserve. 

The link of the reimbursement rate on student loans to the 90- 

day financial CP rate has become problematic for student lenders, 

because their cost of funds tends to be tied to Libor, and the spread 

between Libor and the fmancial CP rate has moved against them. 

Importantly, the wider spread likely reflects pressures on the Libor 

rate as well as the CP rate. In addition, this spread first widened 

a few weeks before the CPFF began operation. 

To ensure that market participants fully understand our methodology for calculating CP rates, we published the following announcement on the Federal Reserve’s commercial paper website on 

November 5, the first paragraph of which was also added (as already mentioned in our response to Question 11) as a footnote to 

the Federal Reserve’s H–15 release: 

CLARIFICATION OF CRITERIA CONSIDERED FOR COMMERCIAL PAPER

RATES

Financial paper that is insured by the FDIC’s Temporary Liquidity Guarantee Program is not excluded from relevant indexes, nor 

is any financial, nonfinancial, or asset-backed commercial paper 

that may be directly or indirectly affected by one or more of the 

Federal Reserve’s liquidity facilities. Thus the rates published after 

September 19, 2008, likely reflect the direct or indirect effects of 

the new temporary programs and, accordingly, likely are not comparable for some purposes to rates published prior to that period. 

Through November 4, the documentation on the ‘‘About’’ page of 

this release indicated that paper issued under ‘‘credit-enhanced 

programs’’ was excluded from the samples of issues used to calculate reported rates. This wording was intended to convey that 

asset-backed commercial paper was excluded from the calculation 

of financial rates. Indeed, consistent with that intent, the Federal 

Reserve has, since 2006, published a separate rate series for assetbacked commercial paper. To avoid confusion, the reference to 

‘‘credit-enhanced programs’’ will be dropped. 

Too Big to Fail 

Q.14. When Chairman Bernanke testified before this Committee in 

support of emergency legislation to stabilize the economy, he acknowledged that we have a ‘‘serious ‘too big to fail’ problem in this 

country,’’ and that ‘‘it is much worse than we thought it was coming into this crisis.’’ Ironically, as Gary Stern, President of the Federal Reserve Bank of Minneapolis points out, ‘‘The too-big-to-fail 

problem . . . has been exacerbated by actions taken over the past 

year to bolster financial stability.’’ In surveying the financial landscape, one is struck by the fact that we are seeing increased consolidation of financial institutions—not just of commercial banks, 

but including enormous combinations of commercial and investment banks. In fact, news-reports indicate that a number of the institutions that received capital injections are using them to do additional acquisitions. 


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• Are such consolidations increasing our ‘‘too big to fail’’ problem, 

thereby increasing the problem of moral hazard? If so, what do 

we do about it? 

A.14. Working with the Treasury, the FDIC, and other agencies, 

the Federal Reserve believes that we must take all steps necessary 

to minimize systemic risk. We are also concerned about actions 

that increase moral hazard. As the Federal Reserve has previously 

noted, the acquisition of a troubled financial institution by a 

healthy firm can significantly mitigate risks to the financial system 

as a whole, preserve banking services in affected communities, and 

reduce the costs to taxpayers. Although preserving market discipline and avoiding moral hazard are extremely important, in exceptional circumstances it may be necessary for the government to 

intervene to protect financial and economic stability by taking 

steps to avoid the threat that could result from the failure of a 

major financial institution when financial markets are already 

quite fragile. The problems that result from moral hazard and the 

existence of institutions that are ‘‘too big to fail’’ must be addressed 

through prudent decisionmaking by government agencies, regulatory changes, improvements in the financial infrastructure, and 

other measures designed to prevent reoccurrence of threats to overall financial stability. Reforming the system to address these problems should be a top priority for lawmakers and regulators. 

Q.15. Each agency represented at the hearing has aggressive!), 

used the tools at their disposal in dealing with the crisis. However, 

sometimes the use of those tools has led to unintended consequences. For instance, when the Treasury Department guaranteed money market funds, it led to a concern on deposit insurance 

and bank accounts. When the FDIC guaranteed bank debt, it had 

an effect on GSE borrowing costs, which in turn directly affects 

mortgage rates. 

Acknowledging that there is often a need to act quickly in these 

circumstances, please explain what steps and processes you have 

employed to inform other agencies about significant actions you undertake to ensure that there are not serious adverse unintended 

consequences and that your actions are working in concert with 

theirs. 

A.15. For many years, the Federal Reserve has worked with other 

government agencies—including the Treasury Department, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the other banking agencies—through the 

President’s Working Group on Financial Markets and in other forums, to foster the safety and soundness of financial institutions 

and the stability of financial markets. During the financial crisis, 

this collaboration has increased greatly, and includes regular conference calls at the principals’ level as well as formal and informal 

staff contacts with a range of other agencies to exchange information on financial developments and to discuss possible policy responses. 

Such interactions have contributed importantly to the policy response to the crisis. Indeed, in some cases joint decisions by multiple agencies are required to take particular policy steps. For example, in order for the FDIC to invoke the systemic risk exception 


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to the general requirement for least-cost resolution of a troubled insured depository institution, both the FDIC and Federal Reserve 

Boards must recommend such a step by two-thirds majorities and 

the Secretary of the Treasury, in consultation with the President, 

must determine that a least-cost resolution would have serious adverse effects on economic conditions or financial stability, and that 

a non-least-cost resolution would avoid or mitigate such adverse effects. This process, which involves considerable interaction between 

the three agencies at both the staff level and the principals’ level, 

has been undertaken three times this fall, in connection with the 

difficulties of Wachovia and Citibank and with the establishment 

of the FDIC’s Temporary Liquidity Guarantee Program. Similarly, 

some other policy actions have involved more than one agency, and 

so by necessity have required extensive inter-agency consultation. 

An example is the Term Asset-Backed Securities Loan Facility, 

which calls for an equity investment by the Treasury Department 

and credit provided by the Federal Reserve. Even when joint action 

not been formally required to adopt a particular policy, the Federal 

Reserve has found it useful to exchange views regarding the possible policy in order to benefit from the assessments of other agencies. In many cases such consultations have been organized by 

Treasury Department and have included a wide range of government agencies. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM 

ELIZABETH A. DUKE 

Q.1. As someone with extensive background in the banking industry, what is your opinion of the recent action taken by the SEC and 

FASB to clarify mark-to-market accounting regulations? Do you 

feel such clarification was beneficial for our banking industry? 

What about the financial market as a whole? 

A.1. As the question indicates, the SEC and FASB issued a press 

release on September 30, 2008 containing certain clarifications related to the fair value accounting guidance contained in FASB 

Statement No. 157, Fair Value Measurements, for the benefit of 

auditors and preparers of financial statements. Subsequently, the 

FASB issued FASB Staff Position No. FAS 157–3, Determining the 

Fair Value of a Financial Asset When the Market for That Asset Is 

Not Active. Those formal actions were supplemented by a number 

of roundtable sessions and other meetings and presentations during which SEC and FASB staff discussed practical challenges involved in performing fair value measurements in markets that 

have become significantly less active. 

Generally, guidance was helpful to banks and financial markets 

because it addressed some of the challenges of measuring fair values in inactive markets. However, this guidance did not significantly reduce the uncertainties around the quality of fair value 

measurements that users and investors are experiencing. This may 

indicate that additional information and guidance may be necessary to address these uncertainties. The Federal Reserve is supportive of further efforts by the SEC and the FASB to clarify existing fair value accounting guidance. 


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In addition, as the SEC completes its study of ‘‘mark-to-market’’ 

accounting by January 2, 2009 as required by the Emergency Economic Stabilization Act of 2008, we will review the report and consult with the SEC regarding additional steps that may be deemed 

necessary in light of recent market events. If necessary, such steps 

could range from modifications of accounting requirements to additional clarification of existing guidance. Combined with steps that 

have already been completed to provide clarifying guidance, we 

trust that actions taken in response to the SEC study will benefit 

both the banking industry and the financial market as a whole. 

Q.2. It is possible this committee will be revisiting the regulation 

of credit default swaps (CDS) and other previously unregulated derivative contracts in the near future. Do you believe the proper entity to regulate such financial products is the Federal Reserve? If 

not, which regulator is best suited to oversee these financial products in your opinion? 

A.2. On November 14 the President’s Working Group on Financial 

Markets (PWG) announced a broad set of policy objectives to guide 

efforts to address the full range of challenges associated with CDS 

and other OTC derivatives, including improving the transparency 

and integrity of the CDS market, enhancing risk management of 

OTC derivatives, further strengthening the OTC derivatives market infrastructure, and strengthening cooperation among regulatory authorities. The Federal Reserve believes that this cooperative approach to these issues, which draws on the strengths and 

broad existing authority of the various federal agencies, is likely to 

be more effective at addressing these concerns than assigning authority to oversee CDS to the Federal Reserve or any other single 

agency. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ 

FROM ELIZABETH A. DUKE 

Q.1. I am gravely concerned, about a situation whereby banks are 

taking advantage of AIG’s low credit rating to make a windfall off 

of transactions they have with our nation’s mass transit agencies. 

Is the Treasury willing to appoint a senior official to work with the 

Fed, the IRS, and these public transit agencies to make sure taxpayer money is protected? Given the urgent nature of this situation 

I would like an answer to this question by Tuesday October 28. 

(Please contact my staffer Hal Connolly at 202–224–4744 if you 

have any further questions) 

Q.2. Our nation’s public transit agencies are potentially liable for 

payments in the hundreds of millions of dollars to banks due to the 

downgrading of AIG through LILO/SILO leveraged leases. Does the 

Treasury and the Fed think it appropriate that these banks are in 

a position to make a windfall at the expense of these public agencies? Without action by the Treasury banks stand to gain all of the 

benefits the IRS has declared to be inappropriate. Has the IRS 

backed away from its previous position on these leases? 

A.1.–A.2. As you indicate, a number of transit authorities have 

issued obligations that were guaranteed in whole or in part by 


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American International Group, Inc. (MG) as part of complex, taxdriven lease transactions. 

It was precisely for the purpose of limiting the potential adverse 

effects on the economy of the failure of AIG that the Federal Reserve, on September 16, 2008, extended a line of credit to AIG in 

the amount of $85 billion. The Federal Reserve was concerned that 

the disorderly failure of MG during the current period of economic 

turmoil and fragile markets would have wide-ranging systemic effects and exacerbate the already troubled economic situation. 

Since that time, the Federal Reserve, working with the Department of the Treasury, has taken additional actions to help restore 

confidence in AIG to allow it to maintain its credit ratings and conduct its business while it engaged in an orderly restructuring. On 

November 10, 2008, the Federal Reserve restructured its credit facility and agreed to provide two additional liquidity support facilities to AIG. At the same time, the Department of the Treasury provided an emergency injection of capital to the company. 

While the Federal Reserve has used its authority to provide liquidity to AIG, the Federal Reserve does not have authority to cure 

the potential technical defaults on the transit authority bonds, 

which are based on the credit ratings of MG. The credit ratings for 

AIG are not established by the Federal Reserve, though the actions 

of the Federal Reserve and the Treasury in providing funding to 

MG have helped to stabilize those ratings. We understand that the 

transit authorities are in discussions with lenders to find mutually 

agreeable ways to cure the potential defaults. 

We recognize the importance of mass transit to communities, 

both as a matter of the economic contribution that mass transit 

makes to urban communities in particular and in the effects it has 

on the lives of users of mass transit. This is an important issue 

that we are monitoring carefully. 


rfrederick on DSKD9S0YB1PROD with HEARING