S. HRG. 110–957 

REFORMING THE REGULATION OF THE 

GOVERNMENT–SPONSORED ENTERPRISES 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON 

THE PROBLEMS RELATED TO GSE ACCOUNTING POLICIES AND PRACTICES, INTERNAL CONTROLS, CORPORATE GOVERNANCE, AND CORPORATE CULTURES AND TO CONSIDER IMPROVEMENTS TO THE REGULATORY SYSTEM 

THURSDAY, FEBRUARY 7, 2008 AND THURSDAY, MARCH 6, 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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REFORMING THE REGULATION OF THE GOVERNMENTSPONSORED ENTERPRISES 


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U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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50–367 2010

S. HRG. 110–957 

REFORMING THE REGULATION OF THE 

GOVERNMENT–SPONSORED ENTERPRISES 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON 

THE PROBLEMS RELATED TO GSE ACCOUNTING POLICIES AND PRACTICES, INTERNAL CONTROLS, CORPORATE GOVERNANCE, AND CORPORATE CULTURES AND TO CONSIDER IMPROVEMENTS TO THE REGULATORY SYSTEM 

THURSDAY, FEBRUARY 7, 2008 AND THURSDAY, MARCH 6, 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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(II) 

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 

DAWN RATLIFF, Chief Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 


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(III) 

C O N T E N T S 

THURSDAY, FEBRUARY 7, 2008 

Page 

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

Prepared statement ................................................................................... 67 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 3 

Senator Carper ................................................................................................. 5 

Senator Reed ..................................................................................................... 7 

Prepared statement ................................................................................... 70 

Senator Martinez .............................................................................................. 8 

Senator Menendez ............................................................................................ 9 

Senator Crapo ................................................................................................... 9 

Senator Schumer .............................................................................................. 10 

Senator Dole ...................................................................................................... 12 

Senator Allard ................................................................................................... 14 

Senator Casey ................................................................................................... 14 

Prepared statement ................................................................................... 81 

Senator Bennett ................................................................................................ 15 

Senator Bayh 

Prepared statement ................................................................................... 83 

WITNESSES 

David G. Nason, Assistant Secretary for Financial Institutions, Department 

of the Treasury ..................................................................................................... 16 

Prepared statement .......................................................................................... 85 

Response to written questions of: 

Senator Crapo ............................................................................................ 139 

James B. Lockhart III, Director, Office of Federal Housing Enterprise Oversight ....................................................................................................................... 18

Prepared statement .......................................................................................... 90 

Response to written questions of: 

Senator Bayh ............................................................................................. 140 

Senator Crapo ............................................................................................ 141 

Ronald A. Rosenfeld, Chairman, Federal Housing Finance Board ...................... 20 

Prepared statement .......................................................................................... 110 

Response to written questions of: 

Chairman Dodd ......................................................................................... 142 

Senator Bayh ............................................................................................. 150 

Senator Carper .......................................................................................... 152 

Senator Crapo ............................................................................................ 154 

Richard F. Syron, Chairman and Chief Executive Officer, Federal Home Loan 

Mortgage Corporation (Freddie Mac) ................................................................. 51 

Prepared statement .......................................................................................... 119 

Response to written questions of: 

Senator Crapo ............................................................................................ 157 

Daniel H. Mudd, President and Chief Executive Officer, Federal National 

Mortgage Association (Fannie Mae) ................................................................... 53 

Prepared statement .......................................................................................... 130 

Response to written questions of: 

Senator Crapo ............................................................................................ 160 


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IV 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Prepared statement of Geoffrey A. Bacino and Allan I. Mendelowitz, Directors, Federal Housing Finance Board ................................................................. 166 

THURSDAY, MARCH 6, 2008 

Opening statement of Chairman Dodd .................................................................. 173 

Opening statements, comments, or prepared statements of: ...............................

Senator Corker .................................................................................................. 175 

Senator Reed ..................................................................................................... 175 

Senator Bennett ................................................................................................ 176 

WITNESSES 

William B. Shear, Director, Financial Markets and Community Investment, 

Government Accountability Office ...................................................................... 177 

Prepared statement .......................................................................................... 212 

Vincent E. Malta, Chair, National Association of REALTORS, Public Policy 

Coordinating Committee ...................................................................................... 178 

Prepared statement .......................................................................................... 230 

Kieran P. Quinn, Chairman, Mortgage Bankers Association .............................. 180 

Prepared statement .......................................................................................... 246 

Gerald M. Howard, Executive Vice President and Chief Executive Officer, 

National Association of Home Builders .............................................................. 181 

Prepared statement .......................................................................................... 297 

Nancy Andrews, President and Chief Executive Officer, Low Income Investment Fund ............................................................................................................ 183 

Prepared statement .......................................................................................... 308 


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(1) 

REFORMING THE REGULATION OF THE 

GOVERNMENT-SPONSORED ENTERPRISES 

THURSDAY, FEBRUARY 7, 2008 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10 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. 

This morning’s hearing is entitled ‘‘Reforming the Regulation of 

the Government-sponsored Enterprises,’’ and while this is the first 

meeting on this topic in the 110th Congress, I want to acknowledge 

that the Committee has established a very substantial record on 

these issues, which was developed through a comprehensive series 

of hearings organized by my colleague and friend, the former 

Chairman, Senator Dick Shelby, when he was Chairman of the 

Committee. He has shown important leadership on this issue, and 

I want to acknowledge that at the very outset of all of this. 

I want to acknowledge as well Senator Tom Carper’s strong interest in this issue. Hardly a day goes by when Tom Carper has 

not asked me when we are going to deal with the GSE issues. And 

Jack Reed, of course, I want to mention this in a moment, the issue 

as well on the affordable housing issues and the like. There has 

been a lot of interest in the Committee on the subject matter. 

Because we have a number of Members that are new to this 

Committee, I think it would be useful to remind people of the backdrop on these issues. A pattern of serious abuses and irregularities 

surfaced at Fannie Mae, Freddie Mac, and the Federal home loan 

banks starting in the year 2003. These entities misstated their incomes by billions of dollars and exhibited serious problems with 

their internal controls, accounting practices, and corporate governance. Today, Fannie, Freddie, and the Chicago Home Loan Bank 

are still operating under regulatory agreements. 

It is because of these very serious problems that we all agree 

that a new world-class regulator with broad powers like those of 

the banking regulators should be created to oversee GSEs. By the 

same token, we need to recognize the tremendous benefits that the 

GSEs have brought to the American people, to our communities, 

and to our economy. 

For example, the widespread availability, nearly unique in the 

world, of a 30-year, fixed-rate, payable mortgage is due in no small 


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part to the existence of Fannie Mae and Freddie Mac. As a result, 

millions of Americans have achieved the dream of safe and stable 

homeownership that would otherwise have been out of their reach, 

in my view. This homeownership has been an engine of wealth creation for our Nation, wealth that is measured in the hundreds of 

billions of dollars, wealth that homeowners may use to pay for a 

child’s college education, to finance a secure retirement, or simply 

to get them over a financial rough patch. Fannie and Freddie are 

two of the key drivers of the housing finance system that has created this wealth. 

Now, let me be clear. I will not be one to preside over a legislative process that dismantles this system. I will pursue GSE legislation, and I will do so aggressively. But I will not do anything that 

undermines the foundations of this highly beneficial system. 

Ironically, we have sat through hours of hearings over the years 

with witnesses repeatedly raising alarm bells about the risks 

Fannie and Freddie pose to the financial system. Yet today, the 

only part of the housing finance system where credit is still flowing 

is the GSE and FHA sectors. Everywhere else mortgage credit is 

either unattainable or incredibly expensive. One financial institution after another failed effectively to manage its risks and has 

been forced to seek capital infusions, often from foreign governments, to cushion their losses. Many financial institutions have 

gone bankrupt, but only after making bad loans have they turned 

the American dream into a living nightmare for millions of our 

hard-working fellow citizens. In short, the system is under siege, 

and it is the GSEs that are riding to the rescue. 

I would note the second paragraph of Mr. Lockhart’s testimony 

this morning in his opening statement makes that point very, very 

clear. As you point out, Mr. Lockhart, in your statement, but for 

the GSEs today, this problem would be a far more pronounced and 

serious one, and I thank you for that opening statement because 

it makes the point that I am making here. I will not bother reading 

it, but suffice it to say that that second paragraph states the case 

very clearly. 

I know that there are some who take a very different view of this 

matter. Many are philosophically opposed to the very existence of 

these entities. Former Chairman Alan Greenspan told this Committee very frankly that he was in this camp and that he favored 

privatization. In my view, it is time to get beyond this stale ideological debate. We need to get down to the hard work of crafting 

a balanced bill that will create the kind of regulator that we all 

agree is needed. By doing so, we will ensure the public that a credible regulator is on the job, increasing confidence in our system. We 

will also be able to demand as an integral part of the process that 

the GSEs strengthen and deepen their commitment to affordable 

housing. 

Senator Jack Reed of Rhode Island has provided a framework for 

doing just that, and I commend him for it. I intend to work closely 

with him going forward on that issue. 

In addition, I believe the GSEs need to do more to help subprime 

borrowers get out of the abusive subprime loans and into the safer, 

more affordable stable products. Indeed, as Fannie and Freddie 

successfully address their accounting and management problems, I 


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think it would be very helpful for them to devote a portion of the 

surplus capital they have been required to maintain for the purchase and workout of these troubled loans. 

As my colleague Senator Schumer noted last week, these are the 

times when GSEs must live up to their public obligations, and I intend to put them to the test on this. 

Before I recognize the Ranking Member, I want to reiterate that 

we are in agreement in many areas, and I look forward to working 

with him, with our colleagues on this Committee, with our witnesses, and with other stakeholders to produce a strong, broadly 

balanced, and effective piece of legislation. The American people 

are looking for us in these uncertain times to act. We do not have 

the right to disappoint them, and I do not intend allowing that to 

occur. 

So we are going to move and move carefully with balance, without rigidity, but also understanding these are very, very critical 

times. Very critical times. And how we act, not only the pace of 

how we act, but what we produce is critically important for the 

well-being of our Nation. And I intend to see that we do that. 

So, with that, let me turn to Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. Thank you for calling this hearing. At the outset, I also want to acknowledge—you 

acknowledged the work of some of the other Senators, but Senator 

Hagel, Senator Crapo, Senator Dole, and Senator Martinez, the 

former Secretary of HUD, along with Senator Sununu, have been 

very involved with all of us on trying to reform GSEs and make 

them work. 

I remain committed, Mr. Chairman, to seeing this Committee 

create a new regulator with the authority and independence necessary to ensure that these institutions carry out their mission in 

a safe and a sound manner. While it is easy to recognize the role 

the GSEs play in providing liquidity to our home mortgage markets, I believe it is also important for us to recognize the size and 

scope of their operations. The combined obligations of Fannie Mae, 

Freddie Mac, and the Federal home loan banks exceed $6 trillion. 

That is over $1 trillion more than the $4.4 trillion publicly held 

debt of the U.S. Government. 

Think about it a minute. Additionally, Fannie Mae and Freddie 

Mac are among the largest participants in the derivatives market, 

arising from their need to hedge the risks associated with their 

combined $1.4 trillion portfolios. Through their debt exposure in 

derivative contracts, the GSEs affect an extensive network of financial institutions. Clearly, these are large organizations with a tremendous influence on our financial markets. Should a GSE be unable to meet its obligations, the ramifications for our mortgage 

market and our financial system could be devastating. The current 

difficulties in the subprime market would be small in comparison 

if one of the GSEs were to falter. 

Mr. Chairman, you have heard me say here many times that an 

institution that is well managed, well regulated, and well capitalized is not only likely to be safe and sound, but is also in the best 

position to weather bad economic conditions. We know that. Both 


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Fannie and Freddie have had significant management problems, as 

evidenced by a string of disturbing accounting scandals, which are 

not yet entirely resolved. They are not well regulated because the 

structure and the authorities of the current regulator are grossly 

inadequate to ensure the safe and sound operation of institutions 

the size of both Fannie and Freddie. 

Finally, Fannie Mae and Freddie Mac are not well capitalized, as 

we know. Roughly 3 years ago, OFHEO placed a 30-percent excess 

capital requirement on the GSEs’ statutory minimum capital requirements because of serious operational deficiencies. While a 30- 

percent surcharge may sound like a significant increase, let’s put 

it in perspective. The practical effect is that their capital went from 

2.5 percent—2.5 percent capital—to 3.25 percent for assets. In the 

wake of their combined losses of over $8 billion this year alone, 

representing almost 20 percent of their capital, both Fannie Mae 

and Freddie Mac are leveraged over 80:1 on a fair value basis— 

80:1. These margins leave little, if any, room for error. Even a 

minor decline in the value of their assets or higher than anticipated losses on guaranteed mortgage-backed securities could leave 

Fannie and Freddie ill-equipped to perform the necessary liquidity 

role in today’s troubled housing market. 

Considering that housing market analysts are uniformly forecasting further price declines, and some are even suggesting home 

values may decrease by as much as 25 percent next year, I believe 

it is only prudent to ensure that the GSEs are properly capitalized. 

While we may ask the GSEs to perform the critical task of adding liquidity to the market, I believe we must also be cognizant of 

the fact that the GSEs face the same heightened risk as every 

other participant in the mortgage market. We have already seen 

some of the effects in the GSEs’ bottom lines. In four of the last 

five quarters, Freddie has reported losses; Fannie has had two 

losses in the last five quarters. For the third quarter, the most recent public data, Freddie Mac reported a $2 billion loss while 

Fannie Mae reported a $1.4 billion loss. The fourth quarter is not 

likely to be any better, and 2008 promises to continue this trend 

for the GSEs and other market participants. 

Today, as we find ourselves surrounded by waving red flags, 

what is the first thing we do? Do we look for ways to shore up the 

safety and soundness of these massive institutions by creating a 

strong and independent regulator? Do we look for ways to focus 

them on their original mission of facilitating affordable housing? 

Do we look for ways to decrease the risk profile of the GSEs so that 

we first and foremost protect the American taxpayer from another 

costly bailout? 

The answer to all of these questions is no. We do none of these. 

In fact, we do quite the opposite. As part of the stimulus package, 

the Congress is considering an increase in the GSE conforming 

loan limit from $417,000 to over $700,000. 

Let me repeat so that there is no confusion. The Congress is considering an increase in the GSE conforming loan limit from 

$417,000 to over $700,000. This represents a nearly 75-percent increase in the loan limit, despite the fact that this Committee has 

not held one hearing, has built no record, and has no clear picture 


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as to the status of the jumbo market and whether it really needs 

this kind of help at this time. 

So we are clear, an individual would need a yearly income in ex- cess of $150,000 to even qualify for a $700,000 loan. Once again, 

instead of thinking of ways to further protect the American taxpayer, we are actually considering ways to further expose them for 

the benefit of those making healthy six-figure salaries. As one 

Member of this Committee who lived through the savings and loan 

crisis and its aftermath, as the Chairman did, the mood reminds 

me of the 1980 behind-closed-doors increase in the deposit insurance limit from $40,000 to $100,000. 

Mr. Chairman, we must ask ourselves why the GSEs are regulated in the first place and let the answers drive the structure of 

their regulation. Fannie Mae and Freddie Mac are not regulated 

for the sake of protecting their shareholders or their debt holders 

from loss. They are regulated to protect the taxpayers and to protect the stability of our financial system. 

I commend the hard work of Director Lockhart and his agency 

in making use of the limited tools at their disposal to monitor the 

GSEs. Mr. Chairman, I believe, however, that OFHEO lacks the 

necessary authority to protect both our financial system and the 

American taxpayer from significant loss in the event of a GSE insolvency. This deficiency becomes all the more striking as we consider increasing the conforming loan limits by nearly 75 percent 

without even entertaining some added protection. 

The role played by the GSEs in our mortgage and financial markets is necessary, as you have pointed out. But what is equally necessary, I believe, Mr. Chairman, is the need to ensure the safety 

and soundness of their operations so that they continue to be a 

vital and dependable source of liquidity in our mortgage market. 

Therefore, I believe, Mr. Chairman, that we must craft strong legislation that will address the very real risks posed by the GSEs 

while at the same time facilitating and strengthening their core 

mission. 

I hope we can work together on that goal. 

Chairman DODD. Thank you very much, Senator Shelby. 

Let me just ask our colleagues here, I want to go around and ask 

them for opening statements. It is a big issue and an important 

issue, but if you could try to limit them to a few minutes, this way 

we can get to our witnesses and so we will have a chance to hear 

them. 

Let me turn, if I can, to Senator Carper. And I am, again, going 

to recognize people in the order in which they arrived here this 

morning. 

STATEMENT OF SENATOR THOMAS R. CARPER 

Senator CARPER. Thanks, Mr. Chairman. Thank you for bringing 

us together, and to our witnesses today, welcome. We look forward 

to your comments and your responses to our questions. 

Like many of us gathered here today, I have been a strong supporter of GSE reform for a number of years. Fannie Mae and 

Freddie Mac are, I believe, the backbone of a mortgage market that 

is reeling from the subprime crisis. And as we have seen both this 

year and last year, subprime mortgages have destroyed the privateVerDate Nov 24 2008 08:59 Mar 18, 2010 Jkt 050367 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\A367.XXX A367

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label mortgage-backed security market. It is almost as if a hole had 

been punched in a bucket and all of the liquidity in the mortgage 

market had drained out. 

There are any number of reasons for the decline. This Committee 

has held hearings on the subprime mortgage market and the foreclosure tragedy. In order to bring liquidity back into the marketplace, we must use Government-sponsored enterprises. The Federal 

home loan banks have stepped up to this task already. Federal 

home loan bank advances have increased dramatically over the last 

year, from approximately $600 billion to some $900 billion. And 

while much of the news is focused on the $50 billion advances to 

Countrywide, this system has served many more institutions, and 

I will follow up with some questions later on that explore the risks 

associated with the concentration of advances to Countrywide. 

The stimulus package currently pending before the Senate includes a provision to raise the conforming loan limit from Fannie 

Mae and Freddie Mac to $730,000, alluded to by Senator Shelby. 

This will certainly provide needed liquidity to the markets by expanding the mortgage-backed securities that are guaranteed 

against credit losses, to include mortgages much higher than the 

$417,000 limit under current law. And while this will help, it will 

also bring some added risks to these enterprises, and we must take 

steps to bring the regulator back into the 21st century. 

You know, we have debated these issues over the years, and, unfortunately, at least to date, we have not resolved our differences. 

But we now have some serious challenges facing our economy, and 

this is the time to restore confidence in our mortgage markets. I 

look forward to working with our Chairman and Ranking Member 

and a lot of other folks around this table to find common ground 

on these issues. 

Some of the issues we have argued over in the past have been 

overtaken by market events, and because time is of the essence, I 

would hope that we would use the House-passed bill as a starting 

point. And while I have some concerns about some of its provisions, 

it is a good middle ground, and we can build on the consensus 

reached by Chairman Frank, his Committee, and Secretary 

Paulson and others. 

With that said, any bill that we debate should have the following 

key provisions: A new regulator with combined authority should be 

independent. A new regulator should be able to set minimum capital requirements. A new regulator should have enhanced enforcement authorities. SEC registration—Fannie on track, and I think 

all 12 Federal home loan banks have been registered now. New 

program approval. Affordable housing fund and goals should be included as well. And there should be limits on retained portfolio. 

And while we are searching for ways to help a distressed marketplace, let’s just keep in mind that there are $46 trillion of GSE securities currently in the market around the world, and we need to 

do everything we can to maintain the confidence in the GSEs and 

their security. The best way to maintain confidence is to create a 

regulator that would have the authority and the stature to calm 

the markets and ensure that both the debt and the mortgagebacked securities issued by our GSEs continue to be seen favorably 

by investors. 


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I would just close with this, Mr. Chairman. Go back 2 years ago. 

There was a whole lot that we disagreed on. And if you go down 

the list of things we used to disagree on, on which there is now 

consensus, we agree on a whole lot more today than we disagree 

on. And with that consensus, my hope is we will be able to move 

forward expeditiously. I am delighted that we are here and get this 

party started. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator Carper, very, very much. 

Senator Hagel. 

Senator HAGEL. I will wait for the testimony. 

Chairman DODD. Thank you, Senator. 

Senator Reed, Jack Reed. 

STATEMENT OF SENATOR JACK REED 

Senator REED. Thank you, Mr. Chairman. I have a written statement which I would like to submit to the record. 

Chairman DODD. Done. 

Senator REED. And I would make some very brief comments, I 

think. 

First, we all recognize the crucial importance that the GSEs play 

in our financial system, particularly providing liquidity in our 

mortgage market at a time when that liquidity is desperately needed. 

We also, I think, agree, based on everything I have heard this 

morning, that the GSEs need a strong regulator with a full panoply 

of powers as outlined by Senator Carper, and that is a good starting point. 

As we go forward, Senator Shelby has suggested that we will 

consider allowing Fannie and Freddie to purchase jumbo mortgages. We have to do that carefully, and we also have to ensure 

they do not lose focus on the primary area of their concern, which 

is the moderate- and low-income market in the United States, to 

provide those individual Americans with access to mortgages and 

homeownership. 

As the Chairman indicated, I have introduced, along with colleagues, the GSE Mission Improvement Act, and this would create 

an Affordable Housing Trust Fund. I think that has to be part of 

a final legislative GSE proposal. Sixty-five percent of the money 

would be a formula grant to States which, in the first year, could 

be used to go in and help people who are underwater with their 

mortgages by providing fixed 30-year mortgages rather than the 

exotic mortgages that are now plaguing their lives. The other 35 

percent would be a capital magnet fund which would attract private capital for renovation, rehabilitation, and construction of affordable housing. We do understand that at some point going forward we have to get back into building affordable housing, not expensive housing exclusively. 

And I think without our concentration on affordable housing for 

our citizens, we will continue to have significant problems. Many 

of the people that are troubled today because of mortgage difficulties, had they had access to not only affordable housing but affordable mortgage financing would not be in the terrible predicament 

they are in today. I think we can do more and we should do more. 


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I thank the Chairman and Senator Shelby for holding the hearing and their wise comments. Thank you. 

Chairman DODD. Thank you very much. 

Senator Martinez. 

STATEMENT OF SENATOR MEL MARTINEZ 

Senator MARTINEZ. Mr. Chairman, thank you very much. I want 

to welcome the panel, very especially Ronald Rosenfeld, who I had 

the pleasure to work with while I was at HUD as he was Director 

of Ginnie Mae at the time. 

Mr. Chairman, for a long time, I have been concerned about the 

role of the GSEs, and let me just say that I will put my full statement in the record and just make brief comments. 

The concern arose during my time at HUD because of the great 

risks that the implied guarantee of the Federal Government presented a point of liability to our Government, while at the same 

time understanding the weakness of the current regulator. OFHEO 

and HUD share the regulation. It is not all under one roof. And in 

this bifurcation and without the independence and the enhanced 

powers that a regulator should have, OFHEO does not have the 

tools available to properly regulate these entities. 

This is why it is critical that we do GSE reform. This is why it 

is critical that the time be now, because we are at a time of crisis 

in the housing market. We are at a time of crisis in the liquidity 

of mortgages in the housing market. 

In order to have a strong regulator, we would not only be ensuring the safety and soundness, we would be giving a sense of comfort and security to the United States taxpayer, but also we would 

be enhancing the credibility of Fannie and Freddie and the other 

GSEs as a prudent place to invest money. It would increase liquidity into the housing market at a time when tremendous needs for 

liquidity exist. 

So for my way, I think that the time has come. I think we need 

to move to ensure that the new product requirements be fully overseen, that there be a timely opportunity to object. The current regulator gets told when a new product goes into market. We have got 

to have a situation where, before a product goes into market, that 

it is brought before the regulator for an approval or disapproval in 

a timely way, because I know that the market shifts quickly. But, 

in any event, safety and soundness, new product approval, sticking 

to the charter mission, ensuring that it is about helping housing at 

a certain level of the marketplace. 

I am very, very concerned about the current stimulus including 

an increase in the conforming loan limits. We are doing that without properly knowing and understanding the implications of it, the 

increased liabilities to companies that already are stressed at a 

time of difficulty. And I know there are good reasons why. The people in Miami would have an opportunity to get loans that they otherwise might not get. I am encouraged that this would be very limited in terms of markets where this would happen, but I am very 

concerned—— 

Chairman DODD. And in time, too. 

Senator MARTINEZ. And time. Certainly in time. But it also ought 

to be coupled with a commitment, Mr. Chairman, that we will get 


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GSE reform, that we will not delay on this, because the two ought 

to be coupled together. Sure, there is a need for them to have increased loan limits in certain markets and for a period of time, but 

at the same time, we should not do so without a strong commitment to a strong regulator. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very, very much. 

Senator Menendez. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. Thank you, Mr. Chairman. Let me thank 

you and Senator Shelby for bringing us back to this incredibly important topic, and I look forward to your leadership in moving 

ahead on this. 

Very briefly, the discussion of reform has largely come back to 

the forefront of the debate due to the discussion of loan limit increases in the economic stimulus package, and I want to pick up 

where Senator Martinez left off. 

Let me say that I clearly support a temporary increase in the 

GSE loan limits. It will help restore liquidity to the market. It will 

increase confidence, make loans more affordable and available. It 

is an appropriate and necessary step to help get our economy back 

on track. 

That said, looking forward, I firmly believe that it is time to pass 

a GSE reform bill. It is time to create a stronger, politically independent new regulator. I also believe that it is also time, once they 

have met the requirements of their consent orders, to move forward 

and not let the accounting scandals of the past define their future. 

I have seen the great work that Fannie and Freddie have done 

in my home State of New Jersey. I know the vital role that they 

play in the housing community. Their mission to help low- and 

moderate-income families get affordable financing for a home has 

never been more critically needed than now in terms of the midst 

of this subprime crisis. 

Millions of homeowners across this country are crying out for 

help. They are pleading for help in saving their homes, and today, 

on their behalf, we are asking you to help modify their loan terms. 

I know that you are already working toward this goal, and I simply 

hope you will continue to do so and that we use every resource possible to help these people keep the American dream and not have 

it become the American nightmare. 

And with that we look forward to meaningful GSE reform as a 

critically important step for the longer term and the opportunity to 

do some of what you have suggested in the short term. 

Chairman DODD. Thank you very much, Senator. And let me just 

say to all Members that their full statements will be included in 

the record. 

Senator Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Mr. Chairman, and I 

want to state at the outset, in order to be brief, that I support the 

comments that many of my colleagues have made with regard to 

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age and the need for us to move forward with full GSE reform legislation, primarily to assure that we have a strong, independent 

regulator. I just want to highlight two issues, and then I will look 

forward to working with the witnesses. 

First, one of the areas that I believe we need a lot more evaluation and debate on and vetting is an evaluation of the comparative 

strengths and weaknesses that exist between affordable housing 

goals, affordable housing programs, and an affordable housing 

fund. Fannie and Freddie have affordable housing goals. The Federal home loan banks have an affordable housing program. And the 

House-passed GSE reform legislation would establish a new housing fund with goals. 

I think that we need to look at the—by the way, the most recent 

GSE reform legislation from this Committee did not have the housing fund, but I know there is now a very strong concern for including one. 

Although I do not think there is much disagreement about the 

need to reaffirm the Government-sponsored enterprises’ mission 

with regard to affordable housing, there is still a lot of debate 

about how this can best be accomplished, and specifically, we need 

to determine what is the appropriate amount of resources that 

should be allocated to these affordable housing issues, and who 

should allocate the funds, and how these funds should be best 

spent. I think that is a very critical issue as we move forward with 

regard to this legislation. 

Another issue that I want to revisit is the question of the combining of the regulatory authority of all housing GSEs. I note that 

in Assistant Secretary Nason’s testimony, he reaffirms the position 

that the Federal home loan banks should be included in the GSE 

reform and that we should have one independent regulator. I am 

going to be interested in evaluating the structural differences between Fannie and Freddie and the Federal home loan bank system 

to determine how we would accomplish that and still achieve the 

necessary purposes and objectives that we have for both of the different types of systems that we have to deal with there and whether it is the right decision for us to move to one combined regulator 

for all. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much. 

Senator Schumer. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Thank you, Mr. Chairman. Once again, thank 

you for holding this hearing and for your leadership on this issue 

of GSE reform, which has been long and steadfast. And, of course, 

we are in the midst of one of our Nation’s worst housing crises, so 

it is especially important that we examine the critical role that 

GSEs play in providing liquidity and stabilizing the housing market. 

But rather than focus exclusively on the specific issues of GSE 

reform that we have discussed many times in the past, I would like 

to examine the role that GSEs can and should play in these times. 

As this Committee has worked on this issue over the past several 

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porters of the enterprises. Fannie and Freddie were created to provide liquidity to the Nation’s mortgage market and to ensure that 

a steady supply of mortgage credit is available in all market conditions. In the past, they have done a stellar job. Fannie and Freddie 

have served our country well. They have created unique products 

that could not have been developed by purely private or purely 

public sector companies. This ability strengthens and fills a gap in 

the housing markets. 

However, during the housing market disruption, Fannie and 

Freddie have not lived up to my expectations and those of many 

others when it comes to assisting borrowers who are having difficulty affording their loans. Instead of leading the charge to help 

troubled borrowers, we have had to push them forward every step 

of the way. As Government-sponsored enterprises, Fannie and 

Freddie fill a special need. However, in this time of our greatest 

need in the housing markets since we have recovered from the 

Great Depression, I have been disappointed by their response. 

The conforming loan limit increase, which the enterprises have 

sought for many years, will be a significant and profitable new 

business for Fannie and Freddie, and I expect that in return for allowing the enterprises to enter the jumbo market, the companies 

will make a commitment to fund additional refinancing or modification resources to lower-income borrowers who are having difficulty 

affording their payments. 

While Fannie and Freddie have developed new products and increased their rate of securitization to date, I am increasingly concerned by statements from the companies and from their regulator 

that additional action will be difficult or impossible because of capital constraints and market conditions. 

Let me be clear. This is not an acceptable response. These organizations were created specifically to help in times of crisis. It 

would be like calling the fire department to put out a raging fire 

and have them tell you they were busy getting a cat out of the tree. 

That is what they have always done, and that is what they want 

to keep doing. If capital constraints are restricting action by the 

GSEs, they should consider raising additional capital, and OFHEO 

and Congress should consider ways to give them additional flexibility to help their subprime borrowers. 

One option is to re-examine the 30-percent capital surcharge imposed in the wake of the accounting scandals at Fannie and 

Freddie. If, as expected, the companies become timely filers in February, OFHEO should consider reducing the enterprises’ capital 

surcharge, if that can be done in a safe way. 

Any capital relief has to come with a substantial new commitment to purchase loans for struggling subprime borrowers. If 

Fannie and Freddie will not enter this agreement voluntarily, we 

should consider imposing it as part of the agreement to lift the capital surcharge. If the debt markets are not allowing the GSEs to 

borrow as cheaply as they once could, that is how the world works, 

the capitalist world works. They still enjoy advantages that no 

purely sector actor has, and, thus, they have a responsibility to use 

those advantages to provide liquidity and stabilize the markets. To 

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cause there are other things we do that are more profitable is not 

acceptable in these very critical times. 

So I am calling on their CEOs today, Fannie and Freddie’s CEOs, 

to continue to improve the GSEs’ response to the crisis and make 

a renewed commitment to help struggling borrowers. Although 

market conditions may not be ideal to maximize the GSEs’ profit, 

their role in these conditions is to step in where the private market 

will not and ensure continued liquidity for the mortgage market. 

The GSEs also need to be industry leaders when it comes to 

other aspects of the market. Yesterday, I wrote to both enterprises 

to urge them to clarify mortgage servicing standards for outside 

servicers. Because Fannie and Freddie represent such a large share 

of the market, their servicing guidelines create a de facto industry 

standard that prevents servicers from performing principal 

writedowns—a critical type of loan modification that will help 

many homeowners during the housing crisis, especially those 

trapped underwater in their loans. 

The clarification of these standards would be a simple and prudent step by the GSEs to show their commitment to help at-risk 

homeowners during these troubled times. If Fannie and Freddie 

had the right proactive attitude, I would not have had to write letters to Fannie and Freddie imploring them to set clear and high 

standards for loan servicing. These companies operate with an implicit Government guarantee, are exempt from paying State and 

local taxes, and are able to borrow at reduced rates. With these advantages come responsibilities. I think many of us expect these organizations to be in the vanguard of efforts to help borrowers, especially in times of crisis. They should be proactively looking for ways 

to improve all aspects of their business, from subprime refinancing 

products to their purchasing commitments, to their loss mitigation 

and loan servicing guidelines. 

Mr. Chairman, I have some other things I wanted to say to Mr. 

Rosenfeld and what I feel is the lack of response, particularly in 

regards to Countrywide, but I will ask—in the interest of time, I 

will put that statement in the record and save it for questions. 

Chairman DODD. Thank you, Senator, very, very much. And before you came in, I made the point, to pick up on your point here, 

regarding the lifting of the capital surcharge. I would like to see 

that money stay there so they start utilizing that close to $20 billion that is there specifically to do exactly what you have talked 

about, and that is, to assist those people who are struggling, to 

keep them in their homes. That is exactly the role that Fannie and 

Freddie I think could play at this critical time. 

Senator SCHUMER. Thank you, Mr. Chairman. 

Chairman DODD. Hardly going to be enough, I might point out. 

I think more is needed. But that would be one wise use of that capital. 

Senator SCHUMER. I could not agree more. Thank you. 

Chairman DODD. Senator Dole. 

STATEMENT OF SENATOR ELIZABETH DOLE 

Senator DOLE. Thank you, Mr. Chairman. I certainly want to 

welcome our witnesses today. Director Lockhart and I have worked 

together in the past when I was serving as Secretary of Labor and 


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he was heading the PBGC, and I thank you for your service to our 

country. 

As you know, the GSEs have been of particular concern to me 

and for many of the Members of this Committee. I appreciate the 

Committee’s careful attention to this matter today, particularly in 

light of the current housing and financial unrest. 

Originally, Fannie Mae was created in 1938 as an agency of the 

Federal Government, fully backed by the U.S. Treasury Department. Its intent was to increase affordable housing options for 

Americans. Fannie created a secondary market for home mortgage 

loans at a time when we all know our Nation’s housing market was 

in a period of dire straits. In 1970, Congress charged Freddie Mac 

with a similar mission. Fannie Mae and Freddie Mac’s principal 

business is mortgage securitization. These GSEs buy mortgage 

loans from the original lenders, pooling and repacking them as 

mortgage-backed bonds. According to the current edition of Business Week, Fannie and Freddie accounted for approximately 87 

percent of mortgage securitizations in December 2007 versus fewer 

than half in 2005 and 2006. 

Over the past 5 years, there have been well-documented financial 

issues involving Fannie Mae and Freddie Mac. In 2003 for Freddie 

and in 2004 for Fannie, serious problems were revealed, as we all 

know, with respect to their internal controls. Through various restatements, it was determined that Freddie had understated its net 

income by $5 billion while Fannie overstated its earnings by $6.3 

billion. Due to these accounting problems, the GSEs have had to 

restate their earnings for several years and pay fines totaling hundreds of millions of dollars. I hope to learn today from our panelists 

that these types of financial improprieties are confidently in the 

rearview mirror. 

Over the past two Congresses, I have been an original cosponsor 

of bills that have helped pave the way for comprehensive GSE reform. S. 1100, introduced by Chuck Hagel and cosponsored by Senators Martinez and Sununu and me, concentrates on focusing 

Fannie and Freddie’s portfolios toward its affordable housing mission, improves SEC disclosure requirements, and requires a comprehensive review of the GSEs’ lobbying activities. 

Mr. Chairman, it is of the utmost importance that we enact legislation this year to ensure that Fannie Mae and Freddie Mac operate under an effective world-class regulator. As recent events have 

demonstrated, comprehensive GSE reform is long overdue. One has 

to look no further than the current proposal embedded in the economic stimulus package for a temporary 1-year expansion of the 

conforming loan limits from $417,000 to $730,000 to see why the 

time to act is now. Without such reform, at worse, Congress could 

end up further jeopardizing the stability of the housing and credit 

markets, even as this provision is aimed at increasing liquidity and 

the breadth and depth of the mortgage market. Hence, this Committee has a great opportunity to work in a bipartisan fashion to 

craft comprehensive reform that I think most of us would agree is 

long overdue. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Dole. 

Senator Allard. 


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STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. Thank you, Mr. Chairman. I want to thank you 

for holding this hearing and for Senator Shelby working with you 

in that capacity. 

I have a full statement I would like to make a part of the record 

and ask unanimous consent that it be made a part of the record. 

In the meantime, I just have a few brief remarks that I would like 

to make. 

For me, and I think for the rest of the Committee, it is sort of 

a feeling of deja vu all over again. It just seems like it was just 

a short time ago when we had some huge Government scandals 

and accounting scandals, 5 years ago, when it came to light in both 

Freddie Mac and Fannie Mae, and here we are today still debating 

whether we need adequate regulation or not. In fact, back to that 

time, I even recall a few issues relating to executive compensation. 

So the housing GSEs are huge. Their combined obligations exceed the publicly held debt for the entire United States by more 

than $1 trillion, and yet we do not have reform. We have seen a 

dramatic increase in their share of mortgage origination, yet we do 

not have reform. We have seen a huge increase in their mortgage 

credit leverage, and still lack reform. We have seen more than $10 

billion in financial restatements, and yet we still do not have reform. 

Now, despite their promises, Fannie Mae and Freddie Mac are 

still not timely filers. So I think that it is urgent that we move forward with GSE reform, and particularly in light of the fact that we 

have, in legislation that has come to the floor of the Senate for a 

stimulus package, increasing those loan limits where we increase 

all those factors that have been pointed out to this Committee as 

a problem. 

And so I would hope and urge the Chairman to do whatever he 

can to get these reforms in an expeditious way. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Senator Casey. 

STATEMENT OF SENATOR ROBERT P. CASEY 

Senator CASEY. Thank you, Mr. Chairman. I appreciate you calling us together today. I want to thank the panelists who we will 

be hearing from, both panels. 

We have had in the last couple of years, as everyone knows, a 

real shaking of the confidence of the American people, and I know 

that since 2003 and 2004, both Fannie and Freddie have come a 

long way and there have been certainly new management and updating of business practices and all that, and that is wonderful. We 

appreciate that and we are grateful for that. 

But when a public official, when a public agency, or even in the 

context of Government-sponsored enterprises, whatever we are 

talking about in terms of public trust, when that is shaken or eroded or in some cases shattered, it takes a long, long time to rebuild 

that. And I know a lot of people in this town have worked hard to 

rebuild that trust, and I am confident that is happening. But in 

some cases, it takes a long time, and that is the kind of trust that 

we all have to earn as public officials and as participants in public 


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agencies. We have to earn that trust every single day, and even 

more so if it has been compromised or shattered. So we know that 

people are working to do that, but it is not going to happen in a 

couple of years or it is not going to happen overnight. 

But I do know that in 2006, Freddie Mac helped 2,098 Pennsylvania families avoid foreclosure while Fannie Mae helped another 

2,700. That is good news for our State, and I am sure we could repeat similar numbers in other States. So the GSEs are helping to 

bring millions of dollars in capital into our cities and our States to 

help families purchase homes, and I hope we can continue to work 

together to create a unified, sensible regulatory structure that allows the GSEs to continue bringing the world’s capital into local 

neighborhoods. 

But as I said before, we have still a long way to go, and I look 

forward to working with those who will testify today and with 

Members of this Committee on that common shared agenda. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator Casey, very much. 

Senator Bennett. 

STATEMENT OF SENATOR ROBERT F. BENNETT 

Senator BENNETT. Mr. Chairman, we have plowed this ground 

and raked these leaves enough. I agree that we need a strong regulator, and I agree that we are in a crisis, and I look forward to the 

witnesses. 

Chairman DODD. Thank you very much, Senator. I appreciate 

that. 

Well, I thank all of my colleagues. We have had, I think, 13 

Members of the Committee here this morning. I appreciate the patience of our witnesses, but you get a sense of the sense of urgency 

here on a bipartisan basis about the issue and some very common 

points that have been raised as well. I think without exception everyone has talked about the need for a strong regulator. So we 

begin, I think, with a good opportunity for us to be able to craft 

something here. It probably will not be exactly what everyone 

would like, but like any other product that comes out of a Committee like this, we try to work together to come out with something we can all agree on and move forward. 

This is not the only piece of the puzzle, but it is an important 

piece of doing what needs to be done to restore the sense of confidence and optimism in the country. So, with that, let me thank 

our witnesses and introduce them quickly, if I can. 

Our first witness, David Nason, Assistant Secretary for Financial 

Institutions at Treasury, serves as the senior adviser to the Secretary, Deputy Secretary, and Under Secretary for Domestic Finance on financial institutions, GSEs, financial literacy, and other 

issues, and, Mr. Nason, we thank you very much for being with us. 

Next will be Jim Lockhart, who has been already referenced here 

several times this morning, Director of OFHEO. Mr. Lockhart has 

served as Director since June of 2006 and prior to that served as 

the Deputy Commissioner of Social Security. 

And, finally, we will hear from Ronald Rosenfeld, Chairman of 

the Federal Housing Finance Board, a position to which he was 


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confirmed by the Senate in December of 2004. Prior to becoming 

Chairman, Mr. Rosenfeld served as President of Ginnie Mae. 

And so I want to welcome all of our witnesses here this morning, 

and before taking their testimony, I want to note that the witnesses were asked to provide written copies of their testimony 24 

hours before the hearing, which is the longstanding tradition of 

this Committee. I have been on this Committee for 26 years, and 

we have always required it. It is pretty much a standard requirement before any committee of the U.S. Senate to have the testimony before us. Both OFHEO and the Treasury failed to meet that 

deadline, I would point out. In fact, Treasury’s testimony did not 

arrive until 6 p.m. last evening, and OFHEO’s testimony did not 

arrive until 4 p.m. yesterday. 

We take our oversight responsibilities very, very seriously here, 

all of us do, and it is critically important that Members and staffs 

have an opportunity to be able to read that testimony so we can 

do our jobs here in terms of questioning and raising issues that are 

important to everyone. 

I want to note this is the second time in 2 weeks we have had 

a problem with the Treasury, Mr. Nason. I want you to carry the 

message back. I am a new Chairman of this Committee. If that 

happens again, you will not be appearing before the Committee. 

Now, there can be extreme circumstances that come up, and certainly let the Committee know when that occurs. But I want testimony here in a timely fashion, and so don’t let it ever happen 

again here, at least under my watch. OK? Do we understand each 

other on that point? Thank you very much. 

Mr. Nason. 

STATEMENT OF DAVID G. NASON, ASSISTANT SECRETARY FOR 

FINANCIAL INSTITUTIONS, DEPARTMENT OF THE TREASURY 

Mr. NASON. Thank you very much, and I will certainly take that 

message back. 

Chairman Dodd, Ranking Member Shelby, and Members of the 

Committee, thank you very much for inviting me to appear before 

you today. I very much appreciate the opportunity to present the 

Treasury Department’s perspective on GSE regulatory reform. 

The U.S. economy is diverse and resilient, and our long-term fundamentals are healthy. Yet economic growth has slowed, and the 

risks are clearly to the downside, given current conditions in the 

housing, credit, and energy markets. Issues related to housing and 

credit markets bring us directly to the topic of today’s hearing. This 

Committee is very well aware that the housing and mortgage markets are going through a transition period that is exerting stress 

on homeowners. The current housing downturn comes after years 

of exceptional housing price appreciation, and the housing market 

is likely to remain weak well into this year and potentially beyond 

2008. 

The Administration also recognizes that the GSEs have played 

an important role in making credit available to current and prospective homeowners. Since year-end 2006, Fannie Mae and 

Freddie Mac have increased their outstanding mortgage-backed securities by over $600 billion. In addition, outstanding advances of 


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the Federal home loan bank system increased by $184 billion in the 

third quarter alone. 

However, the well-documented accounting and corporate governance problems that emerged first at Freddie Mac in 2003 and then 

later at Fannie Mae in 2004 raised fundamental questions about 

the risk management practices at both companies. Substantial 

progress has been made to address these issues, but challenges remain. In addition, the Federal home loan banks were not immune 

to similar risk management issues as the regulatory actions associated with problems at the Federal Home Loan Bank of Chicago and 

the Federal Home Loan Bank of Seattle illustrated. 

More recently, much like other financial institutions involved in 

mortgage finance, Fannie Mae and Freddie Mac have experienced 

various levels of stress in the current mortgage environment. For 

example, in the third quarter of 2007, Fannie Mae and Freddie 

Mac reported losses of $1.5 billion and $2.1 billion, respectively. All 

of these factors point to a clear and urgent need for completing 

housing GSE regulatory reform, and we thank this Committee for 

taking this important step toward this goal. 

The Treasury Department’s core objectives for housing GSE regulatory reform are: first, the need for a sound and resilient financial system; and, second, increased homeownership opportunities 

for less advantaged Americans. It is paramount that the housing 

GSEs properly manage and supervise the risks they undertake and 

that a strong regulator oversee their operations. Otherwise, their 

solvency could be threatened, and this could have a negative impact on the stability of other financial systems and the overall 

strength of the economy. 

Throughout the debate on housing GSE regulatory reform, the 

Treasury Department’s focus has been on ensuring that the new 

regulator has all the powers, authority, and stature required to 

perform its mandated function. In this regard, the new regulator’s 

powers should be comparable in scope and force to those of our Nation’s other financial regulators. 

Many of the following key elements of housing GSE regulatory 

reform have been debated in recent years: providing authority to 

set capital, providing receivership authority, transferring new activity approval and mission oversight from HUD, providing independent funding and litigating authority, eliminating Governmentappointed directors to the GSEs’ boards, and combining the regulatory authority over Fannie Mae, Freddie Mac, and the Federal 

home loan banks. 

The housing GSE regulatory reform bill passed by the House of 

Representatives addresses many of these issues aforementioned in 

an adequate manner. However, additional elements of reform are 

necessary to address the GSEs’ particular characteristics. 

In addition to addressing the fundamental shortcomings in the 

current GSE regulatory structure, it is just as important that the 

new regulator have the appropriate authority to consider the 

unique characteristics of the GSEs and their housing missions. The 

housing GSEs were created to accomplish a mission, and they were 

provided a certain set of statutory benefits to help in carrying on 

that mission. Freddie Mac and Fannie Mae operate in the secondary mortgage market by providing credit guarantees on MBS or 


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by directly investing in mortgages and mortgage-related securities 

through their retained mortgage portfolios. 

The combination of three key features of Fannie Mae and 

Freddie Mac’s retained mortgage portfolios warrant the attention of 

policymakers: first, the size of the retained mortgage portfolios of 

Fannie Mae and Freddie Mac, $1.4 trillion as of year-end 2007; 

two, the lack of effectiveness market discipline over these organizations; and, three, the interconnectivity between the GSEs’ mortgage 

investment activities and the other key players in our Nation’s financial system, both insured depository institutions and derivatives counterparties. The combination of these three factors caused 

the GSEs to present the potential for systemic risk to our financial 

system and the global economy. 

Policymakers have been struggling with the inherent tension and 

the potential problems posed by the GSEs for years. In fact, a 

Treasury Department official stated in testimony a few years ago, 

and I quote, ‘‘[a]s the GSEs continue to grow and to play an increasingly central role in the capital markets, issues of potential 

systemic risk and market competition become more relevant.’’ 

That statement was not from a member of the Bush Administration Treasury Department but, rather, from testimony delivered in 

March of 2000 by then-Under Secretary Gensler of the Clinton Administration Treasury Department. 

As we further consider authorities of the new GSE regulator to 

address the long-run issues posed by their retained mortgage portfolios, the new housing GSE regulatory agency must be provided 

specific review authority over the retained mortgage portfolios. 

Such authority must establish a clear and transparent process 

based on guidance from Congress on how the new regulatory agency will evaluate the retained mortgage portfolios in terms of risk 

and consistency with mission. 

In conclusion, we at Treasury remain convinced that a new regulatory structure for the housing GSEs is essential if these entities 

are to continue to perform their public mission successfully. We 

look forward to continuing to work with you on this important 

issue. 

Thank you very much. 

Chairman DODD. Thank you very much, Mr. Nason. That was 

good timing, too. Right on the button here. 

Mr. Lockhart. 

STATEMENT OF JAMES B. LOCKHART III, DIRECTOR, OFFICE 

OF FEDERAL HOUSING ENTERPRISE OVERSIGHT 

Mr. LOCKHART. Mr. Chairman, Ranking Member Shelby, Members of the Committee, thank you for the opportunity to testify on 

the critical need for GSE regulatory reform. 

The GSEs have become the dominant mortgage funder in these 

troubling times as they fulfill their missions of providing liquidity 

and stability and affordability. They have been reducing risk in the 

market, but concentrating mortgage risk on themselves. They are 

now being asked to take on even more risk in the subprime and 

jumbo markets. Given the past accounting and operational problems of both Fannie Mae and Freddie Mac, OFHEO directed the 

enterprises to take many remedial actions. We also capped the 


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growth of their portfolios, which we loosened last September, and 

required them to keep capital levels 30 percent higher than the 

minimum required by law. In retrospect, these actions were extremely important in reducing credit losses and preventing disruptions of the conforming loan market. 

Both enterprises have made significant progress on their remediation efforts, but significant issues do remain. They did publish 

third quarter financials, but that accomplishment was dampened 

by about $3.5 billion of losses. They expect to produce timely 2007 

financials at the end of this month. 

During 2007, the housing GSEs’ debt and guaranteed MBS outstanding grew 16 percent to $6.3 trillion. To put trillions in perspective, this chart you have a copy of, a simple comparison is to 

the debt of the United States, which was $5.1 trillion, including 

that held by the Fed. The whole debt of Fannie and Freddie in 

their MBSs equals that, and if you add on the Federal Home Loan 

Bank’s debt of $1.2 trillion, you get $6.3 trillion of debt. 

Housing market conditions in many parts of the country are 

weak. Virtually all measures of the housing market have deteriorated very sharply, especially over the last two quarters. During 

this period of turmoil, the enterprises have provided stability and 

liquidity to the conforming mortgage market. They have securitized 

almost $100 billion a month in mortgages. As a result, there has 

been a dramatic reversal in their market share, as you can see in 

this next chart. 

Their share of total mortgage originations was less than 38 percent in 2006. By the fourth quarter of this year, it had doubled to 

76 percent. They are effectively, combined with the Federal Home 

Loan Banks, the mortgage market. Actually, it might be 90 percent 

if you added in the Federal Home Loan Banks. 

Credit losses and risks are growing. In the fourth quarter, they 

cut their dividends and raised almost $14 billion in preferred stock, 

which is critical, as both CEOs have said they are going to have 

very tough fourth quarters and 2008s. An increase in the conforming loan limit will add to the enterprises’ risk. OFHEO believes an increase should be coupled with quick enactment of comprehensive GSE reform. 

Jumbo loans would present new risks to the already challenged 

GSEs. Underwriting them successfully will require new models, 

systems, and tough capital allocation decisions. OFHEO has promised to work closely with Fannie Mae and Freddie Mac to ensure 

that an increase is implemented as quickly, safely, and soundly as 

possible. 

Why is GSE reform so critical now? As I said, they have really 

become the secondary mortgage market in these very troubling 

times, and they need to continue to provide that liquidity. We in 

turn need to maintain confidence in the GSEs, especially with foreign and domestic investors, who hold that $6.3 trillion of securities. 

We need to rebuild confidence in the housing and mortgage markets. Their growing credit losses, risk, and market share requires 

a stronger regulatory framework to reduce the potential risk to the 

financial markets. 


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The first component of comprehensive GSE reform is the creation 

of a single, unified, and independent GSE regulator by combining 

OFHEO, the Federal Housing Finance Board, and HUD’s mission 

and product authority. 

Second, as the enterprises agree, the regulator needs bank regulator-like powers, including receivership and independent litigation 

and budget authorities. Most critically, OFHEO needs the flexibility to adjust capital requirements, both the statutory minimum 

and the risk-based requirement, which is not even working at the 

moment. 

Finally, the new regulator needs to be able to consider mission 

fulfillment and risk of the portfolios. 

I believe the House bill is a good start, but the effective date 

should be upon enactment. The GSEs are stretched and are being 

asked to do more. I note the Committee’s strong agreement that we 

need to restore confidence by creating a much stronger, unified regulator to support the U.S. housing finance system. I look forward 

to working with you to achieve GSE reform soon. 

Thank you. 

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

Mr. Rosenfeld, thank you very much. 

STATEMENT OF RONALD A. ROSENFELD, CHAIRMAN, 

FEDERAL HOUSING FINANCE BOARD 

Mr. ROSENFELD. Thank you, Chairman Dodd, Ranking Member 

Shelby, and distinguished Members of the Committee. Thank you 

for the opportunity to present a statement to you about the importance of reform of Government-sponsored enterprises. The views 

that I will be expressing today are mine and do not necessarily represent the views of my colleagues on the Federal Housing Finance 

Board. 

The Congress and the administration have discussed and debated reform of the GSEs for years. I believe it is now time to act. 

Together, the Federal home loan banks, Fannie Mae, and Freddie 

Mac play a vital role in helping to finance homeownership for millions of Americans, and stabilizing and strengthening housing and 

financial markets and the economy at large. 

Given the size and significance of these institutions, which together have more than $3 trillion in assets, it is imperative that 

they be supervised and regulated by a single Federal regulator and 

that the regulator have all the tools necessary to provide effective 

and thorough oversight. 

The Federal banking agencies have a full arsenal of supervisory 

and enforcement tools at their disposal which allows them to take 

early and resolute action, if necessary. Those tools include examination, capital, and enforcement authority over the institutions 

they regulate. A new GSE regulator should, at a minimum, have 

the same tools possessed by the Federal banking agencies. 

In particular, a new GSE regulator should have the ability to 

fund itself through the assessment of the GSEs and be outside of 

the appropriations process. It should have the ability to place a 

GSE into receivership or conservatorship. It should have the authority to approve new and existing business activities. And it 

should have the power to set minimum capital levels. 


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The Finance Board already has the authority to assess Federal 

home loan banks to fund its operations. Among the Federal financial institution supervisory agencies, only OFHEO relies on appropriated funds. In addition, the Finance Board has the authority, 

and exercises it, to require an individual Federal home loan bank 

to have and maintain additional capital, to approve new business 

activities, and to regulate the composition of the Federal home loan 

bank’s assets portfolio. 

A single, unified GSE regulator would provide for a more efficient and effective regulatory body. It would be more efficient in its 

ability to share examination and supervisory information among 

examiners and other agency staff. The agency’s risk modeling 

would be enhanced by greater interaction and consultation among 

the quantitative risk professionals already in place at OFHEO and 

the Finance Board. Examination and risk management expertise 

and resources could be shared as appropriate, particularly in dealing with complex or significant supervisory matters at one of the 

enterprises or the home loan banks. 

Finally, all GSEs should have to meet the same high governance 

and disclosure standards. At present, all 12 Federal home loan 

banks are registered with the SEC and are subject to its oversight 

of their financial statements and disclosure. 

While I believe consultation and interaction are critical attributes of a single Federal regulator for the housing-related GSEs, 

the differences between the Federal home loan banks and the enterprises must also be recognized and accommodated through any 

legislation that would reform GSEs’ supervision. The Federal home 

loan banks are member-owned cooperatives. Their corporate structure and their business operations are far different from that of 

shareholder-owned Fannie Mae and Freddie Mac. These differences 

exhibit themselves in different capital structures, different board 

structures, and different orientations toward return to shareholders 

and the pricing of products to their customers. 

Also, the essence of the Federal home loan banks’ business is secured lending, where most of the collateral is mortgage loans. The 

Federal home loan banks do not securitize mortgages, and the direct mortgage holdings are only 7.2 percent of their assets. 

In conclusion, the recent stress in the housing markets has 

taught us that the GSEs are vital to supporting the Nation’s housing needs. In particular, Federal home loan bank advances have 

provided critical liquidity to members whose alternative sources of 

funding have dried up. A single regulator would assure homebuyers and the market participants that the overseer of the housing GSEs speaks with a single voice, acts with a consistent purpose, and is clear, consistent, and vigilant. While the housing GSEs 

can and do operate in a variety of different ways to fulfill their 

housing finance mission, they have a common heritage, they share 

many of the same customers, they raise funds from the same 

sources; and the recent environment has shown us that whether 

they securitize mortgages, whether they own mortgages, or whether they take them as collateral, they have common concerns. 

Simply put, the reform of GSEs makes sense. It will help promote a healthy and vibrant housing market. 

Thank you. 


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Chairman DODD. Thank you very much, to all three of you here, 

and what I would like to do is try and keep our time to—with this 

many Members here, let’s say 6 minutes here for questions and answers in the first round, and then we can give a chance to everyone 

to stay involved and make as many Members be able to stay as 

possible. I know if we move a little quickly here, we can maintain 

that participation. 

I mentioned, Mr. Lockhart, at the outset of my remarks the 

statement that you make in your prepared statement for this 

morning, and just to read it here, it said, ‘‘The GSEs have become 

the dominant funding mechanism for the entire mortgage system 

in these troubling times. They are fulfilling their missions of providing liquidity, stability, and affordability to the mortgage markets.’’ You go on to say, ‘‘In doing so, they have been reducing risk 

in the market, but concentrating mortgage risk on themselves.’’ 

And you go on. But I appreciate that statement in that paragraph. 

It is an important one. 

Let me ask you, if I can, to take a look at the proposal—Senator 

Schumer raised this issue, but I raised it more directly here, and 

that, again, I am pleased to note in your testimony on page 11 that 

you have ‘‘encouraged the enterprises to increase subprime rescue 

mortgages,’’ to quote you. And in my view, and I think the view of 

some here, Fannie and Freddie could play a very constructive role 

in this regard as well, given the importance of it. 

Could the current capital surcharge to be devoted to this purpose, at least in part? For example, could Fannie and Freddie use 

their capital to buy subprime loans and restructure them to help 

keep homeowners in place? In his testimony, Dan Mudd notes that 

Fannie Mae is very close to fulfilling all the requirements of the 

2006 consent order which he signed with OFHEO. You have made 

reference as well that there are still some outstanding issues you 

just pointed out. And what is the appropriate response of the regulator at that point with regard to the capital surcharge and the 

portfolio limits? 

Mr. LOCKHART. We have been looking at that 30 percent capital 

surcharge. We have been talking to the two companies about it. It 

was imposed because of their operational problems. They made 

good progress, but they still have a series of issues to go on the 

operational side and, obviously, they have significantly more credit 

risk than when it was imposed a long time ago. 

Chairman DODD. Right. 

Mr. LOCKHART. We are working with the two companies. We are 

developing lists of what has to be done to get that 30 percent removed. You are right. We have been encouraging them to do more 

in the subprime area, and they have done a lot of refinancings of 

people out of subprime into more prime-like, less risky mortgages. 

They have been making good progress on that and will continue to 

do that. 

They do have enough capital at the moment to do more, especially in the securitization area. Securitization takes about 20 percent of the capital versus having to buy them and put them in their 

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rities and are selling them. We are continuing to monitor that and 

working with them. 

Chairman DODD. What about the amount that is in there? There 

is about $17 or $18 billion, I think. There is 8 or 9—I forget the 

numbers exactly there that exist. What would be your recommendation regarding that? 

Mr. LOCKHART. Are you talking about the capital at this point? 

Chairman DODD. Yes. 

Mr. LOCKHART. My recommendation is that we need to be very 

careful as we take this off, given the added risks that these two 

companies have. We need to be very careful. 

I think the important thing is I would be much more comfortable 

taking this off if I had regulatory power to look at capital. At the 

moment I really do not. These were only imposed because of a consent agreement. What we need—and it is a key part of the legislation, as many Members have mentioned—is to give the regulator 

power to look at minimum and risk-based capital. 

Chairman DODD. Well, I appreciate you getting back on message 

here. That is important here. Let me try the question again. What 

do you think about the possibility of utilizing that capital? 

Mr. LOCKHART. As I said, we are working with the two companies’ management teams to start to free up that capital, and we 

will as we see progress on these operational issues. 

Chairman DODD. OK. Mr. Nason, let me ask you, if I can, Secretary Steel was here last week, as you know, talking about the 

Hope Now Alliance, and I mentioned at that time that it was about 

a year we met in this very room with stakeholders to try and encourage workouts with the people, owner-occupied homes that 

would fall into delinquency or, worse, into foreclosure. I think he 

heard considerable concern from Members up here regarding the 

responsiveness of the industry for the need for quick action. And 

we heard from some housing counselors working with borrowers, 

from servicers and other advocates, that the GSEs’ policies are 

making it more difficult to get loan modifications done prior or immediately after a delinquency. As you know, getting borrowers 

early is very important. It obviously makes some sense. 

I wonder if it is your view or the view of the Department here 

that the GSEs are being as helpful—or not helpful—as possible in 

the effort to get these loan modifications worked out. 

Mr. NASON. Thank you for that question. I think it is safe to say 

that the GSEs are trying to be helpful. Both the GSEs are members of the Hope Now Alliance, and they have been supportive of 

our efforts. So I think it would be a safe assumption to say that 

they have been a force for good in trying to work on the situation, 

although the comments that Senator Schumer made earlier about 

whether or not the GSEs could be helpful in helping lenders write 

down loans faster, that is something that is certainly worth exploring. 

One of the things that is holding up a significant amount of 

modifications and refinancing from occurring is whether or not 

lenders are willing to take the fair value on these loans, and 

whether or not the GSEs could provide some leadership in that 

area is something definitely worth exploring. 


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Chairman DODD. Let me ask you, Mr. Rosenfeld, the American 

Banker reported on Tuesday that the Board of Directors of the Federal Home Loan Bank of Dallas and Chicago voted to approve a 

merger of the two banks. As I understand it, there has never been 

a voluntary merger. You can correct me, historically, if I am wrong 

about this, but our information is that there has never been a voluntary merger in the home loan bank system. And the last merger, 

which was not undertaken voluntarily, was done some 60 years 

ago. 

This proposed merger raises some very serious questions, and the 

statute under which you operate does not specifically address voluntary mergers. But you may correct me on that. There may be 

someplace here you will tell me otherwise. 

I wonder what standards are going to be used to decide whether 

or not to approve the merger. And do you expect to follow an open 

process, allowing for comment by the other banks and their members, who are, after all, jointly and severally liable under the statutes here for the debt issued by the Dallas and Chicago banks? 

Mr. ROSENFELD. Senator Dodd, the Chicago bank and the Dallas 

bank have been engaged in merger conversation. Our responsibility 

will be to review the safety and soundness of whatever may be ultimately proposed. An application for merger has not come forth to 

us, so at this time we have not addressed that issue. 

The single most significant element in our deliberations will be 

the safety and soundness of the banks and, of course, the overall 

system. I think it is public knowledge that the Chicago bank is currently operating under a consent cease and desist order which prevents it from stock redemptions and dividends and so on. So suffice 

it to say, that institution has a somewhat long history of having 

some distress in its operations. The Dallas bank has been very well 

run, number-one-rated bank, and we have very high regard for that 

institution. 

As I have said on other occasions, although there are 12 home 

loan banks, there is no particular reason there has to be 12 home 

loan banks. If two banks for their own reasons decide they want 

to combine and it meets our standards of safety and soundness, I 

think that is the ultimate test. 

In terms of the process, we have not determined the process that 

we will utilize because, quite frankly, that issue is not ripe at this 

time, although I will tell you that I think it is fundamentally a 

matter between the two banks involved. I think that without question, if it were to occur, a very important element would be the 

judgment that it enhances the safety and soundness of all the—of 

the two banks and, of course, the entire system. So that would 

be—— 

Chairman DODD. Well, I appreciate that. As I point out, there is 

a joint—and I am going to move on because I have gone over my 

time already, but the joint and several liability issue raises some 

additional questions. I appreciate your point. And also, just to be— 

and I would ask you to do it in writing, the statutory background 

that would—I was just unclear since there have not been any historically. Is there something that we ought to be concerned about 

here in terms of the authority of the board to make that decision? 

Mr. ROSENFELD. There has never been a voluntary merger. 


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Chairman DODD. Right. 

Mr. ROSENFELD. There was an event in 1946 where the bank 

moved, and two banks actually got together and then moved. That 

was involuntary. It resulted in some lawsuits, and ultimately the 

move was sustained. 

We believe, based upon the advice of our counsel, that we do 

have the authority to merger two banks if that were deemed appropriate, if it were requested and deemed appropriate. 

Chairman DODD. OK. Thank you. 

Senator Shelby. 

Senator SHELBY. Some of the basic principles for GSE regulatory 

reform—and I will start with you, Mr. Lockhart. In your opinion, 

what are the most important components in any reform measure 

that we undertake here? 

Mr. LOCKHART. There are several important components. A key 

one will be to combine the three GSE regulators into one entity to 

give it the power and the prominence and the breadth that it 

needs. Critical also will be the capital one I just discussed with the 

Chairman and the portfolio, to make sure that they are focused on 

mission and the risk of those portfolios. 

Senator SHELBY. Talk just for a minute about the systemic risk 

that Chairman Greenspan, Chairman Bernanke, and others have 

spoken of, the systemic risk of the GSEs to the whole financial system, to the taxpayers, considering the thin capital that they have. 

Mr. LOCKHART. I believe systemic risk is an issue of any safety 

and soundness regulator, and these two in particular. As you can 

see in that market share chart we had up earlier, they have become the system for secondary mortgages in this country. If either 

one of them had any serious troubles, it would really have a major 

impact on the mortgage markets in this country and potentially the 

financial markets. 

We have to be very careful as we add more risks to them that 

we also give the regulator much stronger powers. 

Senator SHELBY. And product approval? 

Mr. LOCKHART. Product approval is also an important issue, and 

the whole bank-like regulatory powers are needed too. 

Senator SHELBY. Are very important. Do you agree with that, 

Secretary Nason? 

Mr. NASON. I do. I agree with Director Lockhart on that. 

Senator SHELBY. Mr. Rosenfeld. 

Mr. ROSENFELD. Yes, sir. 

Senator SHELBY. Secretary Nason, in negotiating a stimulus 

package, the administration—you are part of it—indicated its intent to target the package to those with the greatest financial need. 

The administration also previously indicated to a lot of us—Secretary Paulson very explicit about it—indicated that the GSE loan 

limit would not be increased absent comprehensive reform. Now we 

are looking at a package that includes the increase without reform. 

Given that the only people who could qualify for those high-end 

mortgages have incomes well over $100,000 a year, how does this 

square with the administration’s stated goal for fiscal stimulus? 

And why is it important that we help the jumbo portion of the 

home mortgage market when the current $417,000 limit is already 


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2.3 times the national median home price for the U.S. of $223,800? 

Was that a political decision? Sure it was. You cannot say, but—— 

Mr. NASON. As you know, Senator, this was a package negotiated 

by my boss, Secretary Paulson, and—— 

Senator SHELBY. After he told us he was not going to do this in 

conference. He met with Republicans. I asked him the question, 

was he and the administration soft, going soft on GSE reform, and 

he said, ‘‘Absolutely not.’’ I asked him the further question, was he 

going to negotiate the limits, upper limits. He said, ‘‘Absolutely 

not.’’ Two hours later, he did it. I have not met him lately, but we 

will see each other again. [Laughter.] 

Mr. NASON. I am sure you will, Senator Shelby. I guess what I 

would say is two things. 

First, in no way does this being part of the stimulus package undercut the Secretary’s commitment to comprehensive GSE reform. 

And, two, I think the Secretary was quite—— 

Senator SHELBY. It does not undercut it? Now, how do you 

square that? I want you to explain that. 

Mr. NASON. Well, I think the importance of us being here right 

now is suggesting how important it is for us to have GSE reform, 

and the Treasury Secretary is committed to that. 

And then, second, I would just like to say—— 

Senator SHELBY. But how committed is he? 

Mr. NASON. Well, he said right after the—or at the discussions 

on the stimulus package that this is not something that he was 

strongly advocating. 

Senator SHELBY. Well, I know Mr. Lockhart is committed to it, 

and I know Mr. Rosenfeld is. But I am not sure about Secretary 

Paulson. You know, he says one thing and does another. 

Mr. NASON. The Secretary is committed to comprehensive GSE 

reform, sir. 

Senator SHELBY. I have not seen it yet. I hope you are right, but 

I doubt it. 

How will you, Mr. Lockhart, as the safety and soundness regulator, ensure that these additional risks are well managed by the 

GSEs? In other words, as we run the loan limit up, how are you 

going to manage that? Because there is a lot more risk there. If 

Fannie Mae and Freddie Mac, for example, had been more active 

over the past 2 years, had had the jumbo loans, in States like California and others, which have the largest price declines in recent 

months, what do you believe would have been the impact on the 

financial condition of Freddie Mac and Fannie Mae if their loans 

that they bought went down in the price—the houses? 

Mr. LOCKHART. Certainly, many of the jumbo loans were done on 

a relatively risky basis. People were reaching to get into houses. 

There was a lot of floating rate, adjustable rate mortgages, interest 

only, and negative amortization done. Very few, actually, 30-year 

fixed were in the jumbo market. Probably only 50 percent. They 

were, yes, much riskier. They had credit risk. They had significantly more prepayment risk. And it could have had a serious impact. 

Overall, as you will hear from the two CEOs, the books that they 

took on in late 2005, 2006, and early 2007 were much riskier even 

in the conforming area. It could have had a serious impact. 


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We are going to work very closely with the two management 

teams as they look at this. There are significantly more risks that 

they are taking on, and they need new risk management systems, 

new pricing models, and internal controls. They have new product 

processes in place. We will watch them and work with them to do 

this. 

But this is complex. By using the FHA standards, there could be 

hundreds of different mortgage limits around the country, much 

more than there were in the original House bill. It is also going to 

cover a lot more people than the original House bill in that it could 

cover people—— 

Senator SHELBY. More people, more risk? 

Mr. LOCKHART. More people, more risk. It could go down to an area with a median house price of $335,000, so well below the conforming, and bring it above the conforming. And as you said, it 

could also go up to $730,000. 

Senator SHELBY. Mr. Rosenfeld, tell us again how important is 

it that we include in any reform of the GSEs the Federal home loan 

bank system? Why is it important to tie that into it? 

Mr. ROSENFELD. Senator, I believe it is important for a number 

of reasons beyond what I mentioned in terms of working together 

and having greater expertise. I think one of the reasons that it is 

very important is the history of the Federal Home Loan Bank 

Board. I believe that I was the ninth Chairman in 14 years. That 

suggests something of a lack of stability in that structure. 

Some years ago, the American Banker was frequently reporting 

on food fights at board meetings. We do not have that today. Actually, today, Senator, we are having, I think, an excellent working 

relationship between the colleagues on the Board. I can tell you 

personally I like my colleagues and I respect them. I think we are 

working very hard addressing the problems we have to deal with 

today. But this is a relatively unique period in the history of the 

Federal Home Loan Bank Board, and I would suggest that there 

are some problems with its basic structure. You have basically 

five—you have five directors, four of whom sit probably within 50 

feet of each other, each having an assistant and an administrative 

assistant. And we regulate 12 banks. It gets a little bit awkward. 

I think another—— 

Senator SHELBY. Are 12 banks too many? 

Mr. ROSENFELD. Pardon? 

Senator SHELBY. The 12 banks, is that too many? 

Mr. ROSENFELD. No. 

Senator SHELBY. Not necessarily? 

Mr. ROSENFELD. Oh, maybe we could do with less, but if they are 

cooperative—they are owned by the members. If they choose to 

have 12, there will be 12. We have no intentions of creating any 

mandatory rule that there be less than 12. If banks decide to get 

together, we would, you know, look at it at that time. 

Senator SHELBY. Or if some of them get real shaky? 

Mr. ROSENFELD. Then they may find themselves closer together. 

Senator SHELBY. And do you have the power to do that? 

Mr. ROSENFELD. We believe we do. And one other thing which 

has just come up, which I think is incredibly important. Given the 

serious chaos in the mortgage finance world, it became very apparVerDate Nov 24 2008 08:59 Mar 18, 2010 Jkt 050367 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\A367.XXX A367

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ent to me that if any of the major players in the industry, the 

major banks, mortgage companies, were to have a serious, serious 

problem, Fannie and Freddie and the home loan banks would find 

ourselves having a very common concern in terms of what the hell 

do we do with the situation now. And it, I think, would be a much 

stronger source of protection for all of us if, in fact, we had one regulator to deal with what is fundamentally the same business that 

we are both in, which is the mortgage business. 

Senator SHELBY. But you do not need a regulator unless the regulator has power, do you? 

Mr. ROSENFELD. Well, absolutely. And I think another factor that 

you got me to think about is the fact that if you are going to attract 

really top people to a world-class organization, they have to have 

an organization that is structurally world class. And I think that 

would be an extraordinarily significant step in getting the kind of 

folks or people to run this combined regulator. 

Senator SHELBY. And a regulator that is above politics, if you can 

find such a person in Washington, D.C., right? 

Mr. ROSENFELD. I think that you can, Senator. 

Senator SHELBY. As much as you can. 

Mr. ROSENFELD. I think you can find some very fine people, but 

you have to give them the opportunity to really do their job without 

the interference that may come from an appropriation process or 

such things. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman DODD. Above politics? 

Senator SHELBY. Yes. 

Chairman DODD. Senator Carper. 

Senator CARPER. Thanks, Mr. Chairman. Gentlemen, welcome. It 

is good to see all of you. Thank you for being here today and for 

your testimony. 

I think what I would like to do is just start off by going through 

the things I think you agree on, all right? And one of those is, as 

I have listened to your testimony, I believe I heard you essentially 

say that you agree that the House-passed bill is a real good starting point for us in the Senate. Is that pretty much how you feel? 

Mr. LOCKHART. Yes, Senator. 

Senator CARPER. Thank you. I believe that each of you have said 

that you feel that we do not need two regulators, we need one regulator, both for Fannie Mae and Freddie Mac and for the Federal 

home loan banks. Do you agree on that? 

Mr. NASON. I do. 

Mr. LOCKHART. Yes. 

Senator CARPER. OK. We have heard you say that you believe 

the regulator should be independent and independently and not 

have to depend on annual appropriations. Is that correct? 

Mr. NASON. Yes. 

Mr. LOCKHART. That is correct. 

Senator CARPER. All right. I believe we have heard you say that 

the regulator ought to be able to set minimum risk-based capital 

requirements, not have those statutorily but have that—— 

Mr. NASON. Yes. 

Mr. LOCKHART. Yes. 


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Senator CARPER. OK. And that the regulator should have enhanced enforcement authority, I think you said that. 

Mr. LOCKHART. Yes. 

Mr. NASON. Yes. 

Senator CARPER. Talk to us about SEC registration. I think 

Fannie is on track. I believe all the 12 Federal home loan banks 

have been registered. But just give us your thoughts on that. It is 

not clear to me. 

Mr. LOCKHART. You would like me to? 

Senator CARPER. All three. 

Mr. LOCKHART. OK. I could start out. 

Mr. NASON. Sure. 

Mr. LOCKHART. We believe SEC registration is critical. All 12 

Federal Home Loan Banks are. Fannie is registered and they are 

hopefully going to become timely when they file at the end of this 

month, and hopefully they also will become Sarbanes-Oxley compliant at that point. 

Freddie Mac, on the other hand, has never been registered with 

the SEC. It is starting the process. And after it files its statements 

in February, it will start the process, and hopefully by the middle 

of this year it will be SEC registered and by the beginning of next 

year, Sarbanes-Oxley compliant. 

Senator CARPER. All right. 

Mr. NASON. I would share that view. I would say that making 

them file like any other private company is an indication that they 

are not a different type of corporation, and more disclosure to investors that are investing in their debt and stock is always a positive thing from our perspective. So we would be supportive of that. 

Senator CARPER. OK. I believe we have heard you say that, unlike the situation now where you have—the regulator has authority 

over financial operations and so forth, but HUD has responsibility 

and oversight over the program, that we should consolidate those 

two into a single entity. We are in agreement on that, are we not? 

Mr. NASON. Yes. 

Mr. LOCKHART. That is very important to me. All the other regulators have that. By fragmenting the new product authority from 

safety and soundness and mission, you can lead to a lot of tensions 

that do not make a lot of sense. 

Senator CARPER. OK. There is another—Senator Martinez—from 

time to time I ask him to put on his old HUD hat as HUD Secretary, and we talk about a path forward on GSE reform. And one 

of the things that he and I have talked about in the last week or 

so is this—this is really the issue that Senator Shelby has raised, 

and that is, whether we should include in the stimulus package— 

which I think we are going to be voting on later today. Should we 

include in the stimulus package a limit on—a portfolio loan limit 

up to about $730,000 for Fannie and Freddie? And in the legislation that we are contemplating, it would provide for a 1-year extension or a 1-year grant of that authority. That would take us to either the end of the year or the early part of next year. 

My fear—I believe in the old adage that work expands to fill the 

amount of time we allocate to do a particular job. And we have a 

way around here, if we get into early October and we have not 

done it, there is a pretty good chance we are not going to do it this 


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year. And we will kick it off into a new administration, into next 

year and a new Congress, and then hopefully not start all over but 

we could, and then just delay it further. 

Senator Martinez and I have talked about maybe we are going 

to include a provision in the stimulus package to allow this increase in the conforming loan limit, that we make it for 6 months 

rather than for 12. Would you have any thoughts along those lines? 

Mr. LOCKHART. As you all know, I believe strongly that if you are 

going to increase the conforming loan limit, it is critical to give the 

regulator more powers. And that is why hopefully we can do this 

legislation very quickly. One incentive might be to shorten the time 

of the increase. It may take several months for the two entities to 

install the kind of systems and have the right kind of culture and 

risk management around these products. So it may take 2 or 3 

months to get there to begin with. The key thing is that we need 

to get GSE reform so that by the time they are in place and ready 

to start doing these jumbo loans, we actually have a stronger regulator. And that is what I humbly ask every Member of this Committee to work on. 

Senator CARPER. Any other thoughts on this? 

Mr. NASON. I would echo the Director’s comments about the need 

for GSE reform, but the Administration supports the current stimulus legislation. 

Senator CARPER. Thank you. A question for Mr. Lockhart, if I 

could. We have talked about the affordable housing fund, something that Senator Reed has championed, and certainly I strongly 

support. It has been a point of some contention in the past, as you 

know. 

If the affordable housing fund that is included in the House bill 

were enacted today, any idea what would be, just roughly, the annual contributions from Fannie or Freddie maybe this year or next 

year, maybe even the year after that? 

Mr. LOCKHART. The annual contributions as done in the House 

bill are a percent of their whole book of business. I believe it is 1.4 

basis points. It is about half a billion and growing. 

Now, obviously, with the companies both losing money, there are 

some issues around that, but that is what the numbers are at the 

moment. 

Senator CARPER. But given where the companies are financially 

now, what would you estimate the housing fund contributions 

would be for maybe this year and at least—— 

Mr. LOCKHART. Because it is on the whole book of business, it 

would be that half a billion dollars. The only issue we would have 

to think about is how to put that in place given that they are already losing a significant amount of money. 

Senator CARPER. All right. Thanks very much. 

Thanks, Mr. Chairman. 

Chairman DODD. Senator Hagel. 

Senator HAGEL. Thank you, Mr. Chairman. 

Director Lockhart, I noticed in Mr. Mudd’s testimony, which we 

have received—and the Chairman noted part of this in his beginning questions to you—that in that testimony, and I will quote, Mr. 

Mudd says, ‘‘Only one hurdle remains for us to fully comply with 

the 81 recommendation measures called for in our 2006 consent 


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order with OFHEO. That hurdle is the filing of our fully audited 

2007 results with the SEC, which we will have done at the end of 

the month.’’ 

Is that accurate? 

Mr. LOCKHART. Well, there are a handful of ones that we are still 

looking at, so we have not signed off on. In addition, about 45 of 

the 81 included plans, and so we have to look that they are implementing those plans. They have presented the plans, but we want 

to make sure that they are implementing them. Just putting out 

a plan, does not help unless you are implementing it. We are reviewing that as well. 

There are issues that we need to continue to work on like operational risk capital, and economic capital. There are a whole series 

of issues that need to continue to be worked on. 

Senator HAGEL. So would it be a fair assessment that Mr. Mudd 

took some liberty with that statement? 

Mr. LOCKHART. I believe it is technically correct, but I especially 

if you are talking, as the Chairman was, about removing the 30 

percent capital, there are significant other issues that still have to 

be addressed before we get to that. I am hopeful that they can get 

it done quickly, and we are working with them on that list of what 

needs to be done. 

Senator HAGEL. And how many issues would you say out of the 

81 that they are still working on? 

Mr. LOCKHART. I do not know. I cannot give you a number. But 

it is probably in the single digits. 

Senator HAGEL. What specifically can you tell us regarding internal control and risk management recommendations? 

Mr. LOCKHART. Certainly they have some ongoing internal control issues in both companies. They have done a lot. As I said, 

Fannie will be Sarbanes-Oxley compliant. But that requires a lot 

of manual activities and they need to get more systematic about 

them. Freddie is not Sarbanes-Oxley compliant and, again, they 

need to work a lot on their internal controls. 

On the risk management side, we all agree that they need to 

adopt a new economic capital framework, and that is part of the 

legislation. We are all working together on that, but that is going 

to take a while. I think that is critical going forward that we make 

sure that their capital grows when the risks grow. And that is 

going to take some significant work. 

Senator HAGEL. For both Fannie and Freddie. 

Mr. LOCKHART. For both Fannie and Freddie, yes, Senator. 

Senator HAGEL. Thank you. You responded to some questions 

from Senator Carper regarding the SEC and registration with the 

SEC. And I want to quote from a letter I received recently from 

Chairman Cox and then ask a question. And I had inquired with 

the SEC Chairman on some of these matters, and he responded as 

part of that letter, ‘‘I firmly believe that because GSEs sell securities to the public, have public investors, and do not have the full 

faith and credit of government backing of government securities, 

GSE disclosure should comply with the disclosure requirements of 

the Federal securities law.’’ And, of course, you agree with that, 

and I assume your colleagues at the table agree with that. 


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Here is the question: In your opinion, should Fannie and Freddie 

be required to register their debt and mortgage-backed securities 

as well as their common stock with the SEC? 

Mr. LOCKHART. That is a good question. I agree wholeheartedly 

with the Chairman that they need to adopt full disclosure, and 

probably even more disclosure, given the significance of their size 

and their importance to the American economy. 

Registering their debt has some pluses and minuses. It will raise 

the cost of debt somewhat. If they have a full registration with the 

SEC for their common stock, that is probably enough in most circumstances. 

Senator HAGEL. So would you see value or not value in registering—— 

Mr. LOCKHART. There would be some value, but not significant 

value added there. I would think there are other places to put their 

resources at this point. 

Senator HAGEL. Well, let me ask it this way: In light of the question that has been presented and the environment of the market 

today, confidence, as we know, drives markets. 

Mr. LOCKHART. Right. 

Senator HAGEL. Would this enhance confidence, do you believe, 

or not? 

Mr. LOCKHART. On the margin, it probably would enhance confidence somewhat, yes. 

Senator HAGEL. Mr. Nason, would Treasury have a position on 

this? 

Mr. NASON. Yes, I would agree with that. More information 

about the companies disclosed to the public would be beneficial at 

the margin. I think a full equity registration statement would provide a significant amount of information about how they operate, 

but at the margin, I think it would be helpful. 

Senator HAGEL. Well, also, all of the other institutions, companies in the marketplace are required, are they not, to make those 

disclosures with the SEC? 

Mr. NASON. Yes. 

Senator HAGEL. Why then would we exempt the GSE? 

Mr. NASON. That was what I was trying to say earlier to Senator 

Carper’s question, which is exempting them from the registration 

requirements just conveys more special status on them, and that 

is something that we would not be supportive of. So additional registration would be fine. I was just trying to say how much additional information you would get from the debt registration requirements. 

Senator HAGEL. Would you like to add anything to that, Director 

Lockhart? 

Mr. LOCKHART. No. That is right. More disclosure is better. I 

think one of the issues is that they are very large debt issuers and 

a lot of their debt looks very similar. So the process of more of a 

shelf-type structure would make sense. 

Senator HAGEL. Thank you. 

Mr. Chairman, thank you. 

Chairman DODD. Thank you very much, Senator. 

Senator Reed. 

Senator REED. Thank you, Mr. Chairman. 


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Mr. Lockhart, I was very much interested in your chart depicting 

how Fannie, Freddie, and the home loan banks have stepped into 

the breach, and I agree with your conclusion it shows the critical 

role they are playing. But isn’t this a rapidly contracting market? 

And might some of this 71 percent be a function not so much of 

super activity as the fact that everybody else has left and the market is getting much smaller? 

Mr. LOCKHART. It is a combination. The market is not growing 

as much as it has in previous years, obviously, but their growth 

has been dramatic. In fact, probably more than in any previous 

year. So, yes, they are growing a lot. The market is not growing 

as much as it had historically done. So, it is a combination. But the 

point is that all that risk is coming on them where it used to be 

spread through many other mechanisms. 

Senator REED. But I think one of our challenges, frankly, stepping aside from simply the regulatory issues, is to expand that 

market once again at a dramatic rate. You know, one of the reasons why they are taking up all this risk is that—and we have 

been through this debate about capping their participation because 

the private sector really should be able to get in there and get the 

job done. A lot of these private actors turned out to be predatory 

lenders in the subprime market, standards that now we see are 

just—we are horrified about, securitizations based upon very weak 

analysis by credit agencies, et cetera. 

So, I mean, I think the point is that part of this debate we have 

heard time and time again has not just been about giving you the 

ability to set regulatory capital, which I think—and risk capital, 

which is absolutely important; it is also putting limits upon the 

growth of these entities in addition to that. 

So let me ask the question. Do you think if you had as a financial 

regulator, most other financial regulators, the ability to set appropriate levels of capital, risk capital as well as basic capital, and you 

had access to the portfolios, to examine their portfolios, et cetera, 

that that would be sufficient without any type of arbitrary limits 

on the size of their portfolios? 

Mr. LOCKHART. I believe that the portfolio should be focused on 

the mission and a major portion of it now is just buying their own 

securities. Seventeen percent of all the securities they issue they 

have in their own portfolios, and that is really not needed. 

I believe that the House bill does required regulation that makes 

sense and does lay out some criteria, not all of which we agree 

with, but pretty much. And I think that makes a lot of sense, focus 

them on their mission of stability, liquidity, and affordability. We 

need to do that with their portfolios. 

They have been growing very rapidly this year at 16 percent. 

One of the things we also need is to get the private sector back in, 

and that will take some confidence building. You may not know 

this, but about a quarter of their portfolios were those securities 

that Wall Street was issuing that you were talking about. 

Senator REED. That raises another issue, which is, you know, 

they are a private enterprise in the marketplace. They are literally 

competing. And one could argue that maybe it was a race to the 

bottom, that some of their competitors were putting together 

securitization products which now look deeply suspicious in terms 


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of their due diligence, in terms of, even worse accusations are being 

floated around, and that as we told them, frankly, to get into this 

market and as they went to the market and started competing, 

they were sort of pulled down. 

I think there is an opportunity, particularly with Fannie and 

Freddie, either through your good offices or your colleagues, that 

if they can establish—raise the standard, you know, no prepayment 

penalties during reset periods, full documentation, et cetera, all 

those things—we can drive the market up. But my sense is—and 

maybe it was unintended consequences of the debate we have had 

over the last several years about reining in the GSEs, is we gave 

full rein to a bunch of actors right now that have—many have already entered bankruptcy or left the scene, and the damage is 

being sort of calculated and trying to be rectified. 

Mr. LOCKHART. There is no doubt that over the last 2 or 3 years 

underwriting standards fell dramatically, and Fannie and Freddie 

to a certain extent had to chase that because they had the affordable housing goals, the mission to do it. The good news is because 

of some of the controls we had on them, they could not do too much 

in this area, and also because the managements realized that there 

were problems in the marketplace. 

Going forward, one of the things we did is the bank regulators 

put together a non-traditional mortgage guidance and a subprime 

guidance. We made Fannie and Freddie adopt that for everything 

they buy, not only for mortgage-backed securities in their portfolios, but also if they buy private-label mortgage-backed securities. 

They now have to make sure every mortgage in that package complies with that guidance, which hits many of the things you were 

talking about. We are trying to help them instill a much higher 

standard than the market—— 

Senator REED. And I commend you for that, and I think the activities over the last several years that OFHEO has undertaken, 

mostly through consent, have been effective in, I think, providing 

a much higher standard that we need going forward. Now the challenge is if we get these standards aligned, if we give you, I think, 

the authority certainly to regulate appropriate capital, both riskbased capital and other capital, and then the next challenge is to 

deploy this reform, these entities, into the marketplace to start 

once again expanding originations, expanding access to loans. Because from the macroeconomic level, you know, if it keeps declining, that is not good news for anyone. 

Mr. LOCKHART. As I said, they are expanding. They have expanded 16 percent this year. 

Senator REED. And you do not have any problems in terms of 

that as an issue of safety and soundness? 

Mr. LOCKHART. No. We even encouraged them to do mortgagebacked securities. Obviously, we had restraints on their portfolios, 

but at this point, they could grow their portfolios by about $100 billion for the next 6 months and not hit our constraints. We have not 

been constraining them through this year. 

Senator REED. In fact, I would presume—may I presume that 

you would encourage them as a stimulus to the economy to keep 

expanding up to their capital limits? 

Mr. LOCKHART. In a safe and sound manner. 


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Senator REED. Absolutely. 

Mr. LOCKHART. That is the critical issue here. 

Senator REED. Absolutely. 

Mr. LOCKHART. Unfortunately, I go back to—on message again, 

if I may, but we need GSE reform to really be able to make sure 

that they have that safety net. 

Senator REED. I do not think anyone is arguing about that, but 

I think, you know, we should stop and give you credit and your colleagues credit and because of, I think, obviously, self-interest, the 

entities, is that they took some prudent steps over the last few 

years to rein in some of the excesses that were quite obvious in the 

private sector. 

Mr. LOCKHART. Yes. Thank you. 

Senator REED. Thank you. 

Chairman DODD. Let me just, before we turn to our next Senator, 

I just want to thank Senator Reed. That is a very important exchange that just went on. 

Staff gave me a note here that Fannie and Freddie’s share has 

gone up by 30 percent from the second quarter of 2007 to the 

fourth quarter in mortgage originations, while the market has declined from $730 billion to $450 billion. But for Fannie and 

Freddie, we would be looking at a very, very different situation. 

Senator REED. And the lights would be out. 

Chairman DODD. Yes. And, candidly, look, I mean, I—Jack said 

it well in a sense, and I will raise it myself later. You know, it was 

not just that underwriting standards got lax. They were not in 

place, despite legislation adopted in a bipartisan fashion by this 

Congress 13, 14 years ago. The concentration of the GSEs is important, but the suggestion somehow that the problem we are facing 

today was a GSE problem I think is to miss the point dramatically. 

Now, I am for a strong regulator and all of that, but the suggestion 

we are in the mess we are in today because of that is to miss the 

whole point. What has happened here, you know, we are now 

awash in sovereign wealth coming into the country with these 

bankers going around shopping all over the world to bring capital 

in to bail them out. 

Mr. LOCKHART. No, I did not mean to suggest that they—that 

they are the problem. In fact, they are part of the solution. 

Chairman DODD. Absolutely. 

Mr. LOCKHART. A big part of the solution. 

Chairman DODD. Well, we have to make that clear. It is very important to make that clear here, I think. 

Mr. LOCKHART. I believe that and that is why I took this job, because I thought that they had such an important role to play in 

this economy. At the same time, we have to make sure that they 

continue to play that role in a safe and sound manner. 

Chairman DODD. I agree. Thank you, Jack, very much for that. 

Let me turn to Senator Crapo. 

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

I would like to pursue the question of whether we should roll the 

Federal home loan banks into the system a little bit further. Mr. 

Rosenfeld, we have testimony from other of the Finance Board 

members who argue that they do not believe that is the right deciVerDate Nov 24 2008 08:59 Mar 18, 2010 Jkt 050367 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HR\OC\A367.XXX A367

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sion. I guess it is fair to say that the Finance Board itself is mixed 

on this issue. Is that correct? 

Mr. ROSENFELD. Yes, sir. 

Senator CRAPO. One of the questions I have is that as we have 

been looking at the need for a strong, independent regulator, the 

types of things we are looking at are the need for a regulator that 

is able to independently finance itself so that it is not dependent 

on congressional appropriations; the ability for the regulator to 

place a GSE into receivership or conservatorship; the ability to 

have authority to approve new and existing businesses and business products that may come forth, or activities; the ability to set 

minimum capital levels; and things like that. 

Does the Finance Board not already have all of those authorities? 

Mr. ROSENFELD. Yes. We have quite extensive authorities. I 

think there are some—unquestionably, there are some things that 

would improve our situation, but what you have just mentioned, we 

have those authorities. Yes, sir. 

Senator CRAPO. Well, the concern that I have is that there are 

clearly differences between the Federal home loan bank enterprises 

and the Fannie and Freddie enterprises. And any legislation that 

we pass would have to accommodate those differences in some way. 

Mr. ROSENFELD. I agree completely. 

Senator CRAPO. And as I see those differences, it appears we 

have different capital structures, different board structures, different approaches to the stockholder return and to the pricing for 

customers and so forth. And we also have a major difference in the 

fact that, as you say in your own testimony, the Federal home loan 

bank’s business is secured lending, where most of the collateral is 

mortgage loans. The Federal home loan banks do not securitize 

mortgages, and direct mortgage holdings are only 7.2 percent of 

their total assets. 

With these kinds of differences, how would we write legislation 

so that we would create one regulator that would regulate enterprises that have such significantly different structural approaches? 

Mr. ROSENFELD. Well, I think for reasons which I attempted to 

articulate a few moments ago, I think that one regulator is the preferred way to do. Now, keep in mind that one regulator may have— 

for example, hypothetically you may have two or three people in 

charge of the organization as opposed to one. Director A may have 

primary responsibility over the home loan banks, Director B over 

Fannie and Freddie. 

The question of how you regulate both seems to me to be the subsidiary question to the more important one, that there be one regulator for the GSEs who speaks with a common voice and executes 

a common fundamental policy, because at the end of the day, it is 

the Federal Government who provides this implicit guarantee for 

both of them. And I commend my colleagues on the Board for 

bringing to your attention as well as others’ the differences between the enterprises and the home loan banks. And they are 

clearly there, and they clearly have to be honored and respected. 

But that to me is not a basis for not having a better overall regulatory structure that we have today. 

And, furthermore, again, as I said in response to a question by 

Senator Shelby, I think that a more significant structure for the 


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regulation would, in fact, over time provide unquestionably better 

leadership for both. 

Senator CRAPO. Mr. Lockhart, do you want to comment on that 

at all? 

Mr. LOCKHART. First of all, there are a lot of similarities. They 

are both dealing in the mortgage market. They are dealing with 

the same customers. They are borrowing money from the same people. They are dealing with the same risk. They both have examination teams. All firms are following the same accounting principles. 

There is a tremendous amount of similarities and synergies by 

combining these two groups and getting to a bigger, more prominent position, as well as a more significant place at the regulator’s 

table. We are not involved in the bank regulators’ Examination 

Council. There are a whole series of things, because we are so 

small, that we are not part of. So that is important. 

As to the structure, the House bill has Deputy Directors for 

Fannie and Freddie and a Deputy Director for the 12 Federal 

Home Loan Banks. There are significant differences, as you said, 

and I think that combination structure will make it a very effective 

regulator going forward. 

Senator CRAPO. Mr. Nason, I assume you agree with this, but 

you are welcome to pitch in if you would like. 

Mr. NASON. Sure. The Treasury has very strong feelings that this 

is an effective structure. There are more symmetries that would 

bring a lot of utility to having a single regulator. And, frankly— 

of course, with all due respect to my colleagues—a stature increase 

in the regulators would be very beneficial for such very large, complex organizations that are very, very important to a critical part 

of our capital markets, which is the mortgage market. 

Senator CRAPO. Just a last point on this, and that is, with regard 

to the Finance Board’s activities in this current crisis that we have 

as well as the ongoing operations, nobody is suggesting that the Finance Board has had a failing or a lapse in some way, or a lack 

of power to deal with the issues that have come forth to this point, 

are they? 

Mr. ROSENFELD. I think that we have exercised our authorities 

appropriately. I think that, as I said a moment ago, we do have the 

authorities for the most part that we need to conduct our affairs 

and keep the banks in a safe and sound situation. I do think that 

on behalf of my colleague, Mr. Lockhart, that OFHEO certainly 

needs strengthening in the areas which we have discussed at great 

length this morning. 

Senator CRAPO. Thank you. 

Mr. LOCKHART. To take an example of how they work together, 

some of the big banks are customers of both institutions. For instance, we see Citibank and Countrywide taking big advances over 

there. They are also some of the biggest customers of Freddie and 

Fannie. We may see, as we pass this conforming loan limit provision, that some of the advances they have been making will now 

come from them and come back to Fannie and Freddie as they take 

the jumbo mortgages that they are financing with the Federal 

Home Loan Banks and sell them to Fannie and Freddie. 

There are a lot of synergies between these two, and one regulator 

looking over the structure makes a lot of sense. 


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Senator CRAPO. Well, thank you. I see my time has expired, so 

I cannot pursue it any further. But I would like to work with you 

on this issue as we move forward to be sure we can get it right. 

Thank you, Mr. Chairman. 

Chairman DODD. Yes, thank you very much, Senator. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. And thank you 

all for your testimony. 

Mr. Lockhart, let me ask you, do you believe that the GSEs not 

only have an important role to play in the subprime crisis, but is 

there anything—do you think there is more that they could do to 

help? And are there any restrictions currently in place that are 

holding them back from helping more homeowners? 

Mr. LOCKHART. They have a very important role to play in the 

subprime area, and the whole housing market, as we have been 

discussing. What their role has been is really helping people that 

maybe should have never been in subprime or are in better quality 

subprime and get into better mortgages, less risky mortgages. They 

have been doing that in a big way from refinancing those mortgages, and we are encouraging them to do that. 

They have also been very involved in the Hope Now process and 

are trying to encourage modifications of loans to keep people in 

their houses. 

As Senator Schumer mentioned, the whole idea of partial 

writedowns makes a lot of sense. We will be working with the two 

enterprises on that issue. 

They have an important role to play, and they are going to continue to play it, but they also have to make sure that they do not 

take too high a risk. There are certainly a lot of subprime borrowers where the risk level is too high for them to buy those mortgages. 

Senator MENENDEZ. Is there any restriction that you as a regulator look at and say, well, these restrictions are stopping them 

from playing the vigorous role that we want them to play? 

Mr. LOCKHART. They develop their own underwriting standards, 

and we review the underwriting standards. We have not asked 

them to tighten the underwriting standards, but we continue to review them to make sure that they are safe and sound. 

Senator MENENDEZ. Let me ask you this: Considering the missions of the GSEs to help low- and moderate-income families get 

affordable financing, do you think that—for example, this whole 

issue of new products as an essential part of reaching low-income 

and particularly minority communities, if we overregulate the process of getting new products to the market, aren’t we essentially 

slowing down that process? And, second, as you answer that question, are we creating a disadvantage if we tell the world—if I were 

in the universe of lending money and I tell the world this is a new 

product that I am going to offer that may have some unique perspectives to it that would be attractive that I might want to offer 

it, and I tell the world 30 days before I put it out on the marketplace, am I not ultimately undercutting my ability by forecasting 

to all those in the universe who might give this and had not 

thought about it themselves? 


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Mr. LOCKHART. They really compete with each other more than 

anybody else, so it is really notifying Fannie, notifying Freddie and 

vice versa, because the banks themselves are the ones that are 

going to develop these products for them. They have to tell the 

banks what they are looking at for a new product. 

There are issues whether it should be proprietary and not necessarily should it be exposed to the public right away. Certainly 

ones that have a significant public impact, there should definitely 

be an exposure. Certainly ones that are sort of at the edge of their 

mission, there should be an exposure. Certainly if they are looking 

at trying to get into the primary mortgage market, that should 

very much be subject to comment because they are not allowed to. 

Senator MENENDEZ. All right. One last question. You made a 

statement with reference to capital levels for the GSEs that the 

level is too low. In the 1992 reform legislation and the recently 

passed House bill, they reaffirmed the congressionally mandated 

minimum capital levels for the GSEs. Can you elaborate upon that 

in terms of—— 

Mr. LOCKHART. What I was referring to is the minimum capital, 

which is 2.5 percent for assets and 45 basis points for their MBSs. 

In fact, in the House bill, what they did is they did what I think 

makes sense because it is what the bank regulators have. They 

gave the regulator the power to look at those, both the minimum 

capital and the risk-based capital, and adjust over time. And that 

is what really should be done. So what the House bill did was actually do what I was asking for, which is provide some flexibility on 

capital. 

Fifteen years ago, when the law was passed, I do not think people were envisioning what has happened in the mortgage market 

today; that is, the credit risk we are seeing today. To me, that 

means that maybe those numbers were too low, and we may have 

to adjust them, especially in times like this. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

I apologize to Senator Martinez. I have my list here, and I went 

to Senator Crapo, and—— 

Senator MARTINEZ. Quite all right. 

Chairman DODD. Please forgive me. Senator Martinez. 

Senator MARTINEZ. No problem. Thank you very much, Mr. 

Chairman. 

First of all, I want to, Secretary Nason, associate myself with the 

comments that Senator Shelby made. I think that I am suffering 

also under greatly diminished credibility from the Secretary of 

Treasury because to direct point-blank questions, the answers came 

back that, yes, he wanted to insist on a strong regulator, and, no, 

he was not in favor and would not be part of stimulus to have higher loan limits, conforming loan limits, for the GSEs. Within a matter of a few hours of that conversation, that is exactly what he did. 

What I would like to ask you is: How does doing that enhance 

the safety and soundness? And what concerns does that raise in 

your mind as to the safety and soundness of the GSEs when it is 

not coupled with a regulator that, going back to the days that Secretary Snow and I were working together for a stronger regulator, 

before Fannie and Freddie showed us that they did not know how 


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to bookkeep—that is before they had their crises. How is it that we 

are to feel more comfortable and more confident that the taxpayers 

of America are not at greater risk by increasing the conforming 

loan limits of Fannie and Freddie without a corresponding stronger 

regulator? 

Mr. NASON. The way that I would answer that, Senator, is I 

think our strong preference would be to couple it with strong GSE 

regulation, and I think that the discussion of the stimulus package 

suggests that there were exigent circumstances in the mortgage 

market. It was crafted to be temporary. And I think that that does 

strengthen the case. Allowing the GSEs to move into a new line of 

business on a temporary basis does increase the need for a GSE reform package. And we are certainly hopeful and supportive that we 

will get one. 

Senator MARTINEZ. Mr. Lockhart, let me ask you, as you look at 

the increase in the conforming loan limits—and, first of all, let me 

just say, Mr. Lockhart, I think you have done an exceedingly great 

job at OFHEO under extremely difficult circumstances. I would 

liken it to being in the circus main ring with a lion and a tiger and 

maybe something else thrown in there, with a hand tied behind 

your back and maybe with a weight around your left leg, and doing 

an admirable job. 

Mr. LOCKHART. Thank you. 

Senator MARTINEZ. So I commend you and I thank you. But what 

concerns come to your mind as we increase the loan limits, but not 

your ability to more carefully regulate these entities? 

Mr. LOCKHART. We are adding more risk to companies that are 

already pretty well stretched, and to me that means that we need 

to make sure that we have a good capital regime, that we have the 

ability to make sure that what they are putting in their portfolio 

makes sense. 

Another thing that concerns me is it is going to lessen their ability to meet their affordable housing goals. You know, a jumbo mortgage takes 3 times as much capital as their normal mortgage. So 

that is a concern to us. 

But from a safety and soundness standpoint, the key thing is 

they are going to have to build models, they are going to have to 

put in rigorous discipline, because these are different risks that 

they have never dealt with before. 

And so I think it is critical that we have all the powers of a 

strong regulator, not only to make sure they do this properly, but 

to make sure everybody else believes that they can do it properly. 

Senator MARTINEZ. By giving them additional loan limits, we are 

enhancing their risk in an area where they have no expertise. 

Mr. LOCKHART. That is correct. 

Senator MARTINEZ. So that would make it even riskier than their 

normal line of business, would it not? 

Mr. LOCKHART. That is correct. It is also a very concentrated risk 

too, in that over 50 percent is in California. 

Senator MARTINEZ. Now, I know the housing goals are set by 

HUD, which is one of the problems. We need to do it all under the 

same roof. But why are housing goals important to GSEs? 

Mr. LOCKHART. I believe one of the key roles GSEs play is for affordable housing. They have a lot of benefits being GSE’s—no State 


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income tax and being able to borrow more and cheaper than other 

AAAs. As such, there need to be goals. The goals have to be set realistically, and they have to be stretch goals. We need to make sure 

that they focus on them going forward, and that is a key reason 

why I think we need to relook at the portfolios as well. 

Senator MARTINEZ. So affordable housing and loan limits in ex- cess of $700,000 may not be equally compatible, even, frankly, in 

markets like Miami. 

Mr. LOCKHART. The bill out of the House suggested that they 

were going to remove that from the calculation, but it still takes 

capital that could be put into affordable housing. 

Senator MARTINEZ. So, in other words, they will have to skew 

their investments into areas of non-affordable and to the detriment 

of affordable, which may, in fact, make it impossible for them to 

meet the housing goals that have been set for them that are what 

their mission is about. 

Mr. LOCKHART. Yes. I think that if you talk to the two CEOs, 

they would tell you they are going to have an extremely hard time 

this year meeting their housing goals. 

Senator MARTINEZ. They used to tell me every year to tell me 

how difficult it was going to be to meet their housing goals when 

they were having their loan limits where they were, even lower 

than they are now. 

What is important about the new product requirements? I understand the Senator from New Jersey was asking questions about the 

delay and maybe tipping the hand. At the end of the day, both of 

these entities are Government chartered for the purpose of enhancing affordable housing. And so at the end of the day, their competitiveness may not be the No. 1 overriding reason of why they exist. 

But why is the idea that new product ought to be reviewed by the 

regulator prior to the time when they just embark upon a new 

product? 

Mr. LOCKHART. I agree wholeheartedly. It should be reviewed before and it should be reviewed from the mission standpoint and the 

safety and soundness standpoint together, to make sure that the 

product is both. Today, we only can do it from safety and soundness and, frankly, we are trying to do more and more going forward 

in that area. But, again, this legislation would help us do that in 

a much more systematic way. 

Senator MARTINEZ. Thank you, Mr. Chairman. My time has expired, but I thank the chair. 

Chairman DODD. Well, thank you very much. 

Let me—I do not consider my role here to be defending the Secretary of the Treasury, but I—we have a tendency to stovepipe 

these issues. And while certainly they are very legitimate issues 

and we all, I think, agree here about the importance of a strong 

regulator, we are in a major economic crisis. The face of that crisis 

is the housing crisis, and the face of the housing crisis is the foreclosure crisis. And certainly there are very legitimate issues to be 

raised, in my view, about raising these limits to include some of 

these jumbo loans. We have a liquidity issue, and we are trying to 

respond to that here. 

You could make a strong case that this stimulus package is not 

as strong as it ought to be, but it is going to be critically important, 


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and we need to address the housing problem as part of this larger 

economic crisis. 

And so I do not want to get in the middle of obviously what was 

said in rooms that I was not in, and I appreciate Senator Shelby’s 

concerns and my friend Senator Martinez’s concerns. But we have 

a major problem in this country, and we are acting as if things are 

relatively normal around here and we are just going to kind of deal 

with this thing in sort of technical perspective. 

We have got a major, major problem in our country, and it is 

global, in effect, and we have got to act. And this is one of the 

places you have got to do not only to stimulate spending, but you 

need to address the underlying issue, and that is housing and foreclosures. And by getting more liquidity in the market by raising 

these loan limits I think helps in that regard. 

The other issues are not illegitimate. I respect them. But given 

the balance between the two, I think it makes more sense at this 

juncture to try and do something about that to try and address this 

underlying problem that we have got to confront. That does not 

minimize the important points you are making, Mr. Lockhart, 

about this, but I think in fairness to the Secretary and others who 

are trying to do something about housing and dealing with the 

foreclosure problem, this is one of the ways in which you can get 

liquidity in the market. Don’t you agree with that? 

Mr. LOCKHART. Yes, I do, and it will help the market, and we 

need to make sure that Fannie and Freddie are strong enough to 

do it. 

Chairman DODD. Well, we cannot separate these issues out like 

we are just sort of talking about a purely academic exercise. 

Mr. LOCKHART. Hopefully, we can do them together. Hopefully, 

this bill can move quickly. 

Chairman DODD. Well, that is why we are here today, and that 

is what I have told the Secretary. He raised the questions. I should 

let my colleagues know when I met with him. He asked the question whether or not we are going to move. I said we are having the 

hearing today, we are going to move on this, and we are going to 

get this done. But that does not mean you should hold up and not 

address the underlying problem that is having a major impact on 

our country, and a global impact. And the suggestion somehow we 

ought to wait on doing that I don’t think is responsible. 

Mr. LOCKHART. Yes, Mr. Chairman. What I was trying to say is 

that at this point we do need to strengthen them at the same time 

on different tracks. I sincerely believe that President Bush and Secretary Paulson strongly believe that we need GSE reform, and they 

want to do it as quickly as possible. And I certainly agree with 

that. 

Senator MARTINEZ. Mr. Chairman, may I—— 

Chairman DODD. Senator Schumer. 

Senator MARTINEZ. Mr. Chairman, just a quick comment. 

Chairman DODD. Yes. 

Senator MARTINEZ. I share your concern for the urgency of doing 

something about housing, and I understand and I agree with you 

that this package of stimulus may not do enough in the area of 

housing. However, I think to increase the risk of the GSEs may not 


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be a smart way in the long term to increase liquidity and confidence in the market. 

So my point would be that there are a number of other strategies 

that could be employed, perhaps safer, that would, in fact, get at 

the housing market, like the incredible inventory that exists. 

So I share the concern on housing. I am not ignoring the problem. 

Chairman DODD. No, no. Thanks. 

Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman. 

First, I fully agree with Chairman Dodd here. We have a crisis. 

We have debated GSE reform for a year. We have sort of been 

deadlocked. And to say, to use this huge housing crisis as hostage 

to move GSE reform, which is important but one is a mountain, 

and one is not a molehill, one is an average size hill, and it is backward priorities. 

I think Secretary Paulson did the responsible thing, and I would 

say to my colleague from Florida, there are a lot of places where 

the conforming loan limit is just average, for average middle—Long 

Island, the average house costs $440,000, and that means the majority of homes are not right now available to the protections of 

Fannie and Freddie. And I do not think raising the conforming loan 

limit dilutes the safety. It is sort of a political shell game to say 

do not do the one before you do the other. 

Again, I do not know the promises that Secretary Paulson made, 

but on the policy, he is doing exactly the right thing. I worked hard 

to see the conforming loan limits be put in, and they should be. We 

should do GSE reform, of course. But when you have a crisis—and, 

you know, it is sort of what I said about Fannie. When the house 

is burning, you do not say, well, I am not going to hose down the 

house until I sort of clean up the front yard. And that is what the 

problem is, in my judgment. 

I would like to go to you, Mr. Lockhart. The issue of the 30-percent capital surcharge, don’t you agree that allowing some flexibility in their capital will give the GSEs more ability to help struggling homeowners? I mean, that is sort of irrefutable. 

Mr. LOCKHART. Giving them more flexibility in their capital will 

certainly help them do more mortgages. What we have to worry 

about, is not only the short term but the long term. We have to 

make sure that they are going to be there not just today and tomorrow but a year from now. It may take that long for us to get 

through this. 

There have to be judgments and as I said to the Chairman, we 

will be looking at potentially releasing some of that 30 percent 

going forward as they continue to meet the goals and—— 

Senator SCHUMER. And do you have—because they have been 

meeting the goals. They have been good on this. And as I understood it, we were planning to do some release. 

Let me ask you this, though: Do you have—— 

Mr. LOCKHART. There are two different things. On the portfolio 

limits, it is pretty clear from the agreements that we had imposing 

them, they will be released, assuming they get their financials out. 

Senator SCHUMER. Right. 


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Mr. LOCKHART. But the capital was about their overall operational problems. 

Senator SCHUMER. No, I understand. But let me ask you this: Let 

us assume we feel we can deal with the 30-percent capital surcharge and allow some flexibility. Do you have any comment on requiring—I mean, as I said in my opening statement, I would want 

some flexibility on the 30-percent capital surcharge, but only if 

Fannie and Freddie take that new room and use it to help aid the 

crisis. And at this point, given their reluctance to do that—they are 

always saying I will only do it this way but not that way or this 

way, I have lost some faith in Fannie and Freddie. 

Do you have any problems sort of importuning them or even requiring them, if they got their capital flexibility that they very 

much want, to put some of that money into the kinds of things we 

need where there is a shortage of money and there is a capital crisis? 

Mr. LOCKHART. As you know, we did loosen the—— 

Senator SCHUMER. Yes. 

Mr. LOCKHART. We had discussions with you about that. 

Senator SCHUMER. We did. You and I did, yes. 

Mr. LOCKHART. We did loosen the portfolio limits in September. 

As part of that, we did ask them to fulfill their commitment for the 

$20 billion each on subprime. And they have. 

Senator SCHUMER. Yes. Well, I am talking now about the capital 

requirement and giving that in exchange for more. 

Mr. LOCKHART. Again, I think it has to be done in a safe and 

sound manner. 

Senator SCHUMER. I agree. 

Mr. LOCKHART. And that is the critical thing. But, yes, they can 

do more on affordable housing, and I think that is critical. And 

they can do more in subprime, not only in the refinancing area but 

in—— 

Senator SCHUMER. So you do not have an initial adverse reaction 

to some kind of either importunation—if that is a word—or requirement that they take this new-found flexibility and use it for helping relieve the crisis in one way or another? 

Mr. LOCKHART. I am not sure that we have the powers to require 

it. 

Senator SCHUMER. Well, what about us? 

Mr. LOCKHART. They are government-sponsored enterprises. 

Senator SCHUMER. Yes, and importunation works. 

Mr. LOCKHART. It does. 

Senator SCHUMER. OK. I want to go to just—you know, Mr. 

Nason mentioned the idea of GSEs playing a role in pushing lenders to accept fair market value for loans. Could you just elaborate 

a little bit on that? 

Mr. NASON. Sure, Senator. What I was saying is one of the biggest road blocks to refinancings and modifications are you have a 

significant class of borrowers that their LTVs are too high, they are 

underwater. So the problem with getting those folks into a mortgage product that is sustainable would require a lender to take a 

writedown. And lenders have not been that willing to take a 

writedown. 


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Senator SCHUMER. Right. My time is running out, but you think 

basically this would work and be a very positive thing? 

Mr. NASON. I think that getting lenders to take a writedown 

would be a very positive thing. 

Senator SCHUMER. One final question, quickly, of Mr. Rosenfeld. 

Why hasn’t the Federal Housing Finance Board joined its regulator 

colleagues in adopting the subprime mortgage lending guidance 

and holding collateral to the same standards that Fannie and 

Freddie have? As you know, I have had serious problems with what 

the Atlanta bank did, and I think I have been vindicated by the 

fact that they actually reduced the value of the collateral that they 

were holding, required more collateral for a smaller amount of 

lending. I do not understand why Atlanta was involved with Countrywide. I do not understand what the regulations were. I do not 

understand how careful they were. And if you would put these regulations into effect, we could make sure that things were much better done. So why won’t you implement them? 

Mr. ROSENFELD. We did. Senator Schumer, we have told all of 

the banks not to make—to accept loans or accept loans as collateral, or buy MBS that has loans, mortgage loans in it that does not 

conform to the FFIEC. We did not do it perhaps as quickly as we 

might have, but we have now done it. And I will tell you that most 

all the concerns you articulated about the conduct of the Atlanta 

bank and referring to Countrywide, I can tell you that we are confident that—— 

Senator SCHUMER. But you have not publicly adopted the regulations, have you? 

Mr. ROSENFELD. We have told the banks. 

Senator SCHUMER. But why don’t you publicly adopt the regulations? This is not a game of whispering. 

Mr. ROSENFELD. I am not—— 

Senator SCHUMER. Would you consider doing that? 

Mr. ROSENFELD. Yes, we would consider doing that. 

Senator SCHUMER. Thank you. 

Thank you, Mr. Chairman. I know I went over my time. 

Chairman DODD. No, not at all. Thank you, Senator Schumer, 

very much. Very good questions. 

Senator Bennett. 

Senator BENNETT. Thank you very much. 

Sitting here through all of this, I do not have much new to add, 

but I think I have a slightly different perspective that I would like 

to pursue. 

If I am a shareholder in either Fannie or Freddie, I have 

watched my share value drop from a price in the 50s down to a 

price in the 20s. I get my financial reports, whether they are completely compliant with SEC requirements or not, that tell me that 

Fannie lost $1.4 billion in the third quarter, and Freddie, $2 billion 

in the third quarter; both expect to lose money in the fourth quarter. 

All of this talk about the contribution that the GSEs have made 

to stabilizing the market is terrific, and I agree with it. But are 

they going to survive? Two billion dollars in a quarter is not a trivial amount of loss, even for a company the size of Freddie Mac. And 

are we doing things in urging them to solve this problem and get 


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into this area and take on this additional burden that might, in 

fact, cause these companies to go under? 

Mr. LOCKHART. Certainly, we are very concerned about their 

safety and soundness. One of the good things that both of them did 

is raise significant capital in the fourth quarter and, unfortunately 

for their shareholders, cut their dividends. But it was a safe and 

sound thing to do. 

Senator BENNETT. Yes. 

Mr. LOCKHART. From the standpoint of the stock, for better or 

worse, a lot of other financial firms are having—— 

Senator BENNETT. I am not worried about the stock. I use that 

just to illustrate. 

Mr. LOCKHART. Right. 

Senator BENNETT. These are publicly held companies whose management, in addition to the mission and all of the other things we 

talk about, have a fiduciary responsibility to their shareholders. 

And as we push them—we, speaking generically of public officials—to perform all of these missions that are good for dealing 

with the problem, we are—are we—I am asking the question. Are 

we creating a tension there that would cause the CEO to wonder 

why he took the job? Because he has got his fiduciary responsibility 

to his shareholders, and if he does not meet that, he is not in a 

position to meet his social responsibility to the Government. And 

is there a tension between those two that we need to be aware of 

as we address this whole question? 

Mr. LOCKHART. Certainly, there is some tension between being a 

public-owned company and a GSE. There are some benefits and 

there are some tensions. 

From our standpoint, the pushing should only be done in a safe 

and sound manner. The whole idea of stretching them too far one 

direction or the other does not make any sense. 

These companies have to earn an adequate return, or they are 

not going to survive long term. Certainly, as their regulator, one 

of the things we look at is their capability to have a decent return 

and decent earnings. And certainly that is a concern that we share 

with you, and we want to make sure—and hopefully this legislation 

will help—that if they are pushed to do more in one area, that they 

have the capital and powers to do it. 

Senator BENNETT. Let us go to the underlining problem. It is the 

overhang, inventory overhang of housing in this country. We saw 

human behavior repeat what it has done for centuries. This is 

Tulip Time. When we had the tulip mania in Holland, it destroyed 

their economy for over 100 years when it finally shook out as people were spending an enormous amount for tulip bulbs, and then 

suddenly discovered that the greater fool that was going to buy the 

tulip for a higher price than they paid for it no longer existed, and 

the whole economy of Holland collapsed over tulip mania. 

But the same human impulses that produced Tulip Time have 

produced one bubble after another. We had the bubble of overbuilding shopping centers that led to the savings and loan collapse. 

We had the bubble of the high-tech dot-com that produced the collapse in the early 1990s. And now we have had the housing bubble, 

and we can decry it all we want, but human beings are going to 

continue to do that, and there will be additional bubbles that will 


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continue to come. They only work themselves out when the excess 

inventory is taken care of. 

Are the kinds of things we are urging the GSEs to do now contributing to working down the overhang of inventory that is in the 

housing market? 

Mr. LOCKHART. Certainly, there is an overhang and there is no 

doubt about it and, as you know, part of it is being corrected by 

less building and other things that are painful for the economy, 

and that will continue. 

I think part of the role that the GSEs can play is to make sure 

that there is a mortgage market out there so the market does not 

overcorrect. I think what we need to do is obviously have this correction, but have it in a very orderly fashion and come out of it in 

an orderly fashion. And I think the role of Fannie and Freddie 

should be to add the stability as we go through this process. And, 

again, that is critically important that they stay that way and they 

stay safe and strong to help there. 

They can help, as was discussed earlier, on loan modifications—— 

Senator BENNETT. Specifically, because my time is gone, would 

the increase in the limits that is in the House bill, that is in the 

stimulus package we are debating, contribute to that smoothing 

that you are describing? 

Mr. LOCKHART. Potentially so in some markets. Some of the higher-cost markets, it gets very hard, but it might actually slow down 

some of the correction too. There is a tradeoff always. Some people 

say that—and I am not sure I believe this—if you go to these markets, you might prop up the housing prices and make it harder for 

it to be affordable. And part of what is happening here is we are 

correcting the affordability issue. We are getting house prices back 

to where people can afford to live in them, and certainly my children, who will be buying houses in the next 5 years, will probably 

benefit from some of this. But overall, I think the critical role that 

they play is to provide the stability and help smooth out going forward. 

Senator BENNETT. Thank you. 

Chairman DODD. Let me just, if I can, I wanted to—Senator Bennett always adds valuable input to any conversation we have in 

these matters, but just the numbers he is talking about. I suspect 

the witnesses know these, but just for the record, the current housing market is, of course, the worst since the Great Depression according to many. But the inventory of existing homes for sale 

stands at nearly 4 million units, almost double the number in January of 2005. This is equal to about 10 months of supply. The number of vacant homes for sale equals 2.6 percent, or 2.1 million 

homes of the stock of owner-occupied homes compared to the longstanding historical rate of 1.6 percent. In 2007, as a whole, singlefamily home sales fell 13 percent; new-home sales fell 40.7 percent, 

year over year in December. The weakest performance since 1981, 

just to add. That is our problem, a huge issue. 

And I do not know whether we are doing this or not. I should 

check on this. I think part of the stimulus package has some tax 

incentives that might actually exacerbate this problem, which is 

not an easy thing to talk about, because obviously we are talking 


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about a lot of jobs involved in this area. But it is one issue of supply and demand. Normally market forces would correct this, and if 

you are not going to have—if you are going to be exacerbating the 

supply and demand issue and then relying on a market response 

to this thing, I think a lot of—— 

Senator BENNETT. Stimulating and building additional housing is 

not necessarily a good idea. 

Chairman DODD. No, and it is difficult, obviously, for people out 

there whose jobs and families depend on this stuff. It is a complicated issue. But we are not getting—the idea that the market is 

going to correct this problem with this continuing to exacerbate 

here—anyway, I do not mean to—— 

Senator BENNETT. No. Thank you. 

Chairman DODD. Senator Shelby. 

Senator SHELBY. I think it is going to correct the problem with 

pain and some suffering, as it always does. That is the market. But 

allow these house prices, as they fall, is going to create a market, 

too. Not maybe what a lot of people want. Is that right, Mr. 

Rosenfeld? 

Mr. ROSENFELD. Senator Shelby, this is my third major credit 

crisis of my career, and I must tell you that the solutions to them 

are always the same. It is time and liquidity. And one of the biggest things we have to fear is falling house prices. It is certainly 

important. I think what we need to do is stabilize housing prices 

through the efforts of people like Chairman Bernanke and provide 

things specifically, and we will get out of this. 

Senator SHELBY. I want to get into bond insurance. Mr. 

Lockhart, the bond industry has been under significant financial 

pressure, as we know. While the GSEs’ charter indicate that the 

GSEs should purchase 80 percent loan-to-value mortgages, they 

can purchase higher LTV mortgages, loan-to-value mortgages, that 

carry private mortgage insurance. Is that correct? 

Mr. LOCKHART. That is correct. 

Senator SHELBY. Should the private insurers face further difficulties or downgrades, which we are all concerned about, are the 

GSEs adequately reserved for any possible losses here? And going 

forward, will the difficulties in the private insurance, that is the 

bond, affect the GSEs in terms of their ability to purchase higher 

loan-to-value mortgages? 

Mr. LOCKHART. That is a very good question. Both Fannie Mae 

and Freddie Mac are spending a lot of time, and certainly we are, 

at looking at the financial condition of the bond insurers and the 

mortgage insurers. 

Senator SHELBY. Explain just to the audience—I am sure a lot 

of them are very sophisticated—what loan-to-value, LTV mortgages 

mean. What does that mean? 

Mr. LOCKHART. It means that the value of the house is $100,000 

that they only can lend $80,000 against it. And what happened the 

last 2 or 3 years is almost everybody was borrowing much more 

than $80,000, in some cases all the way up to 100. So, they had 

to rely on credit enhancement under their charters, and that credit 

enhancement came from the mortgage insurers or—— 

Senator SHELBY. Private insurers. 

Mr. LOCKHART. Private insurers. 


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Senator SHELBY. That a lot of us are concerned about their capital at this time. 

Mr. LOCKHART. We are concerned about their capital. They, too, 

have taken on a lot of risk. In fact, to do a lot of the jumbos, they 

will probably need those mortgage insurers because many people 

will not be able to afford that 80 percent loan-to-value. 

Senator SHELBY. Director Lockhart, of the $1.4 trillion portfolios 

retained by Fannie and Freddie, almost a fourth is in the form of 

private-label mortgage-backed securities. Is that correct? 

Mr. LOCKHART. That is correct. More in Freddie than Fannie, but 

on average, a quarter. 

Senator SHELBY. What do you believe is the GSEs’ primary reason for holding such a significant amount of private-label mortgage-backed securities on their balance sheet? 

Mr. LOCKHART. Most of them are subprime. About two-thirds are 

subprime and about a third are Alt-A. Most of them, or a lot of 

them had affordability characteristics, and they got credit toward 

the HUD goals for doing that. 

Senator SHELBY. Isn’t that a big risk there? What is the value 

of that portfolio? You know, it is not what is stated, obviously. 

Mr. LOCKHART. When they got into that business, one of the 

things that they agreed to with us is they would only do AAAs. 

Now, some of them are no longer AAAs, but the vast majority still 

are AAAs. Yes, there is risk. Yes, the value is significantly less 

than 100 at this point, and it is something we are monitoring. 

Senator SHELBY. Do private-label, non-agency mortgage-backed 

securities represent a unique risk to the GSEs that is different 

from the risk of holding their own mortgage-backed securities in 

portfolio? Is there a difference here? If so, explain the difference. 

I think there is some. 

Mr. LOCKHART. Underlying their own and other people’s mortgage-backed securities are mortgages. They did not do a lot in the 

subprime directly, so these mortgages under the private label are 

more risky than the ones they normally buy. On the other hand, 

there was this credit enhancement and other ways—at the AAA 

level they are somewhat cushioned so that the lower levels will 

take the hits first. But, yes, there is significant risk. 

Senator SHELBY. You may be familiar with this, but a recent 

analysis by Credit Suisse raised some troubling numbers with respect to the GSEs’ portfolios. Fannie Mae and Freddie Mac, according to Credit Suisse, held over $230 billion in securities backed by 

Alternate-A and subprime mortgages at the end of the third quarter of 2007. 

Based on market prices for subprimes and Alternate-As, Credit Suisse estimated that Freddie Mac could face an $8 billion to $11 

billion writedown and Fannie Mae an impairment of a writedown 

of $2.25 billion to $5 billion. 

As the safety and soundness regulator—you, Mr. Lockhart—do 

these numbers square with your understanding of the risk posed 

to the GSEs from these holdings? 

Mr. LOCKHART. A lot is based on how you price these securities. 

Unfortunately, at the moment they are not trading, so it is very 

hard to price them. There is a very wide bid-ask, if you will, and 

that concerns us significantly. 


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Certainly on a fair value basis—— 

Senator SHELBY. Well, sooner or later, they will be priced, won’t 

they? 

Mr. LOCKHART. We are hoping that the market does come back 

and people will start trading these securities. But, yes, it is an 

issue we are looking at. I think the Credit Suisse numbers are too 

high, but we are certainly looking at it. Certainly, they will price 

them as they look at their fair value. Whether they will have to 

take an impairment charge or not on these securities is something 

that they are looking at right now. 

Senator SHELBY. Chairman Rosenfeld, as I understand it, bank 

advances can be offered using jumbo mortgages as collateral. What 

role have the Federal home loan banks played in providing liquidity to the jumbo market? 

Mr. ROSENFELD. They do not buy them to be held in their portfolios. They only take them as collateral. 

I am sorry. They do not buy jumbo mortgages to be held in their 

portfolios—— 

Senator SHELBY. But they will take them as collateral, though. 

Mr. ROSENFELD. They take them as collateral. Yes, sir. 

Senator SHELBY. Is that a significant difference? They take them 

as collateral but they do not buy them. 

Mr. ROSENFELD. Well, but in the sense that they take them as 

collateral, they do provide liquidity for jumbo mortgages. 

Senator SHELBY. OK. 

Thank you, Mr. Chairman. 

Chairman DODD. First of all, I want to thank all of our witnesses 

here. You have been very generous with your time here this morning. I am not going to engage in a second round right now, but I 

am going to leave the record open. We have got, obviously, Mr. 

Syron and Mr. Mudd to testify. And we will ask members to submit 

questions to you that they would have otherwise raised in a second 

round. Let me mention just a couple of things. 

Mr. Dinallo, who is the Insurance Commissioner of New York, is 

going to be here tomorrow. Staff will be meeting with him to talk 

about what steps are being taken in New York dealing with the 

bond insurance issue. 

Senator Shelby and I will be preparing a letter to go to the 

Treasury as well as to others that would have some direct relationship to this issue to ask what steps are being taken, what thoughts 

they want to share with us, whether or not there are any steps we 

ought to be taking here to deal with this issue that Senator Shelby 

has raised, I have raised, as well as others. This is a serious issue, 

as we all know, and it has got to be handled carefully. And obviously language we use needs to be judicious in this because that 

can have its own effects on the issue. So we are going to do that 

carefully. 

And with that, I thank—we are going to move on this. I told Secretary Paulson and others, certainly Senator Shelby, that we are 

going to try and get this GSE bill done. There are some differences 

here, but I do not think that they are that wide. I think we care 

about some of the very basic things that are secure on. Senator 

Shelby and I have a long record of working well with each other, 

and I anticipate that is going to continue with this bill as well. So 


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we will be looking forward to your input in the coming days here, 

but we intend to get this done. It is one piece of this, but I want 

to just go back to what Senator Schumer said as well. I think we 

need to keep it in proportion here and not have the tail wagging 

the dog here. We have got another issue in front of us here that 

demands some action immediately here if we are going to stem this 

tide of the present economic crisis. And this is important, and it is 

going to be an important piece in the long term as well as the short 

term of moving forward. And we intend to do that. Mr. Chairman, 

I will get the job done. 

I thank all three of you for being here. 

Mr. LOCKHART. Thank you, Mr. Chairman. 

Chairman DODD. Let me invite Richard Syron and Dan Mudd to 

join us. I think the audience here is well known to both these individuals. Richard Syron is Chairman and CEO of Freddie Mac. He 

joined Freddie Mac in December of 2003 after a long and varied career in the financial services sector, including as Chairman and 

CEO of the American Stock Exchange, President of the Federal Reserve Bank of Boston, and the Federal Home Loan Bank of Boston. 

I want to note that Freddie Mac helped lead the market with its 

decision last year to stop buying the 228 subprime ARM loans that 

have led to so much trouble, both for homeowners and the mortgage markets as a whole. That is the kind of leadership we expect 

the GSEs to continue to show as we continue to work our way 

through the current crisis. 

Dan Mudd is President and CEO of Fannie Mae. He has worked 

at Fannie Mae since 2000, where he also served as Chief Operating 

Officer. Mr. Mudd was an officer in the U.S. Marines, with decorated combat service in Beirut, Lebanon, and we thank both of you 

for being with us. Good to see you this morning. 

I am going to have you start in the order that I have introduced 

you. I am going to step out of the room for a second, but I will be 

right back. I have read the testimony so I know what you are going 

to say. So why don’t you begin, Dick? 

STATEMENT OF RICHARD F. SYRON, CHAIRMAN AND CEO, 

FEDERAL HOME LOAN MORTGAGE CORPORATION (FREDDIE 

MAC) 

Mr. SYRON. Thank you, sir. 

Chairman Dodd, Ranking Member Shelby, and members of the 

Committee, I greatly appreciate the opportunity to appear before 

you today. 

The last time I testified before this Committee was in 2005. It 

was obviously a very different time. House prices were robust and 

rising. Today they are falling. Housing was a strong contributor to 

GDP growth, adding another percentage to growth. Today, many 

fear we are headed into a recession. 

Back then, markets were flush with liquidity and banks were reporting large profits. Now a number of lenders have gone out of 

business and we are in a global credit contraction, noted in today’s 

Wall Street Journal in the case of U.K. 

One bright spot is the conventional conforming market. The 

GSEs are one of the only sources of capital to invest in the mortgage market, which is exactly what is needed now. Senator Dodd 


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brought early attention to the unfolding subprime crisis last spring 

and we responded with our commitment to buy $20 billion of 

subprime product. Today I am pleased to report we have bought 

about $42 billion in prime rate mortgages that finance people 

largely who found themselves before in subprime. This effort follows a period and a tradition of working to improve subprime practices by combating predatory lending. 

As Senator Dodd noted, we were the first ones. Senator Dodd, I 

was just saying, as you noted, we were the first ones, actually a 

year ago right now, to put in place the anti-predatory features of 

lending. 

As we all consider how to deal with the current subprime crisis, 

I am reminded of the lessons learned during the New England 

credit crisis in the early 1990s when I was heading the Boston Fed. 

During that time of economic distress, it was critical to find a way 

to balance the need for maintaining safety and soundness, while at 

the same time assuring adequate credit flows. 

I would respectfully say we are in the same position today. And 

just so people know I am not a Johnny-come-lately since I have 

joined Freddie Mac on this issue, I have appended to my written 

statement, Mr. Chairman, testimony I gave before this Committee 

actually 17 years ago, which raised the same points on how these 

balances—particularly in the case of capital—had to be worked out. 

This experience is very relevant to the debate we have today. 

Finding the right balance between preserving capital and providing 

liquidity is not easy and there are legitimate differences in view. 

But we all need to acknowledge that tradeoffs and balances are required. I know it may not be popular to mention shareholders in 

this context. But we have to keep in mind, and Senator Bennett 

noted this, that they are the first line of protection for the taxpayers. And without an expectation of a reasonable return, investors in the GSE system may just decide to take their money elsewhere. And that would be a very bad outcome for all of us, particularly the U.S. taxpayer. 

Freddie Mac does support GSE reform and I want to underline 

that. We just want to be sure it strengthens the GSEs and the ability to meet their mission, particularly at this point in time, while 

keeping investors in the game. 

As I described in my written testimony, there are two areas in 

particular that warrant the Committee’s attention: capital and the 

affordable housing component of our mission. The subprime crisis 

set into motion a destructive cycle in which falling housing prices 

have exacerbated credit problems and generated losses. These 

losses, in turn, have eroded capital. One repercussion has been a 

wave of capital infusions, I might say from domestic and foreign 

sources. We have substantially added to our capital, as well. 

To ensure that we can consistently provide liquidity in both good 

times and in bad—and we are needed more in bad—capital levels 

need to be consistent with the inherent risks that an institution’s 

assets hold. If required capital is too high, the returns may be so 

diluted we would not be able to attract capital that does provide 

the taxpayer. If they are too low, they would threaten safety and 

soundness. It is a balancing act. 


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As for affordable housing, there needs to be greater flexibility to 

assure that the GSEs can meet its housing goals and all proposed 

commitments in all economic environments. We need to ensure 

that the goals, however well-intended, do not result in overstimulation of mortgage credit that leads to a situation like we are today, 

let’s stimulate predation. 

We look forward to working with the Committees and others to 

ensure we put families into homes they can keep. 

In closing, let us remember that it was not long ago that many 

said the U.S. financial markets had matured to the point where we 

did not need GSEs. The street was going to take care of everything. 

This past year reminded everyone that we not only still need them, 

but we need them to be strong and vibrant. To do that, they have 

to have capital tied to their inherent risk and affordable housing 

obligations that make sense over the long run. 

If I may say so, Mr. Chairman and Mr. Ranking Member, there 

were a number of, I thought, very good points raised by the previous witnesses and all of you in your questions. I think what they 

highlight is that people need to get together and work to resolve 

the tradeoffs that are inherently involved in that. 

And excuse that, I do not mean that as an editorial comment. 

Thank you very much for the opportunity to appear today, and 

I very much look forward to your questions. 

Chairman DODD. Thank you very much. 

Dan, thank you for being here. 

STATEMENT OF DANIEL H. MUDD, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FEDERAL NATIONAL MORTGAGE ASSOCIATION (FANNIE MAE) 

Mr. MUDD. Thank you, Mr. Chairman. Thank you, Ranking 

Member Shelby, for the opportunity. 

We are committed to supporting your efforts to pass reform legislation in this Congress. Let me repeat that: we are in favor of regulatory reform legislation. 

Fannie Mae has undergone significant change in recent years. At 

the same time, the mortgage and the housing markets have themselves undergone significant change. Fannie Mae has new management, and a completely revamped corporate governance and internal control environment. Only one hurdle remains, the filing of our 

10–K later this month, for Fannie Mae to meet the 81 remediation 

measures called for in our 2006 consent order with OFHEO. 

We believe that the internal improvements that we have made 

since 2005 have helped us meet an external challenge, which is 

maintaining liquidity, stability, and affordability in the prime conventional conforming mortgage market during this, a period of extraordinary stress. While the subprime and the jumbo market and 

other non-conforming markets have shrunk or shut down completely, the center of the markets where the GSEs have a large 

presence has performed relatively well. 

Having said that, we are not immune. We are not immune from 

the disruptions in the market and we will take our lumps. In fact, 

as pointed out, we had a GAAP loss in the third quarter and we 

saw more difficult headwinds in the fourth quarter. And we expect 

2008 to be some tough sledding. 


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Yes indeed, these are tough times, and that is when you want 

a Fannie Mae around. The GSEs have an important role to play 

in helping the market through these problems. Both companies are 

doing loan workouts and foreclosure prevention on a large scale. 

Chairman Dodd, you mentioned this in your opening remarks. 

Through our HomeStay initiative, Fannie Mae has successfully refinanced 68,000 subprime borrowers into safer prime fixed-rate 

loans. We continue to maintain a stable, liquid center of the mortgage market so that borrowers can access safe and affordable mortgages. 

This market and our response are worth considering, I believe, 

as Congress and the Administration take up the issue of reforming 

the regulatory regime of the GSEs. The choices you make now 

should be durable and stand the test of time. We support the creation of a strong, independent bank-like regulator. Strength and 

independence, I think, are clear enough. Bank-like means we do 

support stronger power than our regulator has now. But at the 

same time, such powers and the skills that go with those powers 

should be comparable to and on a par with those of other modern 

regulators. 

Our view of the principles that should guide regulatory reform 

has remained unchanged since I first testified before this Committee on April 20th, 2005. The dramatic changes in the housing 

market only reinforce our views of the key elements of regulatory 

reform. One, capital, Congress has established a statutory minimum capital standard for Fannie Mae and Freddie Mac that reflects the unique role of the Government-sponsored enterprises and 

the importance of capital in meeting their liquidity, stability, and 

affordability missions. 

We support this Committee’s reaffirmation of our minimum statutory capital requirement in S. 190 from the 109th Congress and 

the House’s more recent reaffirmation in H.R. 1427. We also support the regulator’s ability to increase our capital requirements 

when necessary to meet a clearly articulated safety and soundness 

concern. When such concerns are absent, legislation should enable 

our capital requirements return to the levels established by Congress. The normal capital levels established by Congress for normal 

times should be the norm. 

Two, on portfolio oversight, we support regulation ensuring that 

the GSEs’ mortgage portfolios are managed in a safe and sound 

manner. But regulation should not impose arbitrary limits, including a so-called systemic risk standard that does not exist anywhere 

else in bank supervision. To that end, we support legislation clearly 

identifying the bank-like safety and soundness factors that would 

guide regulatory oversight of our portfolio. 

In the new product area, third, the bank regulation model also 

offers a guide. Banks keep regulators apprised of their new business initiatives through the examination process and by regular 

communication with their examiners. So should the GSEs. Particularly during times of extraordinary disruption and change, such as 

now, the GSEs have to move quickly to address the pressing needs 

of the primary market. A cumbersome pre-approval process, and 

public notice and comment, would be a step backwards. 


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Fourth, reform legislation should reinforce the GSEs’ affordable 

housing mission. The GSEs’ strong new regulator should set and 

oversee streamlined goals that reflect current market data and 

adapt to changing market conditions. 

Fannie Mae also supports the creation of an affordable housing 

fund to be funded from GSE net income and integrated into a new, 

affordable housing goals framework. We should manage the fund, 

and we should be held accountable for the results. 

In conclusion, Mr. Chairman, the housing and mortgage markets 

need certainty and stability at this time, and strengthening the 

oversight will provide an additional measure of confidence that the 

GSEs will be here to do our job now and in the long-run. 

Thank you. 

Chairman DODD. Thanks very much. Thanks to both of you. I 

will leave the record open, obviously, for the other members who 

were not able to stay around, so they will be able to raise some 

questions with you, as well. 

Let me begin, if I can, Mr. Mudd, with you. In a presentation labeled ‘‘preferred offering roadshow’’ available on the website of 

Fannie, you noted that your market share is rising, your delinquencies are lower than the industry average. Your book of business has significant credit enhancements, and you are enjoying 

wider spreads on mortgage acquisitions. 

And yet, Fannie appears to be designating whole counties, the socalled declining markets, for higher pricing, a practice some have 

called redlining in the past here, and a practice of also increasing 

charges to subprime borrowers who need access to your credit more 

than ever. 

One, will these changes translate into higher rates for the borrower, in your mind? Will these changes, particularly those dealing 

with the declining markets, actually exacerbate downward pressure 

on prices by making credit harder to come by? 

And obviously, the basic question here, and that is the GSEs, the 

very reason for their existence here, in part not only to serve an 

affordable housing issue, but to be counter cyclical at moments like 

this. It seems to me the very constituency we are talking about 

that is struggling right here, what you are suggesting, it seems to 

me, in the website is to exactly walk away from that very constituency and it raises serious alarm bells. 

Mr. MUDD. Thank you, Mr. Chairman. 

Two pieces. One piece is that on the adjustment for markets that 

are declining, what happens is that when our underwriting system 

detects a loan being underwritten in a market that is declining, it 

sends a message back to the primary lender that says take a look 

at this and get another appraisal. 

The purpose of that is to make sure that in a declining market 

you do not put a borrower into a home that is under water on day 

one. So it is a piece of prudent underwriting, in our judgment. 

I appreciate your comment, in the sense that it is very important 

to us to be sensitive to providing the liquidity in these markets. 

But the driver of it is the safety of the borrower and the driver of 

it is the safety of the loan, rather than anything else. 

On the pricing, we are making sure that in a market where everyone would agree that there is more risk than there was before, 


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that the pricing reflects the risk that is actually out there. And 

there is, I think we would all agree, more risk in the current market. 

Chairman DODD. The self-fulfilling prophecy notion of all of this 

is troubling to me. You get into that downward spiral and trying 

to reverse that becomes terribly difficult and I am concerned about 

it. 

You may have heard, and I will raise this with both of you here, 

that there were several of us here that raised the idea—Senator 

Schumer as well as myself—the idea of using your 30 percent capital surcharge. I think collectively it is around close to $20 billion, 

I think, between the two of you here, to actually provide those resources to assist this subprime borrowers to be able to have some 

workouts here that would allow them to stay in their homes. 

These are owner-occupied. I am not interested in the speculating 

community at all. I mean, I am interested in that owner-occupied. 

You may have heard me say, in fact I will be there on Monday. 

But in Bridgeport, Connecticut, the new mayor of that city indicated to me the other day that he may have 6,000 foreclosures in 

that city of less than 100,000 people. Needless to say, in a city— 

as so many are—that is struggles anyway economically to have 

that kind—and Richard, you will know, coming from New England 

you know what I am talking about here, that that can mean. 

Anyway, share with us your thoughts on this and understand 

where we are coming from in this and the importance of engaging 

in this. What is your reaction to that request? 

Mr. SYRON. Senator, Mr. Chairman, if I might, I think you raise 

the key question of how regulators should act, how lending institutions should act, and the reason that you have Freddie Mac and 

Fannie Mae. Quite honestly, if you look back a few years, there 

was enormous private sector participation in the market. Whether 

all of that was salutary in the end or not, pure private sector, is 

a matter for some dispute. 

But we are there to be there in good times and bad. It is the only 

business line we are in. And we should act in a counter cyclical 

way. 

But as part of that acting in a counter cyclical way—and I am 

sorry to be Johnny-one-note on this, but as you know, you were on 

the Committee when I testified before, 17 years ago. It is important 

that capital treatment not be pro-cyclical either. It is not a very 

good idea if you start to unreasonably raise capital on these institutions at a time when you need them to do more because the only 

thing they can do—if you want to have private shareholders, and 

never mind that, just to meet the capital—is to be more restrictive 

in lending. 

Chairman DODD. Of course, to be the devil’s advocate, the argument is, of course, if not requiring those capital standards in difficult times, you do not have the resources to participate. 

Mr. SYRON. Well no, but I think the story is that for all financial 

institutions what you should do is husband and build capital in 

good times and have it there so you are able to meet more difficult 

times. 

Chairman DODD. I agree with that. 


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Mr. MUDD. I would say, Senator, just to emphasize Dick’s point, 

I think it is a balance, obviously, between making sure you are providing liquidity and maintaining safety and soundness. I look at 

the problem as having three groups, with respect to subprime. The 

top group is basically refinanceable into safer, fixed rate mortgages. 

We have done a lot of that. 

There is a group at the bottom that is not going to be able to stay 

in their homes. And there are a number of things that can be done 

and a number of things that we have done to encourage people to 

do that as a workout on a peaceable, non-damaging to the consumer basis. 

It is the middle group that requires the toughest thinking. How 

do you modify those loans to try to keep people in their homes? Our 

experience is that it is really a matter of trying to bridge them 

through this period. There are five or six different efforts that are 

underway—Hope Now could be one of them—that basically holds 

those payment levels constant so that homeowners can make their 

payments through the period of time until incomes go up, until 

home prices recover. We doing our part to make sure that we are 

making it as easy as possible for the servicers and the lenders to 

do those modifications is kind of the lever that we should be pulling on at Fannie Mae, certainly. 

Chairman DODD. Why should I be anymore optimistic about this 

Hope Now Alliance, given the experience of—you were both in the 

room a year ago, or almost a year ago. We sat in this very room 

with the stakeholders and talked about what would need to be 

done in order to try to get these workouts moving. And yet, we 

hear reports of only a fraction of those numbers actually moving. 

What should make me feel any more confident that I am going 

to see any more reaction now than I have seen over the last year? 

Mr. MUDD. I will answer the question as directly as I can, which 

is that I think that it took the industry a while to gear up, to be 

able to move from a world that said that moving quickly through 

foreclosure was the right answer to a world that said foreclosure 

was absolutely the wrong answer. And it took the industry a while 

to get its processes turned around on that. 

I do not think that the Hope Now answer, or the Fannie answer, 

or the Freddie answer is the magic bullet to this problem. Each is 

one piece of it that applies to a certain subset of borrowers and 

puts that key in that lock. There are many other things that could 

be done to give you, I think, Senator, more hope and encouragement that we are going to make progress. 

Mr. SYRON. Senator, excuse me, Mr. Chairman, if I might add on 

to that. First, I agree with everything that Dan said. 

Second, I think some of the ideas that have been put forward, 

the idea that you have raised for some sort of entity to deal with 

the bottom end of the market, I think a harsh reality we have to 

realize—because Senator Bennett talked about overhang in the 

market. There is an overhang in the market from units that have 

never been sold or are for sale. 

But there is also kind of a second overhang. And that second 

overhang is we have got to admit we have put some people into 

houses, unfortunately, that probably did not belong in them and 

need to be renters. 


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Now the entity that you discussed could be, it seems to me, useful in that in converting to get through this process some of those 

units—we have a match. We have people that want to live in units 

and we have the units. But convert them for a period of time back 

into rental units with maybe a lease-to-buy type of process. 

Chairman DODD. Mm-hmm. 

Mr. SYRON. That is one thing I think could be pursued. 

What Senator Schumer talked about on dealing with the seconds 

sort of issue, or dealing with avoiding foreclosure, I think is something that needs to be pursued. It is absolutely clear that when you 

foreclose on a unit there is a dead weight loss of 20 percent to 30 

percent that everyone suffers from. 

Chairman DODD. You know, there was—I was speaking to someone in the last couple of days who is fairly knowledgeable in this 

area and indicated to me that you were running into a significant— 

I think, a significant number of people who were not even able to 

meet the teaser rates because of what has happened to incomes, 

wages, and the like. 

Are you seeing any evidence of this in your own data? 

Mr. SYRON. Yes, sir. I think, unfortunately, we are headed into 

a period of economic softening. Whether it meets the test of a full 

recession or not is something that people can argue about later. 

But I think that there are people that are having trouble meeting 

teaser rates. 

Now fortunately, the actions of the Federal Reserve will make, 

for some people, when the teaser rate ratchets up, less of a ratchet 

than it would have been before. 

Chairman DODD. Let me just say, Director Lockhart noticed that 

your companies were both constrained from entering the subprime 

market over the past several years with the unfortunate exception 

of your purchases of private label securities because lending standards had gotten too lax and you could not compete for the business. 

Now, however, the subprime market has all but ground to a halt, 

as we know. This creates an opportunity for the enterprises to 

enter the subprime market and establish a set of strong lending 

standards such as fully indexed loans without prepayment penalties, yield spread premiums, balloon payments, and the like. 

I want to urge you to take advantage of this opportunity and I 

want you to comment on the possibility of doing that. 

I should point out, by the way, and I think in the case of 

Freddie—I am not sure of Fannie—you led the way, in some ways, 

in terms of setting some of these standards of the underwriting requirements, and I applaud you for that. But give me some response 

to this set of suggestions. 

Mr. SYRON. Senator—excuse me, Mr. Chairman, if I could, I 

think that we can buy originations. As you said, there have not 

been a lot of them so far. And we are in a tight situation, I will 

admit, at least our institution, for capital. That is why I think some 

of the issues you raised about the 30 percent are certainly well 

worth thinking about. 

But we would be very willing to buy mortgages that met the new 

standards. Because I think to not meet the new standards would 

be irresponsible for the people—towards the people that were there 

before. 


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If I could quickly add one thing: on the ABS mortgages we 

bought into our portfolio, the subprime mortgages, we bought them 

in really to aid that market and to meet our goals. We do not, at 

this time, expect to take any losses on those mortgages. This is a 

market that does not trade. A lot of this is priced to different ABX 

indices, it gets very esoteric. 

But when we look at the—no one can forecast the future. But 

when we look at what we expect in terms of foreclosure rates and 

what they call transition rates and difficulty rates, we do not expect to take losses on those. 

Mr. MUDD. Mr. Chairman, my observation would be that there 

is nothing the matter with being a subprime borrower in this country. Certainly the notion is—a subprime borrower is somebody with 

a credit blemish. And if the notion is that if you have ever had a 

credit blemish in America, you are never going to be able to own 

a home in America, I do not think that is a place that we want to 

go. 

So the question is under what standards should subprime lending be done? There are subprime borrowers that we have lent 

money to and we have put them in safe products, 30-year, fully amortizing fixed-rate loans. That is where the focus ought to be. 

I think one of the reasons that these troubles started in the 

subprime market was that there were really no standards. The 

standard was do what needs to be done in order to get the loan 

made and at least get the person in the door for the first payment. 

Chairman DODD. And then bundle them and sell them and get 

them out the door and you do not have any accountability. 

Mr. MUDD. And not retain any of the risk, which is very different 

than the way these two companies operate. 

The observation I would make, just as a corollary to your comment, was I think one of the other things we could do in this market is clean up the disclosures. It is hard enough for Dick and I 

to understand all the documents and all the provisions in our mortgages. But for first-time subprime borrowers that we have admitted 

already have a problem, we could certainly do worlds better in 

terms of disclosing clearly what they are getting into. 

Chairman DODD. I want to turn to Senator Shelby, but I want 

to come back to you, Dick, on this, because the financial literacy 

issues, Fannie Mae seems to be walking away from some of that. 

And in light of this, I wonder whether they are going to come back 

to the earlier requirements for financial literacy, which was an important element in all of this. 

Let me turn to Senator Shelby. 

Senator SHELBY. I agree with both of you, that there is always 

going to be a subprime market, and there should be a subprime 

market. We have got to come up with some standards, or you have. 

And I know you have tightened some of the stuff. 

Did I hear it right, I think Mr. Syron, you said that, that your 

subprime portfolio is working? It is performing, and so forth? 

Mr. SYRON. Yes, sir. What we have in sub—— 

Senator SHELBY. If that is true, that is good. Go ahead. 

Mr. SYRON. I am sorry. 

Senator SHELBY. Do you have a subprime portfolio? 


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Mr. SYRON. We have about $100 billion in AAA rated subprime 

securities. 

Senator SHELBY. And are they AAA rated because of private insurance? 

Mr. SYRON. Some yes, and believe me, we look at that all the 

time. I was on the phone—— 

Senator SHELBY. We think about it, too, up here. 

Mr. SYRON. But so far, actually—and as I said, anyone would be 

foolhardy to make promises about the future. But so far we have 

had good experience on that. And we are heavily subordinated. And 

so we think that all or almost all this is going to be money good. 

Senator SHELBY. What about you, Mr. Mudd? 

Mr. MUDD. Subprime represents—— 

Senator SHELBY. Are they subprime—— 

Mr. MUDD [continuing]. Less than 1 percent of our book. We do 

have—— 

Senator SHELBY. Are they performing? 

Mr. MUDD. Yes, sir, they are. 

Senator SHELBY. That is good. 

Mr. MUDD. We have—we look at those very closely in terms of 

their performance. We look very closely at where they are rated but 

we do have our own separate rating system. There is credit enhancement, mortgage insurance, other forms of protection there. 

But we also stress test that and discount that, as need be. 

We are watching it very closely. I think it is apt for you to point 

out that this is one of the risk areas in the market that we are in 

right now. 

Senator SHELBY. Well, we want it to work. 

Jumbo mortgages purchases. Congress, we have been talking 

about, is moving in the direction of allowing your companies to play 

a larger role in higher cost markets, such as California and others. 

According to an OFHEO analysis, mortgages associated with these 

higher cost properties may well pose greater credit risk, on average, than loans now purchased by the GSEs. These jumbo loans 

have different default rates, prepayment rates, and are more geographically concentrated. 

Given the significant, if they are, operational risk your companies have recently had to fix in relation the plain, vanilla conforming loan market, how prepared do you believe the GSEs, 

Fannie and Freddie, will be to deal with these new and additional 

risks of jumbo loans? 

Mr. MUDD. Thank you, Senator. 

If you separate out the jumbo market and treat it as a distinct 

market from the prime, conventional conforming market, you can 

get very different answers. So the beginning of my response would 

be any participation in that market for us would be a continuation 

of the standards and the routines and the controls and the governance that we put around the prime market. I am sure you know 

that there are higher cost limits for us in Alaska, Hawaii, Guam. 

I am not sure how that happened. It was before my time, certainly. 

But we looked very closely at that book, the same book, the same 

sort of working family type borrower, just in geographies that had 

more expensive homes. And we found out that by applying those 


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same standards to the higher loan limits in those areas, their performance was largely indistinguishable. 

So your point to me would be do not be doing vacation homes and 

mountaintop homes and all that. That is not, I think, what would 

be helpful to this market. A continuation of applying our standards 

to those areas of the near conforming market, you might say, that 

are relevant, I think we could provide some help there. 

Senator SHELBY. With substantial down payments or whatever? 

Mr. MUDD. With the very conservative credit standards that we 

know and love, Senator. 

Mr. SYRON. Senator, might I just add to that? 

Senator SHELBY. Sure. 

Mr. SYRON. As an economist, I have to candidly admit that I 

think this is a good part of a stimulus package. I want to be clear, 

though, that this is not a boon in any way for the GSEs. Because, 

as people have noted, there could—may or may not be different 

credit characteristics. We would have to set up, at least in our case, 

different systems because you would not have—at least for the contiguous 48 States—the same loan limit. And that is kind of a bear 

to do and will cost us a lot of money to set up. 

And to do all of this for a program that is going to only last a 

year, you know, we will do it because I think it is good for the 

country. But it is not going to be a great boon for us. 

Senator SHELBY. Let me ask you this, I have been told that a 

$500,000 mortgage owned or guaranteed by either one of your companies would require twice as much capital for regulatory purposes 

as a $250,000 mortgage. And even if the GSEs securitized these 

jumbo loans, that also requires capital that would otherwise be 

used to support the purchase of a larger number of smaller loans. 

Is this true? And would this cause you to look at it, as you have 

just referenced, a little differently? 

Mr. MUDD. I think the capital would certainly be adjusted for the 

size and the risk of the loan. 

One of the points to make, Senator, is that our average loan size 

is now, with a $417,000 loan limit, the average size is $140,000. So 

one of the impacts of this would not be that all of the loans would 

all of a sudden be $600,000. The average might move somewhat. 

But I would feel that it would be very important for us to balance 

that out with a continued focus on the cheaper end of the market, 

the smaller end of the market. 

Senator SHELBY. I will ask you both this. Does this recent increase in guaranty fees reflect your companies’ reassessment of future credit risk or so forth? 

Mr. SYRON. Yes, sir. The answer is yes. 

Mr. MUDD. Yes, we can. [Nodding head.] 

Senator SHELBY. Portfolio activities. Since the peak of the housing market in 2005, your companies have experienced a net increase in mortgage-backed securities outstanding of over $1 trillion, 

while your retained portfolios have been basically flat. Is that correct? 

Mr. SYRON. Yes, sir. 

Senator SHELBY. More or less? 

Mr. MUDD. [Nodding head.] 


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Senator SHELBY. Have your companies been able to meet the liquidity demands in the mortgage market through your 

securitization activities? Or do you believe there remains considerable volatility in the conforming loan market? 

Mr. MUDD. I would characterize it not as an either/or. Yes, we 

have been able to do some work providing continued liquidity. But 

we have had to make some tradeoffs and choices for products, residential apartments, military housing, that type of thing, that do 

not have a securitization market and so would need to be put into 

the portfolio. And we have had to make some choices about not 

doing some of those. 

Mr. SYRON. Senator, if I could—— 

Senator SHELBY. Yes, sir. Go ahead. 

Mr. SYRON. I might just add on, this becomes very applicable to 

the question you just asked about the jumbo loans. 

Senator SHELBY. Sure. 

Mr. SYRON. Because if we wanted to say very early, after whatever legislation is passed to do jumbos, by far the most practical 

way to do it—but it costs a lot of capital—would be to put them 

into the portfolio because you do not have to have developed all 

those things for the securitization machine. And we have been told 

by the dealers and people we sell to that these cannot be 

securitized into the packages that we have now because they have 

different characteristics. So we have to develop a whole new market. 

And so just the point that, as I said, I think this is good policy 

economically. But it is not easy to do. 

Senator SHELBY. Well, both of you have got your challenges here, 

have you not? Assuming this passes Congress? 

Mr. SYRON. I would say so, sir. 

Senator SHELBY. Mr. Mudd, in the fourth quarter of last year, 

Fannie Mae purchased—I have been told—just over $200 billion in 

mortgages. I understand that a fourth of those purchases were 

from Countrywide, who is a big mortgage banker. Given 

Countrywide’s recent financial problems and loan performance, do 

you have any concerns as to the quality of those purchased? Do you 

review those accordingly? You all have your own standards, do you 

not? 

Mr. MUDD. Yes, sir, we do. We review them. We review them 

very carefully. And as somebody becomes a larger counterparty of 

ours, we review them even more carefully. 

In the case of most of those big institutions, we actually have 

staff that are onsite supervising and auditing the process. So we 

have a good deal of confidence in that portfolio. 

We also think it is probably—it is positive, as a general matter, 

that the net counterparty strength between the Bank of America 

and Countrywide looks to be strengthened by this transaction. 

Senator SHELBY. At least they have deeper pockets, do they not? 

Sure. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Let me just ask a couple of final questions, if I can, to both of 

you. 


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Mr. Mudd, on January 29th of this year the American Banker reported the following: it said ‘‘servicers claimed Fannie, in particular, adheres to restrictive rules that reduce the number of loans 

that may be modified. They say Fannie will not agree to a modification of a loan it has securitized until a loan has been delinquent 

for 4 months.’’ 

I wonder if you might explain if that is an accurate statement, 

this policy which seems to fly directly in the face of the direction 

everyone else is heading in. 

Mr. MUDD. It was a fair criticism, absolutely, Mr. Chairman. We 

paid attention to it. It had a number of—it was kind of a Gordian 

knot to try to solve. 

We have a product that we will be rolling out in a matter of a 

few days, which is called Home Saver Advance, which will enable 

us to work with the servicers to get in and rescue those loans, work 

with the borrowers long before they get in trouble. 

So yes, your statement is accurate. It was an issue. We have paid 

attention to it. It will be fixed. 

Chairman DODD. You know, we sat down together here a year 

ago and tried to talk about how we were going to get these things 

worked out. I am a little disappointed—I really was under the impression your people were really going to work at this thing over 

the last 10 or 12 months and discover here I am going through 4 

months of delinquency. It is pretty clear what is happening here. 

Mr. MUDD. That is not the first move that we have made, Mr. 

Chairman. We worked with our servicers. There were—we made a 

number of liberalizations in terms of the modification policy, let it 

work for a period of time, and then sat down with our seller 

servicers and discussed what was working, what was not. They 

gave us a list of an additional 18 things that they would like done. 

We said yes to all 18. 

So we are focused on this. We are working on it and will continue to do more. 

Chairman DODD. Let me ask you, as well, here, there are some 

observers of the markets’ recent turns have suggested that one reason for what has occurred here is that loan down payment lending 

to moderate, low and low-income people is bad business for the 

lender, for the investor, and of course for the home buyer. I wonder 

if you agree with that statement? 

Mr. MUDD. Senator? 

Chairman DODD. Low down payment. 

Mr. MUDD. Low down payment? 

Chairman DODD. Yes. 

Mr. MUDD. There is certainly more risk in a low down payment 

loan than a loan that has more equity in it on day one. But I view 

those types of loans being done prudently as an important part of 

our mission and an important part of our business. 

Chairman DODD. Have you learned any lessons from doing this 

at all? 

Mr. MUDD. I think the stress that we have seen in the market 

here suggests that at the front end of the system there was an underwriting assumption that was made that said home prices are 

going to go up always by some percent forever. It turns out not to 


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be true. And a lot of people have learned lessons from that part of 

the process. 

We have always, as you know, adhered to a standard that says 

if there is not 20 percent equity in the home on day one then some 

other form of credit enhancement is required. I think that is a recognition of the fact that that grubstake in the home is an important piece of it. But it also enables us to get to those borrowers that 

do not have that amount of capital when they enter into a mortgage. 

Chairman DODD. One of the things you pointed out earlier, and 

I agree with you on this, and I think all of us do here. Obviously 

if any one of us, even those of us who sit up here and write a lot 

of this legislation, I suspect every time someone goes to a closing 

who is a Member of Congress they ask themselves whether or not 

they voted for this stuff that only an accountant or a lawyer could 

possibly understand. You made that point a few minutes ago, how 

common—even the two of you, as people who spend all of your days 

dealing with this stuff, this is complicated. 

Fannie had a requirement for many years requiring counseling, 

particularly to first-time home buyers. And you stopped it. How 

does that square with this, all that we are talking about here, 

given the importance of that and understanding what it can mean 

to people going in? It seems to me that is, again, walking in the 

opposite direction of where we should have been going here to 

avoid the kind of pitfalls that many borrowers got themselves into. 

Mr. MUDD. I think it is important, and I think there is an opportunity to put it back in. It is a good idea. 

What happened was that when we put in the requirement, all 

the business went away from us. It is sort of like if you want to 

get car insurance you have to go to driver’s ed, but you can get insurance from these guys without driver’s ed. Everybody goes to the 

insurer that does not require driver’s ed. 

So now we are in a market where you can actually require counseling because, as was pointed out in the earlier panel, more of the 

business is coming our way. So we are working with a number of 

counseling organizations and others to make sure that people are 

more ready for this obligation. 

And I think it ties in to the comment I made a minute ago, that 

better disclosure would also be helpful because you cannot guarantee that people pay attention during driver’s ed. 

Senator SHELBY. Mr. Chairman. 

Chairman DODD. Yes, certainly. Go ahead. 

Senator SHELBY. Can I ask—— 

Chairman DODD. Sure. 

Senator SHELBY. With mortgage rates down right now, if you had 

good credit and a high interest rate, wouldn’t this be a good time 

to looking to refinance your mortgage in America? 

Mr. MUDD. I would recommend that to all our listeners today. 

[Laughter.] 

Senator SHELBY. Do you agree with that, Mr. Syron? 

Mr. SYRON. Yes, I do, Senator. And I think that, you know, there 

is nothing wrong with the old fashioned fixed-rate 15- to 30-year 

mortgage with a decent down payment—— 

Senator SHELBY. Absolutely. 


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Mr. SYRON [continuing]. And somebody knowing what their obligations are going to be as they go forward. 

Senator SHELBY. And those are what we call performing loans in 

the portfolio, aren’t they? 

Mr. SYRON. You got it. 

Senator SHELBY. You got it, both of you. 

If we stick to high standards or higher standards, we have fewer 

problems in the long run, do we not? 

Mr. SYRON. Absolutely right. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman DODD. It is an interesting point because I am trying 

to recall this now from memory. But as I recall, something like 40 

percent of the non-performing loans were not first mortgages, were 

not first time home buyers. These are refinances. Is that correct? 

Am I right about those numbers roughly? Was it 40 percent? 

More than 50 percent. 

Mr. SYRON. I think they were, but quite honestly, it may not be 

popular to say but what happened during the most of the go-go 

days, a lot of people developed products that might be attractive for 

the lender, did not end up being attractive for the borrower over 

the longer run. And they went out and they called people. 

We have all been at dinner and been called by someone. I get 

called all the time about do I need another mortgage. And people 

were sold mortgages that were not to their advantage and because 

they were able to take out a lot of cash or do something else, it was 

a refi. But it was not to their advantage in the long run. 

Chairman DODD. Senator Reed made the point earlier, Jack Reed 

did, and I agree, and I think Senator Schumer did, and I have, as 

well, that the irony, we are sitting down talking. I think all of us 

agree here, I have heard you say it as well, a strong regulator. 

There is no debate about that. I think we are going to get a good 

bill here. 

But the irony is here, we are talking about a crisis now, with a 

highly regulated market out there—allegedly highly regulated— 

that collapsed in many ways because cops were not on the beat. 

Mr. SYRON. Well, sir. Excuse me, Mr. Chairman, I think what 

happened is that a lot of the market moved away from the highly 

regulated—— 

Chairman DODD. I agree. I mean that, supposed to be highly regulated, the notion that it is highly regulated. 

Mr. SYRON. Right. 

Senator SHELBY. Mr. Chairman. 

Chairman DODD. Yes. 

Senator SHELBY. A lot of those people who moved into the other 

market are paying an awful price, are they not? 

Mr. SYRON. They certainly are, sir. 

Senator SHELBY. Investors and others. 

Mr. SYRON. Yes, sir. 

Senator SHELBY. Thank you. 

Chairman DODD. But the borrower pays the ultimate price. 

Senator SHELBY. Oh yes. 

Chairman DODD. Those guys all get golden—most of them are 

leaving their jobs with $125 million golden parachutes. That person 


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who is living in that house in Bridgeport does not get a golden 

parachute. 

Senator SHELBY. We agree. 

Chairman DODD. They just lost their home or are about to lose 

it. And that is the great tragedy. And these numbers are going to 

be in that million, several million range. 

Mr. SYRON. Those people get a lead anchor. 

Chairman DODD. Yes. 

Thank you both. Appreciate it. 

Mr. SYRON. Thank you. 

Mr. MUDD. Thank you. 

Chairman DODD. To be continued. 

[Whereupon, at 1:22 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM DAVID G. NASON 

One of the areas that I believe needs more debate and vetting 

is the strengths and weaknesses between affordable housing goals, 

affordable housing programs, and an affordable housing fund. 

Fannie and Freddie have affordable housing goals, the Federal 

Home Loan Banks have an affordable housing program, and the 

House passed GSE reform legislation would establish a new housing fund with goals. The most recent GSE reform legislation that 

passed the Senate Banking Committee did not have a housing 

fund. 

Q.1. What are the strengths and weaknesses between affordable 

housing goals, affordable housing programs, and an affordable 

housing fund like the House approach? 

A.1 All three approaches have similar goals of ensuring that government sponsored enterprises undertake activities that are consistent with a public purpose mission. 

Affordable housing goals for Fannie Mae and Freddie Mac under 

the existing regulatory structure were originally required by the 

Federal Housing Enterprises Financial Safety and Soundness Act 

of 1992 and established by the Department of Housing and Urban 

Development (HUD). The current goals were set by HUD in 2004. 

The goals are specified in terms of low- and moderate-income housing, special affordable housing, and underserved areas housing. 

HUD’s current affordable housing goal regulation sets the goals at 

levels that require Fannie Mae and Freddie Mac to be market leaders in the housing goal categories. Affordable housing goals focus 

more on broad market segments and the GSEs’ relationship to 

overall market activity. 

The Federal Home Loan Bank (FHLBank) System’s Affordable 

Housing Program (AHP) and the affordable housing fund contained 

in H.R. 1427 are similar approaches in that a portion of the GSEs’ 

income is redirected toward affordable housing activities. Unlike 

Fannie Mae and Freddie Mac, the FHLBank System does not have 

a specific statutory mission. Instead, the FHLBanks generally support housing finance by virtue of the nature of their authorized activities. The FHLBanks’ AHP was mandated by the 1989 thrift legislation and established by regulation in 1990. 

Some key structural differences between the FHLBank’s AHP 

program and affordable housing fund contained in H.R. 1427 include the basis and amount for the assessment, and the administration of the fund. The FHLBanks’ AHP requires 10 percent of net 

income (since the FHLBanks do not pay Federal taxes, this is comparable to 10 percent of before tax income of other companies), 

while the trust fund requires 1.2 basis points for each dollar of the 

average total mortgage portfolio of each enterprise during the preceding year. Disbursement of funds from the FHLBanks’ AHP is 

administered by the FHLBanks, through member financial institutions, while the disbursement of funds from the affordable housing 

fund contained in H.R. 1427 is administered by the Director of the 

new housing GSE regulator in consultation with the Secretary of 

HUD and is based on regulations. The latter feature regarding administering the trust fund is intended to prevent the fund from 


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being used for political purposes. The funds are granted to states 

or state agencies for distribution. 

Q.2. If we go down the track of creating a housing program or 

housing trust fund for Fannie and Freddie, what is the appropriate 

amount of resources that should be spent, who should allocate the 

funds, and how should the funds be spent? 

A.2. We strongly oppose the establishment of an affordable housing 

fund for Fannie Mae and Freddie Mac. This proposal would create 

an undue and counterproductive reliance on Fannie Mae and 

Freddie Mac by tying the potentially unlimited growth of an affordable housing fund to the annual amount of the GSEs’ mortgage 

business. In addition, such an affordable housing fund could be susceptible to political influences that could compromise the goals of 

assisting as many low income families in need as possible. If an affordable housing fund is going to be part of this legislation, the 

fund must be controlled by the Federal government (not by Fannie 

Mae and Freddie Mac), temporary, and capped. 

Q.3. Does it make sense to have both housing goals and a housing 

program for Fannie and Freddie? 

A.3. Housing goals can provide a broad focus to the overall business of a GSE, while affordable housing programs can provide assistance to more specific projects. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BAYH FROM 

JAMES B. LOCKHART III 

A.1. OFHEO responded to the egregious accounting errors and serious systems and operational risk management failures at Fannie 

Mae and Freddie Mac by ensuring the replacement of senior managers and outside auditors, the hiring of competent staff, the development of GAAP compliant accounting policies and of operational 

control systems throughout the Enterprises, transparent public disclosures, and fundamental changes in their corporate cultures. The 

fines paid by Fannie Mae and Freddie Mac to OFHEO and the SEC 

were a strong signal to their Boards, management, shareholders 

and debt and MBS investors that this behavior would not be tolerated in the future. The fines amounted to an average of half of one 

percent of core capital after tax, not enough to materially affect 

their safety and soundness. Of considerable consequence, though, 

was our decision to raise capital requirements at both Enterprises 

by 30 percent and to restrict asset portfolio growth and insist on 

adequate controls for new product development. Without these actions, I seriously doubt that either Enterprise would be playing a 

constructive role in mortgage finance markets today. 

A.2. During normal times, the Enterprises perform their principal 

function by guaranteeing mortgage-backed securities (MBS). Purchasing their own MBS and issuing debt to finance the purchase 

generally provides little additional benefit. While the Enterprises’ 

debt and MBS are not perfect substitutes, both have been highly 

sought after by investors around the world. Yields on the two types 

of securities generally are closely related, with differences reflecting their different payment structures. In the current environment, 

the two markets are less well integrated. Because of that, and beVerDate Nov 24 2008 08:59 Mar 18, 2010 Jkt 050367 PO 00000 Frm 00146 Fmt 6602 Sfmt 6602 E:\HR\OC\A367.XXX A367

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cause both Enterprises have finally completed most of their remediation, we have reached agreements with the Enterprises that eliminated their portfolio restrictions, lowered their required capital requirements and assured that they will each raise more capital so 

that they can better fulfill their missions. That is what is required 

in these difficult market conditions. Legislation should provide the 

regulator with the ability to adjust portfolios according to the circumstances. Any size limitations on these portfolios would be pursuant to notice and comment rulemaking. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JAMES B. LOCKHART III 

Q.1. What are the strengths and weaknesses between affordable 

housing goals, affordable housing programs, and an affordable 

housing fund like the House approach? 

A.1. The Affordable Housing Program (AHP) of the Federal Home 

Loan Banks (FHLBs) was established in the 1989 law that created 

the Federal Housing Finance Board (FHFB). The AHP is expressed 

in terms of monetary contributions by the FHLBs, and mandated 

contributions reflect the relative profitability of each FHLB. The 

AHP most often works in conjunction with other (non-FHLB) forms 

of housing assistance to make individual affordable housing 

projects viable. The AHP is generally seen as an effective form of 

affordable housing assistance. The funds are relatively well-targeted, but the size of the program is limited. The program is in addition to the primary programs of the FHLBs. 

The affordable housing goals now in effect for Fannie Mae and 

Freddie Mac are outlined in the 1992 law that created OFHEO. 

The goals are established by regulation by the HUD Secretary, and 

compliance is monitored and enforced by HUD. The underlying rationale for the 1992 goals is Congress’ view that the Enterprises 

‘‘have an affirmative obligation to facilitate the financing of affordable housing . . . consistent with their overall public purposes.’’ 

The goals, which are expressed as a percentage of each Enterprise’s 

overall business, are intended to affect the way the Enterprises 

carry out their primary programs. In practice, the goals have proven important in directing Enterprise activity, but are less nimble 

as a result of being set in statute. Both H.R. 1427 and S. 2391 revise the framework for the goals, but the framework remains fairly 

rigid. 

H.R. 1427’s affordable housing fund was structured to ensure a 

steady monetary contribution by the Enterprises to affordable 

housing. In the House-passed bill, annual funding is based on the 

Enterprises’ books of business (as opposed to being expressed as a 

percentage of profits). A similar fund is created under S. 2391. 

There are significant differences between the House and Senate 

measures, but both mandate a monetary contribution that is allocated among qualifying entities. Both bills allow for temporary suspension of contributions for reasons related to financial instability 

or inadequate capital. Creating a new constituency dependent on 

Enterprise earnings could add pressure to increase business at the 

expense of safety and soundness. 


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Q.2. If we go down the track of creating a housing program or 

housing trust fund for Fannie and Freddie, what is the appropriate 

amount of resources that should be spent, who should allocate the 

funds, and how should the funds be spent? 

A.2. If Congress makes a judgment to create an affordable housing 

fund, it is important that the funds raised not be so large as to 

raise safety and soundness concerns, and I think the fund would 

work more effectively if it receives a relatively stable flow of funds 

from year to year. Finally, I think it is important that any new 

housing fund should not be controlled by the Enterprises, since 

such control greatly increases the potential for allocations based on 

what is in the Enterprises’ best interests, rather than on what will 

best address affordable housing needs. It should also be subject to 

a sunset test to ensure that it is working. 

Q.3. Does it seem to make sense to have both housing goals and 

a housing program for Fannie and Freddie? 

A.3. This decision will reflect Congress’ view about the degree to 

which the balance between the Enterprises’ public mission to support affordable housing and each company’s need to retain shareholder support. Affordable housing goals and an affordable housing 

fund can function in complementary ways, but a combination of the 

two is undeniably a greater burden for the companies than either 

obligation alone would be. One approach might be to reflect in their 

affordable housing goals the impact of affordable housing grants. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD 

FROM RONALD A. ROSENFELD 

POTENTIAL MERGER OF DALLAS AND CHICAGO HOME LOAN BANKS

Chairman Rosenfeld, as we discussed at the hearing, the American Banker reported on February 5 that the boards of directors of 

the Federal Home Loan Banks of Dallas and Chicago have voted 

to approve a merger of the two Banks. You stated that the merger 

application has not yet been presented to the Finance Board and 

that therefore you have not developed standards or processes for 

deciding whether to approve that merger. You also stated that in 

your view, this is simply a matter between the two Banks. I would 

appreciate your response to the following additional questions: 

Q.1. What is the statutory authority under which two Banks may 

voluntarily merge? Which specific statutory provisions address the 

Finance Board’s authority to approve or disapprove a merger between two Banks? 

A.1. Section 26 of the Federal Home Loan Bank Act (Bank Act) authorizes the Finance Board to liquidate or reorganize any Federal 

Home Loan Bank (FHLBank) ‘‘[w]henever the Board finds that the 

efficient and economical accomplishment of the purposes of [the 

Bank Act] will be aided by such action.’’ The term ‘‘reorganize’’ is 

not defined by the Bank Act, but it is my view that it includes an 

acquisition of one FHLBank by another FHLBank, whether the acquisition is structured as a merger, a purchase and assumption 

transaction, or otherwise. The statute expressly provides that one 


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FHLBank may acquire assets and assume liabilities of another 

FHLBank, either in whole or in part. 

This provision of the Bank Act represents a substantial delegation of authority to the Finance Board. It requires only that the action must ‘‘aid’’ the achievement of the statutory purposes. It does 

not require a finding of insolvency or severe financial distress. This 

construction of section 26 is consistent with other provisions of the 

Bank Act, such as section 3, which gives the Finance Board broad 

discretion to reduce the number of Bank districts to as few as 

eight, and section 25, which provides that ‘‘each [Bank] shall have 

succession until dissolved by the Finance Board or by act of Congress.’’ 

The predecessor to the Finance Board exercised the authority 

conferred by section 26 on one occasion, in 1946, when it merged 

the Los Angeles Bank into the Portland Bank, and relocated the 

successor FHLBank to San Francisco. That action was taken over 

the objection of the Los Angeles Bank. In Fahey v. O’Melveny & 

Myers, 200 F.2d 420 (9th Cir. 1952), the United States Court of Appeals for the Ninth Circuit rejected a challenge to the merger, confirming the broad delegation reflected in section 26. 

Q.2. Given that the Banks are all jointly and severally liable for 

each other’s debt, the other 10 Banks have a clear interest in the 

financial condition of the Dallas and Chicago Banks. Furthermore, 

any standards that are developed as part of this process could set 

a precedent for the future. Therefore I do not believe that this is 

merely a matter between the two Banks. Since the hearing, what 

consideration have you given to the standards you would use to review a merger application? 

A.2. With regard to the financial condition of the Dallas and Chicago Banks, all of the FHLBanks have registered with the Securities and Exchange Commission under the Securities Exchange Act 

of 1934, and all of them are current in their filings with the SEC. 

Before the end of March, I expect that the Chicago and Dallas 

Banks will file their annual reports, on Form 10–K, with the SEC. 

Form 10–K filings include a full set of audited financial statements, which will provide all interested parties an opportunity to 

evaluate the current financial condition of the Dallas and Chicago 

Banks. By requiring the FHLBanks to register with the SEC, the 

Finance Board sought to promote uniform financial disclosure that 

would allow each of the FHLBanks, as well as any other interested 

parties, to evaluate the financial condition of any of the FHLBanks. 

With regard to the standards for approving any merger of two 

FHLBanks, the general standards are set by statute. Under Section 26 of the Bank Act, as noted above, the Finance Board may 

order or approve a ‘‘reorganization’’ of an FHLBank if it determines 

that the ‘‘efficient and economical accomplishment of the purposes 

of [the Bank Act] will be aided by such action.’’ The purposes of the 

Bank Act are reflected in the statutory duties imposed by Congress 

on the Finance Board in Section 2A of the Bank Act. The Finance 

Board has the primary statutory duty of ensuring that the 

FHLBanks operate in a financially safe and sound manner. To the 

extent consistent with this primary duty, the Finance Board is also 

required to ensure: (1) that the FHLBanks remain adequately capVerDate Nov 24 2008 08:59 Mar 18, 2010 Jkt 050367 PO 00000 Frm 00149 Fmt 6602 Sfmt 6602 E:\HR\OC\A367.XXX A367

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italized and able to raise funds in the capital markets; and (2) that 

the FHLBanks carry out their housing finance mission. 

Accordingly, if the Chicago and Dallas Banks submit a merger 

proposal, the Finance Board would evaluate the proposal in light 

of those standards. The Finance Board’s paramount concern would 

be to determine whether the resulting FHLBank would be able to 

operate in a safe and sound manner following the merger. The Finance Board also would evaluate whether the resulting FHLBank 

would remain adequately capitalized and able to raise funds in the 

capital markets after the transaction had closed. Finally, the Finance Board would evaluate whether the resulting FHLBank 

would be able to meet the housing finance needs of all of its members to the same degree, or better, than the Chicago and Dallas 

Banks are doing at present. 

Q.3. It seems to me that the decision confronting the Finance 

Board when the merger application is submitted is sufficiently significant that the process must be transparent and the impact of the 

decision on the System as a whole must be recognized. What do 

you believe are the elements necessary to ensure a transparent decision-making process? 

A.3. I believe that the process will be transparent at several levels. 

If the Dallas and Chicago Banks enter into a definitive agreement 

and submit it to the Finance Board for approval, I expect that they 

will file a Form 8–K with the SEC to announce that development, 

and will include key details and information about the transaction. 

Thus, once that event has occurred, any interested party will be 

able to analyze the terms of the transaction and determine how 

they may be affected by the merger. 

It is also my expectation that the Dallas and Chicago Banks 

would develop a joint disclosure document along the lines of a SECcompliant proxy statement. They would provide that document, 

which would describe in detail the terms of the proposed merger 

and the effect on the members, to all of the members of both 

FHLBanks. I further expect that they would conduct a number of 

member outreach meetings to inform the members as to the terms 

of the transaction and the reasons why the board of directors of 

each FHLBank has determined that the transaction is in its best 

interest. Although the Bank Act does not authorize the members 

to vote on such a transaction, the information in the disclosure documents would allow them to evaluate the transaction and express 

any concerns they might have to their respective FHLBank’s board 

of directors. 

In considering the merits of any merger proposal, I believe that 

the Finance Board must evaluate how the proposed merger may affect the safety and soundness, capital adequacy, and mission 

achievement aspects of not only the Dallas and Chicago Banks, but 

of the other ten FHLBanks as well. 

PROBLEMS AT THE CHICAGO BANK

Q.4. The Home Loan Bank of Chicago is now operating under a 

cease and desist order issued by the Finance Board on October 10, 

2007. The cease and desist order supersedes the Supervisory Agreement issued by the Finance Board on June 30, 2004. The 2004 


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agreement was itself issued as a result of the Chicago Bank’s failure to address items identified in the Bank’s 2003 examination. 

Given that the problems identified at the Chicago Bank over four 

years ago have yet to be remedied, what steps is the Finance Board 

taking to ensure that the Bank’s problems do not pose a risk to the 

System as a whole? If the Chicago Bank and the Dallas Bank 

merge, how will the Finance Board ensure that the resulting entity 

addresses these problems? 

A.4. On October 10, 2007, the Finance Board placed the Federal 

Home Loan Bank of Chicago under a cease and desist order 

(Order). That action was taken to ensure that the Chicago Bank’s 

problems are addressed by current management in a timely manner and that they do not ‘‘spill over’’ to threaten the System as a 

whole. Among other things, the Order prevents the Chicago Bank 

from repurchasing or redeeming capital stock, or from paying dividends, without the prior written approval of the Finance Board’s 

Director of the Office of Supervision. The Order also requires the 

Chicago Bank to improve its risk management practices and to 

maintain a minimum ratio of capital stock, retained earnings, and 

subordinated debt to total assets of at least 4.5 percent. Although 

the specific provisions of the Order are intended to reduce the Chicago Bank’s risk exposures, the Order itself cannot ensure that the 

Chicago Bank’s management and board of directors will succeed in 

addressing its problems effectively and in a timely manner. Thus, 

we are closely monitoring the Chicago Bank’s financial condition, 

performance, and activities to ensure that it is progressing satisfactorily. 

It is incumbent upon the Dallas and Chicago Banks to demonstrate to the satisfaction of their respective stakeholders and the 

Finance board that the proposed merger will succeed. The Finance 

Board will carefully review the terms and conditions of the proposed merger once they are finalized to ensure that the supervisory 

issues concerning the Chicago Bank will be fully addressed. The Finance Board will also assess the financial and managerial resources and earnings prospects of the resulting entity. 

FEDERAL HOME LOAN BANKS’ RESPONSE TO THE HOUSING CRISIS

Our nation is currently in the midst of a housing crisis, with 

record numbers of Americans facing foreclosure. The Federal financial regulators have issued guidance regarding the underwriting of 

nontraditional and subprime mortgages. These guidelines require 

underwriting that more effectively establishes a borrower’s ability 

to repay the mortgage being made. 

Q.5. When did the Finance Board adopt these standards for determining what mortgages are eligible collateral for the Home Loan 

Banks to accept for advances or are eligible to be purchased as acquired member assets? 

A.5. The Finance Board, through its Office of Supervision, issued 

Advisory Bulletin 2007–AB–01, ‘‘Nontraditional and Subprime Residential Mortgage Loans,’’ on April 12, 2007. This advisory bulletin 

requires, in part, that each FHLBank adopt and implement policies 

and risk management practices as part of its credit risk management program that establish appropriate risk limits for, and approVerDate Nov 24 2008 08:59 Mar 18, 2010 Jkt 050367 PO 00000 Frm 00151 Fmt 6602 Sfmt 6602 E:\HR\OC\A367.XXX A367

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priate mitigation of, credit exposure on nontraditional and 

subprime mortgage loans. We evaluate each FHLBank’s compliance 

with this advisory bulletin through our examination program, taking into consideration market conditions and guidance issued by 

the Federal bank regulatory agencies. 

Additionally, in November 2007, we issued an internal bulletin 

to our examiners that provided guidance on assessing credit and 

reputational risks associated with investing in private-label MBS 

that are backed by subprime and nontraditional residential mortgage loans. This bulletin instructed examiners to, in part, determine whether the FHLBank’s private-label MBS investments have 

increased since the Federal Financial Institutions Examination 

Council (FFIEC) agencies issued their guidance on nontraditional 

mortgage product risks in October 2006 and, if so, whether additional investments in private-label MBS with underlying subprime 

and nontraditional mortgage loans consist of loans that conform to 

FFIEC agency guidance. 

In December 2007, as part of our ongoing supervisory efforts and, 

in particular, those ensuing from Advisory Bulletin 2007–AB–01, 

our Examiners-in-Charge contacted each FHLBank to express our 

expectations that FHLBank policies and processes regarding 

subprime and nontraditional mortgages should include requirements that the FHLBank will not include in its collateral coverage 

calculations loans that do not comply with FFIEC guidance on 

subprime and nontraditional mortgages for those loans originated 

after the FFIEC guidance was issued. We are preparing an advisory bulletin to formalize this communication, as well as our expectations that loans that underlie private-label MBS investments or 

that are purchased through the FHLBanks acquired member assets 

programs should similarly comply with FFIEC guidance. We expect 

that this advisory bulletin will be issued within 30 days. 

Q.6. Were these types of loans eligible collateral prior to that guidance being adopted? If so, what has the Finance Board done to ensure that such loans are no longer being used as collateral, and 

how much collateral has been affected? 

A.6. As regulator of the Federal Home Loan Banks, our supervisory 

efforts consider the conditions in the financial marketplace and the 

FHLBanks’ mission. The FHLBanks provide financial products and 

services to members and housing associates, including, but not limited to, advances that are used to assist in financing single-family 

and multi-family housing for consumers at all income levels. The 

use of nontraditional and subprime residential mortgage loans, 

when appropriately underwritten, may have provided and may continue to provide consumers with greater credit options for purposes 

of home ownership. However, when inappropriately marketed, underwritten, and managed, these loans often are associated with increased credit or reputational risk for financial institutions and an 

increased propensity for financial difficulty for the borrowers. 

As a general matter, we have not taken exception to the 

FHLBanks accepting appropriately underwritten subprime and 

nontraditional mortgages as collateral for advances provided that 

they have adopted adequate policies and procedures for doing so. 

As noted in our response to the preceding question, in December 


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2007 we contacted each FHLBank to express our expectations that 

FHLBank policies and processes regarding subprime and nontraditional mortgages should include requirements that the FHLBank 

will not include in its collateral coverage calculations loans that do 

not comply with FFIEC guidance on subprime and nontraditional 

mortgages for those loans originated after the FFIEC guidance was 

issued. We are preparing an advisory bulletin to formalize this 

communication, as well as our expectations that loans that underlie 

private-label MBS investments or that are purchased through the 

FHLBanks acquired member assets programs should similarly 

comply with FFIEC guidance. 

Q.7. What additional steps do you believe the Home Loan Banks 

can take to ensure that they are doing all they can both to stop 

abusive lending practices and to help keep people in their homes? 

A.7. The Finance Board, through its Office of Supervision, issued 

Advisory Bulletin 2005–AB–08, ‘‘Guidance on Federal Home Loan 

Bank Anti-Predatory Lending Policies,’’ on August 25, 2005. This 

advisory bulletin required each FHLBank to adopt comprehensive 

anti-predatory lending policies to govern the FHLBank’s purchasing of mortgages and calculating the level of advances that can 

be made to its members. The guidance requires that the 

FHLBanks’ policies preclude purchasing mortgages that violate applicable federal, state, or local predatory lending laws or including 

such loans when calculating the level of advances that can be made 

to a member. The guidance also requires that the FHLBanks’ policies address such features as mortgages subject to the Home Ownership and Equity Protection Act (HOEPA); prepaid single-premium credit life or similar insurance; prepayment penalties beyond 

the early years of the loan; and mandatory arbitration. Each 

FHLBank has developed written procedures and standards for 

verifying member compliance with its anti-predatory lending mortgage purchase and advance policies. The FHLBanks can help curb 

abusive lending practices by vigorously ensuring compliance with 

these policies. Our examination program includes monitoring the 

FHLBanks’ adherence to their policies and practices. 

The FHLBanks can help keep people in their homes by fulfilling 

their mission, including making advances that assist and enhance 

their members’ financing of housing, including single-family and 

multi-family housing serving consumers at all income levels. Since 

liquidity in the housing and financial markets faltered last year, 

advances at the FHLBanks have increased substantially. Between 

June 30, 2007 and February 13, 2008, advances increased by $234 

billion, providing liquidity to members and, in turn, the housing finance market. 

In addition, the FHLBanks can further assist with homeownership stability by using their affordable housing and community 

lending programs in innovative ways. For example, the Federal 

Home Loan Bank of San Francisco, after receiving certain regulatory waivers from the Finance Board, is establishing a program 

under which it will provide Affordable Housing Program grant subsidies on a noncompetitive basis to refinance or restructure low- or 

moderate-income borrowers’ existing nontraditional adjustable rate 

mortgage loans that are held by members or their affiliates of the 


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FHLBank. The program applies to all such loans when they have 

become unaffordable to those households, or are projected to become unaffordable, because of increased payments resulting from 

adjustments in the interest rates or loan principal that occur subsequent to origination. The Finance Board has initiated a review 

of the AHP regulation to consider changes to the regulation that 

would allow other FHLBank similar authority. 

Further, the Federal Home Loan Bank of Indianapolis (FHLBI) has created a $100 million lending initiative, HomeRetain, to help 

FHLBI financial institution members assist families facing foreclosure. HomeRetain is a part of the FHLBI’s Community Investment Program. Through HomeRetain, FHLBI will make available 

funding to its member financial institutions at the FHLBI’s cost of 

funds, plus a small administrative markup. Member financial institutions can then use the funds to help homeowners at risk of foreclosure to refinance their homes or modify their mortgages on more 

favorable terms. Additionally, last year, the Federal Home Loan 

Bank of Cincinnati started a HomeProtect Program, which makes 

available $250 million in advances to member financial institutions 

at its cost of funds for purposes similar to the Indianapolis Bank’s 

HomeRetain program. 

FINANCE BOARD’S REVIEW OF COLLATERAL

Q.8. What is the Finance Board’s process for reviewing the collateral pledged by the Banks’ members? Does the Finance Board review collateral pledged by individual institutions to see if they are 

pledging housing-related assets and are not simply pledging Treasuries, for example? To what extent does the Finance Board monitor 

the characteristics of mortgage loans that are pledged as collateral, 

such as borrower income levels, geographic distribution, etc.? 

A.8. The Finance Board uses two processes to monitor collateral 

pledged by the FHLBanks’ members. First, our examiners evaluate 

collateral operations during on-site examinations, which we conduct annually for each FHLBank. Specifically, the examiners assess the adequacy of the Banks’ monitoring of collateral pledged by 

members. In this regard, we expect the FHLBanks to obtain collateral information from their members, on a quarterly basis, that 

shows the volume and types of loans pledged. Our examiners also 

evaluate the FHLBanks’ oversight process, in which the FHLBanks 

assess their members’ compliance with pledging requirements. The 

second process is the Finance Board’s annual collateral survey, 

which is used to gather information on the FHLBanks’ collateral 

management practices, including the types of collateral accepted, 

the characteristics of that collateral, and the discounts, or ‘‘haircuts,’’ the FHLBanks apply to collateral to ensure that collateral 

values exceed credit exposures. 

Under the Bank Act, all advances to members must be fully secured by collateral. The FHLBank must obtain and maintain a security interest in ‘‘eligible collateral’’ which includes: (1) whole first 

mortgages on improved residential property (not more than 90 days 

delinquent), or securities representing a whole interest in such 

mortgages; (2) securities issued, insured, or guaranteed by the 

United States Government or any agency thereof; (3) cash or deposits of a Federal Home Loan Bank; (4) other real estate related colVerDate Nov 24 2008 08:59 Mar 18, 2010 Jkt 050367 PO 00000 Frm 00154 Fmt 6602 Sfmt 6602 E:\HR\OC\A367.XXX A367

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lateral acceptable to the Bank, if such collateral has a readily ascertainable value and the Bank can perfect its interest in the collateral; and (5) in the case of any member that qualifies as a ‘‘community financial institution’’, secured loans for small business, agriculture, or securities representing a whole interest in such secured loans. If the collateral securing an advance is insufficient to 

fully secure the advance, the member must reduce the advance 

promptly and prudently in accordance with a schedule determined 

by the FHLBank. 

Most FHLBanks use a ‘‘blanket lien’’ to secure their credit exposures to members. Blanket lien agreements differ among the 

FHLBanks in terms of the assets of the member that are covered 

by the blanket lien. For example, a blanket lien may cover all assets of a member, only the financial assets of a member, or it might 

cover only 1–4 family residential mortgage loans. As a matter of 

practice within the FHLBank System, when a blanket lien is used 

to secure collateral, the blanket lien will, at a minimum, cover all 

1–4 family mortgage loans. 

In lieu of a blanket lien, an FHLBank may require a ‘‘specific 

listing’’ of collateral from a member. Some FHLBanks view a listing requirement as a stronger form of collateral control than a 

blanket lien. FHLBanks often use a listing requirement for members that exhibit a higher than normal risk profile. Under a listing 

requirement, an FHLBank obtains loan level information from the 

member on all collateral that is pledged. The information is typically updated on a quarterly basis. 

FHLBanks can also take possession of a member’s collateral by 

requiring the member to ‘‘deliver’’ any collateral securing an advance. Delivery is generally required if securities are used to secure 

an advance or if the risk profile of the member is a matter of concern. FHLBanks can require delivery of collateral to the 

FHLBank’s premises or to a third party custodian. 

When examiners review the collateral that a member pledges to 

secure an advance, the focus is on whether the collateral that is 

pledged is ‘‘eligible collateral’’ and whether the value of the collateral is sufficient to fully secure the advance. Because Treasury securities are eligible collateral for advances under the Bank Act, an 

FHLBank may accept them as collateral if it wishes to do so; the 

Bank Act does not require an FHLBank to prefer housing-related 

collateral over Treasury securities. 

As a general rule, examiners do not monitor the characteristics 

of mortgage loans that are pledged as collateral, such as borrower 

income levels or geographic distribution. Again, the primary focus 

is on whether the collateral pledged is eligible collateral and 

whether the value of the collateral is sufficient to fully secure the 

advance. However, where examiners are concerned about the value 

of collateral securing a particular advance, they would review the 

characteristics of the mortgage loans that are pledged as collateral 

to ensure that the collateral is not overvalued by the member. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BAYH 

FROM RONALD A. ROSENFELD 

Q.1. I have reviewed the decision making process of regulatory 

boards and commissions and believe that a board structure results 

in much better regulatory decision making than a single person 

regulator. In your experience at FHFB, have you had experiences 

where the interplay with your colleagues on the Board of Directors 

has resulted in better decision making than would have been the 

case if there were only a single regulator? 

A.1. Both models, organizations with a board of directors and those 

with a single person regulator, can work. Each has its benefits and 

costs and there are times and circumstances when one model may 

be better than the other. The decision making process in a board 

or commission model benefits from the different perspectives 

brought to the table. A drawback might be that a board is not always able to act as quickly as circumstances might require. Often 

it is the strength and abilities of the individual or individuals that 

make an organization effective and efficient, and less about the 

structure. 

Having said that, from my experience as Chairman of the Federal Housing Finance Board, I have been a party to decisions 

where the collaboration of members of the board made the process 

better. I would say our rule making process, for example, benefits 

as much from the collaboration of the board members before a rule 

is proposed as it does from the comments we receive from the public stakeholders before making the rule final. 

With respect to government sponsored enterprise (GSE) reform, 

the more critical question is whether a full-time board is necessary 

for an organization whose regulated entities would number only 14, 

all of which are in the same basic business of furthering housing 

finance. I believe the policy making and stewardship responsibilities in such an organization can be carried out effectively through 

an advisory board, as proposed in the House of Representatives-approved GSE legislation, H.R. 1427 (H.R. 1427). The bill calls for a 

single agency responsible for the supervision and regulation of the 

Federal Home Loan Banks, Fannie Mae, and Freddie Mac. A single 

regulator would lead the agency, acting with the benefit of guidance from an advisory board comprising the Secretary of the Treasury, the Secretary of Housing and Urban Development (HUD), and 

the Chairman of the Federal Reserve Board. The advisory board 

would establish the governing principles and standards critical to 

carrying out the responsibility of overseeing the housing GSEs. 

Q.2. In reviewing the statutory authorities of the FHFB and 

OFHEO it appears that the FHFB has all of the authorities and 

independence needed of a strong regulator, and OFHEO is seriously deficient. Why did you not simply suggest that the regulation 

of Fannie Mae and Freddie Mac be moved to the FHFB and subject 

the enterprises to the FHFB statute? 

A.2. I do not believe that there is a simple way, such as subjecting 

Fannie Mae and Freddie Mac to the Federal Home Loan Bank Act, 

to address GSE reform. Any reconfiguration of the regulatory structure for the oversight of Fannie Mae, Freddie Mac, and the Federal 

Home Loan Banks will require extensive amendments to the key 


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regulatory statutes, i.e., the Bank Act and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Housing 

Act), as well as conforming amendments to the Federal National 

Mortgage Association Charter Act and the Federal Home Loan 

Mortgage Corporation Act. This would be true regardless of whether the Finance Board, Office of Federal Housing Enterprise Oversight (OFHEO), or a newly created agency were to be charged with 

supervising all of these entities. 

The Administration has advocated the creation of a new agency 

headed by a single director and would use the Housing Act as the 

primary vehicle to achieve that result. The GSE reform bill passed 

by the House of Representatives, H.R. 1427, followed that same approach. I see no reason to question the wisdom of that approach, 

nor do I believe that using the Bank Act as the vehicle for a new 

regulatory structure would necessarily result in a more effective 

regulatory agency. 

Moreover, I believe that H.R. 1427 includes provisions that would 

enhance the supervisory and enforcement authority of the new 

agency over the powers the Finance Board has under current law. 

For example, the Finance Board’s enforcement powers are conferred by Section 2B of the Bank Act, which generally incorporates 

by reference the enforcement powers that Congress has conferred 

on OFHEO. In other words, the enforcement powers that the Finance Board has today are, with only minor exceptions, derived 

from the OFHEO statute. To the extent that the OFHEO statute 

is amended to enhance its enforcement powers, the new agency 

would have somewhat greater powers than the Finance Board has 

today. In addition, H.R. 1427 would give the new regulatory agency 

enhanced conservatorship powers and detailed receivership powers 

(both of which would apply to the FHLBanks, as well as Fannie 

Mae and Freddie Mac), which would improve upon the existing authority that the Finance Board has to liquidate or reorganize an 

FHLBank. 

In addition, I do not believe that any existing statute is sufficient 

to accommodate the oversight of both the FHLBanks and the Enterprises. The Bank Act, which was enacted in 1932, is specific to 

the Federal Home Loan Bank System, and the Housing Act is specific to the oversight of Fannie Mae and Freddie Mac. Those statutory differences reflect fundamental differences in the structure 

and operation of the three housing GSEs. For example, the 

FHLBanks are member-owned cooperatives, whereas Fannie Mae 

and Freddie Mac are shareholder owned entities whose stocks are 

traded in the capital markets. That difference manifests itself in 

different capital structures, different board structures, and different orientations toward shareholder expectations and product 

pricing. Further, the principal business of the FHLBanks is secured lending to their members, whereas the principal business of 

Fannie Mae and Freddie Mac (Enterprises) is the securitization of 

mortgage loans. 

A single unified housing GSE regulator would be a more efficient 

and effective regulator. As I stated in my prepared testimony, what 

is important is that the new regulator have the ability to fund 

itself through assessments and be out of the appropriations process; it should have the ability to place a GSE into receivership or 


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conservatorship; it should have the authority to approve new and 

existing business activities; and it should have the power to set and 

adjust minimum capital standards. All of these matters can be accomplished by legislation that recognizes the differences between 

the FHLBanks and the Enterprises. In so doing, the Congress will 

assure that the important distinctions between the FHLBanks and 

the Enterprises are preserved. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER 

FROM RONALD A. ROSENFELD 

Q.1. The Federal Home Loan Bank System currently holds $88 billion in private-label MBS and only $4 billion in retained earnings. 

Fifty-eight of these securities are on negative watch. Given market 

conditions, is it possible that all or most of the System’s retained 

earnings could be used to write down the private-label MBS? 

A.1. The FHLBanks own more than 1,650 private-label mortgagebacked securities (MBS), so it is difficult to generalize about potential losses. Deal structures, including credit support structures, 

subordination, and pool composition are key determinants of potential losses. We monitor the FHLBanks’ private-label MBS portfolios 

and are working to ensure that the FHLBanks maintain retained 

earnings at appropriate levels. 

As of February 19, 2008, the FHLBanks held 24 downgraded private-label MBS and 53 private-label MBS under negative watch by 

one or more rating agencies. The securities that have been downgraded or placed on negative watch represent approximately two 

percent of the FHLBanks’ private-label MBS. The remainder of the 

FHLBanks’ MBS is currently rated triple-A with a stable outlook. 

However, given the volatility in this market, the ratings of these 

securities could change. 

In general, the FHLBanks purchase triple-A ‘‘tranches’’ of private-label MBS. The performance of a particular tranche depends 

on the performance of the underlying loans and the structure of the 

particular security. The structure of a security dictates how the 

cash flows are prioritized among the security’s tranches. The problems in the private-label MBS market are serious, but the problems do not affect all securities the same way. For example, losses 

to an investor would be unlikely if the underlying pool of mortgages is experiencing low delinquencies or has very high levels of 

credit support. 

While many private-label MBS are thought to have a market 

value below their book value, specific accounting rules govern 

whether unrealized losses need to be recognized through earnings. 

The overwhelming majority of the FHLBanks’ MBS are in held-tomaturity accounts. Accounting rules require losses to be recognized 

on such assets when the losses are deemed to be ‘‘other than temporary.’’ Factors bearing on whether a loss is other than temporary 

include, among other things: 

• The length of the time and the extent to which the market 

value has been less than cost; 

• The financial condition and near-term prospects of the issuer, 

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ations of the issuer, such as changes in technology that may 

impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the 

future earnings potential; or 

• The intent and ability of the holder to retain its investment in 

the issuer for a period of time sufficient to allow for any anticipated recovery in market value. 

If the FHLBank determines that an MBS in a held-to-maturity 

account is likely to recover its market value losses over time, and 

if the FHLBank has both the intent and ability to hold that security to maturity, then it need not record a loss. 

Q.2. What are you doing about this and when can we expect the 

Finance Board to issue a proposed rule on retained earnings? 

A.2. In August 2003, the Office of Supervision issued Advisory Bulletin 03–08 that called on each FHLBank to assess the adequacy 

of its retained earnings in a systematic fashion. This guidance was 

a part of a continuing supervisory focus on the adequacy of retained earnings. At the end of June 2003, retained earnings were 

$746 million or 0.09 percent of assets. By the end of 2007, retained 

earnings had increased to $3.7 billion or 0.29 percent of assets. 

We expect the FHLBanks to continually assess the adequacy of 

their retained earnings in light of market conditions and adjust 

their retained earnings accordingly. We shortly will be giving instructions to each FHLBank to prepare a substantive analysis of 

the credit risk exposure stemming from MBS. We will expect them 

to prepare and submit that analysis to us within 30 days. We will 

then consider these submissions when we determine the adequacy 

of each FHLBank’s retained earnings. 

Although the Finance Board, in 2006, issued a proposed rule governing the minimum amount of retained earnings each FHLBank 

should have, we deferred any action on the proposed rule. A revised 

retained earnings proposed rule is not currently under active consideration by the Finance Board. 

Q.3. Also can you provide this committee with a list of the downgraded securities? 

A.3. The MBS holdings of individual FHLBanks are obtained as 

part of the supervisory process and are confidential bank supervisory information. I can, however, provide an overview of the 

downgraded securities in the FHLBanks’ MBS portfolios. As of February 19, 2008, the FHLBanks held: 

• 14 MBS that had been downgraded to single-A, from triple-A, 

with a book value of $88.8 million; of these, 10 securities with 

a book value of $16.8 million remain on negative watch; 

• 10 MBS that had been downgraded to double-A with a book 

value of $413.9 million; of these, 8 securities with a book value 

of $373.9 million remain on negative watch; and 

• 53 MBS securities rated triple-A with a book value of $1.2 billion, were placed under negative watch by one or more rating 

agencies. 

The securities that have been downgraded and/or that are on 

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label MBS holdings. All their remaining private-label MBS are currently rated triple-A, and are not on negative watch. However, 

given the volatility in this market, the ratings of these securities 

could change. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM RONALD A. ROSENFELD 

One of the areas that I believe needs more debate and vetting 

is the strengths and weaknesses between affordable housing goals, 

affordable housing programs, and an affordable housing fund. 

Fannie and Freddie have affordable housing goals, the Federal 

Home Loan Banks have an affordable housing program, and the 

House passed GSE reform legislation would establish a new housing fund with goals. The most recent GSE reform legislation that 

passed the Senate Banking Committee did not have a housing 

fund. 

Q.1. What are the strengths and weaknesses between affordable 

housing goals, affordable housing programs, and an affordable 

housing fund like the House approach? 

A.1. Affordable housing goals, the Affordable Housing Program 

(AHP), and an affordable housing fund provide alternative mechanisms for addressing affordable housing problems and needs. The 

affordable housing goals applicable to Fannie Mae and Freddie Mac 

establish targets for their purchases of mortgages in three categories: low- and moderate-income households; housing located in 

central cities, rural areas, or other underserved areas; and a special affordable category covering low-income households in low-income areas or very low-income households. The AHP requires that 

each FHLBank use 10 percent of its net income to operate an affordable housing program. The proposed affordable housing fund 

would require Fannie Mae and Freddie Mac to contribute annually 

an amount equal to 1.2 basis points of their prior year’s total mortgage portfolios, to be allocated by the HUD Secretary to states and 

Indian tribes for affordable owner-occupied and rental housing, and 

for targeted economic and community development. The first two 

approaches, affordable housing goals and the AHP, have operated 

for well over a decade. The proposed affordable housing fund would 

be new and includes some features analogous to those of the AHP, 

such as the contribution of earnings to fund the subsidy. As Chairman of the Federal Housing Finance Board, I am most familiar 

with the AHP and can best provide insights on the operation and 

characteristics of this program. 

The AHP subsidizes the cost of owner-occupied housing for individuals and families with incomes at or below 80 percent of the 

area median income (AMI), and rental housing in which at least 20 

percent of the units are reserved for households with incomes at or 

below 50 percent of AMI. The subsidy may be in the form of a 

grant or a below-cost or subsidized interest rate on an advance. 

Each FHLBank funds its own AHP annually by contributing 10 

percent of its previous year’s net income after the Resolution Funding Corporation payment. In 2007, the 12 FHLBanks contributed 

a combined $295 million to the AHP; since 1990, the FHLBanks 


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have contributed about $3.2 billion to assist eligible affordable 

owner-occupied and rental housing. 

The FHLBanks award AHP funds through a competitive application program and a homeownership set-aside program. In the competitive program, members submit applications on behalf of one or 

more sponsors of eligible housing projects. Projects must meet certain eligibility requirements and score successfully in order to obtain funding. Under the homeownership set-aside program, an 

FHLBank may allocate up to the greater of $4.5 million or 35 percent of its AHP funds each year to assist low- and moderate-income 

households purchase or rehabilitate homes, provided that at least 

one-third of the FHLBank’s homeownership set-aside allocation is 

made available to assist first-time homebuyers. Members obtain 

the AHP set-aside funds from the FHLBank and then use them as 

grants to eligible households. Homeownership set-aside funds may 

be used for down payment, closing cost, counseling or rehabilitation 

assistance in connection with the household’s purchase or rehabilitation of an owner-occupied unit. Each FHLBank sets its own maximum grant amount, which may not exceed $15,000 per household. 

The structure and operation of the AHP exhibit a number of 

strengths on which I elaborate in my response to the question 

below. I believe that key lessons we have learned are that program 

flexibility and local decision-making are preferable to a prescriptive, centralized Washington-defined and driven program, but that 

a strong supervisory foundation should accompany program flexibility. The Bank Act has provided flexibility to the Finance Board 

as regulator to adjust the AHP as conditions warranted; the Finance Board has amended the AHP regulation a number of times, 

including substantively in 1998 and 2006. The Finance Board has 

strengthened its AHP examination program and completed the development of a modernized AHP database to provide enhanced 

measurement of program outcomes. 

Q.2. If we go down the track of creating a housing program or 

housing trust fund for Fannie and Freddie, what is the appropriate 

amount of resources that should be spent, who should allocate the 

funds, and how should the funds be spent? 

A.2. The AHP offers one model of a successful program to support 

affordable housing. The AHP’s design ensures that the funds are 

used for eligible purposes to meet the statutory requirement that 

the preponderance of the subsidy directly benefits very low, lowand moderate-income households. In the case of the AHP, the 

FHLBanks bear the administrative costs of the program as well. 

The flexibility of the program allows it to respond to local housing 

conditions and needs, adapt to evolving market conditions and capitalize on innovations in affordable housing finance. Program decision-making and eligibility requirements are transparent and not 

subject to political or corporate influence in the use and distribution of funds. 

The following seven program features contribute to the efficient 

and effective use of program funds and help to protect the AHP’s 

integrity: 

Basic Eligibility Requirements—Regulatory and statutory eligibility requirements are clear and public. Under the competitive 


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program, any rental or homeownership project that meets the 

eligibility criteria may apply regardless of corporate or political 

affiliation. Under the homeownership set-aside program, 

households that meet the eligibility requirement may apply to 

a member lender for down payment, closing cost or rehabilitation assistance, typically on a first-come-first-served basis. 

Competitive Scoring System—The scoring system is transparent and accessible to the public. Applicants receive points 

based on the extent to which the projects meet defined, largely 

objective criteria. In each funding round, the FHLBanks must 

fund the highest scoring applications in the order of their ranking by points until the available amount of subsidy is exhausted. Applications are not judged on any merits outside of 

the scoring system, and ‘‘lobbying’’ for certain applications or 

projects has no effect on the scoring outcome or the decision to 

fund the project. 

Timely Awarding of Funds—Each FHLBank’s annual contribution of AHP subsidies must be used by or committed to eligible 

projects within that year. Consequently, the FHLBanks announce the successful applications within a few months of receiving the applications. Funding decisions are clear, quick, 

and public. 

Recapture of Misused or Unused AHP Subsidies—If a project 

sponsor or household receives AHP subsidy that it does not use 

for the duration of the affordability retention period or does not 

use in accordance with the AHP requirements, the FHLBank 

must recapture the amount of AHP subsidy. Recapture ensures 

that AHP funds that are not used properly are repaid to the 

AHP and used for subsequent projects and are not ‘‘lost’’ to the 

program. This liability for recapture is a financial incentive for 

the FHLBanks to operate the program in strict conformance 

with the requirements of the statute and regulation. 

Conflicts of Interest Policies—The FHLBanks establish and adhere to conflicts of interest policies that are applicable to 

FHLBank directors, to management and staff, to FHLBank 

member lenders, and to Advisory Council members. 

Oversight by a Public Advisory Council—Each FHLBank has 

an Advisory Council comprising housing and community investment practitioners and experts. These councils advise their 

respective FHLBanks on affordable housing needs in the district and the use of AHP subsidies, set and review scoring criteria, and evaluate the outcomes of funding rounds. 

Oversight by the Federal Regulator—The Federal Housing Finance Board conducts examinations of the FHLBanks’ AHPs. 

These examinations cover both the FHLBanks’ compliance 

with the operational requirements of the AHP, and the 

FHLBanks’ oversight of projects’ compliance with the low-ormoderate-income targeting and affordability requirements of 

the program. 

Q.3. Does it make sense to have both housing goals and a housing 

program for Fannie and Freddie? 


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A.3. The existing housing goals and the affordable housing fund 

proposed in the House-approved GSE reform legislation operate in 

different ways, may reach different beneficiary groups or fulfill different purposes, and need not be mutually exclusive. The housing 

goals focus on the operation of the basic business of the enterprises—purchasing mortgages on the secondary market—and provide benefits indirectly. The 1992 legislation initially establishing 

the affordable housing goals for the Enterprises referred to their 

‘‘. . . affirmative obligation to facilitate the financing of affordable 

housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a 

strong financial condition and a reasonable economic return.’’ One 

effect of the housing goals could be to extend the reach of the private market to lower income groups while also contributing positively to the bottom line of the enterprises. An affordable housing 

fund or program would use funds earned by the Enterprises to provide an explicit subsidy to affordable housing projects or initiatives 

that meet established criteria. The specific focus for any funding 

cycle could change to reflect current market conditions and needs 

and would not necessarily be connected to the secondary market. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM RICHARD F. SYRON 

One of the areas that I believe needs more debate and vetting 

is the strengths and weaknesses between affordable housing goals, 

affordable housing programs, and an affordable housing fund. 

Fannie and Freddie have affordable housing goals, the Federal 

Home Loan Banks have an affordable housing program, and the 

House passed GSE reform legislation would establish a new housing fund with goals. The most recent GSE reform legislation that 

passed the Senate Banking Committee did not have a housing fund 

Q.1. What are the strengths and weaknesses between affordable 

housing goals, affordable housing programs, and an affordable 

housing fund like the House approach? 

A.1. There are many factors that impact the availability of affordable housing including, for example, the availability of mortgage 

credit and the physical supply of housing. There are also different 

policy tools that are designed to address those factors. As discussed 

below, housing goals, a duty to serve, and an AHF have varying 

strengths and weaknesses in their ability to address affordable 

housing needs. 

HOUSING GOALS

A key strength of the affordable housing goals is that they help 

ensure the availability of mortgage credit to low- and moderate-income families and families living in underserved communities by 

requiring that certain percentages of the enterprises’ mortgage purchases finance mortgages made to these families, or finance affordable rental housing. Housing goals thus leverage the ability of the 

enterprises to provide liquidity to the secondary mortgage market, 

and also produce a measurable policy outcome. 


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However, goals and subgoals set in excess of what the primary 

market originates should be avoided to prevent adverse unintended 

consequences, such as over-extension of mortgage credit that can in 

turn result in increased borrower foreclosures and credit losses. In 

fact, a disproportionate share of our credit losses is attributable to 

loans that qualify for one of HUD’s affordable housing goals. These 

loans incur losses approximately two times the rate of non-goal 

qualifying loans. 

To be effective, the GSE regulator must consider prevailing market conditions in making a determination with respect to goals 

achievement and must have responsibility to recalibrate the goals 

in response to changes in market conditions. Finally, the number 

of goals and subgoals should be limited; when market conditions 

are volatile and, as the number of goals increase, so too does the 

likelihood that all goals and subgoals are not concurrently feasible. 

A mix of feasible and infeasible goals that are equally enforceable 

will create unintended market distortions. 

A key weakness of the housing goals is that they can only address the availability of mortgage credit and not other issues that 

are important to enhancing sustainable home ownership, such as 

the supply of affordable housing. 

DUTY TO SERVE

In addition to numerical goals, the GSE reform bill passed by the 

House of Representatives in May 2007, H.R. 1427, and the bill introduced by Senator Reed in November 2007, S. 2391, would create 

an explicit duty to serve underserved markets that would require 

the enterprises to increase investments in products and develop 

credit policies that promote lending in certain affordable housing 

areas that policymakers designate as underserved by the market. 

The duty to serve also would be fully enforceable in the same manner as the housing goals. 

Given the imprecise nature of a duty to serve, we believe that 

the regulator should have flexibility to assess an enterprise’s compliance with a duty to serve and that enforcement should not be 

punitive. For example, the regulator should not be required to 

automatically subject an enterprise to the full panoply of ceaseand-desist and civil money penalty enforcement tools for failure to 

achieve a single aspect of the duty to serve. 

Finally, any duty to serve must be limited in number, duration, 

and total financial burden to ensure that the duty does not impair 

the enterprises’ additional mission responsibilities to provide liquidity and stability to the market or impair the enterprises’ safety 

and soundness. Unless the regulator must review these underserved designations periodically, there is a significant risk of imposing a continuing legal duty on the enterprises even after the 

policy basis for such a designation ceases to exist. 

An alternative means to focus the enterprises’ attention on certain housing markets, is through establishing a bonus points incentive system, within, not in addition to, the numerical goals framework. 


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AFFORDABLE HOUSING FUND

A principal strength of an AHF is that it directly increases the 

supply of affordable housing by subsidizing the construction or 

preservation of such housing. Because an AHF targets the construction and preservation of affordable housing and mandates 

spending funds for such purposes, it helps ensure that affordable 

housing will be built or preserved. If the objectives and management of an AHF are sufficiently flexible, direct subsidies can also 

be combined with other federal, local or private money to leverage 

the effect of the subsidies and provide an even greater supply of affordable housing. An AHF analogous to the affordable housing program (AHP) that the FHLBs must establish, could encourage investments and innovations that complements the core affordable 

responsibilities of the enterprises. 

A principal weakness of the AHF model with respect to the enterprises is that it does not leverage our expertise in providing liquidity and stability to the residential mortgage market. The enterprises are designed to provide a secondary market in support of 

mortgage finance, not provide direct subsidies to particular forms 

of affordable housing. 

We believe that the establishment of an AHF should not be 

viewed in isolation, but rather in the context of our overall affordable housing mission and other regulatory requirements. With this 

perspective in mind, if GSE reform legislation that includes an 

AHF is crafted appropriately, it could be an effective means 

through which we advance our affordable housing mission. 

Q.2. If we go down the track of creating a housing program or 

housing trust fund for Fannie and Freddie, what is the appropriate 

amount of resources that should be spent, who should allocate the 

funds, and how should the funds be spent? 

A.2. Freddie Mac believes that if the enterprises are required to 

fund an AHF, the enterprises’ contributions must be tied to profitability, rather than based on a poll tax on each enterprises’ total 

portfolio, as in H.R. 1427, or new mortgage purchases, as in S. 

2391. In this way, the success of the fund would be more closely 

tied to the success of the enterprises. This type of alignment has 

been successful for the FHLBs’ AHP, on which the AHF is modeled. 

There are sound policy reasons for linking AHF contributions to 

profitability. Congress created the enterprises to harness private 

capital to bring liquidity, stability and affordability to the nation’s 

housing finance system in all economic environments—a vital role, 

as current market conditions demonstrate. When markets are calm 

and business is profitable, the enterprises can make a reasonable 

AHF contribution without significant damage to the residential 

mortgage market. However, a contribution formula based on volume of business would not adequately take into account adverse 

economic times—when the enterprises are most needed. For example, had either H.R. 1427 or S. 2391 been in effect in 2007, the enterprises’ 2008 AHF contribution would have been about $550 million. The resulting decrease in the enterprises’ capital bases would 

remove about $17 billion of liquidity from the mortgage finance 

system in 2008. 


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In the event the enterprises continue to be subject to numerical 

housing goals and are also required to fund an AHF, we believe 

that allocations to the AHF should be limited in recognition of the 

financial impact of numerical goals. 

If an AHF is created by Congress, we support the approach taken 

in H.R. 1427 and S. 2391 whereby the enterprises’ regulator would 

be responsible for the AHF’s administration. The enterprises do not 

possess the requisite expertise for making grants on a large-scale 

and for monitoring compliance with the terms under which funds 

would be provided to housing and community organizations. 

Q.3. Does it make sense to have both housing goals and a housing 

program for Fannie and Freddie? 

A.3. We do not believe the enterprises need both housing goals and 

a housing program to help meet the affordable housing needs of 

low- and moderate-income families and families living in underserved communities that the housing goals are intended to help. In 

the event legislation includes both provisions, we would urge the 

Congress to take into account the full impact of any expansion of 

the enterprises’ affordable housing obligations including multiple 

and potentially overlapping housing goals and subgoals, creation of 

an enforceable duty to serve, and establishment of an AHF. 

In summary, it is important that the enterprises have objective 

affordable housing goals to which they are held accountable. However, we must ensure that we do not end up with too many goals 

that are too confusing and with too much potential to have perverse, if unintended consequences. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM DANIEL H. MUDD 

One of the areas that I believe needs more debate and vetting 

is the strengths and weaknesses between affordable housing goals, 

affordable housing programs, and an affordable housing fund. 

Fannie and Freddie have affordable housing goals, the Federal 

Home Loan Banks have an affordable housing program, and the 

House-passed GSE reform legislation would establish a new housing fund with goals. The most recent GSE reform legislation that 

passed the Senate Banking Committee did not have a housing 

fund. 

Q.1. What are the strengths and weaknesses between the affordable housing goals, affordable housing programs, and an affordable 

housing fund like the House approach? 

A.1. To achieve the affordable housing goals, Fannie Mae has devoted more than half of its business to serving underserved families and communities. At the very minimum, the housing goals 

have helped to ensure that the GSEs’ effort and performance in 

serving the housing finance needs of low- and moderate-income 

households and underserved areas lined up with the performance 

of the market. More than that, Fannie Mae’s affordable housing 

initiatives—including our voluntary minority lending stretch 

goals—may well have helped to transform the market. Clearly, 

more needs to be done because too many families and communities 

remain underserved by housing finance, and the current housing 


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correction is hitting underserved families harder and threatening 

the nation’s progress. But we believe the objective of the affordable 

housing goals has been achieved, as the GSE commitment—and 

achievement—of the goals has promoted significant innovation in 

sustainable affordable housing finance and helped to advance 

homeownership. 

Along the way, a hidden strength of the GSEs’ regulatory regime 

was the way in which the goals were integrated into the business 

practices of the two enterprises. The goals provided their intended 

incentives; they encouraged the GSEs to harness their human capital, technology, standardization, risk management expertise, product development and innovation, and capital market access on behalf of the housing finance needs of low- and moderate-income families and underserved areas. The housing goals encouraged the 

GSEs to use private-sector skills—the skills needed to succeed as 

a for-profit, shareholder-owned company competing in a highlycompetitive global market—to serve the targeted populations. 

The affordable housing goals are an important part of our mission, and Fannie Mae has worked hard to achieve the goals. However, we believe that any new legislation should address several 

weaknesses in the current goals regime. 

First, the goals have now exceeded the available market opportunities presented to the GSEs. The current housing and mortgage 

market correction, tightened lending standards and collapse of 

lending to borrowers with imperfect credit has vastly reduced the 

supply of loans in the market that meet current HUD goals. We 

recognize that increasing the goals has prodded GSEs to do more 

to meet the nation’s affordable housing needs and expand homeownership to underserved families and communities, and to play a 

leadership role in the market by creating a source of capital for 

loans that might not otherwise have been made. We embrace—and 

pursue—those objectives in our business activities every day. But 

when the market for goals-related loans falls below the goal requirements, in spite of our best efforts to promote more affordable 

lending, then the goals can encourage market-distorting activities. 

In particular, when the goals exceed actual market opportunities, 

meeting them requires the GSEs to pay a premium over market 

prices—often a substantial premium—for loans that meet goals requirements. We are concerned that may promote unsustainable 

lending. One alternative would be to reduce our participation in 

loans that do not meet the housing goals, including lending to middle-class families, thus reducing the denominator of the goals calculation. That, of course, would contradict the liquidity mission for 

which the GSEs were chartered by Congress. 

Second, over time, managing compliance with the goals has become increasingly complex. In the 2004 rule-making, HUD added 

three home purchase subgoals to the existing three goals and an 

existing multifamily special affordable subgoal. This new layer of 

complexity has added to the administrative challenges of measuring, tracking, and reporting goals performance and complying 

with other aspects of the regulations. The complexity has also created situations where the goals and subgoals can conflict with one 

another. For example, because the goals and subgoals are measured as a percent of our total business, efforts to close a gap in our 


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performance on the low- and moderate-income subgoal would make 

it harder to meet the special affordable housing subgoal—unless 

the purchased loan met both subgoals simultaneously. 

Third, the goals are not aligned with the affordable housing requirements of other regulated financial institutions that participate 

in the mortgage market—those that have such requirements; many 

do not. For example, the Community Reinvestment Act, which applies to banks and thrifts, has rules and incentives that differ significantly from the GSE affordable-housing goals. Likewise, Fannie 

Mae and Freddie Mac must meet affordable housing goals, while 

the Federal Home Loan Banks, also GSEs, are required only to operate an Affordable Housing Program (AHP) that makes grants in 

support of affordable housing developments and first-time homebuyer programs. H.R. 1427 contemplates that Fannie Mae and 

Freddie Mac would also be required to contribute to a program 

similar to AHP (though unlike the FHLB program, H.R. 1427 

would not permit the GSEs to manage the fund). Fannie Mae 

would encourage that legislation to improve GSE affordable lending 

requirements align the goals and incentives of all the players in 

the primary and secondary mortgage market. 

Fourth, recent legislative proposals have included a provision 

that would impose a new duty on the GSEs to serve certain underserved markets by increasing the liquidity of mortgage investments 

and improving the distribution of investment capital available for 

mortgage financing for these markets. Specifically, the GSE would 

be required to lead the industry in developing loan products and 

flexible underwriting guidelines to facilitate a secondary market in 

at least three specified markets—manufactured housing, affordable 

housing preservation, and rural housing. This new duty to serve 

underserved markets would be in addition to the GSEs’ continuing 

commitment to meet affordable housing goals and the GSEs’ new 

commitment to contribute to an affordable housing fund. 

Fannie Mae stands ready to address the specific housing needs 

identified by Congress as part of a new mission framework. However, we are concerned that if this new requirement is crafted as 

an enforceable subgoal and defined in a quantitative manner, it 

would create a burdensome inefficiency in our business. We would 

support Duties to Serve that were articulated and enforced in a 

manner that is flexible and consistent with market opportunities, 

encouraged the GSEs to lead the industry with both quantitative 

and qualitative contributions, and that did not impose any additional unintended costs on our business to meet these requirements. 

Finally, regarding the strengths of affordable housing programs 

and an affordable housing fund, we believe they appropriately provide critical subsidy dollars to the affordable lending equation. Absent some form of subsidy, the private sector GSE or otherwise 

cannot reliably finance housing that is affordable to the very lowest-income families. 

However, we would offer that a principal weakness currently in 

the nation’s housing programs is that affordable housing developers 

need to seek subsidies from multiple sources in order to make their 

projects succeed. The layering of subsidies and the complexity of 

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ment of affordable housing increases ‘‘soft’’ costs that eat up too 

much of the scarce subsidy dollars. Certainly, the consideration of 

a new federal program financed by GSE dollars would need to address—or at least avoid exacerbating this problem. 

Below is a brief description of how the housing goals work today. 

• By statute, a percentage of Fannie Mae’s mortgage purchases 

every year must serve targeted segments of the home-buying 

public: low- and moderate-income families, families with very 

low incomes, and families living in underserved communities. 

The Department of Housing and Urban Development (HUD) 

sets those goals by regulation. HUD’s current regulations, promulgated in 2004, increased the housing goals levels for 2005– 

2008, increased the special affordable multifamily subgoal, and 

created new home purchase subgoals. 

• For 2007, the annual housing goals were as follows: 55 percent 

of the dwelling units financed by Fannie Mae’s mortgage purchases must be affordable to low- and moderate-income families (families with incomes at or below the area median income); 25 percent must be affordable to very low-income families (families with incomes less than 60 percent of area median 

income) or low-income families living in low-income areas; and 

38 percent must be affordable to families living in underserved 

areas. 

• In addition, the multifamily special affordable subgoal sets a 

minimum dollar volume of qualifying multifamily mortgage 

purchases that Fannie Mae must meet annually. The most recent goal was set at $5.49 billion. 

• The home purchase subgoals are expressed as percentages of 

the total number of mortgages purchased (rather than dwelling 

units financed by mortgage purchases) by Fannie Mae that finance the purchase (not refinance) of single-family, owner-occupied properties located in metropolitan areas. For 2007, the 

subgoals were as follows: 47 percent of Fannie Mae’s purchases 

of home purchase mortgages on single-family, owner-occupied 

properties in metropolitan areas must serve low- and moderate-income families, 18 percent must serve very low-income 

families or low-income families living in low-income areas, and 

33 percent must serve families living in underserved areas. 

Q.2. If we go down the track of creating a housing program or 

housing trust fund for Fannie and Freddie, what is the appropriate 

amount of resources that should be spent, who should allocate the 

funds, and how should the funds be spent? 

A.2. Fannie Mae supports the creation of an affordable housing 

fund calculated from net income that is aligned with the objectives 

of the affordable housing goals and strengthens our public mission. 

We believe the most effective approach to such a fund would be to 

link our contribution to our net income, rather than the size of our 

book of business or new loan acquisitions. In addition, we believe 

there should be provisions that permit a GSE to suspend payments 

to the fund if the payments would risk a depletion of capital to a 

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agement practices or—since the contribution is based on net income—if we were not able to achieve a profit in the previous year. 

Fannie Mae has also stated that we believe the GSEs should 

manage the affordable housing fund, rather than transferring company resources to the government or a third party to administer 

the funds. While on the face of it, enabling the GSEs simply to 

‘‘write a check’’ would free us from the administrative costs and requirement of managing the fund, we believe the most efficient and 

effective use of the funds would be to harness them to enhance our 

ongoing affordable housing efforts including, but not limited to, the 

goals. In particular, if managed by the GSEs, the affordable housing funds would permit us to marry this subsidy with our private 

capital investments to more effectively serve underserved families 

and communities. This approach provides a unique opportunity to 

promote affordable housing efforts that are scalable and replicable, 

consistent with the GSE business model. GSE management of an 

Affordable Housing Fund would permit—and encourage—us to 

work directly with, and assist, the network of state and local affordable housing partners we have built over the years of community investment work. We believe the GSEs should manage the 

fund in regular consultation with Congress and our regulator, including filing an annual plan and report on our efforts. We should 

manage the fund, and we should be held accountable for the results. 

Conversely, we are concerned that if a separate affordable housing program is created with GSE contributions but not GSE management, the result would be another federal program—in essence, 

yet another layer of federal affordable housing subsidies with its 

own set of rules. The new program would certainly provide more 

resources for affordable housing, but would also increase transaction and other ‘‘soft costs’’ that would dilute the impact of the 

new dollars. 

Q.3. Does it make sense to have both housing goals and a housing 

program for Fannie and Freddie? 

A.3. This is an important issue because of the potential for the two 

combined—meeting the affordable housing goals and supporting an 

affordable housing fund—to impose an inordinate and 

unsustainable cost to the GSEs, ultimately undermining their ability to serve the market as a private enterprise. If Congress does 

wish to retain both requirements, Fannie Mae believes that housing goals requirements and an affordable housing program could 

exist side-by-side under these conditions: 

• The combined cost of the affordable housing goals and the affordable housing program does not hinder the ability of the 

GSEs to succeed as privately-owned companies in a highly 

competitive market, or impede their core missions of providing 

liquidity and stability to the broader housing finance system; 

• The housing goals requirements are consistent with the realistic market opportunities for the secondary market, such that 

the goals do not impose inordinate costs on the companies in 

addition to the amount required to support the affordable 

housing fund; and 


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• The requirements are integrated: That is, the GSEs should be 

able to apply the affordable housing fund resources to help the 

companies to address the other mission requirements established by Congress in the legislation. 

Ultimately, we believe that in establishing GSE affordable housing requirements—housing goals and/or housing fund, or otherwise—it is important to recognize that we fulfill our public charters 

through private enterprise. That means permitting the enterprises 

to harness and pursue private sector efficiencies, strategies, innovations. It also means recognizing that market forces are an important consideration. Finally, it means bearing in mind the trade-offs 

that are inherent in the use of private capital in lieu of public funding to achieve a national policy goal. To be specific, the requirements of private enterprise include marshaling, conserving and deploying capital wisely; maintaining a high degree of financial safety 

and soundness; managing business and financial risk; being competitive; and being profitable in order to provide a return to shareholders who finance the enterprise. 

Fannie Mae is deeply committed to our affordable housing mission, and we recognize that fulfilling that mission requires us to operate as a successful, ongoing enterprise. We believe that Congress 

has a unique opportunity to modernize our affordable housing requirements for the betterment of both the GSEs and low- and moderate-income homeowners and renters. We look forward to working 

with you to achieve that goal, and thank you for the opportunity 

to share our views. 


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REFORMING THE REGULATION OF 

GOVERNMENT-SPONSORED ENTERPRISES 

THURSDAY, MARCH 6, 2008 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The committee met at 10:05 a.m., in room 538, Dirksen Senate 

Office Building, Hon. Christopher Dodd, chairman of the committee, presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The committee will come to order. I am told 

that Senator Shelby will be here at some point, but has an Appropriations Committee hearing this morning and so will be a little bit 

delayed. I see Senator Reed and Senator Corker are here, and I appreciate my colleagues’ participation. I want to thank all of our witnesses, as well. 

The committee this morning is holding our second hearing on the 

topic of reforming the regulation of the government-sponsored enterprises. In February, we heard from the Treasury Department 

and regulators from the two enterprises. Today, we will hear from 

the Government Accountability Office as well as a host of interested and knowledgeable parties with considerable housing expertise. 

As I mentioned at our last hearing, under the very able leadership of Senator Richard Shelby, this committee established a very 

substantial record on the GSE issue over the course of the previous 

two Congresses, and I want to reiterate what I have said previously about Senator Shelby and his work, having been a member 

of those committees, obviously, and how important those hearings 

were. 

This hearing adds, I think, to the significant body of work that 

we have accumulated on this subject matter, and as I said at the 

last hearing, the current crisis in the mortgage markets underscores the need to have strong and healthy housing GSEs. The 

FHA and conforming conventional markets are the only parts of 

the mortgage market system that in my view are operating effectively today. 

Both Fannie Mae and Freddie Mac, each of whom have just recently brought their financial reporting up to date, announced serious losses for 2007. In 2007, Freddie Mac experienced its first ever 

annual loss, and Fannie announced its first annual loss in over 20 

years. Despite these problems, however, and in part because of improved oversight by OFHEO, both of these bodies are doing one of 


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the important jobs for which they were created, and that is maintaining liquidity in the mortgage markets. 

Unfortunately, some recent announcements by the enterprises 

raise questions as to how committed these institutions are to continue to meet this obligation going forward. Both Fannie Mae and 

Freddie Mac have announced plans to raise costs or limit access to 

credit in areas that may be in most need of affordable credit. 

Again, I know I am going to hear about safety and soundness, and 

that is very, very important, but these institutions were created for 

unique purposes here, and the fact that we are maybe not addressing some of the underlying areas raises questions in this Senator’s 

mind. These kinds of plans will exacerbate, in my view, the credit 

cycle rather than mitigate its negative effects. In my view, this is 

a curious policy for a government-sponsored enterprise to pursue. 

In any case, there is broad agreement that we need a strong single regulator for all the housing GSEs with the authority over safety and soundness and mission, with the power to set capital commensurate with the risk, to issue cease and desist orders, to require prompt correction action, and to correct unsafe practices or 

conditions. We also need a strengthened commitment to housing affordability for low-income families as well as middle-class families, 

for renters as well as homeowners, and for homeowners at risk of 

losing their homes because of the terrible lending practices that we 

have seen over the past several years. It is my hope to move legislation to achieve all of these outcomes as soon as we possibly can. 

Before turning to my colleagues, I want to take brief note of the 

speech given by Federal Reserve Chairman Bernanke earlier this 

week. Chairman Bernanke has now advocated for the kind of bold 

action that I and others have been arguing for as needed to address 

the housing crisis that has spread more broadly to the capital markets, causing significant damage to the rest of our economy. As all 

of you know, or many of you know, I am drafting legislation to put 

part of these ideas, a plan in action. There is nothing that is written in marble about these ideas, or concrete, but I commend Chairman Bernanke for recognizing that just assuming market forces 

can somehow straighten all of this out is probably naive and that 

we need to step forward with some bolder ideas. I welcome the 

speech he gave in Florida just a few days ago, and obviously I look 

forward to working with all of my colleagues here on trying to develop some ideas that we can go forward on. 

I am disappointed that we have been unable over the last couple 

of weeks here to come forward with some ideas that I thought 

would enjoy pretty broad bipartisan support. I recognize to try and 

come up with something that may be novel or unique or relatively 

unique would probably be more than the institution could tolerate 

in a short amount of time, but my hope is in some of these other 

areas, we might have been able to move forward. I am still hoping 

that will be the case before we adjourn for the March break, but 

I am not terribly optimistic that is going to happen. 

I also want to invite, of course, Chairman Bernanke to work with 

us on this committee to get the kind of legislation that I think 

could make a difference in the foreclosure crisis area, and I want 

to urge Secretary Paulson to join the effort, as well, and I intend 


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to ask today’s witnesses about their views and the best way to address the current crisis in the question and answer period. 

With that, Senator Shelby is not here, but let me turn to Senator 

Corker. You were here and arrived earlier, so let me ask you if you 

have any opening comments you would like to make, and if not, 

Senator Bennett, and then we will turn to Senator Reed. 

STATEMENT OF SENATOR BOB CORKER 

Senator CORKER. Mr. Chairman, thank you. I think this is a 

great hearing, again, and as usual, I really don’t have any opening 

comments. I like to hear the witnesses. 

But I will tell you, I do hope that as it relates to the housing 

issue, that we can do something in regular order and really work 

something out that maybe tries to really focus on the problem. The 

things that we have seen come forth informally have been a hodgepodge of things that focus on irrelevant parts of the problem, and 

I just want you to know that certainly I would look forward to sitting down and focusing on targeted efforts that really are aimed at 

solving a problem versus those that just are a collage of things that 

bail out various industries that have nothing whatsoever to do with 

the actual credit problem itself. 

But with that, I thank you and look forward to these great witnesses testifying. 

Chairman DODD. I appreciate it. By the way, as I have said both 

privately and publicly about Senator Corker, we are delighted to 

have you as a new Member of this Committee, someone who has 

spent a good part of his life engaged in this business, and so brings 

some very practical and solid background in dealing with questions. Having, I think, the 10,000 low-income housing units that 

exist in Chattanooga, Tennessee today, for a variety of reasons not 

the least of which there was someone named Bob Corker who made 

a difference in leading that effort, so he cares about these issues 

and has a long history of being involved in them. 

So we welcome your knowledge and your background and expertise, and obviously focusing on the problem is the critical question. 

Also trying to mitigate the effects of the problem is something we 

need to look at, as well, and I know the Senator cares about that 

as much as I do. 

Senator CORKER. Thank you. 

Chairman DODD. So I thank you very much. 

Senator Reed, any opening comments? 

STATEMENT OF SENATOR JACK REED 

Senator REED. Well, thank you, Mr. Chairman. Thank you for 

holding this hearing along with Senator Shelby, and I want to welcome all the witnesses. We rely extensively on your expertise, your 

experience, and your profound interest in these issues. I am particularly pleased to see Nancy Andrews here from the Low Income 

Investment Fund, and we will talk a little bit about affordable 

housing funds, I hope. 

We have made progress in terms of establishing, I believe, the 

consensus that the Chairman reflected that we do need a strong 

independent regulator. The question of details is still being sorted 

out, but that is a position I think we all share. 


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But within the context of this legislation, I think we also have 

to commit ourselves to affordable housing. The House has taken, 

I think, a very substantial movement in this direction and I hope 

we can match it. 

What we are seeing is historic foreclosures taking place. In fact, 

I think the Mortgage Bankers are releasing a report. Unfortunately, we are setting a record, and we are also setting a record 

in those people falling behind in their payments so foreclosure is 

1 month or 2 months away for many. 

One of the ironies here is it is putting additional pressure on the 

rental housing market. As people are thrown out of their homes, 

where do they go? And in my State of Rhode Island, I think it is 

not uncommon, Connecticut and elsewhere, we don’t have a situation where we have got these huge track homes that were 

overbuilt, like in California, Florida, or Nevada, et cetera. We have 

a defined base of houses, residences. What has happened, we have 

a credit bubble. The price has been driven up and now it can’t be 

afforded. And so you are throwing people out of homes into rental 

situations and there is not an expansion of the rental property 

market. It is the perfect storm. 

So I think we can’t, as we move forward with GSE reform, neglect our obligation to continue to provide affordable housing 

through renovation, construction, expansion of the rental market 

particularly, and some home ownership. 

I hope we can make progress. There are several things we must 

do. I think at the very top of the list is GSE reform with an affordable housing component. I look forward to the testimony. 

Thank you. 

Chairman DODD. Thank you very much, Senator. 

Senator Bennett. 

STATEMENT OF SENATOR ROBERT F. BENNETT 

Senator BENNETT. Mr. Chairman, you and I have been on this 

committee long enough to know that the GSE soap opera has gone 

on for far too long. We have had the hearings on the restating of 

earnings. We have had some conversation that comes close to being 

public flogging of some of the executives of the GSEs. And then 

ironically when the subprime crisis hits, the GSEs emerge as the 

heroes because they are the only ones that have any money left to 

make it possible for people to refinance or hang on to their homes. 

It is time we brought the soap opera to a close, created the strong 

regulator that we have been saying for years we need, and I salute 

you for your determination to do that. 

With that, I look forward to the witnesses. 

Chairman DODD. Well, thank you very, very much, and let me 

introduce our witnesses briefly and then I will ask you to try and 

limit your comments to somewhere around 5 to 7 minutes, if you 

could. 

Let me just inform all of my colleagues as well as our witnesses 

that all of your testimony and any supporting documentation you 

think would help us understand your testimony better will be included as part of the record. So even though your remarks may be 

relatively brief and your prepared testimony may exceed that time, 


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I want to make sure that it is going to be included in the record 

of the committee’s hearing this morning. 

Our first witness is Bill Shear. Bill, we thank you for being with 

us. He is Director of Financial Markets and Community Investment of the U.S. Government Accountability Office. Mr. Shear has 

directed substantial bodies of work addressing the Small Business 

Administration, the Federal Housing Administration, regulation of 

the housing GSEs, the Rural Housing Service, and Community and 

Economic Development Programs, and brings a wealth of experience and knowledge to the subject matter. 

Vince Malta is the Chairman of the Public Policy Coordinating 

Committee of the National Association of REALTORS. He is also 

a co-owner of Malta and Company, located in San Francisco. He 

has received numerous awards, including the Wall Street Journal 

Award for his leadership in business and REALTOR of the Year for 

San Francisco in 1996 and for the State of California in 2006. 

Mr. Kieran Quinn is our third witness, a good friend, Chairman 

of the Column Financial, a Credit Suisse mortgage lending subsidiary for multi-family and commercial properties based in Atlanta, also the Managing Director of Credit Suisse. Mr. Quinn is 

Chairman of the Mortgage Bankers Association, and Kieran, we 

thank you for being with us this morning. 

Jerry Howard is the Executive Vice President and Chief Executive Officer of the National Association of Home Builders. Prior to 

joining NAHB, Jerry served as the chief lobbyist for the National 

Council of State Housing Agencies, where he was instrumental in 

the development of low-income housing tax credits as part of the 

Tax Reform Act of 1986. He came to this area as tax counsel in 

1988 and served in a variety of roles, including the chief lobbyist 

for the Home Builders. Jerry was promoted to Executive Vice 

President and Chief Executive Officer in 2001, so he has had a long 

history. Jerry, I am pleased to see you again. You have been very 

helpful in the past. 

And finally, Nancy Andrews. Nancy, we thank you for being 

here, as well, this morning. She is President and Chief Executive 

Officer of the Low Income Investment Fund. It is low income investments in capital and technical assistance activities that have 

supported the development of 54,000 affordable homes for families 

and children, 47,000 spaces of child care, and 41,000 spaces in 

school facilities for low-income communities across the country. 

This Low Income Investment Fund targets the poorest of the poor, 

and you have been very successful and we commend you for your 

efforts and look forward to hearing from you this morning, as well. 

With that, Bill, we will hear from you first, then work down the 

line, and after that we will begin our questioning. 

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, GOVERNMENT 

ACCOUNTABILITY OFFICE 

Mr. SHEAR. Mr. Chairman and Members of the Committee, I am 

pleased to be here this morning to discuss Federal oversight of the 

housing Government-Sponsored Enterprises. Fannie Mae, Freddie 

Mac, and the Federal Home Loan Bank System continue to play a 

critical role in the nation’s housing finance system. In this oral 


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statement, I will focus on the second section of our written statement, addressing the current GSE regulatory structure. Simply 

put, I will emphasize why the establishment of a single Federal 

regulator with adequate authorities to oversee all housing GSE activities is critical to helping ensure that the housing GSEs’ financial soundness is secure while they continue to provide housing opportunities for American families. 

The current housing GSE regulatory structure is fragmented and 

not well equipped to oversee their financial soundness or their 

housing mission achievement. The Office of Federal Housing Enterprise Oversight, called OFHEO, is responsible for safety and soundness oversight of Fannie Mae and Freddie Mac, while the Federal 

Housing Finance Board is responsible for safety and soundness and 

mission oversight of the Federal Home Loan Bank System. Both 

regulators lack key statutory authorities to fulfill their safety and 

soundness responsibilities as compared to the authorities available 

to Federal bank regulators. 

Moreover, HUD, which has housing mission oversight responsibilities for Fannie Mae and Freddie Mac, faces a number of challenges in carrying out its responsibilities. In particular, HUD may 

not have sufficient resources and technical expertise to review sophisticated financial products and issues. 

Creating a single housing GSE regulator could better ensure consistency of regulation among the GSEs. A single regulator would be 

better positioned to consider potential tradeoffs between mission 

and safety and soundness. 

While critics of combining safety and soundness with mission 

have voiced concerns that doing so could create regulatory conflict 

for the regulator, we believe that a healthy tension would be created that would lead to improved oversight. In addition, a single 

regulator could be more independent, objective, efficient, and effective than separate regulatory bodies and could be more prominent 

than either one alone. We also believe that valuable synergies 

could be achieved and expertise in evaluating GSE risk management could be shared more easily within one agency. 

Finally, I want to emphasize that to be effective, the single regulator must have all the regulatory oversight and enforcement powers necessary to address unsafe and unsound practices, respond to 

financial emergencies, assess the extent to which the GSE’s activities benefit home buyers and mortgage markets, and otherwise ensure that the GSEs comply with their very important public missions. 

Mr. Chairman, it is a privilege to be here. I would be happy to 

respond to any questions. 

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

Mr. Malta, for the record, thank you for being here. 

STATEMENT OF VINCENT E. MALTA, CHAIR, NATIONAL ASSOCIATION OF REALTORS, PUBLIC POLICY COORDINATING 

COMMITTEE 

Mr. MALTA. Chairman Dodd, Senator Shelby, and Members of 

the Committee, thank you for inviting me to testify on the important issue of Government-Sponsored Enterprise reform. My name 

is Vince Malta and I am the broker owner of Malta and Company, 


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a San Francisco-based real estate sales and management firm. I 

am also the 2008 Chair of the Public Policy Coordinating Committee of the National Association of REALTORS, and I serve voluntarily on Fannie Mae’s National Housing Advisory Council. 

Today, I am here to share the views of more than 1.3 million REALTORS who engage in all aspects of the real estate industry. 

Fannie Mae and Freddie Mac are our partners in the real estate 

industry. We want to keep them strong and sound. 

REALTORS support H.R. 1427, the Federal Housing Finance 

Reform Act of 2007, which overwhelmingly passed the House of 

Representatives on May 29, 2007, and we are eager for the Senate 

Banking Committee to pursue similar GSE reform legislation focused on several key elements which are detailed in my written 

testimony. 

In the interest of time, my remarks will focus on two points. 

First, the GSEs need a strong regulator and strong corporate governance. Oversight of Fannie Mae, Freddie Mac, and the Federal 

Home Loan Banks should be transferred to a new regulator which 

has the authority to set capital standards, liquidate a financially 

unstable enterprise, and approve new programs and products. The 

regulator also should understand and support the GSEs’ vital housing finance mission and the role housing plays in supporting the 

national economy. 

Second, REALTORS ask that Congress permanently raise the 

GSE loan limits. While we greatly appreciate the loan limit increase included in the economic stimulus package, it will not be in 

place long enough to alleviate the current credit crisis. NAR urges 

the Senate to permanently increase the national conforming loan 

limit to $625,500 or higher. In addition, for high-cost areas, the 

conforming loan limit should be permanently increased to 125 percent of the local median home sales price, but not exceed $729,750. Increasing the national GSE loan limit to $625,500 with an additional increase of 125 percent of the local median home sales price 

in high-cost areas would boost the housing market and the economy in a number of ways. More affordable loans will help bolster 

home buyer confidence and bring people back into the marketplace. 

That can mean as many as 348,000 additional home sales, lower 

inventories, and a two to 3 percent increase in home prices. A boost 

in home prices could reduce the number of foreclosures by as many 

as 210,000 by making it easier for consumers to refinance or sell. 

According to our estimates, the new limits would enable more 

than 500,000 borrowers with loans above $417,000 to refinance to 

lower interest rates. While jumbo mortgages may be associated 

with luxury housing in some parts of the country, they have become the primary option for large numbers of working-class people 

who live and work in more expensive areas of the country, like my 

home State in California. 

There is precedent for regional adjustments for high-cost areas. 

In 1980, Congress designated Alaska, Hawaii, Guam, and the U.S. 

Virgin Islands as high-cost areas. The conforming loan limit in 

these statutory high-cost areas is 50 percent higher than the rest 

of the nation. However, housing prices in many areas of the country now exceed those in Honolulu, for instance. Additional increases in the loan limits in such areas will ensure that borrowers 


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and homeowners across America have access to the same low-cost 

mortgages. Let us not forget that by raising the GSE loan limits, 

we could stimulate $44 billion in additional economic activity. 

Again, REALTORS urge the Senate to increase the national 

conforming loan limit to no less than $625,500 and to make the 

conforming loan limit increase for high-cost areas as provided in 

the economic stimulus legislation permanent. 

In conclusion, Fannie Mae and Freddie Mac are vital to the housing sector for providing liquidity and stability in the mortgage market. Targeted reforms should strengthen and expand their presence 

in the housing finance system, especially now when we need them 

the most. The National Association of REALTORS pledges to 

work with the Senate to enact GSE reform legislation that achieves 

our mutual goals and protects the vibrancy, liquidity, and stability 

of the housing finance system today and for many years to come. 

Thank you again for the opportunity to testify and I will be 

happy to answer any questions. 

Chairman DODD. Thank you very much, Mr. Malta. We appreciate it very much. 

Kieran, we thank you for being here. I don’t know if you have 

the MBA data that is coming out this morning, if you have that 

with you already—— 

Mr. QUINN. I have some highlights. We don’t release it until 10, 

even to me. 

[Laughter.] 

Chairman DODD. It is already on the website here, but welcome. 

We are happy to hear your delinquency rates are—the numbers I 

am getting are 5.82 percent for all loans. That is an all-time high 

since MBA has collected data, I am told, on delinquency rates. 

Loans in foreclosure, 2.04 percent. That is another record high. 

Fourteen-point-forty-four percent of subprime loans are either seriously delinquent or in foreclosure, an increase of over 3 percent for 

the third quarter and nearly double for last year. Those are some 

notes I have received. Welcome. 

STATEMENT OF KIERAN P. QUINN, CHAIRMAN, MORTGAGE 

BANKERS ASSOCIATION 

Mr. QUINN. Thank you. Mr. Chairman and Members of the Committee, thank you for the opportunity to testify for the Mortgage 

Bankers Association today. 

First, I would like to thank Congress and the administration for 

the swift action on the stimulus package last month. The temporary increase in loan limits for FHA, Fannie Mae, and Freddie 

Mac will help consumers by increasing mortgage financing options 

and will particularly help restart the securitization market for 

higher-cost housing markets like California and parts of New England and New York. 

Fannie Mae and Freddie Mac, the GSEs, are critically important 

in mortgage financing. MBA strongly supports the role the GSEs 

play in maintaining and improving liquidity and stability in the 

secondary mortgage market. For these reasons, MBA has long advocated regulatory reform to ensure that GSEs are operating in a 

safe and sound manner, engaging in activities consistent with their 


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charter purposes, and are subject to reasonable affordable housing 

goals that do not distort the market. 

My written statement is comprehensive, so I will touch on a few 

highlights here. 

There seems to be general agreement on the fundamental tools 

the new regulator will need. MBA is particularly interested in the 

powers of the regulator related to the review and approval of GSE 

activities, ongoing and new. The new regulator should be given the 

explicit authority and direction to ensure the GSEs’ activities are 

permitted by their charters and other applicable law. Though MBA 

would suggest a few improvements, we believe the product approval and activity review language in the House-passed bill is an 

improvement over current law and heads in the right direction to 

satisfy industry concerns that the GSEs remain true to their missions and authorities. 

We support the creation of an Affordable Housing Fund and appreciate the provision in the House-passed bill that would calculate 

the amount of the GSEs’ contribution to the Affordable Housing 

Fund on the size of its portfolio rather than its net income. This 

approach would make it more difficult for the GSEs to pass the 

costs of their contribution on to mortgage lenders and to consumers. It would also establish a monetary connection between one 

of the benefits derived by their government sponsorship, lower capital costs, to their charter-based affordable housing obligations. If 

the funds are distributed by formula to State and local agencies to 

administer, MBA recommends a process similar to the HOME program be used so that both cities and States receive an allocation 

and have the ability to target those funds to areas of greatest need. 

MBA maintains the GSE portfolios are important tools that augment their ability to help stabilize mortgage markets and encourage affordable housing. Because these markets are so dynamic, the 

GSEs need flexibility to adjust their portfolios in response to 

changing conditions and marketplace needs. 

Similarly, the GSEs’ regulator also must have sufficient flexibility to adjust to changes in the GSEs’ risk profile or other market 

circumstances as it regulates GSEs’ portfolios. The House-passed 

bill’s treatment of portfolio regulation is consistent with MBA policy. 

Another important tool is the ability of the regulator to set and 

adjust minimum and risk-based capital levels for GSEs. MBA supports a flexible bank-like regulator approach to capital regulation. 

Finally, Congress should strengthen both the secondary mortgage market and the Federal Home Loan Banks by expressly affirming the banks are authorized to securitize mortgage loans. 

Thank you, Mr. Chairman, and we look forward to continuing to 

work with you and this committee on this important matter. 

Chairman DODD. Thank you, Kieran, very much. 

Mr. Howard. 

STATEMENT OF GERALD M. HOWARD, EXECUTIVE VICE PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF HOME BUILDERS 

Mr. HOWARD. Chairman Dodd, Members of the Committee, thank 

you for the opportunity to testify here today. I think you are hearVerDate Nov 24 2008 08:59 Mar 18, 2010 Jkt 050367 PO 00000 Frm 00187 Fmt 6633 Sfmt 6602 E:\HR\OC\A367.XXX A367

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ing overall consensus that we need swift action on GSE regulatory 

reform. 

The GSEs are critical components of the nation’s housing finance 

system. Their mission is to play a vital role in maintaining mortgage market liquidity and stability and promoting affordable housing. It is important, therefore, that the GSEs remain financially 

safe and sound and focused on their Congressionally chartered purposes. 

The GSEs offer tremendous potential to relieve the liquidity 

problems in the nation’s mortgage markets and bring immediate 

benefit to the overall economy. With the U.S. housing market experiencing the most severe downturn since the Great Depression, the 

benefits of the housing GSEs are needed more than ever. Unfortunately, the GSEs are not currently fulfilling their potential due 

both to corporate reticence and deficiencies in the current regulatory framework. 

NAHB believes that Fannie Mae and Freddie Mac have not accomplished as much as they should, particularly in the area of the 

subprime mortgages. Rather than aggressively pursuing market solutions, they are hunkering down in a defensive position far from 

the front lines of mission achievement. In addition, both companies 

are imposing a multitude of additional fees that will raise mortgage 

borrowing costs for the very individuals and families who are the 

most in need of the GSEs’ benefits. Fannie’s and Freddie’s response 

to the mortgage credit crisis should be activities to stabilize markets and fill funding gaps, not take steps to tax already struggling 

mortgage borrowers. 

Fannie Mae and Freddie Mac are confined by their charters to 

the conforming loan limit and thus have not been able to provide 

assistance to the jumbo market. NAHB appreciates the recently 

signed economic stimulus package that provides for a temporary increase in the conforming loan limit in high-cost markets. Expanding the dimensions of the conforming market is an important step 

toward restoring the stability and liquidity in the broader mortgage 

markets. 

However, the bifurcated system for regulating Fannie Mae and 

Freddie Mac will remain a major impediment to effective mission 

pursuit by the GSEs. This convoluted system is simply not working. Until last week, OFHEO maintained restrictive limits on the 

portfolio purchases of Fannie and Freddie and OFHEO continues 

to impose a 30 percent capital surcharge on both companies. These 

restrictions have hamstrung the enterprise. 

Further, there is poor or nonexisting coordination between 

OFHEO and HUD. There is also indifferent mission oversight from 

HUD, which should be requiring more, not less, in the present dire 

market circumstances. Clearly, regulatory reform is long overdue 

and urgently needed. 

To that end, NAHB appreciates this committee’s commitment to 

enacting legislation to improve and bolster the regulatory framework for the housing GSEs. Although there are a myriad array of 

factors and ingredients to consider in the current reform debate, 

given the time here, I will leave NAHB’s detailed views to my written statement. 


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Nevertheless, NAHB believes this process can be a success without undercutting the GSEs’ housing mission if the following areas 

are addressed. One, balancing housing with safety and soundness 

concerns. Two, maintain the GSEs’ flexibility to respond promptly 

within their charters to market needs. Three, extend the increase 

of conforming loan limits in high-cost areas. Four, focus and enhance the GSE benefits to expand affordable housing opportunities. 

Five, employ capital as the precise instrument of risk management. 

And six, preserve the GSE portfolios as tools for achieving liquidity 

and affordable housing mission. 

Single-family housing starts are already down by 60 percent from 

their peak in the beginning of 2006 and the bottom is not yet in 

sight. Moreover, this dramatic contraction has exacted a heavy toll 

on economic growth and employment during the past 2 years and 

is now pushing the U.S. toward the brink of recession. With decisive and appropriate action on behalf of this committee, Congress, 

and the administration, passage of a comprehensive GSE reform 

bill has the ability to greatly relieve liquidity and inventory pressures in the mortgage credit markets, help stabilize housing prices, 

and bolster consumer confidence and thus bring benefit to the overall economy. 

Mr. Chairman, NAHB congratulates you for your leadership in 

this regard and we look forward to working with you and I am prepared to answer any questions. 

Chairman DODD. Excellent testimony. I appreciate it very much, 

as well. 

Ms. Andrews. 

STATEMENT OF NANCY ANDREWS, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, LOW INCOME INVESTMENT FUND 

Ms. ANDREWS. Thank you, Chairman Dodd and Members of the 

Committee. My name is Nancy Andrews. I am the President and 

the CEO of the Low Income Investment Fund. We are a national 

Community Development Financial Institution, a CDFI, and our 

mission is poverty alleviation. 

I have three points that I want to make. First, having safe, 

sound, and strong GSEs focused squarely on the mission of affordable housing is essential. 

Second, deeply targeted affordable housing must be a part of any 

GSE reform effort, and the creation of the Affordable Housing 

Fund will accomplish this. 

And finally, the formation of the Capital Magnet Program as envisioned by Senator Reed will have the greatest impact for 

leveraging capital to serve deep-reach projects in very low-income 

communities. 

The need for affordable housing is tremendous. We see it every 

day in the communities that we work in and it is growing. The National Low Income Housing Coalition estimates that there is a deficit of over five million units affordable to very low-income families. 

We respond to this problem by providing capital when banks cannot or will not lend. Three-fourths of everything we do serves families that are below 50 percent of median income. That is very lowincome families. And yet over two decades of work, we have suffered capital losses of less than one-tenth of 1 percent. 


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The track record of my organization is not unique. It is mirrored 

by Community Development Financial Institutions all over the 

country, and in my written testimony, I have included examples in 

each of the States for the members on this committee so that you 

can see what is being done in your area. 

My very first point is a belief that a strong and sound GSE system is essential to healthy housing markets, but we also support 

strengthening the goals, the affordable housing goals, particularly 

multi-family and refinance goals proposed by Senator Reed. GSEs 

must lead the market and they must also lead us in tackling the 

subprime problem. 

There is a part of the housing production spectrum, however, 

that they have not yet been able to reach well, and that is producing affordable rental housing and ownership housing for very 

low and extremely low-income families, and this leads to my second 

point. We support Senator Reed’s proposal to create an Affordable 

Housing Fund, requiring the two agencies to set aside 4.2 basis 

points of each dollar of new business. This does not include the 

Federal Home Loan Banks because they already have their own 

program. But 65 percent of this set-aside would go into an Affordable Housing Block Grant Program that would be distributed to the 

States by formula, and in its first year would be dedicated to the 

subprime crisis. After that, it would support the production of deeply affordable housing for very low-income and extremely low-income families. 

My third point is to endorse the Capital Magnet Fund as proposed by Senator Reed with the set-aside of the remaining 35 percent of the Affordable Housing Fund. The purpose of this fund 

would be to leverage private dollars with GSE dollars and expand 

housing opportunities and economic opportunities in very low-income communities. 

CDFIs across the country leverage $19 for every one dollar of 

Federal support that they receive. We would use the Capital Magnet Fund to use the resources that GSEs earn, partly on the 

strength of their special relationship with the government, and we 

would put them to work more effectively than Freddie or Fannie 

can do independently serving these deep-reach populations. 

So in conclusion, we believe that the GSEs can and must play 

a stronger role supporting housing that is deeply targeted. They 

must also be financially sound, and this comes first. But working 

with the GSEs, we believe that we can draw private investment 

into projects that they would not otherwise be able to support. We 

can do this safely, we can do it soundly, and we can multiply the 

impact of their investment many times over. It is the combination 

of strengthened goals with the Affordable Housing Block Grant 

Program and the Capital Magnet Fund that we believe will create 

a formula of success, allowing the GSEs to reach more deeply than 

ever before. 

Thank you, and I will be happy to take questions. 

Chairman DODD. Thank you very, very much for your testimony. 

I thank all of you for your testimony and the brevity. You did a 

good job at getting through that as well. 


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I will set the clock here for about 7 minutes per member. There 

are few of us here, so we should be able to move around fairly 

quickly on all of this. 

Let me, if I can, just let me begin with something I raised early 

on, and that was the issue of this whole question of what has gone 

on recently with the GSEs regarding providing their worth in the 

current crisis. The discriminatory pricing system is of some concern 

to me, usually with regards to certain cities and ZIP codes. Doesn’t 

it at least partially undermine the benefit of the GSEs—some of 

you raised this issue and it is of concern to me and I want all of 

you to comment, if you could, on it, if you are interested—by raising prices and/or credit standards in neighborhoods where credit 

may already have disappeared? 

These are Government-Sponsored Enterprises. The very notion 

here was for them to be in areas where traditional market opportunities are not going to be there, and to the extent they are tightening up in the very areas we are looking for help in here sort of 

undermines the very purpose, or at least one of the purposes of 

their existence. I wonder if anyone wants to comment on that, as 

well. My concern is Fannie and Freddie are designed to help alleviate some of these problems and in a sense we are making it worse 

in certain areas rather than contributing to the benefit. 

Mr. Malta. 

Mr. MALTA. Senator, we agree wholeheartedly. Our members are 

greatly concerned about the effect this will have on the market 

when we need Fannie and Freddie the most. NAR believes these 

policies will make home buying less affordable, and we have questioned the disparate impact of the policies on minorities in low-income areas, especially when the average down payment for firsttime home buyers are 2 percent in those instances. NAR raised our 

concerns with the GSEs. We will be talking with them some more. 

Doing it by ZIP code is wholly inadequate. Properties should be 

based on their own merit by property and not by ZIP code. 

Chairman DODD. Are we getting near a redlining sort of approach here that has occurred in the past? 

Mr. MALTA. We have heard those arguments, but again, we believe a property-by-property analysis, not done on ZIP code. In my 

area, one block makes a huge difference as to whether a market 

is declining or not for a variety of reasons—views, schools, et 

cetera. 

Mr. HOWARD. The Home Builders agree with that, Mr. Chairman. I have to tell you that we are appalled at the increases that 

Fannie and Freddie are putting on home buyers at just the absolute worst time. We think it is total disregard for their mission 

statement. 

But on the other hand, it also, I think, evidences the failure in 

the current regulatory system. Their safety and soundness regulator has been so strident, so aggressive in his regulatory efforts 

while the counter-regulator for housing mission has not been as aggressive. It shows the failure in the system and the need for the 

instant legislation. 

Chairman DODD. Does anyone else want to comment on this 

issue? 


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Mr. SHEAR. I would like to add to that. It is a classic conflict, 

even without commenting directly on the risk-based pricing that is 

involved, it is a classic conflict between mission achievement and 

safety and soundness. This is one of the reasons why we think that 

the current inability to look at these sophisticated corporations in 

a whole way, and why a single regulator that does deal with that 

conflict is so important. 

Chairman DODD. Let me bring up—Mr. Howard raised an issue 

here that is one of the contentious points in this legislation as we 

look at it. Everyone is for a strong regulator. There are certain 

matters we all agree on here. There is no debate about it. It is 

when you get into the details here that you find some divisions occurring, and one of the areas of some division is to what extent 

with innovative products you have to get a comment period, this 

concern that if we are going to require that, you are going to limit 

the ability of the GSEs to respond promptly to new ideas and that 

many of these ideas aren’t terribly new in many ways. 

Mr. Howard, in your testimony, you seemed to indicate, at least 

part of your testimony as I listened to you and read the testimony 

here, you are concerned that this may limit the ability of GSEs to 

be creative and innovative. And yet others seem to be arguing 

somehow that this is exactly the kind of thing we want to limit, 

in effect, from the GSEs. Do I understand your testimony correctly—— 

Mr. HOWARD. Yes, sir. 

Chairman DODD [continuing]. Your concern about that? And how 

do you feel about that, Mr. Shear? This is new program approval, 

is what I am talking about. 

Mr. SHEAR. I know, and we think new program approval is a 

very important function because the GSEs are meant to serve a 

public mission and they have certain charter responsibilities. Having said that, what we are looking for is a regulatory framework 

that really treats what is a new program by making the distinctions as to whether it is contributing to the mission or causing the 

GSE to go outside of its mission boundaries. 

So there has to be a reasonableness in terms of how we define 

a new program or activity. I don’t think anyone is saying that 

changing underwriting standards a little bit results in a new program or a new activity, but there has to be a balance that is created to allow some innovation without allowing the GSEs to go outside their charter boundaries. 

Chairman DODD. On page nine of your testimony here, you listed 

the areas where you thought these powers ought to be, the cease 

and desist authority, removal and prohibition authority related to 

officers and directors, prompt corrective action authority for inadequate capital and other unsafe and unsound conditions, authority 

to resolve critically undercapitalized GSEs. You sort of left out this 

area that I just talked about. 

I don’t disagree at all with what you are just saying, but the 

question is whether or not we are going to give extraordinary 

power to the new regulator here that would somehow make it more 

difficult for the new approval process to go forward. Am I am reading you correctly? If you have got a strong regulator, you are less 


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worried about specifically requiring that kind of comment period 

and so forth that is being suggested by some? 

Mr. SHEAR. The comment period, we haven’t evaluated the comment period, but I will just make the observation that in many 

cases, you don’t want a period that goes on too long. So we really 

don’t have a position on the comment period, but we are very mindful of the idea that when introducing innovation in a marketplace 

sometimes there is a need for response. There is some accommodation of that in the current authority that HUD has, but as you 

know, we have concerns about HUD as a mission regulator. As to 

safety and soundness, there has to be an accommodation there, too, 

a reasonable accommodation. Many of those authorities you mention pertain to safety and soundness issues. 

But part of this, in having a single regulator, what we are envisioning is a regulator that would be subject to using the rulemaking process so there would be an expert regulator with discretion in using those powers. But beyond Congressional oversight, 

you would have a system through the promulgation of rulemaking 

processes that would bring some transparency and accountability 

to how oversight that was addressed. 

Mr. QUINN. Senator, in our testimony, we try to separate the secondary market and the primary market—— 

Chairman DODD. Right. 

Mr. QUINN [continuing]. And anything that the GSEs would do 

to create more liquidity in the secondary market, we are all for. We 

just—we believe we have a very competitive primary market today 

and we like to keep the focus on their activities in the secondary 

market. 

Chairman DODD. Mr. Howard. 

Mr. HOWARD. Mr. Chairman, I just want to point out that the 

impact of the current economic stimulus package is going to be 

greatly diminished by the regulatory process that the GSEs have 

to go through. If OFHEO takes some of the time that they have 

taken on past new product approval to approve the increase in the 

conforming loan limits, the statutory deadline of December 31 of 

this year will come and go before it can even happen. So it underscores, again, the importance of getting this done and setting the 

regulator up to be able to approve new programs in a timely way 

so that they can respond to market conditions. 

Chairman DODD. Let me jump—there are a lot of questions here. 

Let me jump to the conforming—the loan limit issue, and Mr. 

Malta, you raised the issue that 417 is just too low. Now, you are 

from California and San Francisco and no one is going to argue 

with you about 417 in San Francisco. But I suspect if Senator Shelby were here, he would say, ‘‘Well, I live in Alabama,’’ and a very 

different real estate situation than exists in your State and particularly the city in which you reside. I live in Connecticut. I can make 

a case on either side of this issue, as you can obviously in California. 

Let me be the devil’s advocate. Why would we be talking about raising this thing? Some have suggested $700,000, $600,000. I 

mean, basically we are talking about an upper income category 

here, getting beyond the mission statement of the GSEs to set loan 

limits at that high of a level when they ought to be focusing their 


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attention on those who really need the resources going to areas 

where people are struggling to get into the greatest wealth creator 

they are ever going to have for them, is being able to purchase that 

home, develop and to build that equity in it to provide for their 

long-term financial security and the like. You are going to move 

this whole program into an area here that goes far beyond what 

was ever intended by the GSEs. What is your answer to that? 

Mr. MALTA. Well, Senator, we did some analysis based on what 

HUD has posted as those counties that are over 417 and there are 

249 counties in the country that are over 417, which spread over 

to 19 States and, of course, your State of Connecticut. Utah is included. Tennessee is included as well as other States that are familiar high-cost areas. Income in those high-cost areas just have 

not kept up to pace with the home prices. 

In San Francisco, for instance, as you have pointed out, $805,000 

buys the median house in San Francisco. With 20 percent down at 

today’s current jumbo rate loans, a person has to make over 

$214,000 to qualify to buy that median-priced home. Census statistics show that the median household income in San Francisco is 

$65,000 and jumbo loans are getting more expensive. They have 

gotten more expensive during this crisis. So income has not kept 

pace with home prices in a lot of these areas. 

Chairman DODD. Do you want to comment on this, Nancy? 

Ms. ANDREWS. I do. I think in many ways what this does is really underscore the points I made in my testimony, which is the need 

for a different way of approaching deeply targeted households. Incomes simply have not kept up with the cost of housing. When the 

housing costs are taken into account, people are literally thrown 

into poverty because of it and we need to find ways to respond to 

that, and that is why we believe special attention to the Affordable 

Housing Fund is very, very important, particularly in this climate 

right now. 

Chairman DODD. Let me—— 

Mr. QUINN. Senator, in your opening comment, you talked about 

Fannie, Freddie, and the Federal Home Loan Banks. They are the 

market today. 

Chairman DODD. I know that. 

Mr. QUINN. We supported the 50 percent increase up to the 629 

to cover all States, because we met with members in Utah last Friday who wished that they had that availability because there are 

sections in Salt Lake that could have used the higher loan limit, 

across the board, all 50 States. 

Chairman DODD. Well, I am being a bit of a devil’s advocate in 

raising the question here. As you point out, in my own State, we 

are one of those 19 States—certain parts of my State obviously are. 

But there is a case to be made and obviously the point of having 

a strong affordable housing feature to this bill would mitigate a lot 

of these problems we are talking about as you do both. So it needs 

some adjustment. I am not suggesting as high as you are possibly 

in favor of, Mr. Malta, but I certainly think an increase is warranted here to reflect the realities of what is going on in the marketplace. 

Do you want to comment on that? I am sorry. 


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Mr. MALTA. Senator, by creating a market for these jumbo loans, 

it could free up money—— 

Chairman DODD. I understand that—— 

Mr. MALTA [continuing]. That could go toward—— 

Chairman DODD. I made that argument, not with any great success, by the way, over the last year or so. 

[Laughter.] 

I have got to address, Kieran, the question of these numbers 

coming out from the mortgage bankers. I would be remiss, quickly 

here, if we didn’t ask you to comment on what you see in all of this. 

I just will mention here again, this is a handwritten note, so I am 

presuming these numbers are correct, as I look back at my staff 

here. The data this morning from the Mortgage Bankers Association has delinquency rates are getting close to 6 percent for all 

loans, and again, to put it in perspective, that is apparently an alltime high. I don’t know how long MBA has been collecting data, 

but for however long you have been collecting it, that is a high. 

Mr. QUINN. A long time. 

Chairman DODD. Loans in foreclosure, again, in excess of 2 percent. That is another record high. Fourteen-and-a-half percent, 

roughly, of subprime loans are either seriously delinquent or in 

foreclosure. That is an increase of over 3 percent for the third quarter and nearly double from last year. 

I am going to tell you, I have wonderful conversations with my 

good friend from Tennessee who likes to try to remind me to keep 

this in perspective here, these numbers. And so while these numbers are record-setting numbers, in the context of everything else 

that is going on out there, there needs to be a perspective about 

it, and I am sure he will articulate this point when he gets to you, 

but tell me, what is your read on all of this? This is the last question I will have for you here, any thoughts you have, the panel 

here, that you think the administration, the Treasury, the Fed, we 

up here—obviously, we know about GSEs, we know about FHA, we 

are working hard to get that done. Anything else you would be recommending here for us to take into consideration? 

[Ringing telephone.] 

Chairman DODD. That is my phone going off there. 

[Laughter.] 

Any thoughts you would have for us up here as we are looking 

at a variety of ideas to be constructive, to be responsible in terms 

of doing what is necessary for us? 

[Ringing telephone.] 

Chairman DODD. This is a persistent caller here. 

Mr. QUINN. Senator, I will remind everyone that the study is effective—— 

Chairman DODD. I am not Rudy Giuliani, by the way. 

[Laughter.] 

We were in the same office, but I never tried that trick, I can 

tell you. 

[Laughter.] 

Mr. QUINN. The study is effective 12/31/07. Your numbers are entirely correct. The Hope Now Alliance was really kicked into gear 

on or around December 1. We saw a dramatic increase since the 

500,000 letters went out in the month of December. The frustration 


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we have had all along, and it has been verified by every major regulator, 50 percent of the cases where a home goes to foreclosure, 

we can’t get in touch with the person living in that home. They 

have either left ahead of time or just don’t feel that there is a hope. 

So your hearing today does a great job of expanding the knowledge 

and the awareness of the Hope Now Alliance, the 1–888 number, 

HOPE NOW number. 

The one number that came out of this study, they told me on the 

way out, is in the Midwest where this all started, we are starting 

to see some stabilization. That is just a start. We do believe foreclosures will continue to increase this year. 

There are several things, though. You have done the stimulus 

package. You have raised the limits. We would like to see the FHA 

modernization. That is where—— 

Chairman DODD. We are going to get that done. I mean, we are 

very, very close. I reported yesterday, said last evening, Senator 

Shelby, his staff, our staff, Barney Frank and his and other members were—literally, my hope is that literally in the next few days, 

we will have an agreement on that bill and can move forward. We 

are down to basically one issue, and I won’t bother getting into that 

in a public setting, but we are very close to getting that done. 

Mr. QUINN. That is equally a key part of our legislation. 

As far as some of the ideas, we don’t have any current policy on 

sort of the—I call it the Resolution Trust Corporation. Chairman 

Bernanke mentioned it yesterday to some of the community bankers. 

Chairman DODD. Right. 

Mr. QUINN. But we are willing to come in and talk about that 

at any time. 

Chairman DODD. Does anyone else want to comment here on 

that open-ended question, just some ideas about—yes, Mr. Malta. 

Mr. MALTA. Senator, the REALTORS support the Affordable 

Housing Fund that has been talked about. 

Chairman DODD. Right. 

Mr. MALTA. On the House of Representatives side, it was in H.R. 

1427. We supported that. We supported the stand-alone bill that 

Chairman Frank had. We would suggest respectfully that you examine that as a stand-alone bill, as well, because of the contentious 

manner of that issue, as important as it is, though, so that we don’t 

slow the work that you are doing in GSE reform. 

Mr. HOWARD. Beyond the jurisdiction of this committee, and I 

guess evidence of the complexity of the housing finance system 

itself, within the tax code, there is the expansion of the Mortgage 

Revenue Bond Program that could be a very big help. 

Chairman DODD. Yes. 

Mr. HOWARD. There is the notion of a tax credit, either temporary in nature to help stimulate home buying—— 

Chairman DODD. You would do that—Johnny Isakson has been 

talking about that idea, and as I understood his original proposal, 

it was to provide that credit to people who would move into foreclosed properties. 

Mr. HOWARD. That is correct. 

Chairman DODD. Is that correct? It wasn’t open-ended to just 

anyone. 


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Mr. HOWARD. That is the Isakson proposal. In 1975 and 1976, 

President Ford and the Congress worked together on a proposal to 

stimulate purchases of new homes and reduce the overhang in inventory and thus stimulate the economy. That is another concept 

that we think has merit. 

Chairman DODD. I am very intrigued by that idea, and, in fact, 

welcoming of that idea. Obviously, as you point out, it is a Finance 

Committee issue, but you will understand my concern. I would like 

to avoid that as much as possible and make it possible for people 

in their homes to stay in their homes. 

Mr. HOWARD. Sure. 

Chairman DODD. But if that fails, then obviously having some 

means by which you put that property back into private hands 

where they are generating tax revenues and creating wealth for the 

family that has moved in. But to the extent I am able to avoid that 

from happening is something we are looking at, as well, and that 

is where some of these other ideas are emerging. 

Ms. ANDREWS. If I may, Mr. Chairman, I would like to urge you 

to continue to include the Affordable Housing Fund in this legislation because of the obligation that we believe that the GSEs do 

have. They can do something very unique. They can touch a part 

of the population that is not being served by any other program 

that we have. And missing this opportunity within this legislation, 

I think, would be a terrible waste. 

Chairman DODD. I hear you, Ms. Andrews, and my intention 

here is to do everything possible to keep that as a part of this package, as well. 

I have taken a lot more time than I said I would and I apologize. 

Bob. 

Senator CORKER. Actually, since I know we have gotten off the 

initial focus here, which I think is a good thing, by the way, and 

I want to do the same, but since Senator Bennett has had such a 

history with the primary focus of this, I am going to go ahead and 

let him go first and then follow up. 

Chairman DODD. That is a new Senator, very smart on the seniority system. 

[Laughter.] 

I was never that—when I sat in that chair down there, Jefferson 

was President when I was actually sitting there, it was that long 

ago. 

[Laughter.] 

Senator BENNETT. You are assuming I am totally prepared. 

Mr. Howard, you have talked about the expiration date that is 

in the current legislation with respect to the change in the mortgage level. What is wrong with making it permanent? 

Mr. HOWARD. Well, we had been very supportive of making it 

permanent, Senator, but just to show the severity of the dire consequences to our industry right now, we would settle for any extension of it. We have been working with some of the largest banks 

and the Financial Services Roundtable and have come up with a 

proposal to extend it for another 2 years. Any extension would be 

welcome, and permanency, of course, is something that we would 

very much like. 


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Mr. QUINN. Senator, our members would support the increase 

with GSE reform. That was the one caveat they gave us. Mandate 

to go temporary increases, but if you get GSE reform, we would be 

willing to go for a permanent increase. 

Senator BENNETT. I don’t think the housing market, as we work 

our way through this particular problem, is ever going to go back 

to a period where the lower rate makes a lot of sense. Yes, housing 

prices have spiked at, what, 50 percent, whatever, depending on 

what you take as your base to get the spiked amount, but in terms 

of the long-term trend going up, even coming down from the high, 

it is within the band of the long-term upward movement and therefore a permanent increase in that rate makes sense in the long 

term to me. 

Now, Ms. Andrews, you testified to the shortage of low-income 

housing, and that is one of the factors here that we have talked 

about, we talked about in the previous hearing. If we take the overall numbers of the inventory overhang, it looks like our big problem 

is we have too much housing and we have to wait until the inventory is sold off. But if you segment the market, there is no overhang in the area where you are particularly concerned, and that 

gives rise to the possibility of somehow splitting the incentives and 

saying that the people who worked to create our problem—they 

didn’t do it to create the problem, but the people who created the 

problem by buying houses in the hot markets in the hope that they 

could flip them and thereby created demand in the hot markets to 

the point where there is the overhang in Miami and California and 

other places, let them take the consequences of their actions. 

I like the comment that is in the Washington Post where they 

say in their editorial, these decisions were made by grown-ups who 

were hoping to profit enormously, and when it turns out the market went the other way, they should pay the price for having bet 

incorrectly. 

The people you represent are not in that circumstance, and as 

the whole building system, the home builders, Mr. Malta, are 

seized up by lack of credit, what could we do to increase lack of 

credit making money available for home builders to deal with the 

undersupply of housing in the area that Ms. Andrews represents 

so that they can go back to building homes while at the same time 

those who speculated for the vacation homes or the second or third 

home, the hot part of the market, pay the economic price of having 

made the wrong decision, but we don’t impose that market discipline on the part of the market that needs home builders? 

Here is a perfect supply and demand situation that is being interrupted by the availability of credit. Ms. Andrews’ constituents 

need homes. Your constituents want to build homes. Why aren’t we 

doing it? Because the money isn’t available. The credit isn’t available to have people buy it. Solve that problem for us, any of you. 

Ms. ANDREWS. I would be happy to take a crack at it. I think the 

perfect solution really is in the proposed Affordable Housing Fund. 

This would provide a combination of subsidies that would allow the 

prices to be affordable to people at the bottom end of the income 

spectrum and therefore would help the production folks, and it 

would provide leveraged support that would allow lenders to get involved in that equation. 


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So, for example, our organization would be able to do the very 

early stage front-end stuff that is hard for the banks to do, get the 

projects ready for the private sector, and then have private money, 

construction funds and permanent funds, come in and take these 

out. So this is a perfect ramp, if you will, between that market segment and the private sector, both the building community and the 

lending community. 

Mr. HOWARD. Senator, from the home builders’ perspective, we 

are seeing now a lack of credit not only on the mortgage end, but 

on the acquisition, development, and construction end, as well. 

Senator BENNETT. Right. 

Mr. HOWARD. So from our perspective, the first thing that has to 

be done is to stabilize the financial markets as a whole through the 

tax credits, through FHA modernization. Even GSE reform sends 

the right message to the capital markets and to the consumers and 

will shore up confidence. That has got to happen before we could 

avail ourselves of anything in the Affordable Housing Fund, because right now, the builders are not getting credit themselves to 

even begin the development process. 

Senator BENNETT. Let us take Johnny Isakson’s idea and apply 

it to this particular problem. Johnny Isakson’s idea is to deal with 

those properties that are going into foreclosure. Is there a tweak 

that could be made in tax incentives that would go in this direction, or Mr. Howard, are you saying that that is not the problem 

and that wouldn’t be helpful? 

Mr. HOWARD. This problem is so severe that that is a step in the 

right direction and would be helpful, but it is not going to be the 

panacea, I am afraid, that many believe it could be. So we would 

have to tweak it and I would have to have some time to get with 

some of our analysts and experts and even bring in people from the 

capital markets themselves and give you a more thorough answer, 

Senator. 

Senator BENNETT. OK. Mr. Malta, you—— 

Mr. MALTA. Senator, yes. Johnny Isakson’s proposal, REALTORS 

applaud the proposal and we see it both for new construction, for 

first-time buyers, for the credit applying for buying foreclosed property, et cetera. We see that liquidity in the market is absolutely essential to jump-start the market and buyers need an incentive to 

go out and buy property. They feel that next year, they could buy 

it at a lower price, so why get out there and do it? So these incentives in the marketplace, I think would be key to jump-start that. 

Senator BENNETT. Anyone else? I see a perfect way to get home 

builders going, get REALTORS getting commissions, and solving 

the problem that seems to be, as you say, Mr. Howard, blocked by 

the fact that people can’t get a hold of money. That is very interesting. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you. What I will do here is Senator Carper is on his way back. We have a vote going on. So we will take 

a 2-minute recess, but as soon as Senator Carper comes back, he 

will start the questioning, so we will just pause for a minute here 

until he comes back. I would normally stay, but the second bells 

have rung here, so we probably want to get over and vote. 

We will be in recess for a couple of minutes. 


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[Recess.] 

Senator CARPER [presiding]. Senator Dodd has gone to vote. He 

was good enough to allow me to reconvene us and we can continue 

to save some time. Thank you all for being here. 

I apologize for arriving a little late. My oldest son is a senior in 

high school and we were making a college campus visit this morning and so I had my ‘‘Dad’’ hat on. That is the most important 

thing in my life, but the GSE regulatory reform is—maybe not a 

close second, but second or third, so it is important to me, and I 

think it is important to our country. We appreciate very much your 

input and your testimony today. 

We had some other folks—actually, we had a lot of banking regulators before us earlier this week and I sort of reviewed with them 

a list of the issues that I think over the last several years we have 

come to agreement on with respect to regulatory reform for GSEs. 

No. 1 is the idea of combining OFHEO, combining the Federal Finance Board into one entity. 

Second would be the independence of the regulator, the idea of 

having a regulator that is independent of the appropriations process, much as the other regulators are. 

Third is the notion that instead of having to go through the Justice Department for litigation, this regulator would be independent 

and have independent litigation authority as other regulators do on 

receivership. This independent regulator for GSEs would have the 

power to put a GSE in receivership if it was ever needed. Hopefully, that won’t happen. 

The idea of combining mission oversight and new product authority into one world class regulator, we all seem to agree on. Flexibility for the regulator to set capital standards, whether they might 

be risk-based or minimum capital, there is sort of general consensus on that. And there is some agreement on restriction of the 

size of GSE portfolios. 

But there are a couple of areas, maybe four or so, that we don’t 

necessarily see eye-to-eye on. The House has been able to find common ground, but we have not, and I wanted to try to focus on some 

of those and to follow up on Senator Dodd’s questioning. 

We have been joined by Senator Jack Reed of Rhode Island, who 

has worked long and hard, and Jack, before you were here, Ms. Andrews and others were talking about your good work and hoping 

and encouraging us to ensure at the end of the day we pass a regulatory reform measure for the GSEs and that we include in it an 

Affordable Housing Fund. 

There are at least three ideas out there for how to fund it, and 

Senator Reed has one of those. I want to ask—and I think there 

is a different approach in the House bill and I think there is yet 

a different approach for creating affordable housing through Federal Home Loan Banks, and I think their approach under law is 

10 percent of net income. I think that is a requirement. I think 

there is a fund that is actually set up for that purpose and is a repository for those dollars. 

What I would like for us to do is to focus on the three ideas, the 

existing practice that is within—the practice of the Federal Home 

Loan Banks under law; second, the proposal of Senator Reed which 

Ms. Andrews has alluded to; and the third is the approach in the 


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House bill with respect to how to fund an Affordable Housing 

Fund. 

Let me just ask any of you to comment for or against, favorably 

or unfavorably, about any of those three options, please. Ms. Andrews, would you just kick it off? 

Ms. ANDREWS. Sure. Well, first—— 

Senator CARPER. Let me just say, one of the things that I have 

heard about the idea of having what I call a transaction fee that 

would simply go into an Affordable Housing Fund as opposed to 

some percentage of net income is that you may have years like this 

year, like last year, where the GSEs, Fannie Mae and Freddie Mac 

lost a lot of money and yet they would still be required to put 

money into the Affordable Housing Fund. Safety and soundness 

concerns have been raised about that. A lot of years, they made a 

bundle of money, so it wasn’t much of a concern, but last year it 

may have been a concern. 

So that is sort of setting the stage for a little discussion here and 

let us just have it. Ms. Andrews, why don’t you kick it off. 

Ms. ANDREWS. Yes. The first thing I should say is we would be 

happy to consider all of those ideas and to think through all of 

those ideas. The key thing is to get this going and to find a way 

that everyone can agree that it should be funded. 

We endorse the approach that Senator Reed has proposed, which 

is a small amount on the ongoing annual business, and we do that 

and he has proposed it in the context of making sure that there is 

safety and soundness and that the regulator has the judgment and 

the opportunity and the power if there is a financial—a year that 

poses financial difficulty, to cease the contributions going into that 

fund. So we feel that aligning it with the expansion of business, 

with the expansion of the GSEs’ ability to do work, profitable work 

in our neighborhoods and in our communities is really the way to 

go about it with a strong regulator that can exercise judgment. 

Senator CARPER. OK. Thanks so much. 

Let me hear from others, please. 

Mr. QUINN. Senator, we suggested a tax on the portfolio. They 

use their borrowings to support the portfolios. That is where they 

get the greatest advantage in the capital markets, so we thought 

that would be much more direct. We are very concerned with a net 

income or a fee on a transaction that gets passed directly over to 

the consumer. 

Senator CARPER. Help me. The approach in the House bill—is 

that the approach they use in the House bill? 

Mr. QUINN. I thought it was in Senator Reed’s bill—— 

Ms. ANDREWS. The House bill, if I may, the House bill imposes 

a 1.2 basis point tax, if you will, on the stable book of business. 

Mr. QUINN. On the portfolios. 

Ms. ANDREWS. Senator Reed has proposed on the business flow. 

Mr. QUINN. On the portfolios. 

Senator CARPER. So you are suggesting—— 

Mr. QUINN. The House—— 

Senator CARPER [continuing]. The House approach. OK. Let me 

hear from some others, please. 

Mr. HOWARD. I guess from our perspective, first and foremost, I 

agree with Kieran that we certainly don’t want to see the GSEs 


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pass on the cost of this to the ultimate consumers and raise housing costs. Given their recent practice of increasing fees, I think that 

is something we really need to protect against. 

Second, as representing those who would be building these affordable housing units, there has to be some sort of a safeguard to 

ensure that even in a bad year, the fund doesn’t go down to zero 

and projects that are in the pipeline and have already had significant dollars put into them aren’t cut off. So that has to be examined very carefully to make sure that there is going to be a continuity of effort and that this program is not interrupted by bad 

years. 

Senator CARPER. OK. Good point. Thanks. Other thoughts, 

please. 

Mr. SHEAR. I will first thank you for so well summarizing the position we have on the single regulator, which we have had for some 

time now. So I will thank you for just—— 

Senator CARPER. You guys have been staying on message for 

some time. Good work. 

[Laughter.] 

Mr. SHEAR. Thank you. When we have talked about it among 

ourselves—this is not an evaluation we have conducted but we 

have discussed the idea of a broader based fee, in terms of basis 

points applied to the enterprises’ book of business. If you are going 

to have an Affordable Housing Fund, you are moving in a direction 

such as the Federal Home Loan Bank’s Affordable Housing Program, and there is a cost of doing that. You have to recognize this 

cost in setting the numeric goals. It would change the paradigm. 

But we like the broader-based fee based on the idea that we don’t 

want to create incentives for the GSEs to change their—how much 

they use retained portfolio versus securitization to achieve certain 

targets. 

Senator CARPER. All right. Thank you. Yes, sir? 

Mr. MALTA. Thank you, Senator. We, too—REALTORS would 

have concerns if it were done on a per transaction basis for obvious 

reasons, as the speakers have already spoken on. Thank you. 

Senator CARPER. Thanks very much. 

The other question I want to ask, and I will ask you just to be 

real brief in responding on this point, the same general subject. 

The issue is Affordable Housing Fund. In my State, and I am sure 

in Rhode Island and other States, we benefit from the good work 

of, in Delaware, the Pittsburgh Bank, but we have these Federal 

Home Loan Banks around our country. They contribute, I think, 10 

percent of their net income to affordable housing. I think they actually have a repository into which, or a trust fund into which the 

money actually flows. 

My question is, if we are going to have an Affordable Housing 

Fund that goes out of Fannie Mae and Freddie Mac, and my hope 

is that we will—I am strongly supportive of Senator Reed’s efforts 

generally in that direction—but if we are going to have it, should 

we simply—do we need to reinvent the wheel? Do we need to come 

up with another trust fund in which to be a repository, in this case 

for monies that might flow from activities of Fannie Mae or Freddie 

Mac, or should we simply use the repository that is already there? 

Yes, ma’am. 


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Mr. HOWARD. May I get to that? 

Senator CARPER. And I would ask you to be brief, everyone to 

just be brief because my time has expired. 

Mr. HOWARD. We certainly support and think that the Affordable 

Housing Program that the Federal Home Loan Banks has developed is a good one and it is a step, but it really doesn’t go far 

enough. These grants from the Affordable Housing Fund amount to 

about $5,000 on a per unit basis. It is very, very shallow from a 

subsidy point of view, does not produce that much with the way of 

deeply affordable housing, and the income standards are still very 

high. 

I think what is important about the Affordable Housing Fund, 

the block grant program and the Capital Magnet Program, is that 

it is targeting very deeply, and that is something we have not had 

in these programs in many, many years. 

Senator CARPER. Thank you. Let me hear from others, please. 

Mr. QUINN. Senator, we are fine with the funds being there with 

the regulator. We want to make sure that it goes after—we are seeing a shortage of multi-family apartments, also, that serve the very 

lowest incomes. It is going to be people are moving from foreclosed 

homes back to this multi-family. They are going to be staying in 

those multi-family properties longer because it is going to be harder to qualify for a loan. So we want to see—the home program that 

you use now, we think is a great vehicle and we want to see it go 

to cities and States. 

Senator CARPER. Thanks very much. Others, please. 

Mr. MALTA. Senator, coming from California where these funds 

tend to get raided a lot, we would like to see whatever vehicle is 

best that protects those funds, that those funds go directly to what 

it was intended. 

Senator CARPER. All right. Thank you. Anyone else? No? OK. 

Senator Reed. Thank you all. 

Senator REED. Thank you very much, Senator Carper. Senator 

Carper has been a relentless advocate for the GSE reform bill and 

a very effective one, and so if we—and I hope we do get it through. 

Much of the credit for keeping it moving goes to you, so thank you. 

Thank you very much. 

I want to thank all the panelists not only for your testimony 

today, but your insights over several years in your professional capacities have been extremely helpful to me and also to the committee. 

One point that I was thinking about, Senator Carper raised a 

very interesting line of questioning about how you assess a fee or 

a levy to support an Affordable Housing Trust Fund, and one of the 

concerns about that being passed through. But it raises a question 

of mine is, it is very difficult in a business when you know you 

have a cost or taxes not to think of ways to pass it on to your customers. The real question might be how easy it is to pass on or 

what percent you can pass on given these different transaction fees 

versus net income assessment. 

So in that line, let us begin with you, Ms. Andrews, on that, to 

ask people, my sense is that any organization would try to pass on 

costs to consumers if they could get away with it, so the form of 

the assessment, that might be the critical issue. 


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Ms. ANDREWS. I agree. I don’t think that that is really the critical issue. We know and we believe that whatever impact this will 

have, it will not be a material one on the shareholders. It is well 

within the range of the two agencies to absorb this and to do it in 

a way that really is not going to impact their stock, their shareholders, or their ability to capitalize themselves. 

Senator REED. I guess, and I want to ask everybody else to respond, but to me, again, the most obvious would be to put some 

type of basis point levy on every transaction because it looks like 

a sales tax or excise tax or something and it could be attributed 

directly. That is why I think one of the—we were thinking more 

in lines of a levy on net income, which is less specific to individualized transactions. 

Mr. Howard. 

Mr. HOWARD. I guess, Senator, from my perspective, what this 

again is evidence of is the importance of having a regulator of safety and soundness as well as the mission regulator at one place 

talking with each other and they can make sure that the appropriate balance would be reached on how to raise the money and 

how to make sure at the same time it is not increasing costs of 

housing somewhere else in the market. 

Senator REED. Thank you. Mr. Quinn, please. 

Mr. QUINN. Senator, it is very difficult to hide an additional cost 

and not pass it through, but a fee on a transaction would be direct 

and would jump up. 

Senator REED. Yes. 

Mr. QUINN. We went to the portfolios. That is where they get 

their savings. We thought that was a direct—— 

Senator REED. No, I mean, the good news is the House has an 

Affordable Housing Fund component in their bill. We could add to 

that good news by passing legislation in the Senate. Then we would 

get to conference and we would have to have a very detailed discussion based upon a whole set of issues, and one which you have both 

highlighted is to what extent would this be passed on and inhibit 

activity of the consumers or the services of Fannie and Freddie, so 

I think this is a very fair point. But my hope is we have this discussion in conference and we resolve it. 

Mr. Malta, do you have comments? 

Mr. MALTA. Thank you, Senator. I would just be echoing the comments that were already made. 

Senator REED. Mr. Shear. 

Mr. SHEAR. I would be echoing the comments. A lot of times, the 

devil is in the details and we are not going to resolve it at this 

table. 

Senator REED. No, but your insights are very, very helpful and 

I thank you for that. 

One of the aspects of the proposal that I have made with respect 

to affordable housing is to provide 35 percent of the funds to Community Development Finance agencies to match with private funds, 

et cetera. Ms. Andrews, you are deeply engaged in the CDFI effort. 

Can you tell us how you would use it, how much funds you think 

you can leverage, and anything else you think is relevant? 

Ms. ANDREWS. Sure, I would be delighted. One of the proposals 

that is on the table for this and actually is being worked on by one 


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of our groups now, it is called Self-Help in North Carolina, is to 

create a pool of funds that would be leveraged through something 

like this that would be available for the purchase of foreclosed and 

abandoned property for the rehabilitation and stabilization of that 

property, and then to make those new properties available to very 

low-income people. So that is a great example of the kind of thing 

that we could do. 

If I may, I will give you one more concrete example. 

Senator REED. Sure. 

Ms. ANDREWS. We have—my organization just in the last few weeks provided a $10 million loan to the Elva McZeal Apartments 

in Brooklyn, New York. This is a 142-unit building that is occupied 

entirely by very low-income families. Most of them are single female-headed households. We were able to take funds from our fund 

and then leverage in funds from the United Methodist Pension 

Fund that created a stable mortgage, a fixed rate, a 30-year mortgage that allowed this building to stabilize, and the mostly women, 

female-headed households, to become homeowners. That is another 

example of how we would leverage. 

Senator REED. And the concept embedded in the legislation we 

are talking about is that funds flowing out to CDFIs would always 

have to be matched—— 

Ms. ANDREWS. Absolutely. 

Senator REED [continuing]. And therefore, we get a bigger bang 

for the dollars that we are directing your way. 

Ms. ANDREWS. Absolutely. We are, as a group across the country, on average, leveraging $19 of private money for every single dollar 

of Federal money that we get. 

Senator REED. One other point in response to your discussions 

about acquiring foreclosed property, et cetera. I had a very interesting discussion with the head of our Rhode Island Housing Mortgage Finance Corporation and there is a real fear all across the 

country that these foreclosures are leaving properties abandoned 

which very quickly are being stripped of piping. So if we don’t move 

dramatically, we are going to have to go ahead and rebuild affordable housing that has been destroyed through the foreclosure process. That is a very disturbing process, and so unfortunately, I think 

the funds like this would be very useful. 

But I would invite any comments about this magnet funds. Mr. 

Shear, perhaps I will start with you. Have you had a chance to review this, or—— 

Mr. SHEAR. We have had some discussion of the Affordable Housing Fund along the lines of financing it, the need to have controls 

in place and the need to have the right incentive structure. We 

have also discussed how it might affect the paradigm of how the 

numeric goals might play out, but I don’t have anything more specific than that. 

Senator REED. Thank you. Mr. Malta, any comments? 

Mr. MALTA. We supported similar legislation on the House side 

and we look forward to working with you in the future on what you 

are working on. 

Senator REED. Thank you very much. 

Mr. QUINN. The benefit of that single regulator is he can work 

with different people over time to see what is working. 


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Senator REED. You are absolutely right and I think that is one 

concept I think we are all keen on. The details, as we have talked 

about, are critical. 

I would also echo your point, Mr. Quinn, about really the increased demand for multi-family housing. Many times, that is exactly what these local agencies are doing, as Ms. Andrews has 

pointed out in terms of that apartment complex in Brooklyn. 

Mr. Howard, any comments? 

Mr. HOWARD. Well, we always believe, Senator, that passing and 

giving the responsibility at the most local level of government is 

definitely the most effective way to get anything done. We would 

also like to point out that we firmly believe that there should be 

a competitive process by which the construction is awarded to the 

most cost-efficient professional means of building the affordable 

units. 

Senator REED. Thank you very much. Good comments. 

One final question and I would invite anyone if they wanted to 

comment about it, that part of the legislation we have proposed has 

new affordable housing goals which would direct Fannie and 

Freddie to serve, we hope more effectively, underserved markets, 

including some of those underserved markets of manufactured 

housing, affordable housing preservation efforts, subprime borrowers who are facing immediate foreclosure. We talked about 

CDFIs, rural markets. Is there anything in that list or additions 

that we should consider in terms of the goals of Fannie and 

Freddie? Mr. Shear, do you have a comment, or does anyone have 

a comment? 

Mr. SHEAR. I think you have a very good list and I would just 

bring it back to basically our proposal and what has been echoed 

here. It is very important to have a regulator that can look at both 

sides of the issue in a very independent and a very sophisticated 

way and we would love to work with you and the committee in trying to move forward on that. 

Senator REED. Thank you very much. Nancy. 

Ms. ANDREWS. Yes. Senator Reed, one of the things—we agree 

with the list in the duty to serve language. We think that is a fine 

list and it is good. One of the things that you have done and that 

we endorse very much is to ensure that the goals pull out the deep 

targeting that we are looking for, that they look closely at very lowincome and extremely low-income households. So we would encourage that. 

Senator REED. Thank you. Mr. Quinn. 

Mr. QUINN. I would echo the lower income on the affordable 

housing goals. 

Senator REED. Thank you very much. Gentlemen and Ms. Andrews, thank you very much for your testimony. Your ongoing assistance and advice to us is very, very useful. Thank you. 

Chairman DODD [presiding]. Thank you, Senator Reed. 

Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. I want to thank all 

of you for your testimony. I think this is a—— 

Chairman DODD. Bob, if you want to come up and sit up a little 

closer, you don’t have to feel that estranged from—— 


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Senator CORKER. I have got my notes all spread out, but if we 

continue, I will move up right beside you and it will be a tremendous honor, but—— 

[Laughter.] 

Chairman DODD. I want to keep you close here. 

Senator CORKER. I understand, and I do, Mr. Chairman. I know 

that we sometimes have differing points of view, but I think it is 

all very, very constructive, and as I told you on the elevator going 

to vote, I think you have had some outstanding hearings and I am 

really honored to be on this committee. I think we are addressing 

some really, really important issues right now and I think these 

panelists and the ones we have had in the past have been just really constructive in that process. 

Chairman DODD. Thanks. 

Senator CORKER. I find it interesting that the markets create differing opportunities and differing problems as we move through the 

cycle. I know that Nancy has focused on making sure that people 

have affordable housing, and that is something that all of us need 

to focus on, there is no question. I know that as we have had this 

housing bubble, if you will, just a few years ago, we were really, 

really focused on just the high cost of housing. I know some of the 

testimony earlier was that it really—while in some ways, those 

who owned it were benefiting from a growth in equity, those who 

were just trying to get by were really having a difficult time. 

So I just want to point out that we do have these dilemmas and 

sometimes we in the Senate and House try to focus on the problem, 

but in essence, the fact that housing prices are declining some, for 

those people who are financially struggling, that is a good thing. 

I just want us to keep that in mind. I mean, we have had an incredible increase in housing prices. Places like California basically 

cause middle-income people in some cases not to be able to afford 

housing. I just think as we move through trying to focus on this 

problem, we ought to keep those kind of things in perspective. 

At the same time, I know there was some comment, and I am 

not totally familiar with Senator Reed’s legislation, that a way of 

providing affordable housing would be to charge 4.2 basis points on 

transactions to create the funds necessary for low-income housing. 

I would just like for some of the market-based folks that are dealing with other areas—I guess that, in fact, would inflate the cost 

or the loan cost to all borrowers across the country, is that correct? 

Mr. HOWARD. [Nodding head.] 

Senator CORKER. OK. And I think, and while I absolutely applaud the efforts to do that, and I probably wouldn’t be in the Senate today if it hadn’t been for my involvement civically in similar 

kinds of issues, as far as the market-based folks are concerned, is 

that the best way to deal with it, meaning that we basically are 

jacking up, if you will, the cost for people all across America to borrow money and own homes? Is that the best way to deal with affordable housing, or would a more surgical approach, where we allocate resources in a different way, would that be a different—of 

course, all taxpayers, in fact, pay for that, too. I am just wondering 

if there is any competing philosophy there as it relates to how we 

deal with low-income housing. 


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Mr. MALTA. Senator, there is no best way to tackle the affordable 

housing issue. It is a multi-prong approach that it is going to take 

to deal with that issue and to get us through this crisis and beyond. 

We believe that we have got to get the market stabilized, and 

that is why we are coming out so very strongly in relation to our 

comments in relation to the jumbo market, et cetera, which does 

impact the affordability overall. We are not just talking luxury 

properties. We are talking about the market as a whole. So, again, 

the fund is one component of many prongs that you need to move 

this whole legislation forward and work on it. 

Mr. QUINN. It is exactly that, one component that doesn’t exist 

today. If it is targeted to low- and moderate-income people, it will 

be excellently received out in the marketplace. It is very hard to 

distinguish a tax, a cost. It is going to raise the cost of financing, 

and to what degree. But we echo also the message to the capital 

markets today for passing this legislation could go a long way to 

sort of free up some gridlock all across the capital markets. There 

are a number of different things you can do for foreclosures and to 

stir up the economy. You have passed the bills up to date, but this 

is just one major signal. I can’t underestimate that enough. 

Ms. ANDREWS. Senator Corker, if I may, this is a tax, if you will, 

that amounts to about a half-a-penny. It is less than a half-a-penny 

and it grows and it shrinks based on the strength of business. It 

can be stopped. It can be ceased at the point that there is a financial problem that the GSEs face. So if we are trying to think of how 

do we equitably do this, this approach is as good, I think, as almost 

anything else that we can come up with. 

Mr. HOWARD. Senator, I would agree with that. I guess my underlying point right now would be, however, that the housing economy is in such bad shape that adding any cost right now is a potentially troubling situation. If the GSEs were going to keep the 

costs themselves and keep them in-house, that is one thing. But as 

was pointed out by Senator Reed, that almost never happens in 

business, and right now, those who are trying to finance the construction of new homes at every level of the market are struggling 

mightily, and adding any cost right now is something that we 

would be concerned about. 

Senator CORKER. What I would like to do then is follow that line 

of thinking, and that is I know that each of you have focused on 

some of the components in this last stimulus package, and those 

were the ones that actually cost nothing immediately. I mean, in 

essence, we raised the GSE limits and that is what—I just would 

like to point out, that is what all of you have focused on. The other 

part of sprinkling money around America and getting people to 

spend it obviously was a huge part of the cost and yet does nothing 

to really focus on the crisis, if you will, or the correction or whatever we want to call it that we are dealing with right now. 

So I know we are going to be dealing with some other legislation 

and since we have this awesome panel of folks here to talk about 

it, what are the things that surgically deal with this problem? We 

have got such a collage of ideas out there, and I actually would like 

to focus first on the home builders. Instead of having a 2-year loss 

carry-forward, you go back 5 years. It is a cost to the Treasury of 


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$17 billion, OK. I know Nancy has a lot she could do with $17 billion, and all of you do. It is a $17 billion cost, and yet it does absolutely nothing, if you will, as it relates to dealing with the credit 

issue. 

That is what I have been trying in my own one of 100 focus to 

do, is to make people realize that it is going to do nothing whatsoever other than shore up home builders that are in trouble. It 

shores up every industry, but that is really not the problem today. 

I mean, the problem is that we have a credit issue, and since the 

home builders are the ones who are going to benefit from that most 

of this group, anyway, I would love for you to respond. 

Mr. HOWARD. Well, sir, I guess it would be difficult for many 

home builders to be able to avail themselves of stability in the 

credit markets if they go out of business, and unfortunately, the 

circumstances are such that many home building concerns throughout the nation, in fact, in your State as well as others, are in a position where being able to carry back their net operating losses, or 

carry forward their net operating losses would enable them to infuse capital into their own businesses and keep people employed 

and keep businesses open. 

You are right, it doesn’t address the credit issue immediately, 

but it keeps people at work and in business and that is why we 

think it is important, and that is how dire this situation is for the 

home building concerns around this country. 

Senator CORKER. I guess all the framers and plumbers and electricians and all that would just deal with the next home builder 

that was solvent, is that not correct? I mean, it is not like—when 

you talk about the employment issue, home builders don’t really 

employ that many people. It is all the subcontractors that actually 

work under that umbrella—— 

Mr. HOWARD. Senator, as one who just went through the process 

of building my home and is very intimately involved in the business, as much as I applaud the work of the subcontractors, you 

need a general contractor to oversee everything. If they go out of 

business, it will make the home construction process significantly 

more difficult. 

Senator CORKER. Yes, and I am certainly not saying that you can 

do that without a general contractor. So you would see that as 

spreading that net loss carry-forward out to every industry in 

America, not just home builders, every—— 

Mr. HOWARD. That is correct, sir. 

Senator CORKER. You understand, I mean, that is every company 

in America—— 

Mr. HOWARD. I do understand that—— 

Senator CORKER [continuing]. And that is a $17 billion expenditure. You think that is an important factor to solving the credit 

problem that we are dealing with today? 

Mr. HOWARD. I don’t think it is an important factor to solving the 

credit problem, sir. I think it is an important factor to keep many 

of America’s small businesses open with their doors open, and Senator, not to be disrespectful, but I had not heard $17 billion. I 

thought it was a $7 billion cost. 

Senator CORKER. Seventeen billion was the number we were 

given yesterday. 


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All right. There is another, I guess, another piece of this that is the $10 billion—expanding the State governments’ ability to use 

their own bonds, tax-free bonds, to help people with subprimes. It 

is a $1.7 billion cost. I am wondering if anybody might comment 

on the efficacy of that particular proposal, which does seem like it 

at least gets it down at a level where people actually know what 

is happening on the ground and might actually deal with people 

they know, but I would love for you all to respond to that. 

Mr. QUINN. Senator, we support that wholeheartedly. I think it 

does two things. It gets capital out in the markets and gets it into 

many States. There are three States in the Upper Midwest, California, Florida, Nevada, that are having the more serious problems. 

So it is a very targeted solution. So we applaud that. 

Senator CORKER. So we have a targeted solution that costs $1.7 billion that actually addresses the credit problem. We have a $17 

billion issue that helps some home builders—and by the way, I understand the problem, but it also scatters throughout the entire 

economic base in our country that has nothing whatsoever to do 

with this credit issue. 

I think you may have a comment. 

Mr. MALTA. In the same, the National Association of REALTORS came out and supported the mortgage revenue bonds, as 

well. 

Senator CORKER. So surgically, that, in fact, does help us. What 

I find interesting about this entire stimulus issue is that there are 

so many things that we can do legislatively that cost the taxpayers 

almost nothing, and I am talking about the GSE jacking the rates 

up, creating some freedom through the FHA modernization, the 

$1.7 billion—which is a lot of money, don’t get me wrong, but compared to the $160 billion we just spent and what is now being proposed—very, very small amounts of money and some legislative 

freedoms can do huge things to solve this problem versus, if you 

will, spending billions and billions and billions that have nothing 

whatsoever to do with the problem. 

I would just like some expansive conversation. Was there another 

comment? Yes, Nancy. 

Ms. ANDREWS. I did want to say with a little humor that I feel 

like I am offering you the best deal on the block. We are talking 

about a program that is 4.2 basis points. It is about $800 million 

a year. We are going to leverage it 19 times over. The stimulative 

effect of that is very profound. It just pales by comparison with the 

other numbers that you are describing. 

Mr. HOWARD. I guess, Senator, from the perspective of our organization and our industry, which as recently as 2 years ago was 16 

percent of the GDP and is now about 14 percent, a 2 percent dropoff, we are feeling that we are heading precipitously toward a recession, that there are two different philosophies on how to address 

it, how to stimulate the economy. One is do you stimulate the consumers, as the bill that just passed did, or do you look at the industries, and if home building concerns are important to the economic 

health of this country, then it would seem to us that keeping them 

viable is equally as important. 

And so I think you have to debate and it is really the decision 

of you all on that side of the dais to determine what is the most 


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effective way to do it. But we can make a very solid case for net 

operating losses, for mortgage revenue bonds, even for the 1975– 

76 President Ford tax credit at this point in time, and we believe 

that the situation is so dire that any and all of these things need 

to be discussed, but ultimately that some action needs to be taken 

very, very soon. 

Mr. QUINN. We are with him on the tax credit idea, new homes 

and homes coming out of foreclosure. 

Senator CORKER. The Johnny Isakson—I think that is a $13 bil- lion—it is somewhere from a $9 to $13 billion cost, and that everybody at the table agrees is something that ought to occur. 

Mr. MALTA. Yes. 

Senator CORKER. OK. Mr. Chairman. 

Chairman DODD. Well, thank you very much, Senator. 

A couple of other items were included in this idea. One was the 

Community Development Block Grant approach, targeted resources 

to go to counties and municipalities to assist county supervisors 

and mayors and others where you had foreclosed properties, to 

mitigate against the adverse effects of that, not as a revenue sharing program but as some assistance. The counseling idea, Senator 

Kit Bond and I offered $180 million back some months ago and resources to go to various counseling organizations. We are told there 

is a greater need for that. 

Again, Senator Corker’s point, I would say that there are three 

clusters of issues here that we are grappling with. There are a lot 

of moving parts in all of this. One is what do we do to make sure 

that this doesn’t happen again, and there are a lot of ideas. We 

have introduced some legislation. I have talked with Kieran and 

his group and others about various things that we have to do, and 

we are going to get to that. But at this juncture here, that isn’t as 

immediate an issue as is the current, I call it crisis, problem. So 

that is the first cluster. 

The second cluster is what can we do to minimize the impacts 

of this on people who are being adversely affected by it, those who 

are facing foreclosure, the costs to communities and the like to try 

and mitigate. It doesn’t deal with the problem, it just deals with 

the problems that have been created by the problem, in a sense. 

And the third cluster is obviously what do you do about the problem, in a sense, of loosening up this credit, looking at this whole 

issue of moving again. That is the third group of issues, and the 

most important one in many ways, because if you could help solve 

that—and I don’t think the two are entirely separate. I think there 

is a correlation between building the kind of confidence and optimism, that intangible quality that has an awful lot to do with the 

issue of people once again taking risks, stepping up to the plate. 

I don’t want to overestimate the importance of that, but I think to 

sort of stovepipe it and just say these are totally separate issues, 

I think is to miss the point. 

While I agree with Senator Corker, some of these things don’t 

really address the issue of how we get this back on track again, I 

think there is a value in that and in providing some level of confidence and hope. And obviously to the extent you can keep people 

in their homes can make a huge difference to me. I mean, that is 

just dealing with the problem. I would much rather keep someone 


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in their home than the question of having to offer a $13 billion tax 

credit to provide someone with the opportunity to buy that foreclosed property. 

It seems to me to the extent we can minimize this cost—and 

when we tried this idea in the past of actually setting up a corporation to take highly distressed mortgages and buy them in bulk and 

then offer them at a discount cost and a fixed rate over a period 

of time, the Federal Government made $10 billion off that program. 

It was not neutral, it was a money maker. Now, they could argue 

whether or not that would work today given the differences that 

existed earlier, but like that idea or the one that Chairman 

Bernanke talked about yesterday, but the idea that we would try 

and put people in a position who are owner-occupied—I am not 

talking about the speculating community, but to give that constituency an opportunity to remain in their homes with a cost that they 

could afford. 

My concerns are that right now, we are talking about people who 

have had credit problems in the past, are in some trouble, but it 

is beginning to move into a more secure constituency, as well. The 

estimates are that we can be starting to talk about not 2.5 million 

homes, but as many as 40 to 50 million homes that are underwater 

or could be underwater in the sense of what the value of that property is and the cost of that mortgage. And then if these problems 

create larger economic issues, the ability of that individual to sustain those payments until the value of that property begins to exceed the cost of that mortgage get more difficult. Then the problem 

becomes a lot larger than 2.5 million. And, of course, when you 

have a 10 to 15 percent decline in housing values, there are some 

reports that indicate there is a $2 trillion effect in our economy, 

and those are staggering numbers. 

So again, I am, as you can sense, I have a sense of frustration 

in trying to get some ideas on how we deal with this and I am certainly going to get the FHA and the GSE bill, and Kieran, I don’t 

disagree, I think those are important issues to send, but they go 

back in a sense to Senator Corker’s point. To some degree, FHA 

will provide some help, but I think it would be a mistake to exaggerate what FHA reform is going to do here. I am worried that people are going to think that is going to solve the problem. It doesn’t. 

It can offer some amelioration to it, but it isn’t going to solve the 

underlying issue. 

So this has been a great panel and obviously important. I just 

have two quick questions I want to raise regarding the GSEs. 

There have been some who have suggested that instead of having 

a singular regulator, we ought to look at like the SEC model or 

FDIC. Is there any appeal to that, or is it far better to—Mr. Shear, 

do you have a notion on that at all, whether you would like the— 

I think the single regulator is what people are talking about. That 

makes more sense. Is there any appetite for a board like the SEC 

or FDIC? 

Mr. SHEAR. No. 

Chairman DODD. No? 

Mr. SHEAR. No, we do not favor having regulatory agency, with 

a board, that shares oversight responsibilities with other regulatory 

entities. With respect to whether the single regulator should have 


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a board or director structure, the director model has certain advantages while a board structure has others. As stated in our written 

statement, we favor a single regulatory agency with either a board 

or what we call a hybrid board structure where a director is in 

charge of the agency. 

Chairman DODD. Ms. Andrews, any—— 

Ms. ANDREWS. No, I am sorry. That is not an area—— 

Chairman DODD. And then whether or not you would be subject 

to—the regulator would be subject to the appropriation process for 

its funding. Any thought on that one at all? That gets rather into 

the weeds here, but have you given any thought to that? I see you 

shaking your head. 

Ms. ANDREWS. No, I have not considered that. 

Chairman DODD. All right. 

Mr. SHEAR. We have considered it and there can be some tradeoffs involved, but we see many of the benefits that other financial 

regulators have had being outside of the appropriations process. So 

we are very concerned about HUD not only being in the appropriations process, but not being paid for by the GSEs, and there are 

certain benefits in terms of independence, the ability to plan, a 

number of other benefits of removing the GSE regulator from the 

appropriations process. 

Chairman DODD. All right. Well, those are the kind of issues 

when we start marking up a piece of legislation, you can imagine 

we will have some debates about some of these matters. 

I am told by staff that the $10 billion number that I mentioned 

a moment ago that the Federal Government made as a result of a 

similar program tried a number of years ago may be an inflated 

number, but I may be right and you may be wrong, so we will 

check that out. 

[Laughter.] 

And the Senator is always right. 

[Laughter.] 

We will revise and extend the remarks a little later, as we used 

to say. 

Senator Carper, do you have any additional questions? 

Senator CARPER. The Senator is always right, except at home 

with our spouses. 

[Laughter.] 

My staff was good enough to provide a list of four items where 

we are sort of hung up. I mentioned, Mr. Chairman, I mentioned 

at the beginning of my questioning of the panel all the areas where 

we found common ground with one another and I think with the 

administration. There are, as I understand it, about four areas 

where we may still be looking for consensus. 

One of those deals with the issue of new products and the—— 

Chairman DODD. The approval of new products. 

Senator CARPER. The approval of new products. 

Chairman DODD. I raised that earlier. 

Senator CARPER. I want to go back to that just for a moment, if 

I can. 

Chairman DODD. Can I just say, by the way, I mean, I should 

have made the point earlier, in your testimony, the list on page 

nine of your testimony, I think is a very good list, by the way. As 


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Chairman here, I am very encouraged by those series of suggestions. I think they are very sound. Sorry. 

Senator CARPER. Was that directed to Mr. Shear? 

Chairman DODD. Yes. 

Senator CARPER. The one and only Billy Shear? 

[Laughter.] 

All right. Thank you for an excellent list. One more thing to be 

grateful for. 

Product approval. The House, a I understand the House proposal, 

if one of these GSEs comes up with—now this would just be for 

Fannie Mae or Freddie Mac. This would not, as I understand it, it 

would not pertain to the Home Loan Banks. But if Fannie Mae or 

Freddie Mac would come up with a new product idea, they have to 

go through a process where they lay out an idea, maybe there is 

a 30-day notice or some kind of comment period, a 30-day comment 

period. It is a process that can take an extended period of time. 

I think Senator Sarbanes when he was our Chair or Ranking 

Member, I think he had a different approach and that was to say 

that for existing products, that changes for existing products 

wouldn’t have to go through the notice, the approval process for 

changes to existing products, but for new products, they would 

have to go through this kind of notice and comment period. 

And then there is the idea that a third alternative would be basically to treat, for new products, treat Fannie Mae and Freddie Mac 

much as the Home Loan Banks are treated now, and that is they 

don’t have to go through the extended notice and comment period. 

Chairman Dodd may have raised this when I was out of the 

room, I ran to vote earlier in the hearing, but where is a reasonable compromise on this and why? Anybody? 

Mr. SHEAR. I will try to repeat my answer from earlier. It is important—I don’t think anybody is saying that if there are changes 

in underwriting or other approaches that that is a new product, but 

there has to be a lot of attention paid and a reasonable compromise 

on how you define a new product or activity, and it is important 

to balance the need to keep Fannie Mae and Freddie Mac consistent with their charters and contributing to the housing mission. 

There also is a need to be able to adapt products that might be consistent with that vision in a reasonable amount of time. So a lot 

of it, I think, gets into how do you define a new product or a new 

activity. 

Senator CARPER. All right. 

Mr. QUINN. Senator, we are very focused on giving the regulators 

sort of broad latitude to define a new program. Clearly, if it is supporting liquidity in the secondary market, we think he can recognize that very clearly and I think he can also agree when it is 

interfering with the primary market and the competitive nature of 

that market. So we give in many cases, and certainly on portfolio 

caps, we want to give the regulator broad latitude in both areas. 

Senator CARPER. Some other thoughts, please? Yes, sir? 

Mr. MALTA. Senator, yes. Our concerns are more broad. We just 

don’t want to see them derailed from being able to do their mission, 

creating an undue process for them that would not—or would stifle 

them from being able to create new programs in the marketplace, 

especially now when it is so great is the need. 


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Senator CARPER. Anyone else? 

[No response.] 

Senator CARPER. One of the other differences of opinion that we 

appear to have deals with capital authority, and I think in the 

House bill, Mr. Chairman, I think there is something called a snapback provision. I don’t know if that rings a bell with you. But I 

think the House bill gives a regulator the authority to unilaterally 

raise the minimum capital standard requirement, but requires the 

capital return back to the normal level after some kind of incident 

of concern has passed and they call it a snap-back provision. I understand there are some who don’t like that, maybe some on this 

committee, who don’t like the snap-back provision. 

I was trying to think through and talk it over with my staff 

member behind me, trying to think through what might be a reasonable alternative or compromise there. The snap-back could be, 

instead of for a limited period of time, it could be stretched out over 

a longer period of time, so it would be a slow snap-back, but there 

might be some other ideas, as well. 

Does anybody have a thought on how to thread the needle on 

this particular difference of opinion? Mr. Shear. 

Mr. SHEAR. I will go back to how we envision this regulator. It 

would be a regulator that would have broad authority. It would be 

subject to not just Congressional oversight, but also to promulgating rules and regulations through a well-defined public comment process. We think that those types of considerations basically 

should be left to the rulemaking process surrounding the authorities given to the new regulator. 

Mr. QUINN. Senator, OFHEO had to go to cease and desist orders 

after the last crisis. A bank-like regulator has much more flexibility 

to raise capital or lower capital requirements. That is the model we 

have been espousing, also. 

Senator CARPER. Yes. 

Mr. HOWARD. And we like the snap-back provisions that are in 

the House bill, but if it had to go to something less—— 

Senator CARPER. Less heavy? Less snappy? 

[Laughter.] 

Mr. HOWARD [continuing]. Less snappy, then I guess we would 

be in favor of a periodic review by the regulator and possibly even 

by Congress to make sure that over-zealous regulators aren’t impeding the GSEs’ ability to achieve their mission. And again, going 

back to Mr. Shear’s comments, a regulator that has responsibility 

for both safety and soundness and the housing mission, I think will 

go very far toward achieving that. 

Senator CARPER. OK. All right. Mr. Chairman, this has been a 

good hearing and I applaud you for bringing this group together 

and putting this issue on the fast track. Thank you so much. 

Chairman DODD. I thank you, and I think we have sort of exhausted. When you spend 10 minutes on snap-back, I think we 

have kind of reached a—— 

[Laughter.] 

We have really gotten down to the weeds on this one, I will tell 

you. This will be the last hearing we are going to have on the GSE 

issue here and we are going to try and mark up a bill here pretty 


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quickly, if we can. My hope is we will use some good common sense 

here. 

I know there are those who, frankly, have been hostile to the 

GSE whole idea, and I am not one of those. I agree with those of 

you here. I think had we, in fact, adopted some of the legislative 

ideas earlier, we might be in a very different and more difficult situation today. It is one of those things where taking a little time— 

time can be an ally, and thinking things through, and in this case 

here, had we acted expeditiously on this matter earlier, the problem today, as serious as it is, I think it would be a more serious 

one. The liquidity provided by the GSEs here has been a lifesaver, 

at least at this point. So we don’t want to miss that opportunity 

and understand the value and the mission statement of Fannie and 

Freddie and the Home Loan Banks. 

I am very grateful to all of you for being here this morning, 

grateful to Senator Shelby for his work he has done as Chairman 

of this committee in this area, as well, and to let you know that 

both on FHA and this issue, we are going to try and get something 

done as soon as we can. But again, we are looking for ideas, as 

well, on how to deal with the problem of keeping people in their 

homes if we can, those who deserve to be kept in their homes and 

can have the ability to do that. 

And the affordable housing issue, Ms. Andrews, you should 

know, I think you heard up here there is a lot of interest in it and 

you make a strong and wonderful case. That constituency is very 

lucky to have you as an advocate. You make an eloquent case for 

the issue. 

Senator CORKER. Mr. Chairman, if I can make a comment—— 

Chairman DODD. Yes, Senator Corker. 

Senator CORKER [continuing]. Since I know you are going to hit 

the gavel here soon, I, too, would like to thank the panel. I think 

that Senator Carper said there is actually a lot of agreement that 

we really need to—it looks like to me we just need to move ahead 

and solve this particular issue as far as the regulation and increased limits. I want to thank the panel for their testimony. 

To the Home Builders, I do want you to know that I are one, if 

you will. I made a living being a general contractor and I meant 

no disrespect as far as what you do. You are the same group that 

I have worked with for years in many different capacities who generally wants government off your back and really hates, if you will, 

so many of the things that we do with such a broad brush. 

My attempt here is really just to figure out a focused way, if you 

will, to deal with the home issues instead of such a broad-brush approach, and I hope you understand that. I think in many other 

ways, you respect that, but in this particular issue, I know it hits 

you right in the heart. I just have been a little disappointed in the 

way we have tried to stimulate the economy over the last month 

and I am trying to bring a narrower focus to that, so I just want 

you to understand that but I thank you for what you do. 

Mr. HOWARD. Thank you, Senator. We do understand. 

Senator CORKER. OK. 

Chairman DODD. Thank you, Senator Corker. Senator Carper, 

thank you. 

The committee will stand adjourned. 


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211 

[Whereupon, at 12:06 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 


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erowe on DSK5CLS3C1PROD with HEARINGInsert offset folio 531 here 50367B.030
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erowe on DSK5CLS3C1PROD with HEARINGInsert offset folio 532 here 50367B.031
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erowe on DSK5CLS3C1PROD with HEARINGInsert offset folio 558 here 50367B.057
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