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MORTGAGE FINANCE REFORM: AN 

EXAMINATION OF THE OBAMA 

ADMINISTRATION’S REPORT TO CONGRESS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MARCH 1, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–9 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

March 1, 2011 ................................................................................................... 1 

Appendix: 

March 1, 2011 ................................................................................................... 51 

WITNESSES 

TUESDAY, MARCH 1, 2011 

Geithner, Hon. Timothy F., Secretary, U.S. Department of the Treasury ......... 7 

APPENDIX 

Prepared statements: 

Ackerman. Hon. Gary ....................................................................................... 52 

Canseco, Hon. Francisco .................................................................................. 54 

Capito, Hon. Shelley Moore ............................................................................. 56 

Carson, Hon. Andre .......................................................................................... 58 

Paul, Hon. Ron .................................................................................................. 59 

Geithner, Hon. Timothy F. .............................................................................. 60 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

Written statement of the Independent Community Bankers of America 

(ICBA) ............................................................................................................ 67 

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

the National Apartment Association (NAA) ............................................... 72 

Waters, Hon. Maxine: 

Letter to Secretary Shaun Donovan and Secretary Timothy Geithner, 

dated December 20, 2010 from various organizations ............................... 78 

Geithner, Hon. Timothy F.: 

Written responses to questions submitted by Representative Perlmutter .. 87 

Written responses to questions submitted by Representative McHenry ..... 88 

Written responses to questions submitted by Representative McCarthy .... 89 

Written responses to questions submitted by Representative Neugebauer 91 

Written responses to questions submitted by Representative Schweikert .. 93 

Written responses to questions submitted by Representative Westmoreland ................................................................................................................ 98 

(1) 

MORTGAGE FINANCE REFORM: 

AN EXAMINATION OF THE 

OBAMA ADMINISTRATION’S 

REPORT TO CONGRESS 

Tuesday, March 1, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Spencer Bachus [chairman of 

the committee] presiding. 

Members present: Representatives Bachus, Hensarling, Royce, 

Lucas, Manzullo, Biggert, Miller of California, Capito, Garrett, 

Neugebauer, McHenry, Campbell, Bachmann, McCotter, Pearce, 

Posey, Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, 

Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, Stivers; Frank, Waters, Maloney, Velazquez, Watt, Ackerman, Sherman, Capuano, Baca, Lynch, Miller of North Carolina, Scott, 

Green, Cleaver, Ellison, Perlmutter, Donnelly, Carson, Peters, and 

Carney. 

Chairman BACHUS. This hearing will come to order. 

In the interest of time, I will recognize three of our members for 

opening statements in the Majority. And, without objection, all 

members’ written statements will be made a part of the record. 

First, the gentleman from New Jersey, Mr. Garrett, is recognized 

for 4 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. 

And I also want to thank you for your report, entitled, ‘‘Reforming America’s Housing Finance Market.’’ I read it over thoroughly. 

And while it might be a little light on some specifics in some areas, 

and without a single concrete position on a way forward, I believe 

that it does come to a number of conclusions that will be very helpful for members to grasp as we move forward with this debate. 

So the first conclusion in it is that the Federal Government’s 

housing policy did play a significant and leading role in the financial crisis of 2008, and the ongoing bailout of Fannie Mae and 

Freddie Mac is over $150 billion and counting, and that dwarfs any 

and all other bailouts that occurred during the crisis. 

The second conclusion is that specific entities, Fannie Mae and 

Freddie Mac, must be terminated and should never come back to 

life. And this is important for everyone, from members to industry, 

community groups and taxpayers, to understand that point. So I 

2 

agree with the Administration that these entities must be put on 

a responsible path to dissolution. And I will work closely with the 

Administration to see ensure that is accomplished. 

The third point, and perhaps the most important conclusion in 

the report, is that a purely private mortgage finance market is very 

serious and an achievable goal. Many supporters of the status quo 

preach doom and gloom for the U.S. housing market without a government guarantee. They would have us believe that any discussion of a purely private mortgage finance market is completely 

without merit and would return the housing market to its Depression-era status. But I believe the Administration plan ends this argument once and for all, that no one serious in this debate believes 

our housing market will ever return to the 1930s. So I applaud the 

Administration for taking this ridiculous rhetoric really off the 

table. 

So now that there is consensus on these issues, we need to decide 

what steps to take next. Here, I also see a number of areas of continued agreement between the Administration and myself. 

The first is a gradual increase of the guarantee fees. This is an 

important component of bringing more accurate pricing into the 

market. But any increase in these fees must correspond with an increase in FHA premiums in order to not push greater risk over 

there. So, again, I look forward to working closely with the Treasury on specific legislation we may need to accomplish that goal. 

The next area of agreement is on the need to reduce the port- folios of the GSEs. Currently at $1.5 trillion, these portfolios pose 

a significant risk to the American taxpayers and don’t serve any 

real purpose anymore. So I believe these portfolios can be wound 

down at a fast pace without jeopardizing the fragile housing market. I look forward also to discussing this with the Secretary in 

greater detail on how we must best shape that legislation to 

achieve that goal. 

A third area of agreement is on the Treasury’s support for higher 

downpayment premiums. I don’t believe that downpayments are 

the only factor that should be used to determine credit quality, but 

I am pleased to see that we both recognize the fact that they play 

an important role in the underwriting process. 

Fourth, is an agreement on reducing the conforming loan limits. 

To be able to afford a house at $729,000, a couple must make, they 

say, on average, around $250,000. This is the same level that some 

in the Administration and some of my colleagues on the other side 

of the aisle describe as being someone who is rich, making that 

much money. So I am glad that the Administration has finally decided that the government should basically be out of the business 

of subsidizing those people who are rich in order to buy a house. 

And, finally, an area that we have strong agreement on is a need 

to create a covered bonds market in the United States. I agree that 

is not a cure-all for the system, but a covered bond market could 

provide significant liquidity benefits and help bring private capital 

back into the mortgage market. 

So, as Ranking Member Frank so eloquently stated repeatedly 

during the former Administration’s tenure, when that was the case, 

I do find it a little bit odd that I am here now this morning defending the current Administration and their proposals on so many 

3 

fronts from their own party. But I do believe that it is an opportunity for us now to try to reach a broad-based consensus on all 

these issues in front. 

And, finally, one final point of agreement that I failed to mention 

above but that is probably the most important is that we must 

never put the American taxpayer on the hook again for the failures 

in the private mortgage market. 

And, with that, I thank you, Mr. Secretary. 

Chairman BACHUS. At this time, I recognize Ranking Member 

Frank for 4 minutes. 

Mr. FRANK. Thank you, Mr. Chairman. 

I am struck at what a difference an election makes. I agree that 

we should be moving forward, and I am interested that we do have 

these areas of consensus. 

But I do have to note a great disappearance. Perhaps the Inspector General can track it down. A year ago, my colleagues on the 

other side knew exactly what they wanted to do with regard to 

Fannie Mae and Freddie Mac. A bill was introduced about a year 

ago, in March of 2010. We heard, during the year, constant criticism from people on the other side that the legislation we adopted 

on financial reform didn’t cover Fannie Mae and Freddie Mac. 

My own view was that since we had, by legislation that was 

adopted in 2007 and 2008, put them into conservatorship, that the 

losses had been largely stemmed, that we were dealing with a situation in which they were very different than they were before, and 

that had bought us some time to think about what to do. 

But that was a position which, last year, when they were in the 

Minority, was rejected by the other side. Indeed, there was a bill 

filed in March, I believe, by the gentleman from Texas, Mr. Hensarling. And, again, we were told that should have been included 

in financial reform. At the conference committee meeting, that bill 

was offered. And that bill was ready last year. 

What I guess is—we used to have this question, what did the 

President know, and when did he know it? My question is, why did 

the Minority know something last year that they don’t know this 

year? They knew last year what to do. They were very critical of 

us for not doing it. They talked about the urgency. Lo and behold, 

being in the Majority has apparently induced a form of legislative 

forgetfulness. They say that power corrupts. Apparently, in this 

case, it hasn’t corrupted; it has taken away memory or knowledge. 

Because, again, I don’t understand why the committee is not now 

dealing with—this is our second hearing, I believe, on the GSEs. 

And that bill that they were so insistent on passing last year and 

were so critical of us for not passing seems to have faded away, and 

it is no longer there. 

I understand that position. My own view is that it was a more 

complicated subject than their bill assumed, that because we had 

put these two entities into conservatorship by legislation which we 

adopted in 2007 and 2008 that the urgency was gone, in the sense 

that the losses had been stemmed, that Fannie Mae and Freddie 

Mac are operating and have been operating since they were put 

into conservatorship on a bipartisan effort in 2008 in a very different manner, and that this year was the year in which we should 

begin looking seriously at it. 

4 

I did say, at the time, that it was my intention to file a bill last 

December to get us started. When control of the House changed, it 

seemed to me that the reasonable thing to do was to acknowledge 

the fact that the Majority was in control. 

But, again, I have this question: Where is the bill? It was all 

ready to go last year. Last year, there was this insistence on passing something and a criticism that it wasn’t passed. Today, we 

have a very reasonable attitude of working with the Administration. 

I think the explanation is that this is a harder issue to deal with 

than the Majority thought when they were in the Minority. I think 

it is also the case that they don’t have the votes for the bill that 

they were pushing last year. And it is one thing when you are in 

the Majority and have to get something done; it is another when 

you are in the Minority. 

But I would say this: The urgency does appear to have ebbed a 

little bit, because the people who are now in control and who knew 

since early November that they were in control have decided not 

to go forward with the bill they had last year, which they were so 

insistent should be passed, and apparently, they are now awaiting 

the Administration. 

I have thought very hard to think of another issue on which this 

particular group of Republicans has awaited the leadership of the 

Obama Administration, and I haven’t thought of one yet, but 

maybe this is the beginning of a trend. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mrs. Biggert is recognized for 2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Welcome, Secretary Geithner, and thank you for joining us this 

morning. 

Page 2 of your written testimony says that, ‘‘The Administration 

and Congress have a responsibility to look forward, reconsider the 

role government has played in the past, and work together to build 

a stronger and more balanced system of housing finance.’’ And I 

couldn’t agree with you more. 

As for where we should start, it is very clear that, in its report 

to Congress, the Administration only laid out options for a reform 

but has chosen to avoid a very tough decision for setting a single 

course of action. 

Having reviewed the Administration’s report to Congress, it is 

clear to me that Option 1 most closely resembles the kind of plan 

that the taxpayers expect from us. And I ask that today you work 

with our committee to not only establish a clearer framework but 

put in motion reforms that facilitate private-sector re-entry, eliminate the taxpayers’ risk, and generate a vibrant housing finance 

system that serves creditworthy Americans. 

For many years, it seems like Republicans on this committee 

have pressed to reform Fannie Mae, Freddie Mac, and the FHA. So 

it is my hope that today you can confirm your commitment to work 

with us. Housing is one of the most important cornerstones of our 

economy, and we have to get it right. 

So, with that, I yield back the balance of my time. 

5 

Chairman BACHUS. Thank you. You still have 33 seconds left, 

and I will claim that time. 

I do want to say that former Chairman Frank, who was the leading advocate for Fannie and Freddie, just gave us a history lesson. 

But, in 2003, he said that neither of these GSEs were in crisis and 

they did not need more regulations. Two years later, he said they 

ought to be pushed to make more affordable loans—i.e., subprime 

loans—not less. So that part of the history lesson was missing. 

And our time has expired. 

Mr. FRANK. Two minutes, Mr. Chairman? I will take 2 of my remaining minutes. 

Chairman BACHUS. Two additional minutes. 

Mr. FRANK. We have just heard a serious distortion of the facts. 

Yes, in 2003, I didn’t think Fannie and Freddie needed reform. 

You want to get into the history? In 2005, the chairman joined 

then-chairman Oxley in passing a bill to reform Fannie Mae and 

Freddie Mac which Mr. Wallison derided as ‘‘wholly insufficient.’’ 

And it then failed because the Senate Republicans rejected the 

House Republican bill. 

In 2007, when the Democrats were in the Majority, we did pass 

a bill which Mr. Wallison, the Republicans’ lead witness on this, 

said was a very good bill. And it was that bill which led them to 

being put into conservatorship. 

I would then go back to the gentlewoman from Illinois. She said 

the Republicans have been pressing for reform. Yes, the Republicans press for reform when they are unable to achieve it. But 

when they are able to achieve it, they don’t press for it. We have 

to get these in-phase. 

They were in power from 1995 through 2006 and passed a bill 

in the House which Mr. Wallison and the President of the United 

States, Mr. Bush, derided as insufficient. Last year, when they 

were in the Minority, they pushed hard for a bill which they told 

us was the answer, and this year it has disappeared, and they are 

now waiting for the Administration. 

And the gentlewoman from Illinois said the Administration has 

avoided making the tough choices. In that, the Administration, if 

that is the case, resembles the Republicans, who aren’t making the 

tough choices either. She said they are ready to reform, so what is 

stopping them? 

The fact is that, in November, it became clear that the Republicans would take control of the House, and I am still waiting to 

see the bill. We had a bill last year. I guess I want to understand, 

what happened to that bill? What flaws were discovered in it? Why 

is that not being put forward? 

And, yes, the fact is that in 2003, I underestimated the need for 

reform. I was wrong. By 2007, we adopted the bill that resulted, 

at the Bush Administration’s request, in their being put into conservatorship, and it is why we now have the time, which the Republicans are taking full advantage of now that they are in the Majority, to deal with. 

I yield back. 

Chairman BACHUS. We have 2 minutes left on our side. I will 

claim the time in opposition. 

6 

Mr. FRANK. If the gentleman would yield, you are no longer in 

opposition. You have to get used to that. You have to produce. 

Chairman BACHUS. That is correct; in opposition to what you just 

said. 

When Chairman Oxley and I and others pushed for a stronger 

regulator for Fannie and Freddie because we felt that it was a captive regulator, then-Chairman Frank opposed that bill, voted 

against it, and actually said that Freddie had an accounting problem but that the people responsible had been dismissed. As we 

found out, it was slightly more than that, and they continue to 

have a problem. 

I yield my remaining time to Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

I think, over 2 years ago, Members of Congress were asked to 

prop up Freddie and Fannie. We were told we really would never 

have to advance any money, that we were going to just overwhelm 

the markets with the size of Congress’ commitment. Oh well, there 

goes that plan. 

One of the things that was articulated at that time and the question I asked was, what would be the exit strategy? And the answer 

again was, we don’t need an exit strategy because we will never advance any of these moneys. But here we are, over 2 years later, 

and billions more mortgages have been originated by these entities, 

which means billions more in contingent liability for the American 

taxpayers. 

I appreciate the Secretary’s report. I wish they would have taken 

a little bit stronger leadership, with a recommendation rather than 

alternatives, but hopefully we can get into more details about that 

today. 

But I think it is important to understand that it is time to get 

the American taxpayers off the hook. They are tired of making 

their own mortgage payments and being responsible for other people’s mortgages, as well. The time to start is now, not later. The 

time to start is now, because, as I said, today, while we have this 

hearing, millions more mortgages will be originated at these entities, and millions more commitments will be outstanding, which 

will put the taxpayers on the hook. 

An important part of this solution is getting the private mortgage 

market back to operating again. We need to take steps to make 

sure that happens, so that, ultimately, the goal here is to, as my 

colleague, the chairman of the subcommittee, said, never, never, 

ever have the taxpayers on the hook for mortgages again in this 

country. 

Thank you. 

Chairman BACHUS. At this time, I yield 15 seconds. 

Mr. FRANK. Yes, the bill the chairman boasted about voting for 

with Mr. Oxley is the one the Senate rejected, the President said 

was way too weak, and Mr. Wallison derided as way too weak. 

As to Mr. Neugebauer, the argument he gave, ‘‘we are going to 

overwhelm it with money,’’ yes, that was an accurate quote from 

Secretary of the Treasury Paulson under the Bush Administration. 

And he was doing that pursuant to a bill for which Mr. Neugebauer 

voted after cosponsoring an amendment that somewhat weakened 

it, in Mr. Paulson’s view, but went through anyway. 

7 

I would ask that my remaining time go to Mr. Scott. 

Chairman BACHUS. Mr. Scott? 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Welcome, Mr. Secretary. 

And I wanted to just make a couple of points on the options that 

were presented in the Obama Administration’s report. 

For one, it says that Option 1, particularly, on privatization, I 

think—and I would like to know if you are concerned about whether or not private capital can meet the needs of the housing market 

with any kind of sufficient liquidity. It seems to me to be unclear 

whether or not there is enough private capital willing to fund such 

a system. 

Under this option, the report is running on the assumption that 

if government support for the housing market is eventually removed, then private money will replace it. That is what we hear 

from our friends on the other side. However, if there is no guarantee this will happen, how can this option be viable? Isn’t there 

a risk that the amount of private funding for the mortgage market 

will be substantially lower than the demand for mortgage loans? 

And the other option in the report, proposed in the report, calls 

for a government option priced far away from market rates that 

can begin to lend mortgages in a time of crisis where private capital disappears. If this backstop is implemented, doesn’t it resemble 

a sort of bailout, in the sense that it would protect private market 

agents without asking for any financial support from them in return? 

And, finally, the report states that the Federal support for the 

housing market must acknowledge that not all Americans should 

be homeowners and that any future system must also include support for the rental-housing sector. However, the plan does not identify a specific proposal for dealing with the GSEs’ multifamily programs. So what does the Treasury plan do in terms of reforming 

existing GSE multifamily programs? 

Thank you very much, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Scott. 

At this time, let me say, without objection, all members’ written 

statements will be included in the record. 

Chairman BACHUS. Secretary Geithner has to leave the committee at 12:30, and that is a hard stop. So we are going to enforce 

the 5-minute rule on all members; just be aware of that. 

At this time, Secretary Geithner, you are recognized for your 

opening statement. Without objection, your entire written statement will be made a part of the record. And you are recognized for 

a 5-minute summary of your written remarks. 

STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Secretary GEITHNER. Thank you, Mr. Chairman, Ranking Member Frank, and members of the committee. 

Two weeks ago, we laid out our proposals for reforming the housing finance system. The written testimony I submitted summarizes 

that report. 

I am going to talk about our proposals for reform, but before I 

do that, I want to just emphasize what I think everybody in this 

8 

room knows, which is that the housing market of the United States 

is still in a very difficult state. The damage caused by this crisis 

is still deep and very broad. Millions of Americans are still at risk 

of losing their homes. Housing demand is still too weak to quickly 

absorb the excess supply in the market, particularly with unemployment so high. And even with the economy growing again, it is 

going to take a long time for us to repair the damage caused by 

the crisis. 

The Administration, working with the tools the Congress gave 

us, has taken a range of steps to help stabilize the market and reduce avoidable foreclosures—not all foreclosures, but avoidable 

foreclosures. These programs have helped catalyze millions of loan 

modifications and refinancings, and helped keep mortgage interest 

rates low. And they were successful in preventing much, much 

greater damage at a much greater cost to a larger fraction of American families. 

Over the next 10 years, our estimates on conservative assumptions show that the total cost to the taxpayer of our support for 

Fannie and Freddie will be well below $100 billion. I think the current estimates in the budget are about $75 billion, but that does 

not take into account our proposals to gradually raise the guarantee fees. So if we were to implement this plan, we expect the ultimate cost to the taxpayer to be lower. 

This process of reform will take years, as I said. And as we debate these options, we have to be very careful that our actions to 

reform the market do not jeopardize either the housing market 

itself or the broader economic recovery now under way. 

Our proposal aims to achieve three key objectives on a responsible timeline. First, we want to wind down Fannie and Freddie 

and help bring private capital back into the mortgage market. 

As you know, in the wake of the crisis, private capital fled the 

market and has not yet returned, leaving the government now to 

guarantee more than 9 out of 10 new mortgages. That assistance 

was essential in stabilizing the market and giving Americans continued access to mortgage credit, but it is not a long-term solution. 

We believe that under normal conditions, under a reformed market, 

the private sector—subject to stronger oversight and better standards of protection for consumers and investors—should be the primary source of mortgage credit and bear primary responsibility for 

absorbing losses. 

Our report recommends a combination of policy levers to wind 

down Fannie and Freddie such as increasing guarantee fees, reducing conforming loan limits, and gradually tightening underwriting 

standards. And, of course, we are committed to supporting the continued wind-down of Fannie and Freddie’s investment portfolio. 

These actions will help shrink the government’s footprint in the 

housing finance market and help bring private capital back. 

But we are not going to get private capital to come back into this 

market unless we fix the very substantial fundamental flaws that 

still exist in the mortgage market as a whole. So a second key piece 

of our reform proposals is to put in place reforms that will help 

provide a better market for private capital. 

And that means giving consumers the ability to make better decisions about mortgages and protecting them from unfair, predatory, 

9 

and deceptive practices. It means requiring participants in the 

securitization process to retain risk, and to improve access to information, improve accountability and transparency throughout the 

securitization process. 

It means requiring banks to hold more capital against the mortgages they hold. And that is important, to make sure that banks 

are in a position to better withstand the losses that can come from 

future recessions. It means addressing the chronic problems we 

still face in the servicing and foreclosure process by setting national servicing standards and improving the incentives for the participants in that market. 

Our third objective is to more effectively target the government’s 

support for access to low- and moderate-income Americans to sustainable mortgage finance and to rental-housing options. 

We think it is important that the government continue to help 

Americans get access to housing that they can afford. This does not 

mean, however, that our goal can be for all Americans to become 

homeowners. We want all Americans that have the financial capacity, the desire to own a home, to be able to take that step. But at 

the same time, we need to provide a broader range of affordable options near good schools and near good jobs for the 100 million 

Americans who rent today, whether they do so by choice or by financial necessity. 

With those three broad objectives in mind, we need to begin the 

process, working with you, to decide on the long-term solutions to 

replace Fannie and Freddie. This requires a thoughtful, careful discussion with Congress and all the stakeholders about what the appropriate role of government is over the longer term. 

We have put forward three broad choices. We do reject two. We 

rejected—considered, and suggest Congress not embrace either 

what you might call the ‘‘full liquidation privatization option,’’ or 

what you might call the ‘‘full nationalization option,’’ as many have 

proposed. So the options we proposed lie in the middle of those 

more stark choices. 

Each of the options we proposed would produce a market where 

the private sector plays the dominant role in providing mortgage 

credit and bears the dominant burden for losses. But each has different advantages and disadvantages, and those need to be carefully considered. 

In the first option, the overwhelming majority of mortgages 

would be financed by lenders and investors and would not benefit 

from a government guarantee. We would limit the government’s 

role to the FHA’s current job of providing targeted support for affordable housing and more affordable mortgage credit. 

In the second option, the government’s targeted assistance 

through the FHA would be complemented by a government backstop, available only in crisis, designed to promote stability and access to mortgage credit only in crisis. 

And as a third option, alongside the FHA, the government would 

provide a form of reinsurance for certain securities that would be 

backed by high-quality mortgages. These securities could be guaranteed by closely regulated, carefully regulated private companies 

under strict capital standards and strict oversight and reinsured by 

the government. 

10 

In providing this narrower set of options and a set of criteria for 

evaluating them, we are hoping to encourage a careful discussion 

with the Congress about the ultimate reform option. And I think 

you all recognize that this will require some tradeoffs and difficult 

choices. As I said, each has advantages and disadvantages, and 

there is no easy solution. 

Our challenge is to find the right balance between making sure 

that low- and moderate-income Americans can have access to mortgage credit, that we have a more stable mortgage market, that the 

taxpayers are less exposed to risk, and that we have the capacity 

in the future to do a better job of limiting the broader damage to 

the economy that can come from financial crises like we saw in this 

crisis. 

Each of these options would require legislation. And our judgment is, we should work together to try to pass legislation within 

the next 2 years. If we can move more quickly than that, we would 

welcome that chance. But we can’t put this off indefinitely or leave 

the market with too much uncertainty. That will make it harder 

to get private capital to come in and replace the role the government is playing today. 

So our hope is that the Congress will work with us to find a consensus on a long-term solution and to make sure that we have the 

authority in the transition—the FHA is the authority—we have the 

authority in the transition to make sure we implement a carefully 

designed transition program that phases out the government role 

without damaging the process of repair in the housing market. 

We look forward to working with you on this challenge, and I 

welcome the chance to answer any of your questions. 

[The prepared statement of Secretary Geithner can be found on 

page 60 of the appendix.] 

Chairman BACHUS. Thank you, Secretary Geithner. 

Secretary Geithner, you have said that now is the time to reform 

the mortgage housing finance market, and I take you at your word. 

The White Paper actually proposes four things that the Republicans have also proposed, as well as many Democrats: first, increasing the guarantee fees, so I think there is agreement there; 

second, increasing downpayments; third, reducing conforming loan 

limits; and fourth, winding down investment portfolios. 

All of those can be done without legislation, can they not? 

Secretary GEITHNER. They can, yes. 

Chairman BACHUS. Could that begin today or tomorrow? Is there 

any reason why at least some of those could not begin even before 

legislation passes? 

Secretary GEITHNER. In fact, we have already started, and 

Fannie and Freddie and the FHA have already started to raise 

guarantee fees or to change pricing and to change the basic standards that apply to their programs. But, yes, we can move reasonably quickly on those initial steps. 

I think the challenge is to make sure that we are doing it in a 

gradual way that doesn’t hurt the housing market or hurt the expansion under way. And what we propose is that the FHA and the 

FHFA—sorry for these acronyms—the Federal Housing Administration and the oversight body of Fannie and Freddie—work together to put out a set of recommendations for how they would imVerDate Nov 24 2008 18:17 Aug 04, 2011 Jkt 065669 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\65669.TXT TERRIE
11 

plement a gradual plan to improve pricing and strengthen underwriting standards to phase out the government’s role. 

Chairman BACHUS. I think if you are going to, as you say, crowd 

out the private markets, you are going to have to begin to do these 

things now. 

The American Banker, this morning, says that Option 3 is 

Fannie by another name. And also, part of Option 2, you say here 

that the Federal Government should reserve the right to backstop 

the mortgage and housing market during times of market stress. 

Secretary GEITHNER. ‘‘Could’’ reserve the right. 

Chairman BACHUS. Could. How do you define ‘‘market stress?’’ 

Secretary GEITHNER. That is an excellent question. And that is 

one of the risks in thinking about just a system where you only 

have the emergency capacity to come in, in a crisis. That is a hard 

thing to do because it takes time; it is hard to scale those programs 

up quickly, and hard to design them carefully in a crisis. And, of 

course, it is a matter of judgment, when market circumstances 

might require the government sort of stepping in. 

And as you have seen and as you would want, you would want 

the government to be very reluctant to do that. Because you don’t 

want the market operating with the expectation that the government would come in too quickly or too easily in the future, even 

in the face of a recession. So that is a challenge. Among the many 

challenges in designing an emergency capacity like that are those. 

Chairman BACHUS. If you are talking about falling housing 

prices as a reason to intervene in the market, falling housing prices 

could actually be constructive, in that they would make homes 

more affordable. So, as long as you have that backstop, it is almost 

an implicit government guarantee, in my mind. Am I wrong? 

Secretary GEITHNER. Yes, I think there is a risk in that, but— 

and this is worth spending some time on—I don’t think it is quite 

right to think about these things as a stark choice between a purely private market and a market where the government, in crisis or 

in normal times, is guaranteeing mortgages. 

If you leave all these mortgages in the banking system, like 

many countries do, the government is still there with an implicit 

commitment to back the banking system. So if you look at the 

model that Canada and many European countries have adopted, 

where, in contrast to our model, they leave most of these mortgages 

with banks, the government provides a lot of support for banks, is 

very reluctant in those countries to let banks fail in a crisis. So the 

support is there, but it is just implicit; it is not explicit. Banks 

don’t have to pay for that support. But it is not quite the privatemarket ideal that many people seem to think. 

It is not fair to say that Option 3 is an option that would recreate 

Fannie and Freddie. And just know that I would not support that. 

Even if this group of people in this room thought that was appealing, we would not support it. I think it is— 

Chairman BACHUS. We would not think that. 

Let me close by saying, when you talk about the government in 

times of stress intervening, I almost think that is what we—and 

I have said for some time, the American people don’t like 

privatizing the profits. In other words, in good times, the financial 

services industry, the lenders make money, and then in the bad 

12 

times, you socialize the losses. And the American people have—November was about ending that. The American people are tired of 

taking the loss. And I think you would agree. 

Secretary GEITHNER. You do not want to run a system in which 

the taxpayer is going to be on the hook when things go bad. That 

is not a system—to some extent, that will be inevitable in severe 

crises, because banks get in trouble in crises and government will 

be exposed to loss and that kind of thing. But you want to avoid 

that, to the extent you can. 

And you are right to say it is very hard to know what level of 

stress would motivate what level of assistance. That is a matter of 

judgment. But what you don’t want to do is leave the country in 

a situation where you face a severe recession, like we did in this 

context, and you can’t do anything to protect the innocent from the 

collateral damage. 

Chairman BACHUS. There will be market stress, and apparently 

there may be government guarantees, and we oppose that. 

Ranking Member Frank? 

Mr. FRANK. Of course, the Majority has the power to pass a bill 

that does anything it wants, so they don’t need to ask the Administration’s permission. 

I want to come—lest I appear too partisan—to the defense of the 

leisurely pace my colleagues have chosen now with regard to legislation here, as opposed to the great urgency that they felt last year 

when they were insisting that we pass the bill as part of financial 

reform. 

And the point is this: We have had allusion to the losses, but my 

understanding is that those losses overwhelmingly, almost entirely 

predate the conservatorship which Secretary Paulson asked this 

Congress to give him and which we gave him and which he then 

used in 2008. 

So is it the case that, in fact, essentially since the conservatorship, the activities of Fannie Mae and Freddie Mac have not been 

incurring new losses? 

Secretary GEITHNER. That, I think, is an accurate view. The 

losses that the taxpayer will ultimately be exposed to will be only, 

I think, in a general sense related to the loans made before the crisis. 

Mr. FRANK. And that means before the legislation, which was initiated in 2007, that Mr. Wallison praised very heavily and which 

eventuated in the conservatorship of 2008. 

We have recently been told that there may, in fact, be some 

money recovered, that the pre-2008 losses that go from the 1990s 

into 2000s, that they may be less than anticipated. Is that accurate? 

Secretary GEITHNER. Yes. The losses keep coming down. Of 

course, the future is uncertain, and it depends a lot on how the 

economy does going forward. But the loss estimates are now coming down, as I said in my opening remarks. In the budget now, the 

current estimate is around $75 billion—between $70 billion and 

$75 billion. But that does not take into account the fact that we 

proposed to raise the guarantee fees carefully going forward, so 

that overstates the likely ultimate loss. 

Mr. FRANK. All right. I apologize. I had to step aside. 

13 

Let me then cover one other factor. One of the arguments we 

have had is, a lot of this problem came because people were trying 

too much to help low-income people. And my own view has been 

that we have erred, bipartisan, over time, by stressing too much 

homeownership for low-income people and not enough for rental opportunity. 

Fannie Mae and Freddie Mac have dealt both with multifamily, 

as my colleague from Georgia referenced, and single-family. As you 

look at the losses, were the losses equally distributed, or proportionally distributed between multi-family activity and single-family, 

or were they more on one or the other? 

Secretary GEITHNER. I have to respond more carefully to you in 

writing on that question, but my impression is that the losses are 

concentrated in single-family. 

Mr. FRANK. That is my impression, too, or I wouldn’t have asked 

you. 

And I do think that is very important because, as we tighten up 

in the single-family area, I hope that will not lead—and this has 

been—yes, I have been quoted in the past actually as talking about 

my support for affordable housing. I may have not been explicit 

about what I meant. I have primarily been looking for help for affordable multi-family rental housing. 

And I hope that out of whatever proposal the Administration 

comes forward with and ultimately passes the Congress, there will 

be some effort to do what we do with the Federal Home Loan 

Banks. The Home Loan Banks, since the late 1980s, under the 

chairmanship of Henry Gonzalez, have been empowered to make 

mortgage decisions based on business decisions. And a fairly small 

percentage of the revenue that is generated then goes to help subsidize affordable rental housing, so that you don’t pollute the basic 

business decision. 

The other point I would make is this: As we go forward, in terms 

of losses, there are two factors that I think give us some reason for 

hope. Namely, part of the problem was that mortgages were, I 

think everybody agrees, improvidently granted. People differ as to 

how much was the fault of the borrower and how much was the 

fault of the lender and whether it was this or that, but, clearly, 

mortgages were improperly granted. 

We now have two pieces of legislation that change that: first of 

all, specific prohibitions on no-document mortgages, on pick-as-youpay, etc., in the financial reform bill; and, second, a requirement 

of risk retention and securitization unless you hit the qualified residential mortgage, which would be maybe a 20 percent downpayment. 

Is it the case that the substantive reforms that we have adopted 

in the mortgage market give us a little bit more flexibility as we 

design this system going forward? 

Secretary GEITHNER. They do. And I think they are very important. I think that any system that is going to work better in the 

future is going to require homeowners to hold more equity against 

the value of their homes, against what they borrow. And banks are 

going to have to hold more capital against loans, retain more risk. 

And you are going to have to have more conservative underwriting 

standards. 

14 

And a lot of that is mandated by the financial reform law that 

you helped to author, and a lot of that is already in place and is 

coming to fruition. 

Mr. FRANK. I think that is very important to note, because we 

are looking at a better set of mortgages, going forward, as one of 

the safeguards. 

Thank you, Mr. Chairman. 

Secretary GEITHNER. Can I just say, Mr. Chairman, quickly that 

we very much support the emphasis on rental multifamily. I think 

the government did a lot of things in the mortgage market, a lot 

of them badly, a lot of them reasonably well, but too much of the 

support we provided went to homeownership as opposed to rental. 

And too much of the support we provided to homeownership went 

to relatively fortunate Americans. 

Mr. FRANK. And you are going to get us the breakdown on how 

the losses were proportionally between single-family and multifamily. Thank you. 

Chairman BACHUS. Thank you, Mr. Frank. 

Our subcommittee chairman, Mr. Garrett, is recognized for 5 

minutes. 

Mr. GARRETT. I thank the Chair. 

And to the ranking member, it really is hard to predict the future, which is what I guess he is trying to do right now. But he 

tried to do that back in 2003, as well, when he said, akin to what 

he is saying right now, ‘‘Fannie and Freddie do very good work, 

and they are not endangering the fiscal health of this country.’’ The 

ranking member also said, ‘‘I think it is clear that Fannie and 

Freddie are sufficiently secure, so they are no great danger.’’ 

So the same statements that he is making now about how wellrun Fannie and Freddie are and how well the underwriting is of 

the loans that they are taking in right now going forward, in essence, are really what he said in this committee back in 2003 about 

the loans that we were taking out at that time. And we all saw 

they didn’t really turn out so well. 

I am sure the Secretary will agree that the loans that they are 

taking out right now have not had the opportunity to, what, season, if you will, and that in reality you have to look at loans a little 

bit down the road to really see what the loss ratios are going to 

be. 

Is that a fair assessment? 

Secretary GEITHNER. True. But if you look at the estimates people have made at FHA of the future losses associated with the 

guarantees they have been writing since conservatorship, the estimates they make are not just modest— 

Mr. GARRETT. And I appreciate that. I appreciate that. But, of 

course, those were exactly—you weren’t here at the time, but those 

are basically the same arguments that were being made and that 

the ranking member was making at the time, as well. If you looked 

at the projections back in 2003, as the ranking member was saying, 

things didn’t look so bad. 

But let me close where I began. It is always hard to predict the 

future. The ranking member didn’t do a very good job of predicting 

the future back in 2003. We will see whether his predictions are 

good this time. 

15 

Secretary GEITHNER. We don’t— 

Mr. GARRETT. But to your report, one of the common arguments 

we hear from the people who are supporting a Federal guarantee 

is that if you don’t do it, the cost for homeowners is just going to 

skyrocket, with regard to homeownership in this country, and people won’t be able to achieve the American dream. 

So, to that point—and you have done your whole report and what 

have you—did you run any quantitative analysis in any one or all 

three of your options to determine exactly what the overall impact 

would be on the monthly payments for a consumer in order to get 

those? 

Secretary GEITHNER. Let me just start with the following observation, which is that, under any of these options, the cost of a 

mortgage is going to be higher in the future. It has to be, because 

the government substantially subsidizes— 

Mr. GARRETT. What about the monthly cost, though, actually? 

Not just the mortgage, but the overall monthly cost— 

Secretary GEITHNER. I am going to answer your question, but let 

me just say, under any of those options, they are going to be somewhat higher than they were before the crisis, and they need to be. 

That is sort of a fundamental reality we face. 

We have looked at a range of estimates, at what the ultimate impact might be on these options on the cost of a mortgage. But it 

is very hard to judge until they are defined more clearly. You cannot know until you look precisely at what version of Option 1, 2, 

or 3 or which mix of those options you would do. You can’t tell. You 

know they will be higher, I think modestly higher, but different degrees of increase, depending on the mix of those options you ultimately embrace. 

Mr. GARRETT. I appreciate that. 

Let me just refer you to an economic analysis that was done. 

This was done by—some would call him a liberal economist—Dean 

Baker of the Center for Economic and Policy Research. His report 

looks at a 30-year mortgage, which is what we are talking about 

here, under a purely private system, and he says that will be about 

90 basis points, as you are saying, more expensive than under a 

similar mortgage system where you have the government guarantee. So what you are saying is true: a little bit higher cost in his 

projections. 

But then he goes into it a little bit deeper. He says, what would 

the overall cost be if you combine it with the medium price of, let’s 

say, a $170,000 mortgage? And this is what he comes out with. He 

calculates that the monthly payment for the mortgage, what you 

are talking about, under a hybrid system would be around $833. 

Okay? Then he calculates that a similar mortgage under a purely 

private system would have a higher financing cost, is what you are 

saying. But the overall price of the house, then, would be less expensive, and the monthly payment would be only about $8 more. 

Okay, so a little bit more under that scenario, with a purely private 

sector. 

Next, however, he factors in the monthly taxes that you will be 

paying on that house. And because the house now, under the hybrid system, the guaranteed system, would be more expensive, 

housing prices would remain high, the property taxes would be 

16 

greater. He then finds—the final calculation is that the monthly 

payments under a private system would be about $4 less than 

under the hybrid system. 

So, overall, you add all of it together, the higher mortgage price, 

the lower price of the house, and then the lower property taxes, it 

comes in between—a difference of about $4. Okay? 

But even if his numbers are off a few dollars there, doesn’t the 

fact that the numbers are so close to each other indicate, then, that 

a hybrid system really doesn’t outweigh the cost of a private system, with all the inherent risks that go with it to the taxpayer at 

the end of the day? 

Secretary GEITHNER. I don’t—just like you just said, we should 

be cautious about predicting the future. I don’t think you can make 

any of those judgments without knowing the precise details of what 

the government role is in this context. And I think it is almost certain that the costs to the homeowner, all in— 

Mr. GARRETT. Right. 

Secretary GEITHNER. —would be higher under Option 1 and 

higher under Option 2 than they would be in Option 3. 

But under all those options, it is going to be somewhat more expensive to borrow to finance a home than was true before the crisis. 

Mr. GARRETT. Thank you. 

Chairman BACHUS. Congresswoman Waters? 

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

Secretary Geithner, you have three options that have been presented. And I guess what you are saying is, any of these three 

would be acceptable to Treasury? 

Secretary GEITHNER. No, I wouldn’t say that. 

Ms. WATERS. Tell me about Option 1. Option 1, as I understand 

it, is complete privatization, except the FHA is available to medium-income families only. That is similar to the Republican plan, 

except the Republicans don’t want any FHA. 

In this plan, if you are slightly above medium income, likely 

there would be no 30-year fixed-rate mortgages. You would have 

higher downpayments, higher interest rates. And, of course, an adjustable-rate, short-term loan would be the norm. 

What is your position on 30-year fixed-rate mortgages? 

Secretary GEITHNER. I think under Option 1, if I understand 

your question, a 30-year fixed-rate mortgage would be more expensive and harder to get than would be true under some of the other 

variants you could consider. 

Ms. WATERS. But it would be acceptable to you if we adopted Option 1? 

Secretary GEITHNER. No, I would not say that. I think the disadvantage of just Option 1, just to be fair about it, is that you 

would leave the Government of the United States with a more limited set of tools to protect the economy and the innocent victims in 

the face of the next severe recession. 

And that is a disadvantage of Option 1—unless, under Option 1, 

you allow the FHA in the crisis to dramatically expand what it 

does. And if you do that, then the taxpayer will be more exposed 

to loss. Because what the FHA does is they provide very high loanto-value mortgages, very low downpayment— 

17 

Ms. WATERS. So I am to understand that this is not your choice? 

You are not saying that this could be as acceptable to you as any 

other option? 

Secretary GEITHNER. I would say it has some disadvantages the 

other options do not have. And, again, you have to be careful that 

you look at all of those advantages and disadvantages. 

And, again, I would caution people on this side of the aisle to say 

that it would be tempting to look at the FHA-only option and say, 

oh, the government control will be more limited in that context. 

But that is not necessarily the case, because what it means is that 

all the risk is with banks. The government does provide support to 

banks. The guarantee is then implicit. The government doesn’t pay 

for it. The taxpayer is not necessarily better protected. And if your 

only option in a crisis is to have the FHA scale up dramatically, 

the taxpayer is much more exposed to risk on an FHA product than 

it would be in those other options. 

So don’t look at that as such an appealing option. It looks like 

it is a more private solution, but it may not be in the end. 

Ms. WATERS. Let me just—I want to get something into the 

record here. The Financial Crisis Inquiry Commission examined 

loan performance and found that mortgages bought by Fannie Mae 

and Freddie Mac were more likely than privately purchased loans 

to require a significant downpayment when borrowers had weak 

credit and were less likely to default. 

For instance, GSE mortgages with a downpayment of at least 10 

percent had a serious delinquency rate of 5.7 percent in 2008, compared with a delinquency rate of 15.5 percent among mortgages in 

private-label securities, the FCIC found. 

Do you agree with that? 

Secretary GEITHNER. I think it is true that the underwriting 

standards in the private market were worse than the underwriting 

standards— 

Ms. WATERS. Okay. Let me continue. 

Mortgages originated for private securitization defaulted at much 

higher rates than those originated for Fannie and Freddie 

securitization, even when controlling for all other factors. Overall, 

private securitization mortgages defaulted at more than 6 times 

the rate of those originated for Fannie and Freddie securitization. 

And I guess this is a study that was done—‘‘Securitization and 

Mortgage Default: Reputation Versus Adverse Selection’’—by the 

Federal Reserve Bank of Philadelphia in September of 2009. Are 

you familiar with that? 

Secretary GEITHNER. I am not familiar with that study, but the 

general pattern is correct, which is that the quality of underwriting 

standards in the private market was, on balance, worse, less conservative, less careful, than was true on the Fannie and Freddie 

guarantee book. 

Ms. WATERS. You have alluded to the exposure to the taxpayers 

under the systems as we know them now. And you have basically 

concluded that it would be better to have the private market rather 

than the government guarantee. And if this is true, what I just 

read, and you agreed with it, how is that so? 

Secretary GEITHNER. No, I would say it a little differently. I 

would say, right now the government is doing 90 percent of new 

18 

mortgages. That is unnecessary—it is necessary today, but it is not 

necessary in the future. It would not be desirable for us to preserve 

that system. 

You want to have a system where the private market plays the 

larger, the more dominant role, not the only role, but— 

Ms. WATERS. But it is a riskier role? 

Secretary GEITHNER. No, not necessarily, because it depends a 

little bit— 

Chairman BACHUS. The gentlewoman’s time has expired. 

Ms. WATERS. Thank you very much. 

Chairman BACHUS. The vice chairman, Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

And good morning, Mr. Secretary. 

First, I would just like to say for the record and the ranking 

member, who unfortunately is absent at the moment but who appears to be obsessing over the timing of the introduction of my 

GSE bill, that as soon as he produces the GSE bill that he promised in the last Congress, I would be very happy to coordinate the 

timing of the introduction of my own bill. 

And I would just note, as a general practice, Mr. Chairman, I try 

to improve my bills before they are voted on instead of after. 

Mr. Secretary, in response to the gentlelady from California, I 

want to make sure I heard what I thought I heard. I thought she 

asked you, ‘‘Do you support the three options that were just presented?’’ And I think I heard you say, ‘‘Not necessarily.’’ 

And if that is correct, we waited 2 years for this? Did I understand your answer correctly, that you are not necessarily supportive of the three options you have presented? 

Secretary GEITHNER. No. She asked me if I supported Option 1. 

Ms. WATERS. Option 1. 

Secretary GEITHNER. I will say this in response to any question, 

and this is very important for people to recognize— 

Mr. HENSARLING. Let me ask you this way: Will you support Option 1? If you are not necessarily supportive of Option 1 over Option 2 or 3, will you support Option 1? 

Secretary GEITHNER. Congressman, we played out three options 

for a reason: because they each have advantages and disadvantages. And we want this— 

Mr. HENSARLING. Are you willing to support each of them? Yes 

or no? It is not a trick question. It is just a yes-or-no question. 

Secretary GEITHNER. But this is an important thing. Remember, 

we are living with a crisis caused by a legacy of bipartisan failures 

designing the role of government in the financial system as a 

whole. So how— 

Mr. HENSARLING. Mr. Secretary, if you would answer the question, I would be happy to give you time to give it some context. But 

it is a simple question. You are presenting three options. Are you 

willing to support the three options? 

Chairman BACHUS. Let me say this, without penalizing the gentleman. We do want the Secretary to have an opportunity to respond to the question. And in fairness, we had a question last week 

which was just a yes-or-no answer. And it is sometimes hard to 

simply give a yes or no. 

19 

But I will go back to the gentleman and add an additional 30 seconds to the gentleman’s time. 

Secretary GEITHNER. The reason I say this is because—and this 

is why we started with options—because it depends a lot on how 

Congress designs them. And you could do a mix of these things 

that might be better than any of them individually. You could design Option 1 in a way that would have a very substantial role for 

a government in crisis that would be worse than the other options. 

You could design Option 3 in a way where the government has 

much less exposure to loss in a crisis. It depends overwhelmingly 

on how you do this. And critically— 

Mr. HENSARLING. So, Mr. Secretary, if you could—and forgive 

me. There is a limited amount of time here. You are not necessarily 

supportive of any option, depending upon how it is written? Is that 

a fair assessment? 

Secretary GEITHNER. It all depends on the design of the specifics 

in each choice. That is why you can’t know what the effect would 

be on— 

Mr. HENSARLING. Okay. Let me move on to another question, if 

I could, Mr. Secretary. On page 2 of your testimony, you say it is 

‘‘very important to wind down Fannie Mae and Freddie Mac at a 

careful and deliberative pace.’’ 

You and the experts at Treasury have now had 2 full years to 

study the matter. What is the careful and deliberative pace? Media 

reports seem to indicate that you have said 5 to 7 years. I do not 

know if the media reports are correct. So what is a careful and deliberative pace? 

Secretary GEITHNER. It is a careful and deliberate pace. I have 

said it will probably take somewhere in the range of 5 to 7 years. 

And that is based on the judgment that we need to move carefully 

because, by any measure, the housing market is in a state of substantial stress still. 

But, of course, that judgment about pace, if you leave it to the 

government, will be designed by the FHA and the FHFA. It is not 

something that I can design. It is their authority to design. 

Mr. HENSARLING. Mr. Secretary, in speaking of Options 2 and 3, 

I am still concerned about the ability of the government to be able 

to accurately price for risk. 

Acting FHA Director DeMarco, before this committee in September, said, ‘‘The presumption behind the need for an explicit 

Federal guarantee is that the market either cannot evaluate and 

price the tail risk of mortgage default, at least at any price that 

most would consider reasonable, or it cannot manage that amount 

of mortgage credit risk on its own. But we might ask whether there 

is reason to believe that the government will do better.’’ 

Already, we know that the National Flood Insurance Program is 

$19 billion in debt. The Federal Crop Insurance Program has cost 

the Federal Government about $40 billion. PBGC has a reported 

deficit of $23 billion at the end of Fiscal Year 2010. Barclays believes that the FHA has dramatically underpriced its risk and 

could face losses of up to $128 billion. And we know that recently 

there has been pressure on the Deposit Insurance Fund of the 

FDIC. 

20 

Why should we have any confidence that government can accurately price the risk on Option 2 or 3? 

Secretary GEITHNER. I share your concern about this. It is an excellent question, and it is one reason why you have to be very careful in embracing any of the three options on the table. 

And you want to remove that decision about how you price the 

guarantee, if you have a guarantee, from any interference by the 

Congress. You want to keep it as independent of politics as you 

can. And one of the reasons why the government’s record is so terrible in those programs is because you have subjected those judgments, which are very difficult, to excess political interference by 

some of the stakeholders in the system. 

I will give you a few other counterexamples so that you don’t lose 

hope completely in this context. If you look at the FDIC guarantee 

program in the crisis, all of the Fed’s programs to prevent the financial system from collapsing, the government’s investments in 

the banking system authorized by Congress, all those investments 

all had a form of guarantee, had risk in there, and were priced in 

a way that the government had a very, very substantial positive return. 

It is not impossible. It is difficult to do, but if you are going to 

have a chance, you have to remove the judgment as much as you 

can from political influence. 

Chairman BACHUS. Mrs. Maloney? 

Mrs. MALONEY. Thank you. 

First of all, I would like to welcome the Secretary and thank you 

for your leadership and your service. You have helped navigate us 

through one of the worst recessions in my lifetime and through one 

of the most significant reforms of our financial system in generations. I know it has been difficult. Thank you for your service and 

for the report that you have put before us. 

I would like to ask, in one of your policy proposals you note the 

importance of retaining access to any future secondary markets by 

lenders of all types and sizes, particularly the community banks 

and the credit unions. 

Could you elaborate on this issue and provide the committee 

with your recommendations on how to ensure access in the future 

system? Some people have written to me that they are concerned 

that it may concentrate the market in very, very few hands and 

would create more problems in the future for the financial security 

of large institutions. 

Secretary GEITHNER. That is a very important question. I think 

you are right to say that there is a credible argument that if Congress were to embrace something more like Option 2 or 3, that 

would leave the mortgage market banking system too concentrated 

and create an unlevel playing field for community banks. That is 

one factor you have to look at very carefully. 

What we want is a system where you have a better designed 

securitization market existing alongside banks, and we want to 

have a banking system that is not materially more concentrated 

than the one we have today. I think the fact that we have a system 

with 8,000 community banks and thrifts is a great strength of our 

system. We want to make sure they can play a very active role in 

the mortgage market going forward. 

21 

Mrs. MALONEY. But specifically, what would the Administration’s 

proposals do to the ability of smaller lenders such as community 

banks to compete in the mortgage market and regional banks? Currently, small lenders are able to participate in the mortgage market by selling loans to Fannie and Freddie without having to go 

through one of the larger banks to accumulate enough loans to create a securitization pool. So how do you answer that challenge? 

Secretary GEITHNER. That is one of the reasons why Option 3 is 

laid out the way it is. That would preserve the capacity for community banks to originate mortgages and then sell them into a market. It is harder for us to do that in either of the other two options. 

It is not impossible, but it is a little harder. 

Mrs. MALONEY. Okay. Your policy proposals mentioned the development of a revenue neutral funding source to provide resources 

for assisting extremely low-income residents. Can you elaborate on 

what these recommendations involve and how would you envision 

them functioning? 

Secretary GEITHNER. That is something we have to work with 

Congress on, but let me say the basic objectives. Where the government provides support to help low- and moderate-income Americans afford housing, we want the support to be transparent and on 

budget, carefully designed. We think it is appropriate for the government to find a financial means to provide support for homeowners through downpayment assistance who need it and for better options in the multi-family rental area. 

There are a variety of different ways you can do that to raise revenues. That is something we have to work with Congress on. There 

are some examples out there that work reasonably well, some examples other countries have tried. That is something we have to 

work with you on. 

Mrs. MALONEY. Also, as you testified in answer to Ms. Waters’ 

question, the performance of Fannie and Freddie during this crisis 

has been good. They have had very few losses. But during this crisis, many private investors have fled the housing market because 

of weaknesses in the private CMBS market, and Fannie and 

Freddie’s share, actually they have been expanding and helping us 

get through this crisis. 

What guarantee do we have that the private sector will step in 

and provide the same support to expand housing opportunities here 

in our country, and could you elaborate on that challenge? 

Secretary GEITHNER. There is no guarantee, and for it to happen 

again, you have to do two things. One is you have to gradually 

phase out the government’s role, phase down the government’s role, 

but you also have to make sure you have a clearer set of rules of 

the game in place for the private market, because investors won’t 

come back in unless they know there is clarity on what the capital 

requirements are, the risk-retention requirements, what type of underwriting standards will prevail, what type of standardization procedures will apply, and what level of transparency there is going 

to be so investors can see into the risk in those mortgage pools. All 

of those things have to happen. 

The financial reform bill lays out a framework for that to happen, and the regulatory community is gradually laying out those 

22 

rules. But until we have a chance for those rules to be defined and 

to be in place, the private market is not going to come back in. 

Mrs. MALONEY. Thank you very much. My time has expired. 

Chairman BACHUS. Mr. Royce? 

Mr. ROYCE. Thank you. Secretary Geithner, how are you? It is 

nice to see you. 

There was in 2008 the agreement for the senior preferred stock 

purchase agreement that was worked out between your predecessor 

and the conservator at the time who worked on behalf of Fannie 

and Freddie. My concern is that if you took a step that would violate that agreement, the original terms of it, it would deprive the 

Treasury of obligated funds, it would unnecessarily absolve the two 

institutions that I think were really at the heart of a lot of the 

problems in the collapse of the housing bubble, and I think that 

there is an opportunity here to stay the course. 

But I read yesterday in the Wall Street Journal that executives 

from Fannie and Freddie were trying to reduce the size of the dividend that is paid back down to 5 percent, and I was going to ask 

you if you were aware of any conversations between Fannie and 

Freddie or their conservator and any Treasury officials on that subject, and I was also going to ask you if the Administration would 

support a reduction or elimination of the dividend payment because 

I frankly think that would be the wrong message to send. 

I say that because Fannie and Freddie had such a powerful lobby 

up here, and you and I have talked about that before. I know that 

the Fed felt the same way, that they were leaning in and basically 

pushing policies that in many cases created systemic risk. There 

was that perception. And that it was impossible really to counter 

the weight of Fannie and Freddie here in the Congress. 

So, if they are now communicating again to change an agreement, and that at least was the report in the press, I would want 

to know and I would also want your reaction to it, Secretary 

Geithner. 

Secretary GEITHNER. I will tell you what we are going to do, but, 

of course, we have to work with the conservator over at the FHFA 

in this context, which is the body Congress gave the authority to 

oversee these institutions. We are going to make sure that we wind 

these institutions down and that we do everything we can to minimize the ultimate losses to the taxpayer. Those things are going to 

guide our decision. We will look at any suggestion from the FHFA 

through the prism of does it support those two objectives. So any 

proposal that is designed to keep them in existence for the long 

term, we will resist; any proposal that carries the risk of increasing 

the ultimate loss to the taxpayer, we will resist. 

I think you are right to highlight the risks that we saw in the 

system where you had this combination of private equity holders 

able to benefit from a guarantee, able to prevent effective regulation, and that is something that we are not prepared to preserve 

for the future. 

Mr. ROYCE. I appreciate that. I will go to a second question I 

have, and that is, as you look at the financial crisis we found ourselves in, you have recognized that there was excessive investment 

in the mortgage market which helped facilitate, as I think you said, 

23 

speculation: 30 percent of the homes at one point were people basically speculating on homes, flipping homes. 

Do you believe there was a perception by investors in addition 

to that, that the housing market was too-big-to-fail basically at the 

time? 

Secretary GEITHNER. I don’t know. I think government policies 

encouraged distorted investment decisions, encouraged too much 

investment in housing, and I think that the market operated absolutely with the perception that Fannie and Freddie were too-big-tofail. 

The market as a whole—banks, credit rating agencies, investors—did not make decisions on the expectation that housing prices 

would fall materially over time, and that mistake pervaded private 

decisions across the country as a whole. Nobody expected or 

planned for the possibility that there would be a crisis where housing prices would fall this much, and that mistake itself was what 

caused the crisis. 

Mr. ROYCE. We concur. But it sounds like from your testimony 

your preference would be basically to not have government intervention, or if you had a limited level of government support in good 

times, you could be in a situation where you would have in place 

a mechanism to expand and support the market in times of stress. 

My concern about that is, if you believe there was a perception 

that the government would prevent the housing market from a 

downturn pre-bubble, why would we take steps to compound that 

perception going forward? You see, it does send that message 

again. 

Secretary GEITHNER. I think there is a risk of that, of course, and 

I think that is one reason why you have to be very careful in defining any role for the government, even in crisis. Because, again, the 

risk is you create exactly the same types of problem that led to excess risk-taking in the boom. 

But again, just living with the scars of this crisis, look what we 

faced in this crisis. You have to have the capacity in extremis to 

protect the economy from broader damage caused by a catastrophic 

financial failure. You have to do that. It is the obligation of government to do that. And one reason why this crisis was so deep and 

so traumatic was we came into this crisis without the tools necessary to protect the innocent in this context. 

So whatever we do, we have to make sure we are preserving ultimately a better set of tools to again protect the economy, all businesses, the innocent victims, from the collateral damage that a severe crisis can come. Of course, if you do that badly, you will make 

future crises more likely, and that is why this is so complicated. 

Chairman BACHUS. Thank you. 

Ms. Velazquez? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Welcome, Secretary 

Geithner. 

You discussed with Mr. Frank the fact that while Fannie and 

Freddie lost billions on securities backed by single-family mortgages, they actually turned a profit in their affordable multi-family 

portfolios. What lessons did we learn in terms of the multi-family 

portfolios, and what will that tell us regarding a proposal to reform 

24 

the housing system and should this approach, this type of financing 

differently? 

Secretary GEITHNER. I think the most important thing is in any 

reform proposal, we have to make sure we have a well-designed capacity for the government to help support multi-family housing and 

rental options. We have to do a better job than we did in the past. 

But, as you said, Fannie and Freddie give us a model for how to 

do that well and carefully and prudently, and that role would have 

to be assumed by the FHA at least. 

But I think you are right to say there are a lot of examples of 

how to do that well, and how to do it not so well. We will take the 

best model available. 

Ms. VELAZQUEZ. Mr. Secretary, for New York City, multi-family 

preservation transactions and special needs housing are particularly important. Can you give us more detail on the type of role 

that the new housing finance system should play in this market? 

Secretary GEITHNER. Again, we have to respond in more detail 

in the coming weeks and months. But I want to say that we are 

committed to and I think it is very important to the Congress to 

provide a capacity for carefully designed but significant support for 

multifamily. Again, if you look back, too much of the support we 

provided went to single-family ownership options and much of that 

support went to people who were relatively fortunate in this country. So when the government provides support, we want to make 

sure that support is more targeted to low- and moderate-income 

families and more of that support goes for rental, not just for ownership. 

Ms. VELAZQUEZ. Would you say that the FHA has the capacity 

to absorb the multifamily? 

Secretary GEITHNER. I think the FHA does an excellent job in a 

lot of things, but they would have to do more in this area if they 

were going to provide the role, the substantial role we think is important. So they would have to take on some of the work Fannie 

and Freddie have been doing in multifamily. 

Ms. VELAZQUEZ. If all the Administration’s proposals for reforming the housing system are intended to greatly reduce the government’s role in housing finance, how can we begin to withdraw government support from homeownership without placing undue 

stress on our financial system? 

Secretary GEITHNER. You have to move very, very carefully. And 

we have started to move, but we are doing so carefully, because, 

again, we cannot afford to take too much risk that we jeopardize 

what is still a very fragile system, because as we all know, unemployment rates are very high and you have millions of homeowners 

who are still at risk of foreclosure, you have millions of communities where house prices are still under stress, and again, the 

huge amount of damage to the innocent victim in this context, and 

we have to be careful as we go forward. 

Ms. VELAZQUEZ. Mr. Secretary, the Administration has proposed 

to let the larger conforming GSE loan limits expire in the next 6 

months. In regions like New York City where the average home 

cost routinely exceeds the lower-limit threshold, can private sector 

lenders continue lending without vital liquidity from Fannie and 

Freddie? 

25 

Secretary GEITHNER. That is an important question, and you 

can’t be sure. But in my judgment, at this stage, based on what we 

know, it is reasonable to expect the market to be able to absorb the 

impact of that reduction in conforming limits. 

I will give you an example of why we think that is the case. I 

think it is true that in 2010, only 5 percent of the mortgages issued 

in that context were within that temporarily raised conforming 

limit threshold, so it is a relatively small share of the market. The 

market is coming back in that area. You can’t be certain, but I 

think based on what we now know, we think the market is likely 

to be able to absorb that. 

Ms. VELAZQUEZ. And if that doesn’t happen? 

Secretary GEITHNER. That is something Congress would have to 

reflect on. Congress would have to legislate actions to prevent those 

limits from falling. But we have to watch carefully. And, again, one 

reason why we have been so careful not to lock in a path for phasing out the government’s role is, there is no certainty in this context and we have to be careful again not to do damage to the recovery. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman BACHUS. Ms. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Secretary Geithner, in my opening statement, I said that we 

have been looking at Option 1 on this side of the aisle. It seems 

that is what taxpayers want. Would you work with our committee 

on Option 1 to establish a clear framework, put in motion reforms 

that facilitate the private sector? 

Secretary GEITHNER. Of course, we will work with you. But, 

again, I would be careful not to be too enthusiastic about that option because you want to recognize that the consequences of that 

could be more concentration in the mortgage market, less level 

playing field for community banks, and in a crisis, you might face 

the risk that in the end, your only option is a model in the FHA 

where the taxpayer may be more exposed to losses. And although 

it seems like a more private option, that risk will be in the banking 

system, and what that means is there will be a general implicit 

guarantee there the taxpayer doesn’t get paid for, so there is risk 

in that option too. 

That is why you have to look at them a little bit more carefully, 

and I would caution you from being too enthusiastic about the stylized versions of even that more limited option, even if you want a 

market that is more private than public. 

Mrs. BIGGERT. I think it is a starting point, but I think when you 

are talking about the FHA, there has to be work at the same time 

with the FHA to make sure that the market goes right to FHA. So 

this probably would be an increase in the costs for FHA as the premiums increase for Fannie and Freddie so that we get the private 

sector in there. But there seems to be then a contradiction between 

the regulators and HUD as far as how this is going to work, because—or the Administration seems to be saying we have to reduce 

the role of FHA. But the regulators have what seems to be this restrictive QRM that will limit the opportunity for borrowers, especially I think the first-time borrowers, and things like having a 20 

percent downpayment is really going to cause some problems. 

26 

Secretary GEITHNER. You made two points which are very important points. One is that you want Fannie and Freddie and the FHA 

to move together as they try to phase out the government’s role. 

That is important and we are committed to doing that. They are 

going to commit to work together in that context, because, again, 

you don’t want one moving and the other not moving and the business just shifting to the other. 

But you are right, as you design these new rules of the game for 

risk retention for the private market, you also don’t want to create 

a situation where you increase the incentives for the government 

to take on more of that role. You are right to emphasize that, and 

I think we can achieve that balance. 

But I think if you look forward in the private market, I think we 

should return, as an objective return to a system where homeowners borrow less against the value of their house and have to 

put a higher downpayment. That is a very important protection. It 

is not the only thing you need to look carefully at, it is not the only 

determinant of loss rates, but it probably leaves the country in a 

better position if there is a bigger cushion of equity in people’s 

homes. 

It is their most valuable financial asset. People need to be able 

to move when they change jobs. If they can’t move because they 

don’t have the equity cushion, it is very damaging to the overall 

economy, and it could be very damaging to other people in their 

community. And so I think for the broader market, we want to 

move to a situation where people put more equity down in their 

homes. 

Mrs. BIGGERT. I ran into former Treasury Secretary Paulson a 

couple of weeks ago, and he mentioned GSEs and said you better 

fix this, and what about being a public utility? I don’t think that 

was too popular. But that is another thing. Did you ever consider 

that as one of the options? 

Secretary GEITHNER. There are variants of Option 3 which people 

describe as having a public utility feature. Again, I would say the 

following things are true: If the government is going to provide a 

guarantee through FHFA or alongside FHA, you want it to be explicit, you want the government to charge for the risk of loss, you 

want there to be private capital ahead of the public capital so that 

private investors absorb the loss ahead of the taxpayer, and you ultimately want the taxpayer to be exposed to less risk of loss. 

But what you don’t want to do is have a system where there is 

this implicit guarantee or a guarantee that is not appropriately 

priced. Those are the things we have to avoid. But when people say 

the word ‘‘utility,’’ again, you could have options—versions of Option 3 which would have that characteristic. You could avoid that 

characteristic in Option 3. It depends on how you do it. 

Mrs. BIGGERT. Thank you. I yield back. 

Chairman BACHUS. Thank you. Mr. Watt? 

Mr. WATT. Thank you, Mr. Chairman. 

Mr. Secretary, I guess I have accepted the notion without arguing that the private sector is going to be a lot more involved in providing mortgage financing and homeownership for upper-income 

people, and it seems to me that all three options, 1, 2, or 3, are 

really directed at how you structure that. What troubles me in this, 

27 

what, 28, 29, 31 pages, is that there doesn’t seem to be much attention to how low-income people can achieve homeownership. A lot 

more attention, with all due respect to Ms. Velazquez and her line 

of questioning, to how they would become renters. 

But as I found it, I found one sentence in the whole report that 

holds out a hope for low- to moderate-income people to be homeowners. That sentence is on page 21. It says that the Administration would support downpayment assistance and counseling to help 

qualified low- and moderate-income home buyers in a form that 

does not expose them or financial institutions to excessive risk or 

cost. Nothing else in this report that I can find addresses low-income people having homeownership. 

So the question is, how are you going to give—just give me some 

ideas about how you give content to that one sentence which is 

hedged at the end with the three options, or let’s just be transparent that low-income people are going to become renters in this 

country, there is not going to be any homeownership at the low-income level. If that is where we are, I would rather know it and 

have the Administration say it up front. 

Secretary GEITHNER. That is not our proposal. I am grateful for 

you to give me a chance to clarify this. Under any of these options, 

we want to make sure that the FHA is able to play the very important role of making sure that Americans with low to moderate income can have the opportunity to get a government-guaranteed 

mortgage with a very modest downpayment. So we think that is 

very important under any of those options. 

Mr. WATT. I didn’t see that in any of the descriptions. 

Secretary GEITHNER. Central to each of these options, in any option, in our view, the FHA has to have the ability, should have the 

ability, Congress has to decide whether it will, to provide with a 

very modest downpayment the ability to low- and moderate-income 

families to borrow to finance a house. That is very important. 

There is a very good public policy case for that. So when we say 

that we have to do a better job of rental and multifamily, we don’t 

mean at the expense of that critical role. 

In addition to that, as you said, there is an important public policy question about how much equity, how much should you be required to put down, how much money should you be required to 

put down for an FHA-guaranteed mortgage. Right now, FHA will 

guarantee, I think, above 97 percent of the value of the house. 

There are people who argue that even for the low- and moderateincome family, they are better off if they have to put a somewhat 

larger fraction of their income down at the time they purchase 

their house, so, again, if they have to change jobs or if there is a 

crisis, they have some cushion there for savings. That is why we 

propose that there be a targeted program funded by the government to provide downpayment assistance to people who really need 

that assistance, and it is that combination of proposals that are at 

the center of this reform proposal. 

So thank you for giving me the chance to clarify that. 

Mr. WATT. I am glad you clarified it, because I, for the life of me, 

didn’t find any of that in these 31 pages. While I know you are 

walking a very, very delicate line here of not trying to agitate my 

colleagues on this committee, if we are going to have an honest disVerDate Nov 24 2008 18:17 Aug 04, 2011 Jkt 065669 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\65669.TXT TERRIE
28 

cussion about this, I think we have to put those things on the table 

and be explicit about them and we can’t finesse them or hide them 

or pretend that—that has to be done as a part of this process, not 

as a separate step, because if it is done as a separate step, it won’t 

ever get done. Rich people will have homeownership and poor people will have—and rich people will make money on apartment rentals, but we will be a renter nation for low-income people. 

I yield back. 

Secretary GEITHNER. I agree with that, and you are right to emphasize it. And, let’s just, again, to be fair, we did not do a good 

job in helping low-income Americans get access to sustainable 

housing finance options. We left them with a system where it was 

easy for them to be taken advantage of and they had none of the 

basic protections we think people need to be able to operate safely 

in a very complex business. So we did not serve them well in our 

current system. And a lot of the support the government provided 

went to much more fortunate Americans. 

So we have to get that balanced better. But you are right to emphasize again, as we try to do, that you want to have a balance of 

support for homeownership and a balance of support for affordable 

rental options. Right now in the country, about two-thirds of Americans own their homes, and about one-third rent. But we put much 

more financial assistance into those who want to own their home 

than we do for those who choose to rent. We have to get that balanced a little bit better. 

Chairman BACHUS. Thank you, Mr. Watt. 

I would also ask all the members to look at pages 20 through 22, 

because I think including rental, affordable rental, because I think 

at least a quarter of our low-income families spend over half their 

income on rental income, and I do think there has been a failure 

in that regard, and the FHA, whether they have the capacity, I 

think that would be a goal of any reform to focus on low-income 

people in both rental and ownership. 

Mr. WATT. I am glad to hear the chairman say that. I haven’t 

heard much of that from your side of the aisle, Mr. Chairman. I 

appreciate that. 

Chairman BACHUS. I think it needs to be part of the discussion. 

I think, as the Administration says, only about 32 out of 100 lowincome families can afford homeownership, so you have to consider, 

as Chairman Frank said, affordable rental income, too. I can tell 

you, I think it will be part of the discussion. 

Mr. Neugebauer? 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Secretary, thank you again for coming. This is a very important discussion. I am a little confused. I was kind of excited when 

I saw your report come out where you embraced—maybe it wasn’t 

your number one, but it was the first recommendation was more 

of a private market solution. I heard you say we need to phase out 

Freddie and Fannie and we can do that with raising the risk premium so that the marketplace can create space in there. You lower 

the conforming loan limits, you create more space in there. 

So along those lines, with Option 2 or 3 you have to go create 

something before you start that process, whereas—it says under 

Option 2, the government would also have to develop a backstop 

29 

mechanism. Number three, it envisions a system where there is an 

explicit guarantee of catastrophic risk, and so you have to go establish some other mechanism in the system. Whereas in Option number 1, basically you are just creating space for a market that has 

been there before, and many of us think we can bring back. So to 

me that kind of delays moving down that road. 

Secretary GEITHNER. Let me clarify that. We believe we have the 

authority, and the chairman said this at the beginning of the hearing, ‘‘we’’ being the FHFA and the FHA, the authority to gradually 

phase down the role of the government over the next several years 

while we work with the Congress to figure out which mix of options 

we want for the future. You don’t need to delay that process until 

you lock in the ultimate design of what is going to replace Fannie 

and Freddie. You don’t need to delay that. You can move ahead. 

What determines the pace at which you can phase them out are 

really these basic questions about the gradual process of the repair 

of the housing market and our success in clarifying the rules of the 

game so that private capital will come in. That is what will determine the pace. 

Mr. NEUGEBAUER. But, Mr. Secretary, you are going to send a 

very mixed signal to the private sector then if you say hey, we are 

ratcheting down, we are going to create space for the private sector, and, by the way, while we are doing that, we are going to set 

up these new mechanisms. I think the private market says, I think 

we will wait until you get the new system set up. So I think that 

is a road that you go down. 

I think one of the things that the mortgage market needs now, 

because I have talked to a number of people all the way through 

that chain, is they need some certainty. So, I think as you start 

down that road, you have to make that commitment. 

I think one of the things that I would ask you in order to create 

that certainty is, do we need a definitive date where the switch is 

turned over? Because at some point in time you have to say it, at 

this point in time, the taxpayers are not guaranteeing these mortgages. 

Secretary GEITHNER. I understand the risks you are saying and 

I think you said it very thoughtfully. That is one reason why you 

can’t delay indefinitely legislation that would define the ultimate 

solution. It is important to recognize that if we do nothing, if we 

don’t legislate, Congress doesn’t legislate, then we are left with authority under what is called HERA that in many ways would recreate Fannie and Freddie at the end of the process, in a slightly different form, with many of the risks in that context, and we don’t 

think that would be prudent. 

So you are right to say that you want to provide as much clarity 

about the endgame as possible, as quickly as possible, but to do 

that in a sensible way does require legislation. So it is a good reason to try to move. That is why I have suggested that this is something Congress wants to do within the next 2 years. You don’t want 

to wait 3 to 5 years to do that. 

Mr. NEUGEBAUER. One of the primary functions that Freddie and 

Fannie play is the aggregation, being able to bring the mortgages 

in and provide securitization. What about the idea of at some point 

in time just letting them, as of this wind-down, continue the aggreVerDate Nov 24 2008 18:17 Aug 04, 2011 Jkt 065669 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\65669.TXT TERRIE
30 

gation function, but at some point in time, eliminate the guarantee 

and let them continue to act as aggregators and sell those securities to the private market? 

Secretary GEITHNER. I think there is something to that and you 

can envision that being part of any long-term solution. There is a 

lot of talent in those institutions and there are a lot of very valuable systems that make that process work better. There is a lot of 

economic value in those systems. So you are right to say that depending on where Congress goes with this, you might want to find 

a way to preserve what is still very valuable in both the people and 

those systems. 

Mr. NEUGEBAUER. Is one of the ways, in other words, the portfolio that Freddie and Fannie have, they are supposed to be reducing those. What we understand is that is kind of a tricky situation. 

They are selling off, they are rolling off some of that, but actually 

they are bringing loans out of some of the securities and bringing 

those in and reworking those by repurchasing them. 

Is there merit in letting Freddie and Fannie sell off some of their 

portfolio in a non-guaranteed portion? What I worry about is they 

have the interest rate risk, so obviously when they sell those securities, that interest rate risk goes on. But if they sell them with a 

guarantee, then basically the risk is still there, and I am looking 

for ways to minimize the taxpayers’ exposure here. 

Secretary GEITHNER. I agree with you. You are right, as you said 

in the beginning, that by gradually winding their role down, and 

there really is no alternative to doing it, they are still issuing guarantees, so there is some risk of exposure to the taxpayer in that 

process. But we just see no alternative to that. You can’t flip a 

switch today and have the private market come in and take over 

90 percent of the market again. It is just not realistic, as you know. 

So there is no real option except for them to be issuing guarantees, 

but more conservatively underwritten, more expensive over time, 

through this transition process. 

You are right that their retained portfolio includes a lot of their 

own guaranteed mortgages, so if they sell those into the market, 

they are still guaranteed in that context. I just don’t see a better 

way to—I don’t see a way to solve that basic problem. We are living 

with that. That is the price of the mistakes of the past. Our job is 

to make sure that, again, we wind them down in a way where we 

reduce the risk of loss to the taxpayer ultimately over time, and I 

think we are doing a very good job of bringing down those losses, 

those estimates, carefully over time. But we are going to stay at 

it, and it depends a lot on the quality of the judgments that the 

FHA makes, and the FHFA makes. 

Chairman BACHUS. Thank you. Mr. Ackerman? 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. 

You have stated that the GSE loan limit is going to be lowered 

from its current elevated level of $729,000 to $625,500 starting in 

October of the current year. In my district, which is in New York 

City and Long Island, the median home price is about $500,000. 

That doesn’t mean that a person having a home that costs them 

$600,000 is living in some extravagant home. Home prices are 

based on a number of things, including the cost of the actual conVerDate Nov 24 2008 18:17 Aug 04, 2011 Jkt 065669 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\65669.TXT TERRIE
31 

struction and the location and cost of living. That same $600,000 

house in my district, which would be a fairly modest house, would 

cost under $300,000 in a lot of other places in the country, so these 

aren’t necessarily people who are living extravagantly. 

This is going to affect my constituents tremendously and they are 

going to be among the first to feel the effects of the larger role of 

the private mortgage market. 

What can people like that or my constituents and other people 

in other parts of the country expect in terms of credit availability 

and interest rates, given the fact that private capital has been 

largely absent over the past few years and that the GSEs have 

been a participant in over 90 percent of the loan originations? In 

your view, is the private market ready to come back and do they 

actually want to play a role or will the trauma of the past few 

years make them hesitant to lend or hesitant to lend at least at 

what most people today consider reasonable rates? 

Secretary GEITHNER. That is a very important question. The way 

the law of the land is written now, without action by the Congress, 

those limits do come down, but they still preserve the capacity for 

differentiation. So they will still be higher in parts of the country 

where home values are much higher than they will be in other 

parts of the country. 

Mr. ACKERMAN. You are talking about the rates? 

Secretary GEITHNER. When the conforming limits, if they are allowed to revert or come down in October, without action by the 

Congress, that is what happens, they still are differentiated to reflect the very different factors driving home values. And I think the 

private market now is not— 

Mr. ACKERMAN. You are saying that there would be a regional 

cost-of-living adjustment? 

Secretary GEITHNER. There is a differentiation in the way the 

law is written now, and I think that is very important to preserve. 

I think, again, for this transition process we are going through, you 

need to have more differentiated limits to reflect the very different 

factors that affect home values throughout the country. That is 

very important. 

You asked whether the private market is coming back yet for 

those higher-value mortgages, and I would say not that much yet. 

It is a very slow, gradual process. And one of the reasons why we 

want to proceed so carefully is because we want to be careful not 

to again jeopardize the recovery, jeopardize the prospect for growth 

and repair of the housing market. 

Mr. ACKERMAN. Is there a rate card or a scale that is available? 

Secretary GEITHNER. There is, but I don’t have it with me. I 

would be happy to share it with you. 

Mr. ACKERMAN. Thank you very much. 

Chairman BACHUS. Thank you, Mr. Ackerman. 

Mr. Miller? 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Secretary. It is good 

to have you here today. 

We tend to be focusing very specifically on Freddie and Fannie, 

and yet when you look at the housing downturn, it has been global. 

But the problem I have is I don’t think we are looking at the problem in the marketplace. And we keep talking about Freddie and 

32 

Fannie’s default and the failures they have had and the money 

they have lost. 

As I see it, the GSEs, Fannie’s seriously delinquent loans are 

about 4.2 percent. That is not a good number. Freddie’s is about 

3.1 percent. That is not a good number. Subprime ARMs delinquent that are not agency loans, 38.7 percent. Subprime loans delinquent, non-agency, 26.5 percent. Even in your prime loans, private sector loans, just delinquent is 5.4 percent. There is a problem 

here. We are shining a light on Fannie and Freddie, but we are not 

saying there is something seriously structurally wrong with the entire market. 

Looking at all the numbers I have seen, you keep talking about 

your affordable housing goals. Freddie and Fannie, in 1998 and 

2000, basically started trying to compete with the private sector, 

became very lenient in their underwriting standards, to raise their 

percentage of the marketplace. It was like a race to the bottom. Yet 

if you look today, they are outperforming the marketplace, and 

they are basically performing their goal, they are providing liquidity in a stressed marketplace: FHA, VA, Freddie and Fannie, 92 

percent of the market. 

We are not addressing the problem. The loans you are making 

today through Freddie and Fannie are performing very well. Yet 

the loans that are performing the best in high-cost areas you are 

wanting to completely eliminate. So let’s eliminate the high-cost 

areas where people likely are able to perform in and just take that 

sector out. 

My concern is we are saying we are going to bring the private 

sector dollars into the marketplace. Where were they at in 2005– 

2006 when the market was heated? You had Countrywide selling 

junk to the marketplace. The only bundled securities you had that 

were any good were the GSEs. All of those mortgage-backed securities by the private sector are worthless, in many cases. 

So we are not addressing the serious problems in the housing industry. We are saying we are going to get the government out. 

But another problem I have is when the TARP funds were issued 

to the private sector, you were charging 5 percent. You are charging Freddie and Fannie 10 percent. Are they paying it? 

Secretary GEITHNER. As you know, in a sense— 

Mr. MILLER OF CALIFORNIA. My question is, why would we 

charge them double if we are trying to not create more of a problem than we are charging anybody else? We are not paying 10 percent for money, the Treasury. When you sell notes, you are paying 

very little. Yet you are saying Freddie and Fannie are seriously 

distressed today, so let’s charge them 10 percent interest on the 

money we forward them. How much sense does that make? 

Secretary GEITHNER. If it makes you feel better, in effect the taxpayer is paying that. It is one hand paying the other. 

Mr. MILLER OF CALIFORNIA. But you are going to get the money 

back from them. 

Secretary GEITHNER. No. As I said, we are not going to recover 

fully the amount of investments the taxpayer put in. It is not possible. But it is going to be substantially lower than anybody 

thought it would be. 

Mr. MILLER OF CALIFORNIA. What do you think it would be? 

33 

Secretary GEITHNER. In the budget, we estimated somewhere around $75 billion, but that doesn’t take account of the fact that 

we are going to raise the guarantee fees gradually over time. So 

it will be less than that. That is an extraordinary amount of 

money. 

Mr. MILLER OF CALIFORNIA. $75 billion is a lot of money. If 

Freddie and Fannie had not been there in 2007, 2008, 2009, 2010, 

what kind of a hit do you think housing values would have in this 

country when there was nobody to make the loans? Because you 

can’t tell me the private sector was there, because they are not. 

Secretary GEITHNER. I don’t think we are disagreeing as much as 

you think. You are absolutely right— 

Mr. MILLER OF CALIFORNIA. You are talking trillions of dollars. 

Secretary GEITHNER. It would have been much, much more devastating than anything we faced, much more devastating. 

Mr. MILLER OF CALIFORNIA. If 61.5 percent of all the taxpayers 

in this country own a home, and we allowed the values of their 

homes to go down by trillions of dollars— 

Secretary GEITHNER. I agree with you completely. 

Mr. MILLER OF CALIFORNIA. Who is getting hurt worse? 

Secretary GEITHNER. I agree with you completely. That is why I 

say that as you examine the future options, be careful to make sure 

you preserve some capacity for the government. 

Mr. MILLER OF CALIFORNIA. Why don’t you give— 

Secretary GEITHNER. To protect the economy and the innocent 

victims from the kind of crisis we went through. 

Mr. MILLER OF CALIFORNIA. You have to have the numbers. Why 

don’t you go back and tell us what year they started to make the 

loans that had a higher propensity of default rates and why that 

occurred. I looked at Freddie and Fannie. They ratcheted up in 

1998 and 1999 and specifically 2000, completely ratcheted down 

their underwriting standards. Those two went in different directions. This did not have to occur. 

Secretary GEITHNER. It was preventable. They pulled the market 

down, I agree with you. 

Mr. MILLER OF CALIFORNIA. Before we make a huge mistake, 

would you get us the data that says why they went wrong and 

when and where so we can analyze the problem rather than throwing the baby out with the bathwater? Because Fannie lost money 

in 1985. Freddie never lost a dime in their history until recently. 

Let’s go and find out why they lost money, rather than just saying 

they are the bad guy while they are outperforming the rest the 

marketplace. I would love to have an hour to talk to you. 

Secretary GEITHNER. Don’t let them off the hook, because they 

made a lot of mistakes and did not hold capital against those 

losses, and Congress made it possible for that to happen. 

Chairman BACHUS. Your time has expired. 

Mr. Sherman? 

Mr. SHERMAN. Yes. I would like to build on Mr. Miller’s questioning. 

There is this view that lenders lost money because they made 

bad loans. That was true at the beginning. But then with housing 

prices declining, lenders lost money when they made good loans, 

because if you make 100 good loans, with at least some of them, 

34 

you are going to have a divorce, you are going to have some guy 

who loses his job, somebody is going to die, you are going to have 

a health crisis. And in the old days, pre-2007, that would happen 

a typical amount of times, and they would sell the house at a profit. 

Anybody who invested in good loans, prime, people who really 

documented their income, still lost money. I don’t know. To what 

extent are Fannie and Freddie’s losses due to their subprime and 

Alt-A lending, which was a small part of their overall portfolio, and 

how much of their losses are due to losses on prime loans where 

you just had an unexpected level of default and yesterday’s profitable sale is today’s short sale. 

Secretary GEITHNER. I would be happy to give you the numbers 

in more detail, but since most of their book is prime, most of the 

losses are on the prime. But still, they lost a substantial amount 

of money in what they did in Alt-A. 

Mr. SHERMAN. And yet if the most pristine and conservative 

banker started his bank in late 2008 for the purpose of making the 

most prime of loans, I am sure they lost money on the loans they 

made in 2008 and 2009. 

Secretary GEITHNER. For the reasons you said, but also because 

when unemployment goes from 5 percent to 10 percent, people lose 

their jobs and that huge shock to income, you are going to see a 

big increase in default rates. 

Mr. SHERMAN. The issue before us short term is the conforming 

loan limit. In Los Angeles, it is easy to get a $20 million loan to 

buy a home in Malibu, because if you are buying a home in Malibu, 

you either know your banker or you are the banker. But it is almost impossible to get a loan in the $800,000 range. 

What could happen to this economy if we precipitously allow that 

$729,750 that applies to roughly 10 major metropolitan areas, including Gary’s and mine, what happens if that were to precipitously drop? What is the effect on housing prices in Los Angeles 

and New York? 

Secretary GEITHNER. As I said several times, I think you need to 

be very, very careful as you look at what to do with conforming 

limits with guarantee fees, with underwriting standards, that we 

not magnify the pressures on a still very delicate market. Again, 

the failures we produced, that this government produced, were, just 

to be fair, they were bipartisan failures, and we have to be very 

careful as we try to fix what is broken, we don’t make this crisis 

worse for people. I think that is a responsibility everybody shares 

here. So we have to be careful as we do it. 

But I do believe that it would be prudent based on what we now 

know today for Congress to let those conforming limits fall modestly, as they are scheduled to do at the end of this year. 

Mr. SHERMAN. Speaking for those who are trying to buy and sell 

homes in Los Angeles, I don’t know if you create a double-dip recession nationwide, but you certainly do in many areas, including the 

second largest metropolitan area. I would point out that the failures of Fannie and Freddie are bipartisan, but they are unicameral. The House of Representatives passed a bill that was carried 

through this committee under Republican leadership that former 

35 

Chairman Oxley explains would have prevented this crisis, and it 

was over on the other side of the Capitol where others blocked it. 

Finally, if we go bad bank-good bank, then the new GSEs’ profits 

belong to someone else rather than those profits being used to pay 

what we hope is less than $75 billion in losses. Doesn’t it make 

sense to make sure not only that future operations are profitable, 

but that those profits are used to repay the taxpayer? 

Secretary GEITHNER. I agree. And I don’t think—I haven’t seen 

a good bank-bad bank version that would achieve the objective of 

minimizing risk of losses to the taxpayer. 

Chairman BACHUS. Thank you. 

Mr. Campbell? 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

Mr. Secretary, in your comments you talked about the continuing 

wind-down of Fannie and Freddie’s investment portfolios at a rate 

of no less than 10 percent annually. Some of that is wind-down. 

Some of that, however, will be selling into the marketplace, which 

we have discussed before. 

What has been done in that regard thus far, and does this mean 

that we are going to be selling off 10 percent of Fannie and 

Freddie’s portfolios into the marketplace in the balance of this 

year? 

Secretary GEITHNER. I can’t tell you precisely the mix between 

natural runoff and what would be an actual sale, but I can say that 

based on the experience so far, the market has been able to absorb 

the wind-down on that pace. I am happy to provide more details 

to you on that. 

You can’t be certain how the market is going to evolve in the future, but we think that it is reasonable and prudent to adhere to 

that path. 

Mr. CAMPBELL. And you do expect to be selling—obviously with 

interest rates where they are, some of this can be sold off at a profit? 

Secretary GEITHNER. I want to be careful how I say it. I can say 

for the Treasury portfolio that would be the case. 

Mr. CAMPBELL. Okay. I suspect you know this, but in terms of 

the three options of where we go in the future, there is not unanimity here. 

Secretary GEITHNER. That is my impression. 

Mr. CAMPBELL. On either side of the aisle. So I will confess that 

I am a public utility model type guy. It sounds like you don’t particularly like that term, so let’s—I guess it falls within Option 3 in 

your set of options. Let’s call it instead something where there is 

a guaranteed or Federal reinsurance that is available to multiple 

entities that is, as you suggested, explicit and limited, as opposed 

to the Freddie and Fannie model where the guarantee was implicit 

and unlimited. 

What is your reaction to that sort of model going forward? 

Secretary GEITHNER. I think it has a lot of merit. But, again, you 

want to be careful to design it in a way that makes sure you meet 

those tests. Again, I want to emphasize something that Mr. Hensarling suggested earlier, which is if you are going to have the government provide a guarantee, through the FHA or through some 

hybrid mechanism like you described, what you need to make sure 

36 

is that it is priced to cover risk of loss, the taxpayer is substantially—the taxpayer is behind a bunch of private capital in that 

context, not ahead of it, and you want to make sure that you leave 

politics out of the setting of the basic fee. That is very important. 

And you can’t create a system that is going to be vulnerable to your 

successors and lobbyists and other stakeholders trying to put pressure to underprice those guarantees in the future. 

Mr. CAMPBELL. I couldn’t agree with you more on those points. 

If we don’t do something like that, if we do something that has less 

involvement, my concern, the housing market is such a huge portion of the economy, as we witnessed in 2008, if left without some 

stability provided by the government, you will have vicissitudes as 

banks, which they often do, they get all excited and all of a sudden 

they want to loan everybody in the world money for a house, and 

then after they have some losses, all of a sudden they don’t want 

to loan to anybody for a house. This happens in other segments of 

the economy and it affects those segments, makes them very volatile, but it doesn’t have that huge an effect on the overall economy 

because they are not that big. But the housing market is so big if 

we subject it to those vicissitudes, I am afraid that we will have 

some significant additional volatility in the overall economy. Do 

you agree? 

Secretary GEITHNER. I think there is that risk, and you state it 

very well, and that is why I want to emphasize over and over again 

that when you look at alternative models that look like they have 

more of what people say is a private character to it, a more purely 

private character to it, most of those systems out there involve 

banks holding all of that risk. And, as you know, the history of financial crisis is largely a history of banks and real estate together, 

and the government ultimately is there, it is just behind the banks 

with this implicit support that they don’t charge for. So it still 

leaves the taxpayer exposed to loss. 

So, again, the really difficult challenge is to try to make sure you 

have a system where you have more conservative standards for underwriting, homeowners hold more equity in their homes, banks 

hold more capital against risk. The government is very limited. 

Mr. CAMPBELL. Let me sneak in one final question here. You 

talked about how we may have higher downs, that will require 

higher downs, and that there may be higher costs for mortgages for 

moderate-income people, etc. How can we reconcile that, taking 

rental aside, but for low-income people then saying no, we are 

going to have modest downs and perhaps no more increase? In 

other words, how can we tell moderate-income people that it is 

going to be harder to buy a house, and for lower-income people, it 

is going to be easier? 

Chairman BACHUS. Let him answer the question. 

Secretary GEITHNER. That is an excellent question. Again, that 

is the kind of judgment Congress has to make. But my own view 

is that there is a good public policy case for the government providing some assistance for low- and moderate-income Americans so 

they can afford that first house. I would want to try to preserve 

that, carefully design it in any system going forward. But that objective is consistent with returning our system to a system where 

the private market plays the major role in housing finance, and if 

37 

we get better oversight, better capital requirements, better underwriting standards, we will have a more stable system. 

Chairman BACHUS. Mr. Capuano? 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Secretary, this is all very interesting, but I think we are mixing a lot of apples and oranges when we are talking low- and moderate-income housing and Fannie. The truth is we are not even 

talking today for some reason about HUD or about tax credits or 

all of the other things that go into low- and moderate-income housing. And I have to tell you, Option 1, Option 2, Option 3, I feel like 

asking, can I get a salad instead of soup? It is hard for anybody 

to follow. 

Secretary GEITHNER. Would you like the salad and the soup? 

Mr. CAPUANO. I would love to, if I could, but I don’t think we can 

afford that. For me, I look at housing as we all do. We all come 

to the table with our own experience. 

I live in my first and only owner-occupied two-family home. I 

don’t know if there is anybody else on this panel or in this room 

who lives in their own two-family home. I bought it because I 

couldn’t afford a single family home. My children went to college 

on the basis of remortgaging that home. If I didn’t have that home, 

my kids could not have gone to college. Even with that, they came 

out with significant loans. 

So, for me, I really want to get to the bottom line. When we are 

done, I would like to know the Administration’s goal on numbers. 

When anybody I know walks in to get a mortgage, they don’t care 

who it comes from. They probably don’t even know, Fannie Mae, 

FHA, private. They just want to know how much, what is it going 

to cost me, and will you give it to me. 

And for me, I come from one of the markets like most of the people in this top row, I come from a very expensive market. Most of 

the people in my district probably would never or seldom qualify 

for a Fannie loan. They just don’t, because the houses are too expensive even with the new numbers. Some do, but not many. 

But we have a lot of young people in this room today, many of 

whom I am willing to bet do not own a home, and if I were them, 

I would be asking, when is it my turn? If a young couple, two good 

jobs, good education, making $100,000 together, paying rent, probably paying student loans off, paying one or two auto loans off, trying to put something aside for everything else, what do you think 

is a fair amount to ask them for a moderately priced home? Again, 

that number changes. Mr. Ackerman is 100 percent right, Mr. Miller is right. A moderately priced home in my district is a castle in 

some of the other places for the numbers. 

But a moderately priced home, what do you expect them to pay? 

Do you expect them to pay 20 percent down? Do you expect them 

to pay 7 or 8 or 10 percent? How are they ever going to be able 

to get this together and how will they ever hope to afford to send 

their children to college? 

Secretary GEITHNER. That is an excellent question, and let me 

just say it again, we think it is very important to make sure that 

the FHA, which is HUD through the FHA, still has the capacity 

to provide mortgages at reasonable cost to people who cannot afford 

to put a lot of money down on their house. 

38 

Mr. CAPUANO. I want to be clear. I am not talking at the moment 

about people who have a lower education or have limited income. 

I am talking about the people in this room. All of the ones that I 

know are very well educated, very intelligent, making decent incomes, and have probably a reasonably decent future. But as they 

are living their daily lives, it will be almost impossible for them to 

put aside, on top of rent and student loans, $60,000, $70,000, 

$80,000 for a downpayment and then qualify for that, especially for 

young women who may want to have a family someday. 

How are they going to be able to do that if we don’t address the 

long-term goal? How much are they going to pay? What is that 

goal? 

Secretary GEITHNER. Again, in this system today, and I think we 

would want to preserve part of this, you would be able to go to the 

FHA, you would have to go to a bank and get an FHA-guaranteed 

mortgage and only have to put down a very small fraction of the 

value of your house, and I think that is appropriate to try to maintain for people of low and moderate income. 

Where Congress defines those lines is a choice for Congress to 

make. For the rest of the American people, we want to have a system where the private market provides that finance, and we think 

that is possible. 

Mr. CAPUANO. I think I am talking about the vast majority of the 

American market. I am not talking about the lower end. Maybe I 

am wrong, but all the young people I know in this room are very 

intelligent people. They are going to have a great future. They are 

not the low end of the socioeconomic scale. They are going to have 

a great future. How are they going to get in? 

Secretary GEITHNER. I said low and moderate, but, again, this is 

the fundamental choice and you are right to raise it, which is the 

way to ask the question is, is it fair to ask all Americans to put 

their money at risk to help subsidize access to housing for more fortunate Americans? Where you draw that line is a judgment Congress has to make. You are right to say that if you put it too low, 

it will still be unfair. 

Mr. CAPUANO. For me—and I guess that we all have to ask ourselves that question—I am not interested in pulling up the ladder 

because I got lucky enough to get my house. I have children; I want 

them to be able to afford a home someday, a reasonable home in 

a reasonable neighborhood, as I do everybody else in this room. 

And I have to think—I agree with you, those are the questions 

we have to ask ourselves. It is also the question the Administration 

has to ask. And as we go forward, though I appreciate all the esoteric academic exercises we have to go through, in the final analysis, it is about how much. How much are we going to ask for 

them? 

And I think this Administration has to do a little bit more— 

Chairman BACHUS. Thank you, Mr. Capuano. 

Mr. CAPUANO. —than this White Paper to help us answer this 

question. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Mr. Pearce? 

Mr. PEARCE. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for being here. 

39 

I am still trying to get my hands wrapped around the comment 

that you made that we just need the tools to protect the innocent. 

With all due respect, when you have a policy of ‘‘too-big-to-fail,’’ 

then you have a policy of ‘‘too-small-to-succeed.’’ That is the State 

I represent, New Mexico. So when you all—you, the regulators— 

suspend prompt corrective action for all the big banks, all the small 

banks still have to comply with prompt corrective action. And it is 

very punitive on the small banks. 

You indicate on page 3 that you are worried about sufficient capital. When Basel II was agreed to back in 2003 or 2004, we allowed 

the big banks to determine by models their own capital requirements. So are the big banks still allowed to determine the capital 

requirements under Basel II, or is that something that you have 

changed? Is that one of the tools that you have— 

Secretary GEITHNER. I want to make it clear, I would never support a system where you allowed banks to choose how much capital 

they hold against risk. 

Mr. PEARCE. Am I incorrect that Basel II basically allows them 

to set their models and declare their own capital requirements? Is 

that a mistake on my part? 

Secretary GEITHNER. Because Basel II took so long to put in 

place, it actually never applied in this context. Under Basel III, 

banks have to hold more capital against risk, and they don’t get to 

decide. 

Mr. PEARCE. But Basel III is not in effect yet. 

Secretary GEITHNER. No, but it will be. 

Mr. PEARCE. Oh, okay. That is—as long as it is not in effect and 

II is. 

What about the mark-to-market? When I was—back in my district, in about 2008, I had Indian hotel owners who dominate in 

New Mexico—it is a small market, kind of low margins—and they 

were being told they had to come up with $750,000 in new capital 

for a $2 million or $3 million facility because of the re-evaluation 

of the mark-to-market rules. 

So is that, sort of, protecting the innocent there when the— 

Secretary GEITHNER. You are not going to find me disagreeing 

with you that you want to have a system where you don’t create 

these perceptions of too-big-to-fail. And I believe very strongly that 

large institutions need to be forced to hold more capital against 

risk than relative to small institutions. So if that is your view— 

Mr. PEARCE. If I could catch you right there, you believe that 

those institutions should hold more capital, and yet— 

Secretary GEITHNER. Relative to risk. 

Mr. PEARCE. —institutions were complained about to—the 

SunTrust institution was complained—when it was trying to put 

more reserves as capital requirements. Then they were penalized 

for adjusting their earnings. 

And so, in good times, banks are prohibited from putting more 

capital aside; and in bad times, they are punished for not putting 

capital aside. And so where does all this stuff— 

Secretary GEITHNER. I am tempted to say— 

Mr. PEARCE. So the innocents out there are wondering, when are 

you going to worry about us? 

40 

Secretary GEITHNER. I agree with you about that. And I am 

tempted to say to you, it is so much worse than you think. 

You are right to say that the accounting system we had in place 

made it harder for banks to put more reserves aside during the 

boom against loss than would have been appropriate. I agree with 

you about that. 

Mr. PEARCE. So if we scooted over, then, to the size of the prob- lem, the estimates at the end of 2006, where we had $1.24 trillion 

in subprime loans, only $300 billion of those, 0.3, were held in 

FDIC-controlled banks. If you give them 75 percent—75 percent of 

those were performing at that point, which means $75 billion nonperforming. And if you took a 50 percent write-down on those, you 

get somewhere in the neighborhood of $38 billion real risk associated with the subprime. 

And then if you take another 25 percent of all the performing loans, write them down, you get another $56 billion or $58 billion. 

So you get about $100 billion of exposure. And we had a $12.3 trillion total in assets in the banks at that point, $1.4 trillion in equity, $150 billion in earnings. 

So the total exposure in the subprime market appears to be in the $100 billion range, and yet we took very dramatic, dramatic actions. That, to me—I question whether or not we took the right actions after the fact. 

Secretary GEITHNER. You mean in terms of the reform legislation 

Congress passed or in terms of the actions— 

Mr. PEARCE. No, in terms of the responses. The responses—I was 

sitting here in Congress at that period—appeared to be ad hoc. 

They appeared— 

Secretary GEITHNER. You think we overreacted? 

Mr. PEARCE. I— 

Secretary GEITHNER. The government overreacted? 

Mr. PEARCE. They appeared to be ad hoc. 

Secretary GEITHNER. Oh. 

Mr. PEARCE. And we let Lehman Brothers fail. Then we, the day 

after, 2 days after, supported AIG; 2 days before, Freddie and 

Fannie. And so— 

Secretary GEITHNER. I would be happy to respond to— 

Mr. PEARCE. —we were sending mixed messages. 

Secretary GEITHNER. I would say that this country came into this 

crisis without the tools not just to prevent crises safely but to respond when crises happened. And that is one reason why the crisis 

was so deep and severe, and it is one reason why Congress had to 

legislate in a panic at particular stages of the crisis. That should 

never happen again. 

And one of the most important things that the financial reform 

legislation does is give the government better tools in an emergency to wind down these institutions without the taxpayer being 

exposed to the loss. It is just for that reason. 

But you are right to say that the tragic mistake this country 

made was to build a system where the government could not come 

in and protect taxpayers, protect the economy from the mistakes 

that large institutions made. 

Chairman BACHUS. Thank you. 

Mr. PEARCE. Thank you, Mr. Chairman. 

41 

Chairman BACHUS. Mr. Lynch? 

Mr. LYNCH. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary, for helping the committee with its 

work. 

I want to look forward here. I know we could argue about who 

did what when, but I think it is important here that we try to figure out a way to wind down Fannie and Freddie, as you have suggested. 

And I think on your point, as I look at Option 3, there are more 

tools, if you would, within that framework to influence the markets 

and to provide some relief when necessary. 

I think that the idea that this government reinsurance would 

only apply to certain securities, mortgage-backed securities, that 

comply with very strict underwriting standards, I think that could 

offer a great incentive to getting the type of product we would approve of and that would be sound, especially when looking at what 

happened in the previous crisis, when you had Standard & Poor’s 

and Moody’s stamping ‘‘AAA’’ on everything. If you had those tight 

requirements on underwriting, I think that could stabilize the market. 

As well, I think that having the loss allocation placed on these 

private guarantors also provides that first-dollar risk that would be 

absorbed by the private sector instead of the government. And I 

like those ideas. 

However, having been here for a few years, I know there are 

some constituencies out there, such as the banking industry, such 

as the housing industry, that would want to have as many products 

comply and get reinsurance as possible. And these private guarantors would also want to have the backstop as close as they could 

so that their losses were minimized and the public losses were 

probably maximized. 

How do you deal with that issue, where you have these constituencies and they are pushing against what you are trying to do? 

And my fear is that, as we get out of this crisis and we get more 

toward a period of normalcy, that we don’t have the robust oversight of these private guarantors, and we may end up back in the 

same place because of a lack of oversight, and the taxpayer ends 

up at risk again. 

Secretary GEITHNER. I think you have figured this out. You have 

it exactly right. I think that is exactly the mix of advantages and 

risks in designing some variant of Option 3. So, for Option 3 to 

work, it is very important to make sure that you have to have 

these basic conditions. 

Absolutely, you have to have the capacity to make sure you set 

capital requirements and oversee those types of mortgage guarantors. That would be an absolutely necessary condition. Absolutely, 

it would be necessary to make sure you had the freedom, independent of politics, removed from politics, to set very conservative, 

very strict eligibility requirements for what would be eligible for a 

guarantee. It is absolutely important to make sure that that guarantee is priced on what is an economically sensible estimate of potential future losses, independent of political influence. 

And one reason why we have been a little careful not to commit 

is to say that, fundamentally, whether you like Option 3 or Option 

42 

2 or Option 1 or some mix of those things, it depends a lot on 

whether Congress is willing or able to design a system that is less 

vulnerable to political influence from people who would like to benefit from the subsidy from the government. 

Mr. LYNCH. Mr. Secretary, the other thing I wanted to ask you 

about is, the definition of ‘‘catastrophic’’ would seem to be agreeing 

that the government should step in to prevent—at that point of catastrophic loss, I guess. 

And my guess is, I know what we just went through was catastrophic, so I know that much complies or comes within your definition. But, also, in reading through this and the President’s proposal and the report of the Administration, it would appear that 

the other definition would be, ‘‘after the private guarantor is wiped 

out.’’ 

Does that trigger ‘‘catastrophic,’’ or is there a reinsurer beyond 

that? 

Secretary GEITHNER. You are talking about in the context of Option 3, variants of Option 3? 

Mr. LYNCH. Yes, please. 

Secretary GEITHNER. One way to do it is to say you have no exposure to the taxpayer until the guarantor has failed. That would be 

one way to design it to make sure there is enough risk ahead of 

the taxpayer. 

And you are right to say that where you set those lines is what 

is important to the economics of the whole arrangement. It is very 

hard to do, but it is not beyond our capacity to design a system 

that works dramatically better than the system we had. 

Chairman BACHUS. Thank you. 

Secretary GEITHNER. So I am actually more optimistic you can 

design something in that area that is not nearly as vulnerable as 

the system we had with the GSEs to the types of failures we saw. 

Mr. LYNCH. Thank you, Mr. Secretary. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Mr. Posey? 

Mr. POSEY. Thank you, Mr. Chairman. 

Thank you for being here today, Mr. Secretary. 

In your testimony, you indicate that your objective is a healthier 

and more stable housing finance system with a broader goal of 

helping our economy recover. A part of stabilizing our economy is 

to ensure there is adequate capital in our financial institutions so 

that money is available for lending for housing, construction, and 

commercial purposes. You have indicated it is one of your goals, 

and I assume it is part of the Fed’s goal for QE2. 

Given that goal, I wanted to call your attention to a recent proposed regulation from the Internal Revenue Service that could have 

a devastating effect on the capital in U.S. financial institutions. 

This rule proposed by the IRS could lead to several hundred billion 

dollars leaving the United States and fleeing to low-tax jurisdictions. 

It is my understanding that for the past 90 years, our national 

policy has been to encourage foreigners to put their money in our 

banks. That money goes to work in the United States economy in 

exchange for those individuals earning some interest. And they 

have the assurance that their money is safe and sound. They also 

43 

have the assurance that corrupt governments don’t have access to 

that information. I think that is a win-win situation, and you are 

shaking your head ‘‘yes.’’ I think you do, too. 

The proposed IRS rule would force banks to hand over interest 

payment information to the IRS. There would still be no tax on the 

interest earned, but the IRS would, in turn, have this information 

to turn over to a foreigner’s own country. 

This was a bad idea when it was first proposed in 2001, and, 

wisely, the Administration and Congress rejected it. It was a bad 

idea then, and I think it is a bad idea now. And I look forward to 

working with you so that we can maybe do that again this time 

around. 

The flight of between $200 billion and $400 billion from U.S. 

banks, as apparently would happen if this regulation were put into 

place, would be devastating to our economy, I think. Furthermore, 

it would raise safety and soundness issues for our bankers and 

have significant deposits from nonresidents—affect those. 

Do you agree that this is a bad idea and that it has come at a 

bad time? 

Secretary GEITHNER. Congressman, I am not completely sure I 

know which draft regulation you are referring to. I think I do. And 

if I am right, I don’t think it has the risks that you are suggesting. 

But I would be happy to spend some time and talk to you about 

it and see if we can figure out a way to address your concerns. 

Mr. POSEY. I would greatly appreciate that, because I think we 

are going to need your support here. 

Again, do you think the housing market has bottomed out yet? 

Secretary GEITHNER. It is very hard to know. We have unemployment between 9 and 10 percent. And although the economy is 

growing and though you have had a big, big adjustment in house 

prices—housing is much more affordable now—I think, by any 

judgment, you still have a lot of damage for the market to absorb 

over time. And that is going to take a fair amount more time. 

Mr. POSEY. Yes. And I think we all know that. I just wondered 

about your personal opinion, yes or no, if you thought it has bottomed out. And I won’t go in there— 

Secretary GEITHNER. I am a very careful person— 

Mr. POSEY. I won’t be insensitive. I apologize for seeming insensitive sometimes and being impatient when the people I represent 

have been ripped off for billions of dollars. People have died over 

this issue, or this economy. It is really serious outside the Beltway 

to real, live people. 

I am not sure, just as a comment I wanted to make, that a larger 

downpayment for FHA is going to help anything. I know for over 

30 years, most people bought their first homes with 3 percent FHA 

downpayments, and they paid them back. There are a lot of zerodownpayment VA loans paid back without problems. 

We never had a problem until Congress got involved and invoked 

its will on Fannie Mae and Freddie Mac under the impossible 

dream that everybody should have a home if they wanted it, 

whether or not they had a job, whether or not they had income, 

whether or not it was worth the loan amount. 

I think if we just get people back to doing their jobs, the 3 percent downpayment is going to work out just fine for this country. 

44 

And you and I talked before about regulators who were taking 

performing loans and classifying them as nonperforming loans because, in their esteemed opinions, they shouldn’t have been performing loans. The standard to determine a performing loan, historically, has been whether or not the loan is performing. 

Can you give us any kind of help on the ground, back in our districts, to take this arbitrary and capricious treatment of our—or to 

make the arbitrary and capricious treatment stop by some of these 

out-of-control bank regulators, who are apparently overreacting for 

their failures to do their job in the first place? 

Secretary GEITHNER. If you gave me authority to do that, I might 

be able to do it. But that is their authority. 

What I can do is—I share your concern. And I know that if you 

have talked to Chairman Bernanke and Chairman Bair and the 

head of the OCC, that they are worried about this problem, too. 

And they are working to try to make sure their examiners bring 

a careful and balanced approach to those judgments and they don’t 

overdo it after, perhaps, being a little bit accommodating in the 

boom. 

I agree with that concern. And I have passed on those concerns 

to them every time I hear them, as I am sure you have. And they 

are working on it. 

Chairman BACHUS. Thank you, Mr. Posey. 

Mr. POSEY. Thank you. 

Chairman BACHUS. Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

Mr. Secretary, in your prepared testimony, you said that the Administration is committed to a housing finance system in which the 

private market, private capital is the primary source of mortgage 

credit. And you said that that would be subject to strong oversight, 

strong consumer and investor protections. 

It is pretty clear that private capital has not come back in this market. There has been one issue of $236 million in the privatelabel mortgage-backed securities market, which is an asterisk compared to what it had been before. 

In response to questions by Ms. Waters, you elaborated some and 

said that we needed more standardization in the market and better 

disclosure so investors know what they are buying, which is consistent with what I have heard from investors. 

But they say that the first effort by the SEC does not quite get 

there. SEC 193 allows greater disclosure of due diligence, but it is 

due diligence still by the issuer or a third party hired by the issue. 

They want to have the ability to do their own due diligence, to 

sample the pools, to see what they are buying. 

And more important, they say it has to be enforceable. They actually have made—more than one has made the comparison of this 

mortgage market to doing business in Russia now and trying to sue 

an oligarch. There is a problem with rule of law, and contractual 

rights are simply very difficult to enforce. 

Will the Administration proposal—would you support, in the 

structural changes to the private market, more disclosure, including direct due diligence by investors, allowing them the opportunity 

to see themselves, not take anybody’s word for it, what they are 

buying; servicing requirements, so they know what happens if a 

45 

mortgage goes into a default; and, third, that there be clear remedies? 

There have been stories in the last week or so about some of the 

bigger banks advising their shareholders that they may face liability. There has been kind of a peevish tone to it, that their ankles 

are getting bitten by lawyers and by regulators. But that strikes 

me as a fairly basic rule of law. 

Will the Administration’s proposal support those three things? 

Secretary GEITHNER. Absolutely share those objectives, and 

happy to talk to you in more detail about how best to achieve those 

objectives. And, again, any concern people have about the market, 

as about these draft rules, we will look carefully at. 

And I think you are right to emphasize that for this to work better, you do not just need clarity on capital rules and things like 

that, risk retention, but you need better disclosure standards, you 

need servicer standards that can be enforced. And those are part 

of the solution. And I think until that happens, it is going to be 

harder to get private capital to come in. 

But I would be happy to talk to you about how best to do that. 

Mr. MILLER OF NORTH CAROLINA. On the servicer requirement 

point, there have also been stories about private negotiations going 

on now between regulators and States’ attorneys general and the 

various servicers, as well as risk-retention rules, whether servicing 

requirements will be part of that. 

Why is that not within your authority now? Why do you need 

them to agree? 

Secretary GEITHNER. Treasury’s authority? 

Mr. MILLER OF NORTH CAROLINA. These are all subsidies of 

banks that are regulated by the OCC. The OCC does not have an 

appointed director now. It has a temporary director that you could 

replace at any time. Why is the OCC not requiring better behavior 

by servicers? 

Secretary GEITHNER. Again, we are trying to take the authority 

that is in the financial reform legislation and apply that carefully 

in a way that will apply to all participants in the market, whether 

they are banks or non-banks, and make sure that there is a consistent, clear set of rules of the game that investors can benefit 

from more generally. And we are trying to do that on a careful, integrated basis. 

It is taking a little more time than we thought. But we have to 

be careful to get it right. And I am not sure how much longer it 

is going to take, but it is going to take a little bit longer than we 

initially expected. 

And we can’t achieve those objectives just using the existing authority we have or the OCC has itself. You have to have a broader—so there is a level playing field across the market as a whole. 

But we are moving in the same direction. And I very much share 

the directives you laid out. It is just a question of getting the details right. 

Mr. MILLER OF NORTH CAROLINA. I am sorry. Do you not have 

existing authority with Dodd-Frank? 

Secretary GEITHNER. No, with Dodd-Frank we do. 

Mr. MILLER OF NORTH CAROLINA. Okay. 

46 

Secretary GEITHNER. But that is what we are putting in place. 

We are laying out the basic architecture through draft rules that 

the market can comment on that would give the comprehensive reforms that you laid out more substance and traction. 

And, again, the way our system works is, we do have a lot of entities involved that have a piece of this. But we want them to move 

together and we want them to put out draft rules so people can 

comment, we get feedback on them, get them right. 

Chairman BACHUS. Thank you, Mr. Miller. 

Mr. MILLER OF NORTH CAROLINA. Thank you. 

Chairman BACHUS. Mr. Luetkemeyer? 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Secretary Geithner, this morning I haven’t heard a whole lot 

with regards to Federal Home Loan Banks. And it is in your testimony, and it is in the report. 

Can you elaborate just a little bit on where you feel their role 

would be—I know there have been a few problems, but generally 

not a lot of problems with them—and where you think that we 

could go with that? 

Secretary GEITHNER. There are a few examples we pointed to in 

the current system which we think deserve attention and reform. 

I will mention those again, although they are in the paper. 

These entities were allowed, like Fannie and Freddie were, to accumulate an investment portfolio, which we don’t think is necessary. And they took on a lot of risk in that context and didn’t 

have—some of them took on some risk and didn’t have capital to 

back that. That is something we should avoid in the future. 

We have also created a system where we allow large banks to be 

members of multiple Home Loan Banks. And that is something we 

have to take a look at again, again, to make sure the system 

doesn’t have too much risk. 

There are other things people have suggested, and we will look 

at every credible idea. And I think, although you are right to say 

that the problems there were not nearly as bad as we saw both in 

the private market and in Fannie and Freddie, there are some 

things we have to take a careful look at. 

Mr. LUETKEMEYER. During the course of your putting together 

the report, did you look at other countries and other programs 

around the world and what the good points of those may have 

been, what worked in other places, and see if they were appropriate for us? Could you elaborate just a little bit on that? 

Secretary GEITHNER. We did. We did a very careful look, actually. And it is a very good question, because if you look at the experience of other countries, a lot of countries did a lot better than we 

did in this crisis. 

But I think the biggest difference you can point to is, in most of 

those systems, banks are the overwhelmingly dominant source of 

credit. And there is not nearly as large a role for the securities 

markets. It is true for corporate debt. It is also true for mortgage 

finance and consumer finance. 

In our system, we have a better balance between credit provided 

by banks and credit that is provided by the broader markets, 

broader investor community, both in terms of asset-backed securities, like real estate, like mortgages, but also just direct corporate 

47 

credit. And we want to try to preserve that kind of balance. We 

think the system would be more stable in the future if you have 

that kind of balance. 

In those systems in housing finance, as I said earlier several 

times, in countries where the government does not provide the kind 

of guarantee that we did through Fannie and Freddie, banks hold 

really the overwhelming bulk of risk, but those governments generally guarantee their banks. They don’t let their banks fail in a 

crisis. In that context, as you saw in the crisis, the taxpayer is still 

exposed to loss, and it is just that the guarantee isn’t explicit. The 

taxpayer isn’t protected in that way. 

So I wouldn’t look to that model as a particularly appealing example of a more private system. As you know, in many of those 

countries, the banks are much more close to the government. The 

governments don’t let them fail; they don’t allow failure. And so, 

in a sense, you are still socializing losses and risk in that context, 

too. 

Mr. LUETKEMEYER. Okay. One of the comments you made a 

while ago was that it is an obligation of the government to protect 

the economy. Can you tell me at what level you believe that is 

where we need to go with that? 

Secretary GEITHNER. That is an excellent question. And, of 

course, that is something people will disagree on in the moment. 

And, again, the basic paradox of this challenge is, if you build in 

protection against the extreme crisis, you might make the crisis 

more likely in the future. That is why governments get these 

things wrong over time. It is very hard to get that right. 

But, again, if you look at what happened in this crisis and what 

helped get us out of it, you have to have the ability in extremis to 

reduce the risk of collateral damage that can push the economy off 

into the kind of deep recession we saw. That is very important, to 

have that capacity. And I think we can do it in a way that doesn’t, 

again, magnify moral hazard or magnify the risk in the future to 

taxpayers. But it is hard to do. 

Mr. LUETKEMEYER. What you are saying, though, is at some 

point, the government is going to be the backstop? 

Secretary GEITHNER. But it should be in a much more limited 

way, and I think we can do it in a way where it is much, much 

more limited, much less risk of loss to the taxpayer. 

And, again, here is the—and not to make it overly simple, but 

if you require banks to hold more capital against risk, if you require homeowners to, in general, hold more equity in their homes, 

if you make sure that underwriting standards are more conservative in that broad context, then you will do a lot of good in making 

sure the system is more stable, even in a deep recession. 

That probably won’t be enough, but that will take you a long way 

to it. You still may need the flexibility in an emergency to come in 

and provide a little more protection. 

Mr. LUETKEMEYER. Okay. 

And, with that, I will yield back my time. Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Let me say this. The Secretary has to leave in 5 minutes. So we 

will have one more—Mr. Scott will be the last—unless you can stay 

48 

an additional few minutes. And I think the agreement—you extended from 12:00 to 12:30 as part of negotiations. 

Secretary GEITHNER. Can I offer the following commitment, 

which is, again, I would be happy to respond in writing to any 

questions. 

Chairman BACHUS. That is fine. 

Secretary GEITHNER. I know you will have a subsequent chance 

to have me up here. 

Chairman BACHUS. What we will do— 

Secretary GEITHNER. You could invert the order of your questions. 

Chairman BACHUS. I would ask unanimous consent that the 

hearing that starts at 2:00, the Secretary Donovan hearing, that 

those members in the room on both sides who did not get a chance 

to ask a question will go first at that hearing. 

And, hearing no objections, Mr. Scott is recognized. He will be 

the last. I apologize to the other members. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

And I am glad I got squeezed in, because, Mr. Secretary, I am 

very worried. I am very worried about unintended consequences 

here. And granted, there is a lot wrong with Fannie and Freddie; 

we certainly need to reform this situation. But there is a role for 

government here, and I think we need to be very clear on this. 

We are examining this issue at a time of great volatility, of 

record, record numbers of people who are losing their homes, largely through no fault of their own but because of our problem up here 

in Washington. And I am concerned about this rush to judgment 

here and the tendency to be throwing the baby out with the 

bathwater. 

We had Fannie and Freddie for a very serious purpose. And 

granted, there are some problems with them, but they provided a 

very useful tool to put us in the position where we are in. There 

are still problems facing minorities in the housing market, that— 

just the rush to bring in—say, ‘‘Get this out of the way. Bring the 

private capital in, and that solves the problem.’’ That does not solve 

the problem of the pangs of color shock many of these folks suffer 

simply because they are African American, because of the color of 

their skin. 

We have other burgeoning problems on the income levels of individuals. Now, we have another problem with many of our returning 

soldiers, which is heartbreaking, who are coming home after leaving here, going, fighting on the battlefields of Iraq and Afghanistan, and they come back and they are on the street, they are 

under the viaduct. 

No matter what we do, bringing private capital in and saying, 

‘‘That is the answer,’’ is not the answer. 

So I want to stress that Treasury and this Administration move 

with a very jaundiced eye on this and understand that, in my review of your report, probably the best option, given the volatility 

of the situation we are in, given the sensitivity, would be to look 

at Option 3 as a base from which we can work. 

I think it has the attributes in here. It has a degree of certainty. 

And even members of the financial services community—the banks, 

the mortgage companies—realize that private capital isn’t coming 

49 

in at any price. There is a need in our housing market for there 

to be some sort of Federal Government guarantee, some way to be 

able to come down in these catastrophic situations, some way for 

us to be able to be there in the event of another financial crisis. 

And so I would like for you simply to respond and give us—I am 

not going to ask you which one you like. But do you not agree that, 

given the difficulty of the situation we are in, the vagaries of the 

different needs that I mentioned in my remarks, that there is a 

need to move more from a position of Option 3 than the other two? 

Secretary GEITHNER. I agree with much of what you said. And 

you are very right to emphasize, as I tried to do, that we have to 

be very, very careful we don’t do more damage as we try to get the 

system to a better place. 

And you could envision, in fact, a mix of those three options as 

being the best place to land this, ultimately. But you have to be 

very, very careful. And, again, I would caution you—and I think 

you know this better than anybody—that if banks and real estate 

companies together are in favor of something that involves a guarantee, you have to be kind of careful. And they will always be in 

favor of something that involves a guarantee by the government, 

in this case. You have to be very, very careful about that. 

But, as I have said many times, I think there are ways to design 

Option 3, alongside a substantial role by the FHA, that would be 

a very dramatic improvement in our current system. The test is 

whether we can design it in a way that doesn’t have the same kind 

of risks that we ultimately saw in Fannie and Freddie. 

Mr. SCOTT. Yes, I meant the safeguards of that. 

But I want to yield 10 seconds to my friend here, if I may, quickly. 

Mr. GREEN. Mr. Secretary, quickly, the impact, please, if you 

will, of terminating the HAMP program, the FHA refinance program, the NSP program, and the Emergency Mortgage Relief Program? Do you have any opinions, please? 

Secretary GEITHNER. Oh, it would be, I would say it would cause 

a huge amount of damage to a very fragile housing market and 

leave hundreds and hundreds of thousands, if not millions, of 

Americans without the chance to take advantage of a mortgage 

modification that would allow them to stay in a home they can afford. 

So I think it would cause a lot of damage, and I would recommend against it. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Chairman BACHUS. Thank you. 

That concludes our hearing. 

Let me say, Secretary Geithner, Congressman Posey posed a 

question to you, I think, which is immensely important. And he 

was referring to a draft proposal by the IRS, the IRS nonresident 

alien deposit rule, which just doesn’t seem to go away. But I think, 

as he stated, it could cause hundreds of billions of dollars to exit 

our banks, particularly our banks in distressed areas in Florida, in 

Texas, in California, in Arizona. So it is a real problem. It is REG146097-09. 

So, with that, the Chair notes that some members may have additional questions for this witness which they may wish submit in 

50 

writing. Without objection, the hearing record will remain open for 

30 days for members to submit written questions to Secretary 

Geithner and to place his responses in the record. 

This hearing is adjourned. 

Thank you, Secretary Geithner. 

[Whereupon, at 12:36 p.m., the hearing was adjourned.] 

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