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S. HRG. 111–925 

NOMINATION OF JOSEPH A. SMITH, JR. 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

ON 

THE NOMINATION OF JOSEPH A. SMITH, JR., OF NORTH CAROLINA, TO 

BE DIRECTOR, FEDERAL HOUSING FINANCE AGENCY 

DECEMBER 9, 2010 

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

( 

Available at: http://www.fdsys.gov/ 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

ERIN BARRY, Legislative Assistant 

LAURA SWANSON, Professional Staff Member 

BETH COOPER, Professional Staff Member 

JONATHAN MILLER, Professional Staff Member 

MARK OESTERLE, Republican Chief Counsel 

CHAD DAVIS, Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

LEVON BAGRAMIAN, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
C O N T E N T S 

THURSDAY, DECEMBER 9, 2010 

Page 

Opening statement of Senator Johnson ................................................................. 3 

Prepared statement .......................................................................................... 11 

Opening statements, comments, or prepared statements of: 

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

WITNESSES 

Richard Burr, Senator from the State of North Carolina .................................... 1 

Kay Hagan, Senator from the State of North Carolina ........................................ 2 

NOMINEE 

Joseph A. Smith, Jr., of North Carolina, to be Director, Federal Housing 

Finance Agency .................................................................................................... 6 

Prepared statement .......................................................................................... 11 

Biographical sketch of nominee ....................................................................... 13 

Responses to written questions of: 

Senator Shelby ........................................................................................... 20 

Senator Reed .............................................................................................. 31 

Senator Kohl .............................................................................................. 31 

Senator Bennet .......................................................................................... 35 

Senator Crapo ............................................................................................ 36 

Senator Corker .......................................................................................... 38 

Senator DeMint ......................................................................................... 39 

Senator Vitter ............................................................................................ 40 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted by the Conference of State Bank Supervisors ......................... 49 

Letter submitted by the Mortgage Bankers Association ...................................... 50 

Letter submitted by the National Association of Realtors ................................... 51 

Letter submitted by the Independent Community Bankers of America ............. 52 

Letter submitted by the National Association of Home Builders ........................ 53 

(III)

(1) 

NOMINATION OF JOSEPH A. SMITH, JR., OF 

NORTH CAROLINA, TO BE DIRECTOR, 

FEDERAL HOUSING FINANCE AGENCY 

THURSDAY, DECEMBER 9, 2010 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:55 a.m., in room SD–538, Dirksen Senate Office Building, Senator Tim Johnson, presiding. 

Senator JOHNSON. We have votes at 11 o’clock and, therefore, 

would you commence your introduction? 

STATEMENT OF RICHARD BURR, SENATOR FROM THE STATE 

OF NORTH CAROLINA 

Senator BURR. Mr. Chairman, thank you. To Senator Shelby and 

to my esteemed colleagues on the Committee, thank you for this 

opportunity. I am sure my cohort from North Carolina will be here 

shortly. 

Mr. Chairman, I want to thank you for holding this hearing and 

for giving me the opportunity and the pleasure of introducing Joseph Smith to my colleagues today. I know getting a nominee for 

Director of the Federal Housing Finance Agency has been a long 

time coming. However, I am pleased the Administration has sent 

forward the best nominee rather than the most quickly named 

nominee. 

I could not agree with the President more when he stated, and 

I quote, ‘‘Mr. Smith brings to this position both tremendous expertise and a deep commitment to the strengthening of our housing 

finance system for the American people.’’ Although born in West 

Virginia, North Carolinians have proudly claimed Joe as one of our 

own ever since he moved to Davidson, North Carolina, to attend 

Davidson College and become a Davidson Wildcat. And, Senator 

Shelby, that was under the days of Lefty Driesell, as you can remember. 

Many of you in the room today have gotten to know Joe over the 

years as his expertise and knowledge as a State banking commissioner has been sought by both this Committee and others on earlier occasions. Since 2002, Joe has served the citizens of North 

Carolina as our State’s Commissioner of Banks. Joe is also the immediate past president chair of the Conference of State Bank Supervisors. In addition to his expertise as a regulator, Joe also has 

extensive real-world, everyday experience, having served as the 

general counsel and secretary for Centura Bank, based in Rocky 
2 

Mount, North Carolina, during the 1990s. From the North Carolina 

Bankers Association stating, and I quote, ‘‘He has been an outstanding commissioner for banks. We hate to lose him,’’ to the Centers for Responsible Lending stating, and I quote, ‘‘It is hard to 

think of a better choice’’; to his fellow State banking commissioners 

stating, and I quote, ‘‘I think it is a perfect choice,’’ Joe’s nomination to serve as Director of the Federal Housing Finance Agency 

has been met with much and well-deserved praise. 

For those of us who know Joe and have gotten to see his work 

up close, we are not surprised by the words of praise for his nomination coming from both the financial institutions he regulated and 

the consumer advocates alike. The praise is a testament to Joe’s 

knowledge, his hard work, common sense, and his commitment to 

getting the job done right. 

Without a doubt, the job Joe has been nominated for will not be 

easy, and many might even ask why anyone would want to take 

on the role of overseer of Fannie and Freddie. However, I guarantee each and every one of you, having gotten to know Joe over 

the years, that Joe comes to this not seeking personal glory but out 

of a sense of duty to do a job that must be done and that must be 

done well. 

I want to thank Joe, Mr. Chairman, for accepting this difficult 

task and assure you, if confirmed, we will all miss his leadership 

and his guidance as North Carolina’s Commissioner of Banks. 

I thank the Committee for the opportunity to speak before you 

and urge my colleagues to, as expeditiously as you can, confirm 

this nominee. I thank the Chairman and I thank the Ranking 

Member. I thank my colleagues. 

Senator JOHNSON. Thank you, Senator Burr. 

Senator Hagan. 

STATEMENT OF KAY HAGAN, SENATOR FROM THE STATE OF 

NORTH CAROLINA 

Senator HAGAN. Thank you, Chairman Johnson, Ranking Member Shelby, Members of the Committee, and my colleague Senator 

Burr, I am grateful for the opportunity to introduce to you North 

Carolina’s Commissioner of Banks, Joseph A. Smith, Jr. While he 

may be quick to point out that he was born and raised in West Virginia, Commissioner Smith and his wife, Elizabeth, have lived in 

North Carolina for more than 20 years where they raised their two 

sons, Joseph and Matthew. 

As a student, business leader, and public servant in North Carolina, Commissioner Smith garnered the respect and support of consumers, regulators, and businessmen and—women throughout our 

State. I am sure they also got a taste of Joe’s self-deprecating sense 

of humor. Indeed, just this morning, he joked that his Type A personality brought him to my office 2 hours before this hearing. My 

office, by the way, is no more than ten steps from this Committee 

room. But, obviously, Commissioner Smith comes prepared for any 

task that he takes on, and I am excited that, should he be confirmed, he will have the opportunity to serve as Director of the 

Federal Housing Finance Agency, where he will bring his considerable talents and experience to some of our Nation’s most pressing 

issues. 
3 

Commissioner Smith graduated from Davidson College in Davidson, North Carolina, in 1971 and from the University of Virginia 

Law School in 1974. During the 1990s, he gained considerable private sector experience while working as general counsel and secretary of a community bank in Raleigh. And for the past 8 years, 

Joe Smith has served as North Carolina’s Commissioner of Banks. 

In his latest role, Commissioner Smith leads the agency responsible 

for regulating banks, savings and loans, mortgage bankers, mortgage brokers, check cashers, and money transmitters. 

Despite the challenges posed by these broad supervisory responsibilities, Commissioner Smith has garnered the respect of bankers, 

regulators, consumer groups, and legislator, both in North Carolina 

and across the Nation. 

In 2009, Commissioner Smith’s peers honored him when they selected him Chairman of the Conference of State Board Supervisors. 

The North Carolina Bankers Association and its 135 member 

banks, savings institutions, and trust companies proudly support 

his nomination. And after working with Commissioner Smith on 

consumer finance laws in the North Carolina Legislature, I join 

these organizations by offering my unqualified support for Commissioner Smith. 

As the Members of this Committee are keenly aware, the housing 

finance system in this country is in need of reform. The Director 

of the FHFA will play a critical role in the future of Fannie Mae, 

Freddie Mac, and the 12 Federal home loan banks that form the 

backbone of our current housing finance system. President Obama 

has nominated a capable leader in Joe Smith who has the experience and convictions to make the tough choices that will be required in the coming years. I cannot think of a better partner for 

Congress to work with as we take up those challenges. 

After 2 years in the Senate, I understand how difficult the nomination process can be, but I am quite confident that, after having 

the opportunity to learn more about Mr. Smith and having the opportunity to discuss some of these issues with him, Members of the 

Committee will be as enthusiastic as I am about confirming this 

thoughtful, capable, and effective nominee. 

Thank you. 

Senator JOHNSON. Thank you, Senator Hagan. 

OPENING STATEMENT OF SENATOR TIM JOHNSON 

Senator JOHNSON. Mr. Smith, would you take your seat at the 

table so we can begin the second hearing? 

I call to order this hearing on the nomination of Mr. Joseph A. 

Smith, Jr., of North Carolina, to be Director of the Federal Housing 

Finance Agency. 

Mr. Smith is no stranger to this Committee or to the challenges 

of implementing financial reforms. As Commissioner of Banks, he 

was responsible for implementing and enforcing North Carolina’s 

antipredatory lending laws, overseeing the State’s foreclosure prevention program, and serving on the Governor’s task force to increase small business lending—to name a few of his accomplishments—all while regulating small and large financial institution in 

the State. To highlight some of those accomplishments, I would like 

to enter into the record letters from the Independent Community 
4 

Bankers Association, the Conference of State Bank Supervisors, the 

Mortgage Bankers Association, and National Association of Realtors. 

Thank you for your willingness to serve at the Federal level, especially at a time when our country is trying to overcome significant economic challenges. Balancing consumer protection and credit availability, regulation and economic growth will be extremely 

important for creating a sustainable housing and economic recovery. I look forward to learning more about your work and how you 

view the role of Director of FHFA. 

Senator Shelby, would you like to give a statement? 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. I would like my 

opening statement to be made part of the record because we are 

getting ready to have some very important votes, and I do not 

know if I will get back. 

I would like to propound to you in my time, Mr. Smith—and I 

will furnish these in writing to you, too—some questions that I 

think are very important as you move forward. 

Protecting the taxpayer. Mr. Smith, according to an article in the 

Wall Street Journal yesterday, the Obama administration is pressuring Fannie Mae and Freddie Mac, through their primary regulator, the Federal Housing Finance Agency, to get the mortgage giants to agree to write down mortgages. For a variety of reasons, 

Fannie and Freddie have been reluctant to reduce principal balances. An important reason why the Federal Housing Finance 

Agency has been reluctant is that they Federal Housing Finance 

Agency is charged, as you well know, with limiting taxpayer losses. 

While underwater homeowners could benefit from principal 

writedowns, financing the writedowns through additional losses imposed on taxpayers amounts to a redistribution from taxpayers in 

general to certain classes of homeowners. 

Mr. Smith, given the responsibilities of the Federal Housing Finance Agency as a conservator of Fannie and Freddie, would you 

resist Administration pressure on Fannie and Freddie for principal 

writedowns? Do you want to answer that now or do you want to 

answer it for the record later? This is important. 

Mr. SMITH. I had hoped to make an opening statement, but I 

know there is—— 

Senator SHELBY. No, I asked you a question. 

Mr. SMITH. I understand that. 

Senator SHELBY. Yes or no. 

Mr. SMITH. Senator, the Federal Housing Finance Agency is an 

independent agency of Government. I am the head of an independent agency of Government now. 

Senator SHELBY. Will you be independent if you are confirmed? 

Mr. SMITH. I will. 

Senator SHELBY. And will you not be subject to pressure from 

anybody? 

Mr. SMITH. Well, I will be pressured by a lot of people, Senator, 

but the answer to your question—— 

Senator SHELBY. Well, will you be subject to that pressure? 
5 

Mr. SMITH. In exercising discretion—in exercising the power that 

this office has and that the agency has in this and a number of 

other very important issues, first and foremost I have got to look 

at it through the screen, if you will, of role as conservator. The first 

and foremost thing is to protect taxpayers. 

Senator SHELBY. I hope you will elaborate on that for the record. 

Mr. SMITH. I will, Senator. 

Senator SHELBY. Influence from outside agencies. Given the involvement of both Treasury and HUD in loan modification programs in which Fannie and Freddie participate, there will be instances in which these agencies have strong opinions as to what actions Fannie and Freddie should take regarding certain policies. 

What is your view of the appropriate role for either the Secretary 

of the Treasury or the HUD Secretary? Does either have any authority relating to the Federal Housing Finance Agency and its responsibilities as conservator? Or is that your responsibility? And 

would it be appropriate for either to ask you to take some action 

that is inconsistent with conserving Fannie and Freddie assets 

such as principal reductions or not pursuing putbacks to protect 

bank solvency? You might want to answer that for the record a little later. I want to go through my questions. 

Mr. SMITH. Very well. 

Senator SHELBY. PACE loans, an question for you. On July 16, 

2010, FHFA, the Federal Housing Finance Agency, found that, and 

I will quote, ‘‘certain energy retrofit lending programs present significant safety and soundness concerns that must be addressed by 

Fannie Mae, Freddie Mac, and the Federal home loan banks.’’ Accordingly, they released guidance to protect these institutions from 

what are commonly referred to as PACE loans. It is my understanding that during conversations with the Banking Committee 

staff, you indicated that you would not alter this guidance as long 

as it was under active litigation. And would you confirm that this 

is your position? And if confirmed, would you protect the lien priorities of existing mortgages owned or guaranteed by the enterprises 

through any guidance that the Federal Housing Finance Agency 

may issue in the future. 

I want to keep going on my questions. 

Plain vanilla mortgages. During the debate on Dodd-Frank, some 

advocated that customers be offered a default of ‘‘plain vanilla 

mortgages,’’ arguing that behavioral economics supported this position. In previous testimony before this Committee, you seemed to 

have a position consistent with this, stating, ‘‘Recent work in behavioral economics suggests that when confronted with information 

overall, bad choices often result.’’ You then stated, ‘‘The default 

mortgage for certain borrowers should be the 30-year fixed-rate 

mortgage.’’ 

Do you continue to believe in the concept of a default mortgage 

for certain consumers? And how do you define so-called behavioral 

economics? And would you use behavioral economics in your capacity running the FHFA? Then we can go to the next question. 

Financial statements. Mr. Smith, as a prospective conservator for 

Government-owned enterprises with large portfolios and scales of 

business, you need to be intimately familiar, like anyone, with the 

financial condition of Freddie and Fannie. My question to you 
6 

would be: What financial statements of Fannie Mae, Freddie Mac, 

or the Federal home loan banks have you read yourself since you 

learned of your nomination? And what have you taken away from 

these statements? I would like that answer for the record. 

Appropriate level of housing goals. During a conversation with 

Banking Committee staff, you indicated that you did not have a position on the appropriateness of the current levels of the GSEs’ 

housing goals. The need for the Director of the Federal Housing Finance Agency to balance these goals with the safety and soundness 

requirements of the institution, however, makes this, I think, a 

critical matter. My question: Having now had more time to reflect 

on the subject, what are your views on Fannie and Freddie’s housing goals? Are they appropriately set? And do you have any reasons 

for changing them? 

I appreciate the Chairman’s time in letting me have the latitude 

to ask these questions, but we will give these questions to you here 

today, and we would like for them to be answered for the record. 

Thank you, Mr. Chairman. 

Senator JOHNSON. Before we turn to you, Mr. Smith, would you 

please stand and raise your right hand for the swearing in. 

Do you swear or affirm that the testimony that you are about to 

give is the truth, the whole truth, and nothing but the truth, so 

help you, God? 

Mr. SMITH. I do. 

Senator JOHNSON. Do you agree to appear and testify before any 

duly constituted committee of the Senate? 

Mr. SMITH. I do. 

Senator JOHNSON. You may be seated. 

We have a short amount of time available, but can you give us 

your testimony, please. 

TESTIMONY OF JOSEPH A. SMITH, JR., OF NORTH CAROLINA, 

NOMINATED TO BE DIRECTOR, FEDERAL HOUSING FINANCE 

AGENCY 

Mr. SMITH. Yes, Senator, I will. I would first like to thank Senator Burr and Senator Hagan for their kind introductions. That 

was overwhelming. I would like to thank Senator Shelby for bringing them back to earth. 

[Laughter.] 

Mr. SMITH. Mr. Chairman, Ranking Member Shelby, and Members of the Committee, I am Joseph A. Smith, Jr., currently the 

North Carolina Commissioner of Banks, and the President’s nominee for the office of Director of the Federal Housing Finance Agency. It is an honor and privilege to sit before you today. I would like 

to express my appreciation to the President for nominating me to 

this position and his confidence in me in fulfilling this significant 

role. 

I would like to express my particular thanks to Chairman Dodd 

and to Ranking Member Shelby for agreeing to consider this nomination so promptly. Such consideration is a great courtesy to me 

and a recognition of FHFA’s critical importance. Thank you very 

much. 
7 

I regret that Elizabeth Smith, my wife of 31 years, cannot be 

with me today. Without her love and support, including sound advice, I would not be here today. 

I come before you with a commitment to public service and to 

strengthening the Nation’s housing finance system. Direct experience in both banking and housing and the hard-won knowledge I 

have managed to accumulate over a 35-year career in law, banking, 

and State government service. 

During my career, I have been involved—directly involved in a 

variety of activities that serve as a daily reminder of the challenges 

ahead. I have worked out commercial loans, represented a bank 

through a real estate crisis, implemented both State and Federal 

mortgage licensing regimes, and supervised banks in varying 

stages of distress up to and including resolution. 

In my 8 years as North Carolina Commissioner of Banks, my colleagues and I have worked diligently and consistently to mitigate 

losses to our lending institutions and the financial system at large, 

as well as to prevent failures on a larger scale. My office supervises 

depository institutions with over $245 billion in total assets and a 

range of nonbank financial services firms, including mortgage 

bankers and brokers, consumer finance companies, check cashers, 

and money transmitters. I have been the Commissioner during the 

recent financial crisis and have direct experience as a safety and 

soundness regulator. 

While I believe that this experience will be important should I 

be confirmed as Director of FHFA, I also know that experience 

alone will not be enough to be successful in that position. In that 

regard, I am looking forward to working with the staff of the 

FHFA, the Administration, and with you and the other Members 

of Congress for your input and guidance. 

As you have said, sir, we are facing a significant challenge in the 

housing finance markets today. Fannie Mae and Freddie Mac are 

under conservatorship and have received $151 billion from the 

Treasury Department in order to maintain their support of the 

housing market, which is critical at this time. 

But conservatorship cannot be a long-term solution. Congress 

and the Administration have important decisions to make regarding the future structure of the housing finance system. If confirmed, I look forward to working with you and having FHFA become an active participant in this process. 

I understand that if confirmed, you expect leadership and not 

just management. The activities of Fannie Mae and Freddie Mac 

are national in scope but local in impact, directly affecting communities across the country. Leadership in this context means determining how to address critical local needs in conjunction with the 

agency’s duties of conservatorship. 

I also pledge to you the same kind of leadership with regard to 

FHFA’s supervision of the Federal Home Loan Banks. I expect that 

many of you have heard from your bankers what I have heard from 

mine. The Federal Home Loan Banks are a crucial and needed 

source of funding and support to community banking, which in 

turn plays a vital role in addressing the credit needs of consumers, 

small businesses, and communities around the country. 
8 

As FHFA has effectively reported, the Federal Home Loan Banks 

have their own challenges and are now subject to enhanced supervision. Community banks are dear to my heart, and you may be assured that the Home Loan Banks will receive my full attention 

with an eye to strengthening them and the banks they serve. 

Mr. Chairman, Ranking Member Shelby, and Members of the 

Committee, thank you again for your consideration of my nomination. Should you see fit to confirm me, I look forward to serving as 

the Director of the Federal Housing Finance Agency. I would be 

happy to answer any questions that you may have. 

Senator JOHNSON. Thank you, Mr. Chairman. 

I ask that 5 minutes be put on the clock before we continue with 

questions. 

Mr. Smith, we spoke a little about this in my office, but I think 

it is an important question to get on the record. The Director is in 

a unique position because FHFA is both a conservator and regulator of Fannie Mae and Freddie Mac. As conservator, the agency 

is responsible for the operations of the entities as well as regulating these operations. How do you plan to balance those roles? 

Mr. SMITH. Senator, I believe that those two roles are actually 

profoundly complementary because, as a regulator, the agency 

seeks to ensure that the enterprises have proper governance, proper risk management, proper operating procedures, that they obey 

law, and all of these things are consistent with the preservation of 

their assets and their rehabilitation. And so I think one is an extension of the other and I think that we can—the agency is and I 

think we will continue to deal with that—any tension there may 

be successfully. But I think the two support each other. 

Senator JOHNSON. Would you cooperate with the investigations of 

the Inspector General’s Office? 

Mr. SMITH. You mean the FHFA Inspector General? 

Senator JOHNSON. Yes. 

Mr. SMITH. FHFA has just gotten, after long efforts to do so, an 

independent Inspector General, and the Inspector General, of 

course, operates independently and we will—as a matter of course, 

I think our activities should be consistent, in any event. 

Senator JOHNSON. In addition to Fannie and Freddie, FHFA regulates the Federal Home Loan Banks which are not in conservatorship. These institutions fulfill different but important roles in our 

financial system. How will you approach the differences and unique 

characteristics of the Home Loan Banks as you develop policies and 

regulations? 

Mr. SMITH. Senator, as I said in my testimony, I think the Home 

Loan Banks are crucial, particularly to community banks, and so 

I will work with staff to come to a full, frankly, understanding of 

the situation in which each of these banks finds themselves and 

the system as a whole, its health and operation, and we will work 

with the managements of those banks to improve them. 

And also, I would say, I look forward to working with bankers 

around the country on this issue, as well, because as you know, sir, 

the Home Loan Banks are cooperative organizations and so it is 

important to be engaged with bankers themselves about what they 

are going to do to support their—the Home Loan Bank system. It 
9 

is all of the above. I will take in a lot of information and we will 

work together. 

Senator JOHNSON. Can you talk about how the Federal Home 

Loan Bank Advance System has functioned in North Carolina during the economic downturn and the impact on financial institutions 

in the State. 

Mr. SMITH. The Home Loan Banks have, over time, during the 

downturn and before, been an important source of funding to our 

banks and an important source of advice, if you will, or technical 

support, and have also been a great assistance to our banks in 

meeting certain of their affordable housing needs. It has been crucial over the long term, frankly, Senator, for the Home Loan Banks 

provide a needed source of funding and support for our banks 

through all parts of the cycle. 

Senator JOHNSON. Can you talk about how you use your regulatory position in the State to help address some of the challenges 

that families are facing during this crisis? 

Mr. SMITH. I am sorry, I did not quite understand—— 

Senator JOHNSON. Can you talk about you use your regulatory 

position in the State—— 

Mr. SMITH. The State—— 

Senator JOHNSON. ——to help address some of the challenges 

that families are facing—— 

Mr. SMITH. I will. 

Senator JOHNSON. ——in this crisis. 

Mr. SMITH. We have done several things. First and foremost, we 

began a licensing system that, over time—it took a long time—removed a number of undesirable characters from the mortgage origination business. The more recent and more apposite answer to 

your question is that my agency has conducted, first with our own 

funds and now with funds gotten from a fee on foreclosures, a foreclosure prevention—we have organized a Foreclosure Prevention 

Network, and over the course of the last couple of years have kept 

5,000 North Carolina families in their home. It took a lot of effort, 

and I will not say it is perfect, but we did what we could do to keep 

families in their homes. 

Going forward, by the way, I will say that the challenge we face 

now in the North Carolina is that while in the past, two-thirds, let 

us say, of the loans were what you might call subprime or highcost loans to start, two-thirds of the loans now are conventional 

loans. They are loans that were properly underwritten to families 

who were fine when the loans were made and the economic situation in which our Nation and the State finds itself has put them 

up against it. So it is an entirely new and different challenge now. 

Senator JOHNSON. Votes have just begun I will recess until after 

the votes are concluded. 

[Recess.] 

Senator JOHNSON. Mr. Smith, you are getting off easy. We are 

going to submit questions for the record to you by four o’clock p.m. 

tomorrow. Please get your responses back quickly. I am hopeful 

that we can then begin to move your nomination in a timely manner. 

I want to thank both of our witnesses at both hearings today. 

Oversight of the financial system and the reform of the housing fi-
10 

nance system will be top priorities for this Committee as we begin 

the next Congress, and both of today’s hearings contributed to 

those discussions. 

I thank everyone again for their time today, and the hearing is 

adjourned. 

[Whereupon, at 12:29 p.m., the hearing was adjourned.] 

[Prepared statements, biographical sketch of nominee, responses 

to written questions, and additional material supplied for the 

record follow:] 
11 

PREPARED STATEMENT OF SENATOR TIM JOHNSON 

I call to order this hearing on the nomination of Mr. Joseph A. Smith, Jr., of 

North Carolina, to be Director of the Federal Housing Finance Agency. 

As our economy recovers, the regulators begin to implement the Dodd-Frank 

Walls Street Reform Act and we consider the future of the housing market, it is essential that the Federal Housing Finance Agency have leadership that is answerable to Congress. I would like to commend Chairman Dodd and Ranking Member 

Shelby for their joint letter urging President Obama to name a nominee for this post 

and ask that the letter be included in the record. The Director of FHFA has a 

unique role as regulator for the Federal Home Loan Bank system and both regulator and conservator of Fannie Mae and Freddie Mac. This dual role requires a balance between protecting taxpayers and using the tools available to stabilize the 

housing market. 

Mr. Smith is no stranger to this Committee or to the challenges of implementing 

financial reforms. As Commissioner of Banks, he was responsible for implementing 

and enforcing North Carolina’s antipredatory lending laws, overseeing the State’s 

foreclosure prevention program and serving on the Governor’s task for to increase 

small business lending—to name a few of his accomplishments—all while regulating 

small and large financial institution in the State. To highlight some of those accomplishments, I would like to enter into the record letters from the Independent Community Bankers Association, the Conference of State Bank Supervisors, the Mortgage Bankers Association and National Association of Realtors. 

Thank you for your willingness to serve at the Federal level—especially at a time 

when our country is trying to overcome significant economic challenges. Balancing 

consumer protection and credit availability, regulation and economic growth will be 

extremely important for creating a sustainable housing and economic recovery. I 

look forward to learning more about your work and how you view the role of Director of FHFA. 

PREPARED STATEMENT OF JOSEPH A. SMITH, JR. 

TO BE DIRECTOR OF THE FEDERAL HOUSING AGENCY

DECEMBER 9, 2010 

Mr. Chairman, Ranking Member Shelby, and Members of the Committee. I am 

Joseph A. Smith, Jr., currently the North Carolina Commissioner of Banks, and the 

President’s nominee for the office of Director of the Federal Housing Finance Agency. It is an honor and a privilege to sit before you today. 

I would like to express my appreciation to the President for nominating me to this 

position, and his confidence in me in fulfilling this significant role. I would also like 

to express particular thanks to Chairman Dodd and Ranking Member Shelby for 

agreeing to consider my nomination so promptly. Such consideration is a great courtesy to me, and a recognition of FHFA’s critical importance. Thank you very much. 

I regret that Elizabeth Smith, my wife of 31 years, cannot be with me today. 

Without her love and support, including sound advice, I would not be here today. 

I come before you with a commitment to public service and to strengthening the 

Nation’s housing finance system, direct experience in both banking and housing, 

and the hard-won knowledge I have managed to accumulate over a 35-year career 

in law, banking and State government service. During my career, I have been directly involved in a variety of activities that serve as a daily reminder of the challenges ahead. I have worked out commercial loans, represented a bank through a 

real estate crisis, implemented both State and Federal mortgage licensing regimes, 

and supervised banks in varying stages of distress, up to and including resolution. 

In my 8 years as the North Carolina Commissioner of Banks, my colleagues and 

I have worked diligently and consistently to mitigate losses to our lending institutions and the financial system at large, as well as to prevent failures on a broader 

scale. My office supervises depository institutions with over $245 billion in total assets and a range of nonbank financial services firms, including mortgage bankers 

and brokers, consumer finance companies, check cashers and money transmitters. 

I have been the Commissioner during the recent financial crisis and have direct experience as a safety and soundness regulator. 

While I believe that this experience will be important should I be confirmed as 

Director of FHFA, I also know that experience alone will not be enough to be successful in this position. In that regard, I look forward to working with the staff of 

FHFA, the Administration, and with you and other Members of Congress for input 

and guidance. 
12 

We are facing a significant challenge in the housing finance markets today. 

Fannie Mae and Freddie Mac are under conservatorship and have received $151 billion from the Treasury Department in order to maintain their support of the housing market, which is critical at this time. But conservatorship cannot be a long-term 

solution. Congress and the Administration have important decisions to make regarding the future structure of the housing finance system. If confirmed, I look forward 

to working with you and having FHFA become an active participant in that process. 

I understand that, if confirmed, you expect leadership and not just management. 

The activities of Fannie Mae and Freddie Mac are national in scope but local in impact, directly affecting communities across the country. Leadership in this context 

means determining how to address critical local needs in conjunction with the Agency’s duties of conservatorship. 

I also pledge to you the same kind of leadership with regard to FHFA’s supervision of the Federal Home Loan Banks. I expect many of you have heard from your 

bankers what I have heard from mine: the Federal Home Loan Banks are a crucial 

and needed source of funding and support to community banking which, in turn, 

plays a vital role in addressing the credit needs of consumers, small businesses and 

communities around the country. As FHFA has effectively reported, the Federal 

Home Loan Banks have their own challenges and are now subject to enhanced supervision. Community banks are dear to my heart, and you may be assured that 

the Home Loan Banks will receive my full attention, with an eye to strengthening 

them and the banks they serve. 

Mr. Chairman, Ranking Member Shelby, and Members of the Committee, thank 

you again for your consideration of my nomination. Should you see fit to confirm 

me, I look forward to serving as the Director of the Federal Housing Finance Agency. I would be happy to answer any questions you may have. 
13 
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM JOSEPH A. SMITH, JR. 

Q.1. Position on Important Issues. Please state your positions on 

the following important issues that will face the next Director of 

FHFA. What is your view on the current levels of affordable housing goals, as set by the Federal Housing Finance Agency (FHFA) 

for Fannie Mae (Fannie) and Freddie Mac (Freddie)? Do you view 

the current levels as appropriate? If so, on what basis do you judge 

appropriateness? If not, why not? 

A.1. While tension exists between implementing the affordable 

housing mandates and the goals of conservatorship to minimize 

taxpayer losses, if confirmed, I would do my best to strike a balance between these two statutory mandates. I believe that my first 

goal will be to conserve and preserve assets, but recognize that, as 

Director I would be legally obligated to set and measure compliance 

with the affordable housing goals. If confirmed, I look forward to 

working with Congress to address appropriate alternatives for supporting affordable housing. 

Q.2. What is your view on whether Fannie and Freddie should 

have sizeable portfolio holdings? 

A.2. I understand that both GSEs are required under the terms of 

their preferred stock purchase agreements with the Treasury Department to reduce their portfolios by 10 percent per year. I want 

to acknowledge that, while there is no reason for the GSEs to have 

large investment portfolios, the portfolios are being used today for 

loss mitigation purposes. I understand that some level of portfolio 

is needed to be able to hold nonperforming loans that will be modified. If confirmed, I look forward to working with my colleagues at 

FHFA to gain a better understanding of the details of the GSEs’ 

portfolios. 

Q.3. Is the current conforming loan limit for Fannie and Freddie 

appropriate? 

A.3. Congress authorizes and sets the conforming loan limit. If confirmed as Director, it would be my responsibility to ensure that 

Congress’ direction is correctly implemented. 

Q.4. What is your view on whether agency mortgaged-backed securities should be explicitly guaranteed by the Federal Government 

as part of any reform of the housing finance system? 

A.4. If Congress decides to provide for an explicit Government 

guarantee, I believe that they should consider the costs of such a 

guarantee and who will bear those costs; any guarantee must be 

appropriately priced to compensate for risk, to cover potential 

losses. 

Q.5. It is my understanding that during conversations with staff of 

the Senate Committee on Banking, Housing, and Urban Affairs 

(Banking Committee), you stated that you did not have positions 

on the above issues. If you now have positions on these issues, 

what has occurred to change your positions? 

A.5. During the last few weeks, I have had an opportunity to review public reports and materials related to all of FHFA’s regulated entities, including their financial statements and FHFA’s con-
21 

servator report and loss projections for Fannie Mae and Freddie 

Mac. That being said, these are complex and huge financial institutions and there is much more to understand before I can responsibly come to fully informed positions. 

Q.6. Analytical Support for Positions. What macroeconmic analysis 

or analysis of mortgage and housing markets have you performed 

or evaluated to arrive at your positions regarding what you feel 

should be the future course for Fannie Mae and Freddie Mac? 

A.6. I am familiar with various pieces of analysis on the U.S. housing market and some of the proposals for reforming the system. 

However, I defer to the judgment of Congress regarding the future 

of Fannie Mae and Freddie Mac. If confirmed, I hope that I can be 

helpful to those who will be making critical decisions about the 

most appropriate structure, by providing information and data that 

can help to inform the deliberations. 

Q.7. Options for Ending the Conservatorship. When then Treasury 

Secretary Paulson and Director Lockhart acted in September 2008 

to establish the conservatorship for Fannie Mae and Freddie Mac, 

they indicated that this is a ‘‘time out’’ so that Congress can consider what, if any, is the appropriate role in our housing finance 

system for the GSEs. 

What would you like to see happen if the GSEs become economically viable again and Congress has not acted on GSE reform? 

Would you, as FHFA Director, continue the conservatorship, or 

would you be required to return the companies to their previous 

form? 

A.7. FHFA’s current loss projections for the GSEs show an expectation of continued losses over the next few years. If confirmed, my 

role as their conservator is to work to minimize these losses. I expect that the decisions made regarding the future of the housing 

finance system will include some type of resolution that ensures 

that the overall cost of the Federal support for the GSEs is as low 

as possible. We all recognize the significant problems that resulted 

from the public/private structure. In whatever form the GSEs 

emerge from conservatorship, we should aim to ensure that they 

are stronger and well-managed to perform any role that Congress 

lays out for them going forward. 

Q.8. If the companies were returned to their previous form, what 

would be the Treasury’s role in their day-to-day operations, considering that the Treasury holds warrants for 79.99 percent of the 

companies’ common stock? 

A.8. I believe that Congress will act with due speed to consider and 

enact housing finance reform and I look forward to working with 

you and other members of Congress to ensure that this accomplished. 

Q.9. Risk Management. According to Fannie Mae’s most recent 10- 

Q statement, Fannie’s business activities expose taxpayers to four, 

often overlapping, major categories of risk: credit risk, market risk, 

operational risk, and model risk. 

If confirmed, please explain in detail what you will do to manage 

each of these risks and whether what you would do deviates from 
22 

what you understand Fannie currently does. If you advocate deviation(s), please explain why. 

A.9. The risks mentioned in the question are traditional concerns 

of financial services regulators (along with liquidity risk, reputation risk, and a number of other risks that may vary, depending 

on market conditions). These risks have been and are being addressed by FHFA supervisory staff as part of their examination 

and supervision of the Enterprises. If confirmed, I intend that this 

process should continue so that, working with the managements 

and boards of the Enterprises, each of these risks (and others, as 

appropriate) are effectively addressed and the Enterprises are 

made more stable and resilient. 

Q.10. Protecting the Taxpayer. Mr. Smith, according to an article 

in the Wall Street Journal dated December 8, the Obama administration ‘‘is pressuring Fannie Mae and Freddie Mac, through their 

primary regulator, the Federal Housing Finance Agency’’ to get the 

mortgage giants to agree to write down mortgages. The FHFA has 

been reluctant to allow principal balance reductions because the 

FHFA is charged with limiting taxpayer losses. 

Mr. Smith, given the responsibilities of FHFA as conservator, 

would you resist Administration pressure on Fannie and Freddie 

for principal write-downs? If so, please explain why. If not, please 

explain why and provide details of the analysis you have performed 

or consulted that has led to your position. 

A.10. The Federal Housing Finance Agency is an independent 

agency of Government. I am the head of an independent agency of 

State government now, I understand how important that independence is, and I appreciate that I will be independent if I am confirmed. While there will be many varying interests before the agency, I will consider any proposal first and foremost from the prospective of the role as conservator, with eye to protecting taxpayers. I 

understand that FHFA has publicly stated that the idea of principal reduction is under review. I have no further knowledge of the 

topic than what I have read in press accounts. 

Q.11. View of Responsibilities. The Director of FHFA has many responsibilities. If confirmed, what do you believe would be your primary responsibility? 

A.11. If confirmed, my main duty is to serve as conservator of 

Fannie Mae and Freddie Mac, working to minimize their losses and 

bring them back to a position of health, in anticipation of Congress’ 

determination of the future structure of the housing finance system. As Director, I would be expected to ensure the safety and 

soundness of all 14 GSEs and would seek to ensure that all of the 

GSEs have proper governance, proper risk management practices, 

proper operating procedures, and that they obey law. For Fannie 

Mae and Freddie Mac under conservatorship, all of these mandates 

are consistent with the preservation of their assets and their rehabilitation. 

Q.12. The oversight of Fannie Mae and Freddie Mac, which are 

multitrillion dollar organizations and are larger than any private 

financial institutions, is a serious responsibility. How has your experience prepared you to undertake this effort? 
23 

A.12. If confirmed, I would look forward to the opportunity to participate in the healing and reform of our Nation’s housing finance 

system. I would bring to this task 35 years of experience in law, 

banking, and financial services regulation. I am humbled by this 

opportunity and look forward to working with agency staff, Congress, and others to address this critical effort. 

Q.13. If confirmed, who do you believe are what you have referred 

to elsewhere as ‘‘stakeholders’’ in Fannie and Freddie, and how 

would you rank those stakeholders in terms of importance and in 

making tradeoffs? 

A.13. If confirmed, my first priority will be the success of the conservatorship of the Enterprises, to protect the interest of taxpayers. 

As noted in my oral testimony, the Enterprises’ business has a significant impact on communities around the country. I will, if confirmed, have an obligation to implement affordable housing mandates and, in that regard, will have to deal with the tension between the ‘‘mission’’ goals and the goals of the conservatorship. I 

expect that I will be asked to implement or support changes to current Enterprise policy in order to increase the availability of credit 

and the involvement of private sector in the housing market. If 

confirmed, I will listen to such proposals, but will make decisions 

based on my position as an independent regulator and conservator 

of the GSEs. 

Q.14. Lack of Conservator Experience. Thus far, I am unaware of 

any experience you have with running a conservatorship. If this is 

correct, how would you plan to compensate for a lack of experience 

in this area given the magnitude of responsibility in operating 

these companies? 

A.14. As my oral testimony points out, as North Carolina Commissioner of Banks I have been and am involved with financial institutions in distress, up to and including resolution. I have extensive 

experience working with bank management, boards, and Federal 

regulators to mitigate losses and, where possible, to prevent bank 

failures. That said, I understand that the Enterprises differ in degree and kind from the institutions with which I have been dealing. 

I am not conducting my current work with distressed institutions 

alone; rather, as Commissioner, I supervise teams of examiners 

and other supervisory personnel, who deal with these lending institutions diligently and skillfully. If confirmed as Director of FHFA, 

I would review with agency management the current status of conservatorship and regulatory activities and would work with them 

to support their efforts and to ensure that they have the resources 

(human, financial, and technical) necessary to do their work fully 

and effectively. Policy decisions would be made only after careful 

review of legal authority and facts and only after full discussion 

with staff. The conservatorship and regulation of the Enterprises is 

not a one person job; while responsibility ultimately rests with the 

Director, it has to be exercised through the agency as a whole. 

Q.15. FHFA as Conservator. In describing its role as conservator, 

FHFA has previously stated: 

The purpose of appointing the Conservator is to preserve 

and conserve the Company’s assets and property and to 
24 

put the Company in a sound and solvent condition. The 

goals of the conservatorship are to help restore confidence 

in the Company, enhance its capacity to fulfill its mission, 

and mitigate the systemic risk that has contributed directly to the instability in the current market. 

Do you agree with this assessment of FHFA’s responsibilities as 

conservator? Why, or why not? 

A.15. I agree with the approach that prior leadership of the FHFA 

have taken with regards to the responsibilities as conservator. If 

confirmed as Director, I intend to pursue three main strategies 

that I believe are consistent with Congress’ intent in granting 

FHFA the authority to act as conservator of the GSEs: (1) minimize 

the losses on the poor quality existing book of business; (2) ensure 

that the GSEs take on good quality business going forward, with 

their prices effectively covering the expected risk; and (3) work to 

stabilize the housing market, which is in the best interest of not 

only the GSEs, but also homeowners and taxpayers who have supported these two firms. 

Q.16. FHFA Role in the Financial Stability Oversight Council. The 

FHFA participates in deliberations of the Financial Stability Oversight Council (FSOC). One task of that Council will be to identify 

‘‘systemically important financial market utilities and payment, 

clearing, and settlement activities.’’ 

What criteria would you use to identify a market utility or payment, clearing, or settlement activity as ‘‘systemically important’’ 

and can you provide examples of entities that currently satisfy your 

criteria? (If you rely solely on the considerations provided in Title 

VIII of the Dodd-Frank Act, please identify quantitative cutoffs beyond which an entity would become, in your view, systemically important.) 

A.16. As I understand it, the determination of systemically important financial market utilities is an important responsibility of the 

Financial Stability Oversight Council. I understand that an Advanced Notice of Proposed Rulemaking was recently issued by the 

Council. If confirmed, I look forward to fully considering this issue 

as a member of the Council. 

Q.17. Plain Vanilla Mortgages. During the debate on what became 

the Dodd-Frank Act, some advocated that customers be offered a 

default of ‘‘plain vanilla mortgages,’’ arguing that behavioral economics supported this position. In previous testimony before this 

Committee you seemed to have a position consistent with this, stating ‘‘recent work in behavioral economics suggests that when confronted with information overload, bad choices often result.’’ You 

then stated that the default mortgage for certain borrowers should 

be the 30 year fixed rate mortgage. 

Do you continue to believe in the concept of a ‘‘default’’ mortgage 

for certain consumers? 

How do you define so-called ‘‘behavioral’’ economics, and how 

would you use behavioral economics in your capacity running the 

FHFA? What do you believe to be the difference between ‘‘behavioral’’ economics and nonbehavioral microeconomics or macroeconomics? 
25 

What do you believe behavioral economics has to offer, if anything, in the context of mortgage contract design? Please identify 

any empirical studies that provide support for your view. 

A.17. I would like to clarify that the remarks that are quoted were 

made in the context of a discussion of the subprime crisis. The key 

elements that are important to me are simplicity, clarity, and consumer choice in the offering of mortgages and their documentation, 

as well as underwriting practices that fairly consider the borrower’s 

ability to repay and other factors that lead to a successful loan. 

These considerations are now under the purview of the Consumer 

Financial Protection Bureau and the Federal regulators who are 

working to implement the provisions of Dodd-Frank that would define ‘‘qualified residential mortgages.’’ The FHFA has a role in 

drafting these regulations and, if confirmed, I look forward to working with the staff on this issue. 

Q.18. PACE Loans. On July 6, 2010, FHFA found that: ‘‘ . . . certain energy retrofit lending programs present significant safety and 

soundness concerns that must be addressed by Fannie Mae, 

Freddie Mac and the Federal Home Loan Banks.’’ Accordingly, they 

released guidance to protect these institutions from what are commonly referred to as PACE loans. It is my understanding that during conversations with Banking Committee staff, you indicated that 

you would not alter this guidance so long as it was under active 

litigation. Would you confirm that this is your position? 

A.18. I feel strongly that the protection of the priority of liens with 

respect to loans financed or guaranteed by the GSEs is critical to 

conservatorship. However, I understand the FHFA is currently a 

party to litigation with respect to PACE loans. Accordingly, should 

I be confirmed, I may well be a named party in such litigation. 

This being the case I believe that any further comment on the subject would be inappropriate at this time. 

Q.19. Role on the FSOC. The Director of the FHFA will sit on the 

Financial Stability Oversight Council, which was recently created 

by the Dodd-Frank Act. In your view, what role should the FSOC 

play, if any, in improving financial regulation, and how would you 

plan to carry out your responsibilities as a member, if confirmed? 

A.19. I think that it is appropriate for FHFA to be a voting member of the FSOC, given that the agency’s regulated entities have a 

significant role in the housing finance system today. I understand 

that most of the members of the Council are also engaged in various aspects of the interagency rule-making to develop the regulations required to implement Dodd-Frank. If confirmed, I will continue to support these efforts, providing information and data, as 

necessary, as well as the expertise of agency staff to discuss and 

debate the important issues to be addressed in the regulations. 

Q.20. Fed and Systemic Risk. The ‘‘Housing and Economic Recovery Act’’ (HERA) required that the FHFA consult the Federal Reserve (Fed) on all regulatory matters related to authorities granted 

by HERA. This was an effort to make certain that the FHFA remained mindful of the impact of its decisions on financial system 

stability. Going forward, what do you believe should be the role of 
26 

the FSOC or the Fed in mitigating systemic risks posed by Fannie 

and Freddie? 

A.20. My understanding of the provision in HERA that required 

FHFA to consult with the Federal Reserve on significant rules is 

that it expired in December 2009. I would note that HERA requires 

an oversight board for FHFA with certain regulators providing advice to the agency. In addition, the Dodd-Frank bill makes FHFA 

a member of the Financial Stability Oversight Council. In its role 

on the FSOC, FHFA would work with other regulators to consider 

the systemic impact of the GSEs on markets as well as the impact 

of market events on the GSEs. FHFA has primary authority to 

work to avoid unsafe and unsound practices at the GSEs that could 

have a systemic risk. 

Q.21. Influence and Oversight. Given the involvement of both 

Treasury and HUD in loan modification programs in which Fannie 

and Freddie participate, there may be instances in which these 

agencies have strong opinions as to what actions Fannie and 

Freddie should take regarding certain policies. What is your view 

of the appropriate role for either the Secretary of Treasury or the 

HUD Secretary with respect to the oversight and management of 

Fannie Mae and Freddie Mac? Does either have any authority related to FHFA and its responsibilities as conservator? 

A.21. As I understand it, FHFA is an independent regulator and 

therefore is not accountable to the Treasury Department or Department of Housing and Urban Development for its decisions. I would 

note that the Treasury Department does have a contractual relationship with the GSEs through the Preferred Stock Purchase 

Agreements and the financial agent contracts for the Making Home 

Affordable program. FHFA also works with the Treasury Department and other Federal regulators through the Financial Stability 

Oversight Council and, should I be confirmed, I would, of course, 

willingly listen to their views and coordinate with them on systemic risk issues. However, my role as Director would be to make 

the appropriate decisions related to the entities that I would regulate—the GSEs—and I would prioritize the goals of the conservatorship in any decision I make. 

Q.22. Would it be appropriate for either to ask you to take some 

action that is inconsistent with conserving Fannie Mae and Freddie 

Mac assets, such as principle reductions or not pursuing ‘‘putbacks’’ 

to protect bank solvency? 

A.22. Should I be confirmed as Director of the FHFA, my main 

duty would be to conserve and preserve the assets of the GSEs in 

conservatorship. While I would consider input from a variety of 

sources in reaching a decision, any decision would ultimately be 

made in light of my role as an independent regulator and conservator of the GSEs. Regarding principal reduction specifically, I understand that FHFA has publicly stated that the idea of principal 

reduction is under review. I have no further knowledge of the topic, 

other than what I have read in press accounts. 

Q.23. If confirmed, what course of action would you take if asked 

to make a decision that might somehow benefit the public, but 
27 

would be detrimental to Fannie Mae and Freddie Mac and thus 

also detrimental to the interest of the taxpayer? 

A.23. If confirmed, my main duty as Director of FHFA would be 

to conserve and preserve the assets of Fannie Mae and Freddie 

Mac in conservatorship. My course of action would entail seeking 

input from a variety of sources, both within FHFA and the GSEs, 

as well as seeking input from external sources. The ultimate decision would conform to my role as an independent regulator and 

conservator of the GSEs, to preserve and conserve GSE assets. 

Q.24. Freddie Mac Suing IRS. On October 22, Freddie Mac filed 

suit against the Internal Revenue Service (IRS), disputing the 

IRS’s determination that Freddie Mac owes $3 billion of additional 

income taxes and penalties for the 1998 to 2005 tax years. While, 

as conservator, the FHFA has a duty to preserve and conserve 

Freddie Mac’s assets and property, and the Secretary of the Treasury has the duty to enforce revenue laws, this dispute seems to be 

an instance of the right hand suing the left, given that the taxpayers essentially own Freddie Mac. 

If confirmed, would you expect that the FHFA and Treasury 

could work out a solution to this dispute that would avoid a scenario in which the taxpayers gain nothing but a bill for attorney 

fees? Would you pursue such a solution? How would you go about 

making this happen? 

A.24. I am unaware of the details of the dispute between Freddie 

Mac and the IRS, but I understand that this matter is now before 

the U.S. Tax Court. If confirmed as Director of FHFA, I would 

work with my colleagues at the FHFA and the IRS to determine 

if a resolution is possible, without the need for further litigation. 

Q.25. When To Expedite Foreclosures. Press reports detailing problems with the preparation and notarization of foreclosure documents by some servicers has led to increased discussions regarding 

foreclosure procedures and their impact on the housing market. 

One such issue is the length of time now required to foreclose in 

certain States. While every homeowner deserves the right to proper 

due process, averages approaching a year and a half in some instances add significant costs to our economy. 

In what instances, if any, should FHFA instruct Fannie Mae and 

Freddie Mac to pursue foreclosure expeditiously? If confirmed, 

would you as FHFA Director advocate suspension of the so-called 

‘‘dual track’’ process of mortgage modification? If so, what tradeoffs 

would you be making and what empirical assessment guides your 

decision? 

A.25. As the North Carolina Commissioner of Banks, I have 

worked directly on foreclosure prevention programs and therefore 

have been closely following the national press on foreclosure processing problems. I have heard local and city officials in North Carolina express serious dismay when vacant properties languish and 

create blight in local communities, and I have heard from consumer 

advocates who oppose the ‘‘dual track’’ process as unfair to the 

troubled homeowner, so I am very interested in finding a middle 

ground to address these competing problems. While all of my decisions as Director of FHFA will be based on the overriding principals of conservatorship, if confirmed, I will certainly take a look 
28 

at the situation and work to find some common ground—to ensure 

that homeowners are provided with every opportunity to keep their 

homes, yet to move foreclosure processing along promptly when 

necessary, to protect local neighborhoods from the harmful effects 

of abandoned and vacant properties. 

Q.26. Financial Statements. Mr. Smith, as a prospective conservator for Government-owned enterprises with large portfolios and 

scales of business, you need to be intimately familiar with the financial conditions of the enterprises. What financial statements of 

Fannie Mae, Freddie Mac or the Federal Home Loan Banks have 

you read during the past year, and what have you taken away from 

those statements? 

A.26. I have read the SEC filings of the GSEs, with particular attention to Fannie Mae, and the consolidated financial statements 

of the Federal Home Loan Banks. I also thoroughly read the examination reports published by FHFA on all of their regulated entities. Frankly, I find the FHFA reports most helpful in understanding the weaknesses and condition of the GSEs. These reports 

highlight a number of supervisory concerns that I intend to focus 

on in my role as regulator and conservator, if confirmed for this position. 

Several things occurred to me as I reviewed the financial statements. Recently, Fannie Mae and Freddie Mac were required, due 

to accounting rule changes, to bring on the balance sheet all their 

guaranteed loans. I was struck by the impact of the consolidated 

statements on the scope of their operations and the difficulty it creates in comparing results quarter-to-quarter or year-to-year. I was 

also struck by the extensive discussions of the national economy 

and levels of employment, which are material factors that have to 

be disclosed as part of the financial statements. The descriptions 

in the reports highlight that there are critical factors to the success 

of the GSEs that are not under FHFA’s control, but that must be 

closely monitored. 

Q.27. Do you believe that you possess sufficient knowledge of 

FHFA’s authorities and responsibilities and of Fannie Mae, Freddie 

Mac, and the FHLB’s operations to be able to properly manage 

FHFA immediately, if you are confirmed? Are there any areas 

where you would need time to get yourself up to speed? If so, what 

areas? 

A.27. As a result of my nomination, I have done my best to familiarize myself with the authorities and responsibilities mentioned in 

your question. If confirmed, I will act only after careful study of the 

relevant authorities and in consultation with staff. 

Q.28. Leadership and Tradeoffs. In discussing your views about 

leadership at FHFA, you testified that: ‘‘Leadership in this context 

means determining how to address critical local needs in conjunction with the agency’s duties of conservatorship.’’ 

Could you elaborate on what you mean by ‘‘local needs’’ and how 

you would use resources available to, or guided by, the Federal 

Housing Finance Agency to address those needs? Could you describe how you would balance local needs with needs of taxpayers 

who are invested in Fannie Mae and Freddie Mac? 
29 

A.28. I was referring to the fact that Fannie Mae and Freddie Mac 

are very large players in the housing finance system and that their 

activities can have an impact on local communities. For example, 

the large numbers of foreclosures are creating a high volume of 

properties that must be sold, which can affect neighborhoods if the 

properties are not moved to sale in an expeditious manner. If confirmed, my priority would be to minimize further losses to the taxpayer, but I would also be conscious of the effect of Enterprise activities on local real estate markets. 

Q.29. FHFA Role in the Future of Housing. In your testimony, you 

identify that conservatorship of Fannie Mae and Freddie Mac cannot be a long-term solution and that Congress and the Administration have important decisions to make with respect to housing finance. You go on to state that: ‘‘If confirmed, I look forward to 

working with you and having FHFA become an active participant 

in this process.’’ Could you elaborate on what you mean by FHFA 

being an ‘‘active participant’’ in the process involving decisions by 

Congress and the Administration with respect to the Nation’s housing finance system? 

A.29. In preparing for this nomination, I have had occasion to review various proposals and options to restructure the GSEs and the 

housing finance system. I am also aware that the Administration 

is preparing a proposal for Congress’s consideration in January. If 

confirmed, I look forward to working with my colleagues at FHFA 

to advise Congress about the costs and benefits on any proposals 

that would be brought before you. As Director of FHFA, I expect 

to provide you factual information and data, and I hope that FHFA 

can serve as a trusted adviser as you deliberate the future of the 

housing finance system. 

Q.30. Abusive Lending and the Housing Bubble. Mr. Smith, according to a November 12 article in the New York Times, you played 

a ‘‘crucial role’’ in North Carolina’s response to the collapse of the 

housing market. 

The article goes on to say that: ‘‘He identified abuses by lenders 

as an important factor in the boom and bust . . . ’’ 

Mr. Smith, have you identified abuses by lenders as an important factor in the boom and bust that has been experienced in the 

Nation’s housing market? If not, do you believe that such abuses 

have been an important factor? If so, could you quantify the contribution of lender abuse to the boom and bust in the housing market or identify the empirical evidence upon which your belief is 

based? 

A.30. During my entire term as North Carolina Commissioner of 

Banks, starting in 2002, I was involved in the implementation and 

enforcement of a licensing system for mortgage brokers and bankers not affiliated with banking organizations. The statute under 

which this system was implemented, the North Carolina Mortgage 

Lending Act (MLA), like the high-cost loan law (commonly called 

the ‘‘predatory lending law’’) that preceded it, had been adopted by 

large bipartisan majorities of both houses of the North Carolina 

General Assembly in response to perceived abuses in the market 

place, particularly the high-cost segment of the market, which 

ranged from churning of loans (repeated refinancing with no net 
30 

benefit to the borrower) to outright fraud. Enforcement of the MLA 

resulted in the removal from the market of literally hundreds of 

originators and their employers who had no business being in the 

mortgage business and, in the worst instances, in Federal and 

State criminal prosecutions. As the most recent Conservator’s Report of FHFA (Second Quarter 2010) shows, the work my colleagues and I have done in mortgage licensing has taken place during a period when the GSEs (including Ginnie Mae) accounted for 

a relatively small share of the MBS market: 54 percent in 2004, 45 

percent in 2005, 44 percent in 2006 and 63 percent in 2007. The 

Conservator’s Report graphically shows a large increase during this 

period in private label securities. In my view, these securities, 

which were the financing source for the abusive practices mentioned above, contributed to the financial crisis. 

Q.31. Foreclosure Prevention. Mr. Smith, during your nomination 

hearing before the Senate Committee on Banking, Housing, and 

Urban Affairs, it was identified that you oversaw a ‘‘foreclosure 

prevention program’’ in North Carolina. Please provide a description of the successes or failures of that program and summary statistics of the program’s performance. 

A.31. Pursuant to legislation adopted by the North Carolina General Assembly, commencing November 1, 2008, the Office of Commissioner of Banks implemented a program that requires filing of 

a notice with the Office of Administrator of the Courts prior to the 

filing of a foreclosure action and a deferral period of 45 days (extendable once, for cause shown). The law also required, and funded 

from the agency’s reserves, outreach to borrowers and referral to 

counselors with regard to high-cost loans. At the time of the statute’s adoption, foreclosure starts were running at the rate of about 

60,000 a year, primarily on high-cost loans. In more recent times, 

the rate of foreclosure starts has increased and its composition has 

changed to predominately conforming loans. Pursuant to further 

State legislation reflecting this change, effective November 1, 2010, 

the General Assembly extended the reach of the program to all 

home loans and funded it with a one-time fee on the filing of foreclosures. Over the course of its operation, the State Home Foreclosure Prevention Program has referred over 13,000 borrowers to 

counseling and has kept 5,237 families in their homes to date. A 

‘‘save’’ is determined by follow-up with counselors to ensure that 

the loan has been modified or restructured, that the family can afford the payments, and that the family is, in fact, still in the home. 

Modifications as the result of counseling are voluntary as a rule; 

my office has no statutory authority to compel modifications. I believe that the SHFPP is a success in that it has prevented foreclosure for a significant number of families. The principal challenges the SHFPP has faced have been borrowers’ reluctance to respond to outreach efforts in a timely way, as well as difficulties experienced by homeowners, counselors, and servicers in seeing the 

loss mitigation process through to ultimate resolution. Loan modifications are typically a document-intensive process that takes 

proactive coordination on the part of all involved. 
31 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM JOSEPH A. SMITH, JR. 

Q.1. At our last full Committee hearing examining foreclosure processing and loan modification issues, we heard from Governor 

Tarullo of the Federal Reserve. He said, ‘‘while bank regulatory 

agencies can and should respond to specific failings that are being 

identified in our interagency examination, there is a strong case to 

be made that broader solutions are needed both to address structural problems in the mortgage servicing industry and to accelerate 

the pace of mortgage modifications or other loss mitigation efforts.’’ 

Do you agree with this statement? Why or why not? 

A.1. I believe that reform of the mortgage finance system should 

include a coordinated and coherent system of regulation of all aspects of the mortgage process from origination through foreclosure. 

The SAFE Act, which is included in the Housing and Economic Recovery Act, is an example of the way in which Federal and State 

regulators can work together on the origination end; comparable coordination in the remainder of the process is very important. 

Q.2. What do you see as FHFA’s major challenge(s) going forward? 

A.2. FHFA’s major challenges are: (i) managing the tension between the duties of conservator, statutory affordable housing goals 

and aspects of the ongoing crisis, the most recent manifestations of 

which involve foreclosure; and (ii) attracting, retaining, and motivating the human capital necessary to carry out its mission. 

Q.3. What would be your top priorities if the Senate confirmed 

you? 

A.3. My top priorities would be: (i) prudent and effective management of the conservatorship of the Enterprises; (ii) effective assistance to Congress as it considers housing finance market reforms; 

and (iii) effective supervision of the Federal Home Loan Bank System. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KOHL 

FROM JOSEPH A. SMITH, JR. 

Q.1. Fannie Mae and Freddie Mac have dramatically increased 

their nonguarantee fees over the past 2 years. These include a set 

fee applicable to all mortgages, as well as separate delivery fees 

that are tied to a borrower’s credit score, initial loan-to-value ratio 

and other factors. Fannie Mae and Freddie Mac claim that these 

fees are used for risk mitigation purposes. 

The GSEs charter requires them to use one of three forms of 

credit enhancement to mitigate their risk on low down payment 

loans. The one used most frequently is mortgage insurance. These 

credit enhancements employ private sector capital which minimizes 

risk to the GSES and, therefore to taxpayers, and are less expensive for borrowers. As Director, what will you do to eliminate these 

fees and ensure that the GSE use proper risk mitigation tools? Furthermore do you believe that these fees are driving homebuyers, 

who are putting less than 20 percent of the home’s value toward 

the down payment, to purchase a home with an FHA mortgage 

rather than with mortgage insurance? 
32 

A.1. From what I understand, Fannie Mae and Freddie Mac use 

various strategies to reduce losses to the taxpayer including credit 

enhancements, such as private mortgage insurance, and guarantee 

fees to cover the cost of potential losses. I have heard the concerns 

about loan level pricing by the GSEs, including its impact on private mortgage insurance. Should I be confirmed as Director of 

FHFA, I will review this issue with staff and the GSEs to better 

understand how those fees are set, to what extent they are necessary to compensate for risk, and the interplay between the fees 

and the credit enhancement. 

Q.2. In Wisconsin, 87 percent of our commercial banks are members of the Federal Home Loan Bank of Chicago. Bankers in Wisconsin tell me how valuable the Federal Home Loan Bank of Chicago is to their business as a source of low-cost funding and mortgage-related services. During the liquidity crisis of 2007 and 

2008—as other sources of funding dried up virtually overnight and 

before the Federal Reserve or the Administration had time to devise a response—the Home Loan Banks proved especially valuable 

as the only reliable source of funding for financial institutions, particularly smaller community banks. 

The Chicago Home Loan Bank increased its lending to Wisconsin 

financial institutions approximately 56 percent from July of 2007 

to January of 2009—resulting in an additional $4.9 billion of funding to better help Wisconsin banks serve the needs of their customers and their communities. While not well understood outside 

of financial circles, this rapid infusion of liquidity into the financial 

system in a safe and controlled manner helped prevent the financial crisis from becoming even more disastrous. 

What are your thoughts on the Federal Home Loan Banks and 

their mission of providing funding to community lenders through 

all business cycles? 

Are there any specific areas or operations of the Home Loan 

Banks that you are concerned about or that you plan to focus on 

as their regulator? 

Are there any specific changes to the Home Loan Banks that you 

would recommend? 

A.2. As I said in my testimony, community banks are dear to my 

heart and the Federal Home Loan Banks are crucial to the success 

of many community banks. The Federal Home Loan Banks provided critically needed liquidity during the financial crisis. I am 

aware that the Federal Home Loan Bank System is a matter of 

heightened supervisory concern for FHFA. If confirmed, I intend to 

address these supervisory concerns with the Federal Home Loan 

Banks and their member banks to maintain and strengthen the 

Home Loan Bank System. 

Q.3. Many of the Federal Home Loan Banks, including the Chicago 

Bank, operate mortgage purchase programs that allow their member banks to sell traditional fixed-rate loans they originate directly 

to their Home Loan Bank, or to the loans through their Home Loan 

Bank as an alternative secondary market option. Many of these 

programs are different from mortgage purchases made by Fannie 

Mae and Freddie Mac because participating lenders are able to 

share in the credit risks of their mortgage loans, thereby keeping 
33 

‘‘skin in the game.’’ This innovative structure has proven to be very 

successful. The percentages of loans that are seriously delinquent 

or are in foreclosure are only about one-third of the loans purchased by Fannie Mae and Freddie Mac. 

These programs are also very popular with FHLB member 

banks, particularly community banks. In Wisconsin, more than 125 

lenders have funded more than $13 billion of mortgage loans using 

these programs to help a family buy a new home or lower the costs 

of their existing mortgage through refinancing. The superb credit 

performance of the loans demonstrates that local community banks 

and thrifts originate very high quality mortgages. 

Are you familiar with the unique risk sharing structure used by 

the Home Loan Bank mortgage programs? 

Do you plan to encourage the further development and growth of 

these programs? 

Are there lessons in these programs that can be applied as we 

look to reform the housing finance industry? 

A.3. Based on the information I have at this time, I am not familiar with the details of this program. If confirmed, I undertake to 

consult with my colleagues at FHFA to assess this program in light 

of the supervisory regime for the Federal Home Loan Bank of Chicago and the Federal Home Loan Bank System as a whole. 

Q.4. Farmers back in Wisconsin often tell me that they have trouble finding banks that are willing to lend to them. I also hear from 

Bankers that regulators often make it difficult for them to expand 

their agriculture farm loan portfolios. The Gramm-Leach-Bliley Act 

expanded the available collateral from Community Financial Institution members of the Federal Home Loan Banks to include agricultural and small business loans. A recent report released by the 

Government Accountability Office found that: 

• Small business and agricultural loans account for only 1 percent of FHLB advances; 

• Implementation has fallen short of the congressional intent to 

improve economic development in local communities and enhance the availability of capital for agricultural loans. 

Why do you think the Federal Home Loan Banks have fallen 

short of the Congressional intent to improve the development of 

local communities? 

Do you think that Federal Home Loan Banks should facilitate 

more agriculture lending? 

Do you plan to encourage Home Loan Banks to facilitate more 

agriculture lending for their member banks? 

A.4. Based on my experience as North Carolina Commissioner of 

Banks, I appreciate the difficulties farmers have in obtaining credit. If confirmed as Director of FHFA, I intend to review the current 

status of agricultural lending by members of the Federal Home 

Loan Bank System and work with Federal Home Loan Banks and 

their members to develop an appropriate participation by such 

banks in that important market. To the extent that these activities 

are relatively new to the Federal Home Loan Banks or their members, any increase in agricultural lending would have to be done in 
34 

a way that does not compromise the integrity the Federal Home 

Loan Banks or the Federal Home Loan Bank System. 

Q.5. Let me get your views on the structure of Government sponsored enterprises (GSEs). Because all GSEs have at least the implicit backing of American taxpayers, the structure of these entities 

is very important. The 12 Federal Home Loan Banks are each organized as a cooperative, as are the Farm Credit Banks. Unlike corporations with publicly traded stock, such as Fannie Mae and 

Freddie Mac, a cooperative structure ensures the interests of a 

GSE’s customers are closely aligned with those of its shareholders 

because they are largely the same group. This structure also greatly reduces a GSEs’ incentive to take unnecessary risks in order to 

meet high profit expectations. For example, all Home Loan Bank 

loans to members are underwritten to strict, traditional standards 

and are fully secured by high-quality collateral. 

What are your views of the cooperative structure of the Home 

Loan Banks? Do you believe this structure should be preserved and 

protected, including protecting the par value stock of GSE shareholders? 

Do you believe this structure has merit for future housing finance entities that Congress might create? 

A.5. The model of the Federal Home Loan Banks proved successful 

during the financial crisis, providing critically needed liquidity to 

community banks across the Nation. As Congress considers the future of the housing finance system and potential options for restructuring, they should consider the successes of the Federal 

Home Loan Bank System as part of their deliberations. 

Q.6. I would like to discuss a local Government innovation called 

Property Assessed Clean Energy, or PACE financing. Wisconsin enacted a law in 2009 that allows local governments that set up financing districts to offer loan programs to pay back investments in 

renewable energy systems through property tax payments. As a result of this law, the Milwaukee Shines Solar PACE Loan Program 

was created in March 2010 making the City of Milwaukee one of 

the first municipalities in the country to implement a PACE financing mechanism. This program was suspended in July after the Federal Housing Finance Agency released guidance on Pace liens. 

Are you aware that the Federal Housing Finance Agency (FHFA) 

issued a statement on July 6 that blocked PACE pilot programs 

across that Nation and in Wisconsin? 

Will you agree to revisit PACE and work with stakeholders on 

this issue? 

A.6. The protection of the priority of liens with respect to loans financed or guaranteed by the GSEs is critical to conservatorship. 

However, I understand the FHFA is currently a party to litigation 

with respect to PACE loans. Accordingly, should I be confirmed, I 

may well be a named party in such litigation. This being the case, 

I believe that any further comment on the subject would be inappropriate at this time. 
35 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BENNET 

FROM JOSEPH A. SMITH, JR. 

Q.1. Property Assessed Clean Energy (PACE) Financing is a creative mechanism to help finance the installation of clean energy 

projects and energy efficiency upgrades on residences. My home 

State of Colorado is at an impasse with the FHFA on the continued 

use of this mechanism because the Agency has issued guidance 

that has essentially halted PACE programs across the country. Can 

you state your position on PACE? 

A.1. I understand and agree with the goals of PACE programs, to 

provide the opportunity for homeowners to make energy improvements to their homes. However, the protection of the priority of 

liens with respect to loans financed or guaranteed by the GSEs is 

critical to FHFA’s mandate of conservatorship. 

Q.2. The Colorado counties of Gunnison, Pitkin, Eagle, and Boulder 

all passed legislation to promote PACE financing. The State legislature and Governor Ritter seized on this momentum and recently 

passed statewide authorizing legislation as well—all of which are 

dependent on the establishment of so-called ‘‘improvement districts.’’ Are improvement districts (PACE districts) for energy efficiency and renewable energy different than the more traditional 

improvement districts used for water, sewer, sidewalks, roadways, 

etc.—and if so, how and why? 

A.2. I am unfamiliar with the specifics regarding Colorado’s improvement districts and look forward to working with my colleagues to better understand the details of the situation, should I 

be confirmed as FHFA Director. 

Q.3. Throughout Colorado, many homeowners who had hoped to 

make energy efficiency improvements on their properties have been 

disappointed in FHFA’s lack of progress on the PACE program. 

Would you consider revisiting the FHFA’s current position on the 

program? 

A.3. I understand the FHFA is currently a party to litigation with 

respect to PACE loans. Accordingly, should I be confirmed, I may 

well be a named party in such litigation. This being the case, I believe that any further comment on the subject would be inappropriate at this time. 

Q.4. FHFA has indicated general skepticism about the reliability 

and relative value of energy efficiency capital improvements. Do 

you support solutions to help homeowners save money through energy efficiency improvements? 

A.4. I do support solutions that help homeowners save money 

through energy efficient improvements to their homes. I believe 

that it is the responsibility of the Department of Energy to determine measurable standards for reliability and relative value of energy improvements. 

Q.5. I hope you can work with me and my staff until we find an 

amicable solution to this impasse on the PACE program. Can I 

have a pledge from you and FHFA that you will continue to work 

with my office to find a solution to this problem? 
36 

A.5. It is my understanding that the current impasse and related 

litigation was preceded by a substantial amount of discussion and 

attempts at accommodation between interested parties. That being 

said, and if confirmed, I am more than willing to work with you 

to identify an appropriate approach going forward. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JOSEPH A. SMITH, JR. 

Q.1. We need to fix our Nation’s broken housing finance system 

and reduce the Government’s involvement in the housing market 

from current levels where the GSEs and FHA are guaranteeing 

about 95 percent of all new mortgages. Some alternatives being discussed range from a completely privatized housing finance system 

to a system in which the Government takes the first-loss position 

in the entire conforming mortgage market. What are the positive 

and negative aspects of the range of options for reforming Fannie 

Mae and Freddie Mac? 

A.1. In preparing for this nomination, I have had occasion to review various proposals and options to restructure the GSEs and the 

housing finance system. I am also aware that the Administration 

is preparing a proposal for Congress’ consideration in January. If 

confirmed, I look forward to working with my colleagues at FHFA 

to advise Congress about the costs and benefits on any proposals 

that would be brought before you. As Director of FHFA, I expect 

to provide you factual information and data, and I hope that FHFA 

can serve as a trusted adviser as you deliberate on the future of 

the housing finance system. 

Q.2. In January, the Treasury Department is required to submit its 

report on how to reform Fannie Mae, Freddie Mac, and the housing 

finance system as a whole. What input has FHFA had in this report and what role do you plan to take in this debate? 

A.2. I have had no discussions with the Treasury Department or 

Administration on their plan for reforming the housing finance system and the GSEs. I am not aware of FHFA’s level of involvement 

in developing options on the future structure of the GSEs or the 

housing finance system as a whole. If confirmed, I look forward to 

contributing to the dialogue and, as the Director of the FHFA, providing information to help facilitate Congress’ deliberations on the 

future of the GSEs. 

Q.3. According to an August FHFA report, Fannie Mae and Freddie Mac have burnt through $226 billion in capital since the 

middle of the 2007. The Congressional Budget Office has estimated 

that, in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the Government’s cost to 

bail out Fannie Mae and Freddie Mac will eventually reach $381 

billion. If confirmed, what internal steps will you take at FHFA to 

reduce taxpayer losses? 

A.3. Should I be confirmed as Director of the FHFA, my main duty 

is to conserve and preserve the assets of the GSEs in conservatorship and work to right the ships so that they emerge from conservatorship, in whatever form Congress deems appropriate, in a 

stronger position to fulfill whatever functions Congress may give 
37 

them. If confirmed, I intend to pursue three main strategies, which 

are consistent with the approach that the prior leadership of the 

FHFA has taken: (1) minimize the losses on the poor quality existing book of business; (2) ensure that the GSEs take on good quality 

business going forward, with the fees effectively covering the expected risk; and (3) work to stabilize the housing market, which is 

in the best interest of not only the GSEs, but also homeowners and 

taxpayers who have supported these two firms. 

Q.4. According to the Wall Street Journal: 

Fannie Mae and Freddie Mac are in talks with Obama administration officials to join fledgling Government programs aimed at reducing loan balances of mortgages 

where borrowers owe more than their homes are worth, according to people familiar with the situation. An agreement with the two Government-owned mortgage giants to 

write down so-called underwater loans could reduce the 

threat to the U.S. housing market from the glut of homeowners believed at risk of default should their personal finances or home prices worsen. A deal would deepen losses 

at Fannie Mae and Freddie Mac, which already have cost 

taxpayers about $134 billion. 

What is your perspective on this proposal and how will this impact projected losses on Fannie Mae and Freddie Mac? 

A.4. While I have read the article you referred to, I have no specific 

knowledge of this particular plan or these discussions on principal 

reduction. If confirmed, I pledge to work with my colleagues at 

FHFA to carefully evaluate any principal reduction proposals from 

the perspective of the conservator, working to conserve the GSEs’ 

assets and reduce their losses. I believe that all of my decisions related to Fannie Mae and Freddie Mac should have the primary 

goal of protecting the taxpayers. 

Q.5. On Christmas Eve, the Treasury Department lifted the $400 

billion loss cap on the two companies, creating a potentially unlimited liability, and effectively providing the full faith and credit of 

the Government in support of their debt. Would you support reestablishing the $200 billion cap per entity and accelerate the 10 percent reductions of the mortgage portfolios, effectively requiring the 

companies to shrink those portfolios by holding a combined $100 

billion from their current levels? 

A.5. My understanding of the Preferred Stock Purchase Agreements is that they are contracts between the Treasury Department 

and the GSEs. From my perspective, should I be confirmed as 

FHFA Director, these agreements are in place and stand as agreed 

to. They are the starting point for my work as conservator, to preserve and conserve the GSEs’ assets. I understand that, under the 

terms of the agreements, the GSEs must reduce their portfolios by 

10 percent each year. I have personal experience as the North 

Carolina Commissioner of Banks with quick sales of an institution’s assets during resolution and I do not believe that such actions always result in the best price. Consequently, in my view, any 

decision to accelerate the pace of the disposition of assets would 

need to be made after analysis of the impact of such action on real 
38 

estate markets, capital markets, and the financial position of the 

GSEs. 

Q.6. During consideration of financial reform, I pushed an amendment to include in the debt calculations of the budget resolution 

the debt obligations of Fannie and Freddie as long as they were in 

conservatorship or receivership. Although the amendment received 

a majority of votes (47–46) it failed because the procedural vote 

needed 60 votes to pass. Would you support including the debt obligations of Fannie and Freddie in the budget? 

A.6. Decisions about what should be on or off the Federal budget 

should be made by Congress and the Administration, through the 

Office of Management and Budget. Experts in Federal Government 

accounting are in a better position to make this determination. 

Q.7. When the Congress developed legislation to combine the regulation of Fannie Mae, Freddie Mac and the Federal Home Loan 

Banks under one new regulator, we wanted to be sure that the differences between Fannie and Freddie and the Federal Home Loan 

Banks were recognized by the FHFA in its supervision and regulatory duties. How will you approach Congress’ direction to recognize and preserve the differences and unique characteristics of the 

Federal Home Loan Banks as you develop policies and regulations 

for all of your regulated entities? 

A.7. As I said in my testimony, community banks are dear to my 

heart and the Federal Home Loan Banks are crucial to the success 

of many community banks. The Federal Home Loan Bank model 

proved successful during the financial crisis, providing critically 

needed liquidity to smaller institutions that cannot access the capital markets on their own. However, I am aware that the Federal 

Home Loan Bank System is a matter of heightened supervisory 

concern for FHFA. If confirmed, I intend to address these supervisory concerns with the Federal Home Loan Banks and their 

member banks to maintain and strengthen the Home Loan Bank 

System. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM JOSEPH A. SMITH, JR. 

Q.1. This week the Wall Street Journal reported that Treasury 

may be pressuring Fannie and Freddie to modify loans in their 

portfolio in a manner that will make them eligible for a FHA’s 

principle write down refinance program. But as you know, FHFA 

is an independent Federal agency. Can you provide assurance that 

the decisions you make as the Director of FHFA will be done independently of political pressure? And will you assure us that all decisions you make with regard to the management of the GSE’s existing books will be done with the principal goal of minimizing additional costs to the taxpayer or recouping taxpayer losses? 

A.1. The Federal Housing Finance Agency is an independent agency of Government. I am the head of an independent agency of State 

government now, I understand how important that independence 

is, and I appreciate that I will be similarly independent if I am confirmed. While there will be many varying interests before the agency, I will consider any proposal first and foremost from the perspec-
39 

tive of conservator, with eye to protecting taxpayers. I understand 

that FHFA has publicly stated that the idea of principal reduction 

is under review. I have no further knowledge of the topic than 

what I have read in press accounts. 

Q.2. Please briefly describe some of the general principles that you 

would like to see part of a new American housing finance system. 

A.2. If confirmed as Director of FHFA, I would, of course, defer to 

Congress on the structure of the future system, but I would hope 

that the new system would include: 

• appropriate regulation of all aspects of the mortgage finance 

system (origination, funding, servicing, foreclosure, REO) 

• appropriate levels of consumer protection 

• appropriate levels of capital for participants 

• proper balancing of the private capital and Government support 

If confirmed, I look forward to contributing to the discussion and, 

as the Director of the FHFA, providing information to help facilitate Congress’ deliberations on the future of the GSEs. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR DEMINT 

FROM JOSEPH A. SMITH, JR. 

Q.1. A December 8th, 2010, article in the Wall Street Journal referenced talks between the Obama administration and Fannie Mae 

and Freddie Mac aimed at encouraging the latter to join an FHA 

program whose goal is securing reductions in loan balances for 

homeowners having difficulties making their mortgage payments. 

Do you support having Fannie and Freddie forgive principal on 

mortgages in order for the borrowers to refinance into FHA loans? 

A.1. While I have read the article you referred to, I have no specific 

knowledge of this particular plan or these discussions on principal 

reduction. If confirmed, I pledge to work with my colleagues at 

FHFA to carefully evaluate any principal reduction proposals from 

the perspective of the conservator working to conserve the GSEs 

assets and reduce their losses. All of my decisions related to Fannie 

Mae and Freddie Mac would be considered in the context of the primary goal of protecting the taxpayers. 

Q.2. If the answer to the previous question is yes, can you please 

provide your reasoning, including how to square the potential 

added losses to Fannie and Freddie would be consistent with the 

FHFA’s duties as a conservator to the enterprises and the goal of 

minimizing taxpayer losses? 

A.2. Not applicable. 

Q.3. Do you believe that reductions in loan balances should be a 

part of any programs that constitute the Government’s response to 

the ongoing mortgage crisis? 

A.3. I understand that FHFA has publicly stated that principal reduction is under review. If confirmed, I would take any prior review under consideration. However, the ultimate decision would be 

made to conform with FHFA’s role as the regulator and conservator 

of the GSEs’ assets. 
40 

Q.4. Would you consider the Administration’s current HAMP program a successful one, and if so, by what standards? 

A.4. It’s not only appropriate, but also critical that the GSEs be 

fully engaged in loss mitigation efforts, including HAMP and nonHAMP modifications. The primary objective of these efforts has 

been to keep families in their homes, to stabilize the housing market, but also to minimize losses to Fannie and Freddie. I have 

heard the concerns about the HAMP program, and, if confirmed, 

commit to you that I am open to additional assessment of the program guidelines and whether there are changes that would make 

it more effective. In addition, I would look forward to hearing your 

thoughts on the subject. 

Q.5. On December 24th, 2009, the Treasury Department removed 

any limits on assistance for Fannie and Freddie, who have currently cost taxpayers more than $150 billion dollars—do you believe that any limits are appropriate on the amount of taxpayer assistance that they can receive, and if so, could you please detail 

what limits you think would be appropriate and why? If you do not, 

could you please explain how that would be consistent with the 

goal of minimizing taxpayer losses? 

A.5. My understanding of the Preferred Stock Purchase Agreements is that they are contracts between the Treasury Department 

and the GSEs. From my perspective, should I be confirmed as 

FHFA Director, these agreements are in place and stand as agreed 

to. As conservator, my primary responsibility is to limit losses to 

taxpayers from the GSEs. 

Q.6. Can you please detail ways that you see or that you intend 

to use to increase the use of private capital, such as private mortgage insurance, as ways to mitigate risk of loss in Fannie and 

Freddie portfolios? 

A.6. Fannie Mae and Freddie Mac are authorized to use several 

forms of credit enhancement, including private mortgage insurance, 

to mitigate risk. Since the onset of the mortgage crisis, the mortgage insurance industry has been fairly credit-constrained. Therefore, if confirmed, I would expect to carefully monitor the regulatory capital condition of these critical counterparties, to ensure 

that they do not pose any additional risk to the Enterprises. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM JOSEPH A. SMITH, JR. 

Q.1. In testimony to the Senate Banking Committee on ‘‘Mortgage 

Market Turmoil: Causes and Consequences,’’ on March 22, 2007, 

you advocated for ‘‘FHA First’’ plan to deal with the problems in 

the mortgage market. You bemoaned the inability of FHA to offer 

subprime loans when you testified: 

Congress should take immediate steps to modernize FHA 

to enable it to be a viable option for home ownership by 

borrowers with credit blemishes. Much of the growth of the 

subprime industry came at the expense of FHA. Clearly, 

Congressional concerns of the solvency of the FHA insur-
41 

ance fund led it to overreact and hamstrung the FHA from 

serving the subprime market. 

Are you aware that the Federal Housing Administration mortgage insurance fund, used to pay claims, is currently below its 2 

percent statutorily required capital ratio? If so, when did you become aware and does that change your opinion on an ‘‘FHA First’’ 

solution? 

A.1. The testimony in question was on behalf of the Conference of 

State Bank Supervisors and was principally intended to present 

the efforts States had made to address abuses in the marketplace,. 

The discussion of FHA was a minor part of the testimony and was 

intended as a response to what the Federal Government might do 

to provide mortgage financing for low and moderate income borrowers. I was not an advocate regarding FHA at that time, in 2007, 

and am not now. If confirmed, I will deal with issues relating to 

the Enterprises, both in their current state and as the debate on 

restructuring goes forward. 

Q.2. Are you aware that the 2010 annual study shows that the 

peak losses for the FHA are still 2–5 years out? If so, when did you 

become aware. 

A.2. I have not done any review of FHA mortgage insurance fund. 

Q.3. Are you aware that if the FHA takes no further action to more 

quickly increase its capital ratio that it will take until 2015 for the 

fund to reach that 2 percent requirement? If so, when did you become aware? 

A.3. I have not done any review of FHA mortgage insurance fund. 

Q.4. Do you still believe that Congress overreacted to concerns of 

the solvency of the FHA insurance fund or that the FHA did not 

adequately serve the subprime market? 

A.4. I have not done any review of FHA mortgage insurance fund. 

Q.5. You also testified at that same hearing in 2007 that, ‘‘in addition, Congress should encourage the GSE’s to devote their primary 

attention to affordable housing for all Americans, particularly the 

subprime market.’’ The action you suggest would have a devastating impact on the U.S. taxpayers subjecting them to even 

more dramatic losses. Do you still believe that is the appropriate 

role of the GSE’s? 

A.5. During that hearing, in which I was testifying solely on behalf 

of the Conference of State Bank Supervisors, the point that I was 

intending to make was that Fannie and Freddie Mac could serve 

some number of creditworthy borrowers who were otherwise being 

offered subprime loans. Access to affordable, prime rate financing 

on safer terms would certainly have been a better option for many 

of these borrowers. I did not intend to convey that Fannie Mae and 

Freddie Mac should follow the lead of the subprime market; rather, 

my point was the opposite—that the American public would be better-served if traditional, conventional conforming loans represented 

a greater portion of the market. 

Q.6. I believe your above comment is an inappropriate sentiment 

for someone who is charged with protecting the American taxpayers by governing the conservatorship of these two companies. 
42 

Do you agree the primary goal of the conservator should be to limit 

the amount of taxpayer dollars that need to be spent to prop up 

these companies? 

A.6. Yes. 

Q.7. The data clearly shows that Federal housing policy clearly 

played a large role in creating this crisis. New research by Edward 

Pinto, a former chief credit officer for Fannie Mae and a housing 

expert has found that, almost half of all mortgages in the financial 

system—27 million loans—were subprime or Alt-A mortgages. Twothirds of these loans were held or guaranteed either by the U.S. 

Government or by Government-backed and controlled institutions 

like Fannie Mae and Freddie Mac. Clearly, the vast numbers of 

weak mortgages that have resulted in the financial crisis were 

made as a result of a concerted Government policy to increase 

homeownership in the United States. 

This point is particularly timely because this week the Wall 

Street Journal reported that Fannie Mae and Freddie Mac are in 

talks with the Obama administration officials to increase the number of loans the two companies will reduce the loan balances for 

underwater borrowers. The article says, ‘‘the Obama administration is pressuring Fannie Mae and Freddie Mac, through their primary regulator, The Federal Housing Finance Agency. The Administration wants the firms to join a program run by the Federal 

Housing Administration that allows banks and other creditors, 

which agree to write down mortgages, to essentially hand off reduced loans to the FHA.’’ 

Of course, taking these write downs will mean not just new, huge 

losses for both Fannie Mae and Freddie Mac but also for the American taxpayer. 

The WSJ article continues, ‘‘one of the reasons Fannie Mae and 

Freddie Mac are reluctant to reduce principal is because it limits 

their options to reduce losses.’’ They can do this either by collecting 

claims from mortgage insurers or by forcing banks to buy back 

loans. 

If the GSE’s are in conservatorship largely because of subprime 

loans they either originated or invested in, do you believe that you 

were wrong to have previously advocated for the GSE’s to give ‘‘primary attention to affordable housing for all Americans, particularly 

in the subprime market?’’ 

A.7. As I mentioned in response to a previous question, I did not 

intend for my comments to advocate for the GSEs to have a greater 

role in the subprime market. I have carefully read FHFA’s latest 

Conservator’s Report and, based on that information, believe that 

the vast majority of losses they have experienced to date are from 

the single family guarantee business. In fact, according to the third 

quarter report, 82 percent of their charges against capital were 

from the single family guarantee business and only 4 percent from 

investments, including purchases of subprime securities. This data 

suggests that the GSEs’ subprime investments were not the primary reason that it was necessary to place them in conservatorship 

and that my focus as conservator, should I be confirmed, should be 

on minimizing losses in their main line of business in conventional 

mortgages. 
43 

Q.8. Can you tell the Committee what you think of the idea of forcing these two companies to write down more loans? 

A.8. While I have read the article you referred to, I have no specific 

knowledge of this particular plan or these discussions on principal 

reduction. If confirmed, I pledge to work with my colleagues at 

FHFA to carefully evaluate any principal reduction proposals from 

the perspective of the conservator, working to conserve the GSEs’ 

assets and reduce their losses. I believe all of my decisions related 

to Fannie Mae and Freddie Mac should have the primary goal of 

protecting the taxpayers. 

Q.9. Do you think the two companies should put back all loans that 

are appropriate on the banks that made them and collect relevant 

mortgage insurance to those loans? 

A.9. Both Fannie Mae and Freddie Mac have contracts with the 

lenders from whom they purchased the loans which specify that the 

loans meet certain standards. As conservator, I would expect these 

banks and mortgage insurance companies to honor their contracts 

and repurchase any loans that do not meet the standards. 

Q.10. Do you pledge to resist Administration efforts to use your 

role as the conservator and regulator of Fannie Mae and Freddie 

Mac to force the two companies to participate in a dramatic write 

down program that would subject taxpayers to tremendous losses? 

A.10. The Federal Housing Finance Agency is an independent 

agency of Government. I am the head of an independent agency of 

State government now, and I understand how important that independence is and will be, if I am confirmed. While there will be 

many varying interests before the agency, I will consider any proposal first and foremost from the perspective of conservator, with 

an eye to protecting taxpayers. I understand that FHFA has publicly stated that the idea of principal reduction is under review. I 

have no further knowledge of the topic than what I have read in 

press accounts. 

Q.11. Currently, Fannie Mae and Freddie Mac are owned by the 

taxpayers. Last month Fannie Mae and Freddie Mac posted additional losses, increasing the amount they have taken from the U.S. 

Treasury to $153 billion. Thanks to a dramatic announcement by 

the Treasury Department, in what some have called the Christmas 

Eve massacre, the two failed mortgage giants can draw an unlimited amount of taxpayer dollars from the U.S. Treasury in order to 

cover losses they suffer. The two companies have been delisted 

from the New York Stock Exchange. Unfortunately, the real price 

tag of resolving these two companies has yet to be presented honestly to the taxpayer. Do you support putting Fannie Mae and 

Freddie Mac on budget where they belong? 

A.11. Decisions about what should be on or off the Federal budget 

are made by Congress and the Administration. If confirmed, it 

would not be my role to make these budgetary determinations. 

Q.12. The Treasury Department has repeatedly kicked the can 

down the road when it comes to reform of Fannie Mae and Freddie 

Mac. On June 18, 2009, at a Senate Banking Committee hearing 

on the Administration’s proposal to modernize the financial regulatory system, United States Treasury Secretary Timothy Geithner 
44 

agreed with me that ‘‘Fannie and Freddie were a core part of what 

went wrong in our system,’’ and that Congress and the Administration are facing ‘‘a challenge for exit, what the future should be. We 

have to fundamentally rethink what the appropriate role of the 

Government is in the future.’’ 

Yet, the Administration didn’t include Fannie and Freddie at all 

when it announced a blue print to reform the financial regulatory 

system. Despite the Administration’s promises to submit a reform 

proposal to the Congress along with the President’s budget earlier 

this year, they now promise a plan next year. According to Inside 

the GSEs, ‘‘we’ve been holding meetings,’’ said a Treasury senior 

policy advisor, ‘‘and more are expected.’’ 

If confirmed, as the conservator of these two companies, what do 

you see as your role in determining an exit strategy for the taxpayers? Will you commit to developing a plan for this Committee 

to review that will end the conservatorship of both Fannie and 

Freddie? 

A.12. In preparing for this nomination, I have had occasion to review various proposals and options to restructure the GSEs and the 

housing finance system. I am also aware that the Administration 

is preparing a proposal for Congress’s consideration in January. If 

confirmed, I look forward to working with my colleagues at FHFA 

to advise Congress about the costs and benefits on any proposals 

that would be brought before you. As Director of FHFA, if confirmed, I would provide you with factual information and data, and 

I would hope that FHFA would serve as a trusted adviser as you 

deliberate on the future of the housing finance system. 

Q.13. The 2009 FHFA annual report, issued in May 2010, said: 

The condition and performance of 6 of the 12 FHLBanks 

are less than adequate. At these FHLBanks, the principal 

supervisory issue is private-label mortgage-backed securities (MBS) investments. Half the FHLBanks incurred credit-related impairment charges of more than $200 million 

on private label MBS in 2009. Four FHLBanks have negative accumulated other comprehensive income, mostly reflecting noncredit impairment on private-label MBS, in excess of their retained earnings, and this excess is large at 

two FHLBanks, Seattle and Boston. 

At the Seattle FHLBank, this condition has led me to use 

my discretionary authority to deem that FHLBank ‘‘undercapitalized’’ despite holding capital in excess of required 

regulatory minimums. During 2009, the FHLBanks collectively made substantial progress in improving the rigor 

and consistency of their analytics in determining the valuation of their private-label MBS. 

I believe this issue is of the upmost importance because of the 

Dodd-Frank bill. In Dodd-Frank legislative language prohibited institutions from lending to any unaffiliated company an amount 

that exceeds 25 percent of the capital stock and surplus of the lending institution. Originally, the Senate version applied this rule to 

the Federal Home Loan Banks. At the time this seemed to be appropriate because the FHFA already has the authority to institute 
45 

concentration limits on the institutions which it regulates. But, 

frankly, that increases the pressure on you at the FHFA to get this 

issue right. 

As you may be aware, at one point during the financial crisis, the 

Federal Home Loan Bank of San Francisco had 62 percent of its 

advances (loans) to JPMorgan, Citi, and Wachovia. 

Do you think that the Federal home loan banks should have a 

concentration limit on loans to one borrower? 

A.13. As a banking regulator, the issue of concentrations of all 

kinds is important to me. If confirmed, I intend to address this 

question with FHFA staff as one of a number of supervisory issues 

that should be considered as part of a dialogue regarding how best 

to strengthen the system. 

Q.14. What is the maximum amount you think a Federal home 

loan bank should lend to one borrower? 

A.14. If confirmed, I will review this issue with FHFA staff and revise the current policy, if appropriate. 

Q.15. Do you believe that the FHFA should have a policy on this? 

A.15. I do. 

Q.16. What strategic role do you envision for the FHLB System in 

the future? 

A.16. I believe that the Federal Home Loan Bank System can be 

an important source of funding and support for community banks. 

To that end, I support Acting Director DeMarco’s call for the system to return to its core mission and traditional methods of operation. 

Q.17. How should the role of the FHLBs be addressed in the upcoming reform of the U.S. housing finance system? 

A.17. This issue will, of course, be for Congress to decide. If confirmed, I look forward to working with Congress as it considers proposals to deal with this very important matter. 

Q.18. Regarding the Federal Home Loan banks, should they be 

consolidated? Why, or why not? 

A.18. I am aware that FHFA has recently issued a proposed rule 

on this topic, to permit the merger of Federal Home Loan Banks, 

but I do not have any personal, settled views on the subject. 

Q.19. Given that some banks have encountered serious financial 

trouble before and during the crisis, does the Nation need 12 Federal home loan banks? Why, or why not? 

A.19. While I personally prefer a diverse and geographically distributed system—a view that is shared by the community bankers 

I talk to—the number of home loan banks will be determined by 

the quality of their operations and, ultimately, by Congress. 

Q.20. Would the FHLB system be collectively stronger if there 

were fewer FHLBs than currently exist? Why, or why not? 

A.20. If confirmed, I would address the issue as part of FHFA’s supervisory activities with regard to the Federal Home Loan Banks 

system and with Congress, if the system is included in reform legislation. 
46 

Q.21. Should some or all of the Federal Home Loan banks be considered systemically risky? 

A.21. Given the interdependence of the member banks of the Federal Home Loan Bank System and their relationship to community 

banks, I believe that the Federal Home Loan Banks are very important, but not necessarily systemically risky. 

Q.22. Freddie Mac has recently announced two fees without giving 

any explanation as to where the money is going. Since the company 

is being kept alive through the forced generosity of the taxpayer, 

taxpayers deserve to know what those fees are and how they are 

being used. Are they being put in a reserve fund to pay future 

losses or is it for something else? 

A.22. At this time, I am not familiar with the operational aspects 

of Freddie Mac’s accounting and how income generated by fees is 

recorded and retained. 

Q.23. What is the appropriate role of FHFA in overseeing and commenting on the fees like these and their uses? 

A.23. FHFA’s primary role in overseeing the Enterprises’ fee-setting and collection activities must be to ensure that the loan-level 

charges are adequate to cover the future potential losses as well as 

any administrative expenses incurred in guaranteeing the loans so 

that the fees cover the costs of doing business. In other words, 

FHFA, as regulator and conservator, must prevent any underpricing of risk, which would create additional taxpayer losses. 

Q.24. Without further explanation, it is unclear who benefits from 

these fees. By FHFA inaction in this area, the fees are driving the 

market to FHA which, despite some limited Congressional action to 

allow for increased premiums, is still a ticking time bomb. It is the 

Banking Committee’s responsibility to make sure that there isn’t a 

huge taxpayer bailout of yet another housing entity. Both the FHA 

and GSEs are completely backed by the U.S. taxpayer and we must 

understand how the pricing used by one company drives taxpayer 

exposure to another company or agency. 

As part of this hearing record will you provide this Committee 

with all the supporting documents necessary to understand these 

new fees, and how they are being used by the two companies? 

A.24. Until confirmed, I am unable to access nonpublic documentation at FHFA’s regulated entities. If confirmed, I would look into 

this situation further and would be happy to meet with you to discuss pricing. 

Q.25. As a State Banking Commissioner, you were in a unique position to see more of what was happening ‘‘on the ground.’’ What 

changes, if any, would you recommend to the mortgage modification programs that have been in place—HAMP and HARP? Clearly, 

the programs, as currently structured, have struggled and have not 

been as effective as the Administration promised they would be. It 

seems that these programs were structured to extend the problem 

and pretend that it would resolve itself over time. 

A.25. It’s not only appropriate, but also critical that the GSEs be 

fully engaged in loss mitigation efforts, including HAMP and nonHAMP modifications in order to minimize their losses under con-
47 

servatorship. I would note that the Treasury Department runs the 

HAMP program. I have heard concerns about the HAMP program 

and about the GSE high-LTV refinance program, HARP. If confirmed, I commit to you that I am open to additional assessment 

of the program guidelines for the GSEs’ implementation of HAMP 

modifications, non-HAMP modifications, and HARP refinances, and 

whether there are changes that would make these programs more 

effective. In addition, I would look forward to hearing your 

thoughts on the subject. 

Q.26. What is your view of the recent Foreclosure Crisis (i.e., 

robosigning, etc.)? North Carolina was a nonjudicial State, do you 

believe we should be looking towards some type of global settlement so that this problem can be resolved? 

A.26. I am concerned about the recent problems in the foreclosure 

process and, from my position as North Carolina Commissioner of 

Banks, have seen the impact both on homeowners and neighborhoods and communities in my State. We must strike a balance to 

ensure that homeowners are provided with every opportunity to 

keep their homes, yet to move foreclosure processing along promptly when necessary in order to protect local neighborhoods from the 

harmful effects of abandoned and vacant properties. I am unaware 

of any details or plans related to a global settlement and therefore 

cannot comment on it at this time. 

Q.27. Some have suggested the creation of an explicit Government 

guarantee for mortgage-backed securities in the event of significant 

losses in the market. Fannie and Freddie, meanwhile, would be 

privatized after a transition period and any securitizers would pay 

premiums to the Government for the MBS guarantee. What are the 

benefits or drawbacks of such an approach? Do you favor such an 

approach? 

A.27. If Congress decides to provide for an explicit Government 

guarantee, I believe that they should consider the costs of such a 

guarantee and who will bear those costs; any guarantee must be 

appropriately priced to compensate for risk, to cover potential 

losses. 

Q.28. How would such a MBS-guarantee-like system have fared in 

the financial crisis? 

A.28. Given that a number of other facets of the system would likely differ if the Enterprises were set up to provide an explicit Federal guarantee, I cannot speculate how such a system would have 

fared. 

Q.29. Would the cost of a MBS-guarantee-like system to taxpayers 

have been higher or lower than the estimated cost of the conservatorship of Fannie and Freddie? 

A.29. As North Carolina Commissioner of Banking, I think that it 

was clear that risk was substantially underpriced during the period 

leading up to the crisis, for both nonguaranteed and guaranteed 

loans alike. That said, I do not think that this type of cost analysis 

would be simple to perform, given the numerous external factors 

that would need to be considered. 
48 

Q.30. Should the Government have any significant role in the 

mortgage market? Please describe the role you believe the Government should play in the mortgage market. 

A.30. I think that we can all agree that there have been advantages to the Government role in the housing market, based on a 

system established during the Great Depression, including the 

widespread availability of an affordable 30-year mortgage product 

with the ability to prepay. Going forward, there are certainly segments of the larger market where the Government can make a difference, for example supporting multifamily rental housing and 

first time homebuyers. Of course, the ultimate decisions regarding 

the role of the Federal Government in housing finance will be up 

to you in Congress. If confirmed, I am committed to assisting you 

in that important work. 

Q.31. Property Assessed Clean Energy loans have garnered a lot 

of attention recently. PACE loans encourage home-energy improvements through special property-tax assessments for homeowners 

that are senior to existing mortgage debt. This summer the FHFA’s 

Acting Director Edward J. DeMarco had this to say: 

In keeping with our safety and soundness obligations, the 

Federal Housing Finance Agency will defend vigorously its 

actions that aim to protect taxpayers, lenders, Fannie Mae 

and Freddie Mac. Homeowners should not be placed at 

risk by programs that alter lien priorities and fail to operate with sound underwriting guidelines and consumer protections. Mortgage holders should not be forced to absorb 

new credit risks after they have already purchased or 

guaranteed a mortgage. 

Do you agree with Mr. DeMarco? 

Would you continue to direct Fannie and Freddie to avoid participating in the PACE program, or would you reverse the FHFA’s position on this issue? What affect would PACE loans have on the 

ability for borrowers to get second liens on primary residences in 

general? 

A.31. I am familiar with the general direction of FHFA’s view on 

PACE and its potential affect on first lien mortgages, but I have 

not studied the issue closely. If confirmed as Director, I would consult with the agency experts in this area and review their analysis 

of the situation. The protection of the priority of liens with respect 

to loans financed or guaranteed by the GSEs is critical to conservatorship. However, I understand the FHFA is currently a party 

to litigation with respect to PACE loans. Accordingly, should I be 

confirmed, I may well be a named party in such litigation. This 

being the case I believe that any further comment on the subject 

would be inappropriate at this time. 
49 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter Submitted by the Conference of State Bank Supervisors 
50 

Letter Submitted by the Mortgage Bankers Association 
51 

Letter Submitted by the National Association of Realtors 
52 

Letter Submitted by the Independent Community Bankers of America 
53 

Letter Submitted by the National Association of Home Builders