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35–404 PDF 2007

LEGISLATIVE PROPOSALS ON GSE REFORM

HEARING

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS,

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 12, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–12

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MARSHA BLACKBURN, Tennessee 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

DEBORAH PRYCE, Ohio 

RICK RENZI, Arizona 

RICHARD H. BAKER, Louisiana 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SHELLEY MOORE CAPITO, West Virginia 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

BLACKBURN, MARSHA, Tennessee 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

SCOTT GARRETT, New Jersey 

JIM GERLACH, Pennsylvania 

JEB HENSARLING, Texas 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

(V)

C O N T E N T S 

Page 

Hearing held on: 

March 12, 2007 ................................................................................................. 1

Appendix: 

March 12, 2007 ................................................................................................. 43

WITNESSES 

MONDAY, MARCH 12, 2007

Connelly, Arthur R., Chairman & CEO, South Shore Savings Bank, on behalf 

of America’s Community Bankers ...................................................................... 10

Menzies, Michael, President/Chief Executive Officer, Easton Bank and Trust 

Company, on behalf of the Independent Community Bankers of America ..... 11

Petrou, Karen Shaw, Managing Partner, Federal Financial Analysts, Inc. ....... 13

Price, John R., President and Chief Executive Officer, Federal Home Loan 

Bank of Pittsburgh, on behalf of The Council of Federal Home Loan Banks . 4

Robbins, John M., CMB, Chairman, Mortgage Bankers Association .................. 9

Stern, Scott, Chief Executive Officer, Lenders One, Chairman, National Alliance of Independent Mortgage Bankers ............................................................. 15

Stevens, Thomas M., 2007 Immediate Past President, National Association 

of Realtors ............................................................................................................. 7

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 44

Kanjorski, Hon. Paul E. ................................................................................... 46

Connelly, Arthur R. .......................................................................................... 48

Menzies, Michael .............................................................................................. 57

Petrou, Karen Shaw ......................................................................................... 69

Price, John R. .................................................................................................... 76

Robbins, John M. .............................................................................................. 93

Stevens, Thomas M. ......................................................................................... 115

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorksi, Hon. Paul E.: 

Statement of the American Bankers Association .......................................... 125

Statement of the Asian Real Estate Association of America ........................ 131

Statement of the National Association of Federal Credit Unions ................ 134

Statement of the National League of Cities ................................................... 137

Statement of the Pennsylvania Bankers Association .................................... 139

(1)

LEGISLATIVE PROPOSALS ON GSE REFORM 

Monday, March 12, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:03 p.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Present: Representatives Kanjorski, Moore of Kansas, Lynch, 

Klein, Perlmutter, Murphy, Donnelly; Renzi, Baker, and Garrett. 

Also present: Representative Maloney. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. 

We have opening statements, and I will take the opportunity to 

put my opening statement in the record. We will have two, and 

then if there are any additional statements, we will have them. 

We meet this afternoon to examine, once again, how best to regulate the housing government-sponsored enterprises, or GSEs. The 

debate on GSEs regulatory reform began 7 years ago this month, 

in 2000, when we held a hearing on H.R. 3703, the Housing Finance Regulatory Improvement Act. In every session of Congress 

since then, the House has had at least one regulatory reform bill 

under consideration. The Financial Services Committee has also 

held dozens of hearings on these matters over the years, and we 

have heard from scores of witnesses. 

These hearings, as well as external events, like the financial reporting problems at the GSEs, have led us to develop a growing 

consensus on GSE regulatory reform. 

In the last Congress, we considered H.R. 1461, the Federal Housing Finance Reform Act, and it was approved by a vote of 330 to 

91. Because this bill did not become law, we are returning to these 

important matters today. 

The housing GSEs play vitally important roles in our Nation’s 

housing finance system. Fannie Mae and Freddie Mac presently 

guarantee about $3 trillion in mortgage-backed securities. The Federal Home Loan Banks also have more than 8,100 members, possess in excess of $1 trillion in assets, and hold about $100 billion 

in mortgage loans. 

As we have long said, we need to have strong, independent, and 

world class GSE regulation to oversee these sizeable institutions. 

2

Such a regulatory system will promote confidence in the GSEs, protect a continued viability of our capital markets, ensure taxpayers 

against systemic risk, and expand housing opportunities. An appropriate regulatory system, like the bill we passed in the 109th Congress, should adhere to several key principles. 

For example, the regulator must have a funding stream, separate 

and apart from the annual appropriations process. In order to be 

credible and effective, the regulator must additionally have genuine 

independence from the political system. Such independence must 

consist of complete autonomy from the enterprises, include sufficient protection from outside special interests, and provide for substantial insulation from political interference. 

A strong regulator must further have robust supervisory and enforcement powers. In this regard, many have suggested that we 

should model GSEs safety and soundness regulation on that of 

other financial institutions. I agree with this sensible concept. 

In fact, the general goal of our longstanding regulatory reform 

debates has been to make GSE supervision more bank-like. Any 

safety and soundness regulator for the housing GSEs needs to have 

enforcement powers on par with other Federal banking regulators. 

As we proceed in the coming weeks, I also hope that we will continue to remember why we created these public/private entities. We 

created GSEs to help make credit available to finance home purchases, because the private market was not effectively meeting 

credit needs. 

Beyond ensuring that the GSEs can continue to fulfill their missions, we must maintain a public voice on their boards. Public participation on these boards helps to focus the GSEs on their missions. Beyond working to improve GSE regulatory oversight, we 

should also look at the upcoming legislative debates as an opportunity to update the statutory mission of the Federal Home Loan 

Bank system, and to reflect what it actually does now. 

In 1999, I worked with then-Chairman Baker, to allow the Federal Home Loan Banks to provide liquidity to community financial 

institutions for the purposes of serving small farms, small businesses, and small agri-business customers. In its bill in the last 

Congress, the Senate Banking Committee had language that would 

have explicitly added such economic development activities to the 

mission of the Federal Home Loan Banks. This idea has merit, and 

we ought to consider it in this chamber. 

In sum, in developing any enhanced GSE regulatory system, we 

should perform deliberate surgery. We should abstain from considering radical proposals that would undermine their charters. We 

should also take appropriate steps to improve their mission and 

performance, in addition to providing for strong, independent, and 

world-class GSEs. 

And now, Mr. Renzi. 

Mr. RENZI. Thank you, Mr. Chairman. Thank you, witnesses, for 

coming all the way today, and members, for joining us. I am filling 

in for Ranking Member Pryce this afternoon, who could not be 

here, as we move forward with the examination of H.R. 1427, 

which was introduced by Chairman Frank, along with Congressmen Baker, Miller, and Watt last Friday. 

3

As you know, the House Financial Services Committee and this 

subcommittee spent countless hours studying the issue of GSE reform over the years, and the House passed comprehensive GSE legislation in the last Congress, but the bill was not taken up by the 

Senate. 

This hearing is the first of two hearings on this bill scheduled 

for this week, and Chairman Frank has expressed a willingness to 

move quickly on this legislation. Therefore, I am eager to hear from 

many of my colleagues on our panel today on their opinions of this 

new bill, most notably the changes between last year’s piece of legislation and this year’s proposed new legislation. 

I believe there is certainly a need for a regulator over Fannie 

Mae, Freddie Mac, and the Federal Home Loan Bank, to supervise 

both the safety and the soundness of the mission compliance of the 

GSEs. As we move forward, we must be careful not to negatively 

impact the housing market, and I really look forward to hearing 

the substance of your arguments, in particular, on that issue. 

The bill we are discussing today is different from last year’s proposal in many ways, most notably that the affordable housing fund 

that would be established would be funded by dedicating hundreds 

of millions of dollars for the construction of affordable housing. 

This fund would be established by using a formula based on portfolios of Fannie Mae and Freddie Mac, rather than profits of 

Fannie Mae and Freddie Mac. 

Additionally, the bill would change the structure of the regulatory board to eliminate independent board members, and would 

also allow regulators to increase minimum capital standards if unsafe or unsound conditions exist. I look forward to the opinions of 

the witnesses, and to my colleagues today, and I thank you, Mr. 

Chairman, for calling the hearing. 

Chairman KANJORSKI. Mr. Lynch, do you have an opening statement? 

Mr. LYNCH. Mr. Chairman, in the interest of time, I have a written statement that I ask unanimous consent to submit for the 

record. 

The only thing I would like to do at this time is to thank the 

panelists for their attendance, and for working with us, and helping the committee do its work. 

We went down this road last year, with H.R. 1461, and I think 

we had not unanimity, but certainly consensus, about the better 

parts of that legislation. I am interested, as Mr. Renzi pointed out, 

in any differences between what we did last year, and some of the 

changes that might be warranted, especially in light of the problems that we are seeing in the subprime market lately. 

And so, I will reserve my time for questions. Thank you, Mr. 

Chairman. I yield back. 

Chairman KANJORSKI. Without objection, all members’ opening 

statements will be made a part of the record. No objection. So ordered. 

The gentleman from New Jersey. 

Mr. GARRETT. Again, also, in the interest of time, to move forward, I just got here from New Jersey specifically for this hearing, 

and I look forward to your testimony. 

4

I share Mr. Baker’s concerns, as he has expressed over the years, 

with the performance of the GSEs and their finances and their 

transparencies. I also share the concerns that I expressed last year, 

when we passed the legislation out of this committee, with regard 

to the housing fund, and how that would have a negative impact 

upon the housing marketplace. And in light of the subprime market’s concerns, I am wondering how that will all flesh out, as well, 

whether what we may be doing here today is exacerbating that 

problem. 

As we only saw this bill drop in—as Mr. Renzi indicated—on Friday, I am still in the process of reviewing it, as well. I am pleased 

to see that there may be some additional safeguards, with regard 

to the portfolio limitations, something that Treasury, I know, was 

looking for, and I was, as well. So I will be looking forward to the 

panel’s discussion on those ends, as well. 

But thank you, Mr. Chairman, on the point of the hearing today. 

Chairman KANJORSKI. Thank you. Our panel today consists of 

seven individuals: Mr. John R. Price, president and chief executive 

officer of the Federal Home Loan Bank of Pittsburgh; Mr. Thomas 

M. Stevens, immediate past president of the National Association 

of Realtors; Mr. John M. Robbins, chairman of the Mortgage Bankers Association; Mr. Arthur R. Connelly, chairman, South Shores 

Savings Bank; Mr. Michael Menzies, president and chief executive 

officer of Easton Bank and Trust Company; Ms. Karen Shaw 

Petrou, managing partner, Federal Financial Analysts, Incorporated; and Mr. Scott Stern, chief executive officer, Lenders One, 

and chairman, National Alliance of Independent Mortgage Bankers. 

Oh, I’m sorry. Mr. Perlmutter, do you have an opening statement? 

Mr. PERLMUTTER. Thank you, Mr. Chairman. When you’re down 

here about four levels, it’s hard to see. I’m not the biggest guy in 

the room, either. 

Chairman KANJORSKI. It takes a little while, but you will get up 

here. 

[Laughter] 

Mr. PERLMUTTER. No, I just appreciate the panel’s being here. 

I’m sorry we didn’t have more of our colleagues here to listen to 

this testimony. I am a freshman, so I am just here to listen and 

learn. I have had experience with Fannie Mae and Freddie Mac 

when I was in the private sector, and I am just interested in your 

testimony today. Thank you. 

Chairman KANJORSKI. Well, thank you. Mr. Price. 

STATEMENT OF JOHN R. PRICE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FEDERAL HOME LOAN BANK OF PITTSBURGH, ON BEHALF OF THE COUNCIL OF FEDERAL HOME 

LOAN BANKS 

Mr. PRICE. Thank you. Chairman Kanjorski, Mr. Renzi, and 

other subcommittee members, I am John R. Price, president and 

CEO of the Federal Home Loan Bank of Pittsburgh, and I am appearing today on behalf of the Council of Federal Home Loan 

Banks. 

5

One of the 12 Home Loan Banks, Pittsburgh helps 334 member 

financial institutions meet the housing and community and economic development credit needs throughout Pennsylvania, Delaware, and West Virginia, just as our 11 sisters do, providing services to 8,100 member banks and financial institutions across the 

country. At year end last year, we had assets of $77 billion at the Pitts- burgh bank, and the system had, as the chairman mentioned, $1 

trillion, on a consolidated basis, in assets. 

We are cooperatives. We are not a listed company. And as cooperatives, we are active partners with our members, as they serve 

individual consumers, affordable housing providers, homebuilders, 

small businesses, and local governments around their markets. 

Some of the results of this partnership include: one, helping a 

first-time low-income home buyer achieve ownership through downpayment or closing cost financing, which we call ‘‘first front door’’; 

two, assisting thousands of families through the affordable housing 

program—more on that later; three, providing thousands of jobs at 

hundreds of small businesses through our banking on business program; and four, helping communities meet pressing infrastructure 

needs, such as water treatment repairs, through our community 

lending program. 

As you approach the legislation here today, it is important to ask 

why the Home Loan Banks are so important to the Nation’s economy, and why it is so important to ensure that the new regulatory 

structure enable, and not impede, our mission achievement. 

Member institutions use the Home Loan Banks’ loans—we call 

them advances—to meet the housing community and economic development lending needs in their local markets. Home Loan Bank 

advances are, in fact, the only capital market access for many 

Home Loan Bank members. 

The Home Loan Banks’ mortgage purchase programs also provide members, particularly smaller-sized institutions, a desirable 

secondary market alternative, and are a very important part of our 

mission to provide liquidity. These programs have allowed many of 

our smaller members to offer 30-year fixed rate mortgage products 

for the first time. 

The Home Loan Banks also represent the single largest private 

sector source of grants supporting low-income housing. Home Loan 

Bank members utilize the AHP, the affordable housing program, to 

help low-income families obtain housing, and have been awarded 

over $2.5 billion to create more than half-a-million—520,000—affordable housing units since 1990. 

A key strength of this affordable housing program is its flexibility to adapt to differing community needs across the country. 

Unlike some other programs, AHP funds can be used for both housing rehab and new construction, and can be used to augment other 

sources of funding, by filling in gaps. 

And, Mr. Chairman, knowing of your personal and strong interest in, and your leadership around Home Loan Bank efforts to support community development as integral to our mission, I wanted 

to highlight what the Pittsburgh Bank is doing in that regard. 

These brief Pittsburgh examples are reflected in what the other 

Home Loan Banks do in their geographies. 

6

Banking on Business, or BOB, as we call it, helps eligible small 

businesses with start-up and expansion costs. It is financing—this 

is a slice of financing that really enables a small business to be 

creditworthy for regular banking. Since 2000, more than $27.5 million in BOB funding in our Pittsburgh geography has created or retained over 3,800 jobs. 

Just simple examples of the businesses include: the Grace Dental 

Practice in Cabin Creek, West Virginia; Nazar Diesel, in Jessup, 

Pennsylvania, a diesel engine repair business; and many others 

like them. This year we will be putting into the pot some $7 million 

in new funds for these new small businesses. 

Then we have our community lending program, an $825 million 

revolving loan pool that offers loans to our member financial institutions for lending for community and economic development 

projects. A Pittsburgh member bank, for example, recently used 

CLP, community lending, to help three northeastern Pennsylvania—does that have a certain ring to it—three northeastern 

Pennsylvania municipalities upgrade their public water and sewer 

systems with $8 million in flexible low-interest financing. 

Systemwide, the Home Loan Banks have used these programs to provide over $44 billion, financing over 600,000 housing units, and 

thousands of economic development projects throughout the country. 

In another take on economic and community development, working with the Governor of Pennsylvania and with the Brookings Institution, the Pittsburgh Bank developed something called ‘‘Blueprint Communities Program,’’ in cooperation with multiple partners. It’s a neighborhood revitalization initiative that was launched 

2 years ago. 

The program, at first, involved 22 urban and rural communities 

across Pennsylvania, and is expanding to Delaware next year. In 

West Virginia, the program was announced by Governor Joe 

Manchin this morning. 

Home Loan Bank letters of credit can be used to help members 

improve the credit rating for tax-exempt housing bonds, taxable 

community lending, and public finance transactions. Additionally, 

they can be used by our Home Loan Bank members to secure municipal deposits. 

I would like to mention important tax legislation, which would 

allow Home Loan Bank member banks to assist their municipalities’ non-profit care outfits, and institutions of higher learning. The 

bill adds Home Loan Banks to the list of GSEs that can credit-enhance tax-exempt bonds, without triggering the loss of the bond’s 

tax-exempt character. Introduced last Congress as H.R. 5177 by 

Ways and Means members Phil English and Sander Levin, it has 

not yet been introduced in this Congress. I would like to thank you, 

Mr. Chairman, and many of the committee members, including 

Congresswoman Pryce, Congressman Bachus, and others, for their 

strong support for this legislation, and we look forward to working 

with you this Congress. 

Several current issues command our attention here today. On appointed directors for the Home Loan Banks, the Council had been 

very concerned about the lack of appointments, and is pleased that 

the finance board recently issued an interim final rule establishing 

7

a process for selecting and appointing directors. Currently, the 

boards of each of the 12 Home Loan Banks are actively engaged 

in the process of identifying and nominating candidates for these 

appointive directorships. 

Concerning the pending GSE legislation, the Council believes it 

is important to resolve the uncertainty, the existing legislative uncertainty. You said that we have been 7 years at the table. It would 

be good to get resolution, and we support your efforts to create a 

strong, independent regulator for the housing GSEs. 

We hope this legislation will preserve the mission of the Home 

Loan Banks, our regulators’ independence, the system’s access to 

capital markets, and the system’s unique regional cooperative 

structure. 

We also support the provisions in the legislation that increase 

the size of community financial institutions, and expand the eligible collateral to include economic development assets. 

We are concerned about the inclusion of the Home Loan Banks 

under the deputy director proposed of FHFA for housing mission. 

Combining the housing mission oversight of the home loans and 

Fannie Mae and Freddie Mac does not reflect the unique benefits 

of each, and may inadvertently create homogenized regulation and 

programs. 

Just as Home Loan Bank corporate operations and business models are really different from Fannie Mae and Freddie Mac, since we 

work through our members, the Home Loan Banks’ affordable 

housing and community investment programs are different. 

Mr. Chairman, thank you for the chance to address the subcommittee on these important matters, and I will be delighted to 

take your questions at the appropriate time. 

[The prepared statement of Mr. Price can be found on page 76 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Price. The next 

witness will be Mr. Stevens, the immediate past president of the 

National Association of Realtors. 

Mr. Stevens. 

STATEMENT OF THOMAS M. STEVENS, IMMEDIATE PAST 

PRESIDENT, NATIONAL ASSOCIATION OF REALTORS 

Mr. STEVENS. Chairman Kanjorski, Representative Renzi, and 

members of the subcommittee, thank you for inviting me here 

today to testify on the important issue of government-sponsored enterprises regulatory reform. 

As the 2007 immediate past president of the National Association of Realtors, and former president of Coldwell Banker Stevens 

Realtors, I am here today on behalf of our 1.3 million Realtors who 

work in all fields of commercial and residential real estate. 

Fannie Mae and Freddie Mac are our partners in the real estate 

industry, so keeping them strong and sound is in everyone’s interest. With that in mind, Realtors have six recommendations that we 

believe should be considered in any legislative proposals to reform 

GSE oversight. 

First, the GSEs need a strong regulator and sound corporate governance. Regulatory oversight of Fannie Mae, Freddie Mac, and the 

Federal Home Loan Bank should be transferred to a new regulator 

8

which has the authority to set capital standards, liquidate a financially unstable enterprise, and approve new programs and products. The regulators should also understand and support the GSEs’ 

vital housing finance mission and the role housing plays in supporting our national economy. 

Realtors also support legislative efforts to strengthen the governance of the Federal Home Loan Banks, by raising the number of 

independent directors, adding community and economic development expertise, and allowing appointed independent directors to 

continue their service until a successor is in place. 

Second, the GSEs’ vital housing mission should be preserved and 

protected. This mission ensures that Fannie Mae and Freddie Mac 

provide capital to the market during downturns, and use their Federal ties to facilitate mortgage finance, and support homeownership 

opportunities. The GSEs’ housing mission is vital to the continued 

success of the housing market. Realtors will oppose legislative proposals which diminish that. 

Third, the GSEs must be able to develop new products and programs that respond to market needs. The standards for approving 

new products and programs should be those contained in the Federal National Mortgage Association Charter Act, and the Federal 

Home Loan Mortgage Corporation Act. We support requiring the 

GSEs to provide notice to the regulator, so that adequate safety, 

soundness, and mission review can be accomplished. 

We oppose requirements that could unduly delay or prevent the 

GSEs from developing new programs and products that support 

their missions. 

Fourth, there should be no overly restrictive bright line test that 

explicitly limits the GSEs’ role in the secondary market, strictly defined. Realtors believe such a test would seriously hinder important 

mission-related consumer outreach activities now supported by the 

GSEs, such as home buyer education. 

Fifth, portfolio limits should be regulated, and not legislated. The 

GSEs’ retained portfolios help support affordable housing programs, and also help provide financing for low-income borrowers. 

For example, Freddie Mac reports that approximately 300 million 

of the mortgages in the retained portfolio qualify under their affordable housing goals. We believe the best way to ensure safety is 

for a strong regulator to limit portfolio risk, and moderate portfolio 

growth, when appropriate. 

Finally, Realtors support increasing the conforming loan limits 

for high-cost areas, and we would like to thank Chairman Frank 

and Representative Miller for their support on this important 

issue, and for including the Miller amendment language in H.R. 

1427. 

While the 2007 national cap of $417,000 exceeds the local median 

for the vast majority of housing markets, it is considerably below 

the local median in a few high-cost metropolitan areas. Regional 

adjustments will help more low- and moderate-income working 

families in high-cost areas qualify for conforming GSE loans. They 

will also expand access to FHA and VA mortgages, since those limits are tied to the conforming ceiling, and give homebuyers access 

to safer mortgages. 

9

Realtors applaud the committee’s current efforts to build a more 

robust GSE regulatory structure. Targeted reform should strengthen our housing financing system. It should not become a reason or 

justification for rewriting the GSEs’ housing mission, or weakening 

the housing finance system. 

Realtors look forward to working with Congress to enact meaningful GSE legislation, and I am happy to answer any questions. 

Thank you. 

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

115 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Stevens. The 

next witness will be Mr. John Robbins, chairman of the Mortgage 

Bankers Association. 

Mr. Robbins. 

STATEMENT OF JOHN M. ROBBINS, CMB, CHAIRMAN, 

MORTGAGE BANKERS ASSOCIATION 

Mr. ROBBINS. Thank you, Chairman Kanjorski, for the opportunity to testify today. 

Fannie Mae and Freddie Mac, the GSEs, are critically important 

to modern mortgage financing, and the MBA supports the role the 

GSEs play in maintaining and improving liquidity and stability in 

the secondary mortgage market. Therefore, MBA has long advocated GSE regulatory reform, to ensure that they are operating in 

a safe and sound manner, engaging only in activities that are consistent with their charter purposes, and are subject to reasonable 

affordable housing goals that do not distort the market. 

My written statement is comprehensive, so I will only touch on 

a few highlights here today. There seems to be general agreement 

on the fundamental tools that the new regulator will need. MBA 

is particularly interested in the powers of the regulator related to 

the review and approval of GSE activities, ongoing and new. 

Today, it is unclear whether certain current GSE activities are 

actually permitted. The new regulator needs sufficient authority to 

solve this problem. MBA has reviewed the recently introduced bill, 

H.R. 1427. We believe that the product approval language heads in 

the right direction to satisfy some of these concerns, and we strongly oppose any effort to weaken it. 

We particularly support the no limitation clause at the end of 

this section on powers to review new and existing products or activities. This is essential authority for a world class financial regulator. 

We appreciate that H.R. 1427 calculates the size of the contribution to the affordable housing fund on the GSEs’ portfolio, rather 

than on net income. This approach would make it more difficult for 

the GSEs to pass the cost of their contribution on to mortgage lenders and consumers. It would also tie a benefit of government sponsorship, the lower capital cost, to the GSEs’ affordable housing contributions. 

Various proposals have been offered to regulate the GSEs’ investment portfolios, and we are pleased with the progress H.R. 1427 

makes in this area. MBA maintains that the GSEs’ portfolios are 

an important part of their ability to help stabilize mortgage markets, and encourage affordable housing. 

10

Because markets are dynamic, the GSEs need flexibility to adjust 

their portfolios to changing conditions and marketplace needs. 

MBA does not believe there is a need to expand the definition of 

high-cost areas under the GSE charters, and we respectfully ask 

the committee to consider the points in our written testimony. 

Jumbo loan borrowers are well served by the private sector, and 

there is no lack of liquidity in the primary or secondary market for 

these borrowers. We note that H.R. 1427 requires the registration 

of Fannie Mae and Freddie Mac stock, but not mortgage-backed securities, and we are supporters of that approach. 

Finally, Congress should strengthen both the secondary mortgage market and the Federal Home Loan Banks, by expressly affirming in H.R. 1427, that the Banks are authorized to securitize 

loans. Thank you, Mr. Chairman, and I look forward to your questions. 

[The prepared statement of Mr. Robbins can be found on page 93 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Robbins. The 

next witness will be Mr. Arthur R. Connelly, chairman of South 

Shore Savings Bank. 

Mr. Connelly. 

STATEMENT OF ARTHUR R. CONNELLY, CHAIRMAN & CEO, 

SOUTH SHORE SAVINGS BANK, ON BEHALF OF AMERICA’S 

COMMUNITY BANKERS 

Mr. CONNELLY. Good afternoon, Chairman Kanjorski, Representative Renzi, and members of the subcommittee. If I might add, I 

would be remiss if I didn’t recognize one of South Boston’s own, 

Congressman Lynch, this week of March 17th. 

My name is Arthur Connelly, and I am chairman and CEO of 

South Shore Bank Corp., MHC. I am also first vice chairman of 

America’s Community Bankers, and I am testifying today on behalf 

of ACB. 

From the outset, I would like to point out that the committee’s 

GSE discussion draft bill is 331 pages, yet only 25 pages pertain 

to the Federal Home Loan Bank system. We believe this illustrates 

the effectiveness of a good system that is running well. 

Regulations of the Federal Home Loan Bank system can be improved within the framework of a single consolidated GSE regulator, but only if adequate safeguards are provided to recognize and 

maintain the unique cooperative characteristics of the system. 

Community banks have a rich history of superior performance in 

lending to minority and low-income borrowers, as well as first-time 

homebuyers. The affordable housing program of the Federal Home 

Loan Banks supports this business with advances and programs. 

These activities would not be possible without access to advances. 

The creation and availability of the Federal Home Loan Bank products, such as advances, are critical to the Federal Home Loan Bank 

system’s ability to evolve and meet the specific needs of our communities. 

We believe that any meaningful reform legislation must create a 

new, independent regulator with the authority to strictly prevent 

Fannie Mae and Freddie Mac from entering the primary market. 

It must also possess the regulatory and supervisory authorities 

11

equivalent to that of the Federal banking regulators, including the 

authority to adjust portfolio holdings and capital requirements for 

safety and soundness. 

The independence of the Federal regulator is also a crucial element. A structure that provides autonomy from the congressional 

appropriation process is essential. Most importantly, the unique cooperative structure of the Federal Home Loan Banks must be preserved. 

The finance board has powers and authorities similar to those of 

the banking regulators in the areas of capital, activities, and supervision. They, too, should be preserved. The success of the Federal 

Home Loan Bank affordable housing programs suggest certain 

characteristics that should be fostered in similar programs that are 

proposed for other GSEs. 

America’s Community Bankers strongly recommends that any 

newly established AHPs draw heavily from the experiences of the 

Federal Home Loan Banks. The design should include private sector lenders, and developers with public and not-for-profit partners, 

both at the proposal stage and in project management. 

We believe that the composition of the boards of each of the Federal Home Loan Banks is a vital mechanism to ensure that the 

governance of the banks is undertaken in an appropriate manner. 

Recently, the finance board passed a rule to address the growing 

number of vacancies on the Federal Home Loan Bank boards in the 

public interest director category. The rule called for Federal Home 

Loan Banks to provide two candidates for each public interest director vacancy on the board. 

It is our preference that the boards be populated through an election, rather than an appointment process. There is no regulator 

who knows the strengths and weaknesses of the boards better than 

the Banks themselves. Even the current chairman of the finance 

board agrees, and has stated repeatedly that the regulator should 

not be in the position to appoint the regulated. 

Again, I wish to express my appreciation for the opportunity to 

testify on this important issue. The bright issue of the Federal 

Home Loan Banks and a strong, well-regulated secondary market, 

is a necessity to the day-to-day operations of many of our community banks, including South Shore Savings Bank, and the communities that we serve. 

I look forward to working with you, Mr. Chairman, and the members of the subcommittee, as the legislative process continues. 

Thank you. 

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

48 of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Connelly. Our next witness will be Mr. Michael Menzies, president and chief executive officer of the Easton Bank and Trust Company. 

STATEMENT OF MICHAEL MENZIES, PRESIDENT/CHIEF EXECUTIVE OFFICER, EASTON BANK AND TRUST COMPANY, ON 

BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF 

AMERICA 

Mr. MENZIES. Thank you, Mr. Chairman, Representative Renzi, 

and members of the committee. I am Mike Menzies, president of 

12

Easton Bank and Trust, from downtown Easton Maryland, the 

Goose Capital of the World. 

We are a 14-year-old community bank, with $130 million in assets, and I am pleased, as vice chairman of the Independent Community Bankers of America, to testify on behalf of GSE regulations. 

The GSEs are vital to our Nation’s community banks. Over the 

last 4 years, our bank has originated over $103 million in mortgages sold in the secondary market. We have a $20 million line of 

credit with the Federal Home Loan Bank of Atlanta, and we use 

that for liquidity and asset liability management, match funding of 

small business loans, and to meet the community develop needs of 

our region. 

Though very different in key respects, all three of the GSEs provide community banks with critical access to capital markets. We 

can offer the same home mortgage products to our customers that 

the largest firms offer to theirs. 

ICBA supported the GSE reform legislation that cleared the 

House last year by a strong bipartisan vote. That bill created a 

world class independent regulator, recognized the unique structure 

and mission of the Federal Home Loan Bank system, and protected 

the GSE status of the enterprises. 

We urge Congress in the strongest possible terms to reject proposals that claim to improve GSE regulation, but are actually designed to undermine their mission, or pave the way for privatization. There are a variety of ideas that could disrupt the functioning 

of the GSEs. One is to impose a cap on their growth or size. Another is to severely restrict the types of mortgage assets that could 

be included in their portfolios. 

We strongly oppose the placement of arbitrary caps or limits, 

without regard to the changing needs of our customers over time. 

Statutory limits could compel Fannie Mae and Freddie Mac to give 

preference to larger volume customers, to the disadvantage of community banks and our customers. Therefore, we oppose granting 

the new regulator authority to limit portfolio growth or composition, except where it is truly needed to ensure safety and soundness. 

The regulators should not be permitted to use capital levels to 

change the Nation’s housing policy. Congress should maintain control over the statutory or minimal capital standards for Fannie 

Mae and Freddie Mac, as is currently the case. Otherwise, a new 

regulator could be subject to political pressure to use minimum 

capital authority to reduce the resources available for housing. 

However, the GSE regulator should have the authority, consistent with the current authority of banking regulators, over the 

risk-based capital the GSEs must hold to ensure their safety and 

soundness. The new regulatory agency must be structured and directed to maintain the cooperative nature, operations, and mission 

of the Home Loan Banks. 

These cooperatively owned banks are very different from the 

publicly-traded housing GSEs. Home Loan Bank advances enable 

community banks to make and hold mortgages and other types of 

loans in their own portfolios, loans that generally cannot be 

securitized. 

13

In a complementary fashion, Fannie Mae and Freddie Mac help 

community banks originate mortgages that can be securitized. Congress should not attempt to draw a bright line between primary 

and secondary mortgage market activities. Frankly, the workings 

of the modern mortgage market are not as tidy as some have suggested. 

For example, automated underwriting systems devised by Fannie 

Mae and Freddie Mac have been criticized as straying too close to 

the line between primary and secondary market activities. However, these systems help community banks to quickly and objectively qualify a customer for a mortgage, and determine if that loan 

is saleable. We want to preserve the ability of Fannie Mae and 

Freddie Mac to innovate to meet the changing needs of community 

bankers and our customers. 

In the Gramm-Leach-Bliley Act, Congress allowed the Home 

Loan Bank members that qualify as community financial institutions to use long-term advances for community development. Not 

all the Home Loan Banks have implemented this authority. We 

don’t think Congress envisioned this as a result. 

Therefore, we urge Congress to clarify that, in addition to housing finance, the mission of the Federal Home Loan Banks includes 

this CFI authority. In addition, ICBA strongly supports a provision 

in last year’s housing bill to increase the size of institutions eligible 

for the CFI program to $1 billion in assets. We agree with you, Mr. 

Chairman, that CFI expansion would benefit all. 

Since Congress has now debated significant regulatory reforms to 

the regulatory oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, it’s a good time to look at the oversight of 

another GSE, the farm credit system. This issue is especially important in a year such as this, when Congress is considering renewal of the Farm Bill. 

We expect the farm credit system to attempt to expand into nonfarm lending through this legislation. We commend the leadership 

of this committee for your letter to the leadership of the Agriculture Committee, highlighting this potential expansion into lending under the Financial Services Committee jurisdiction. 

Thanks for the opportunity to share these thoughts with you, 

and the views of our Nation’s community bankers. I would be delighted to answer any questions, should you have them. 

[The prepared statement of Mr. Menzies can be found on page 57 

of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Menzies. The next witness 

will be Ms. Karen Shaw Petrou, managing partner of Federal Financial Analysts, Incorporated. 

STATEMENT OF KAREN SHAW PETROU, MANAGING PARTNER, 

FEDERAL FINANCIAL ANALYSTS, INC. 

Ms. PETROU. Thank you. It is an honor to appear before this subcommittee to discuss the urgent need for GSE reform. I last did so 

in June of 2003, shortly after the problems at Freddie Mac became 

apparent. I said then that those were deep problems that warranted action to reform the Office of Federal Housing Enterprise 

Oversight, or OFHEO, and I worried then that Fannie Mae would 

14

soon follow Freddie Mac, and shows signs of significant internal 

control problems, as well. 

At that time, those were debatable propositions, and of course, 

now, they’re not. This committee has worked very hard, and there 

is clear consensus now on the need for world class and bank-like 

regulation. The challenge, I think now, is not on the overall need 

for the legislation, because that debate has finally ended, but rather, on what constitutes a bank-like world class framework, and 

there is still some debate. 

H.R. 1461, as passed by the House in the last Congress, was a 

significant improvement over current law, with regard to the safety 

and soundness governance of all of the housing GSEs. And H.R. 

1427, as introduced on Friday, is, I think, a still more sound and 

far-reaching piece of legislation. 

If I may, I would like to quickly talk about some of the key provisions in the new bill, H.R. 1427, highlighting how they compare to 

the powers that the banking agencies have. I would like to focus 

quickly on the more controversial issues of capital, new product review, and the portfolio, but also mention several other critical prudential provisions—that were in—H.R. 1461 and are now in H.R. 

1427. You all know all too well how things can end up on the cutting room floor in the middle of the night, and some of these provisions that aren’t drawing as much attention are truly critical to a 

bank-like, world class regulation. So I would like also, quickly, to 

mention them. 

On capital, it is, I think, very important to provide, as the legislation would do, the new regulator with flexibility to set minimum 

and risk-based capital thresholds. We have given that to the banking agencies, because it is critical that capital rules not only reflect 

risk, but also anticipate it. 

The capital frameworks for Fannie Mae and Freddie Mac were 

set in 1992, and that for the Home Loan Banks in law in 1999. And 

you know all too well the many changes in the markets, now that 

very troublesome problems in subprime, but before that, the 

growth of derivatives, and many other issues that were not anticipated when the statutes went into the depth they do on the capital 

frameworks now in place. 

The regulators should be freed, as the banking agencies are, to 

set capital appropriate to risk. And, indeed, you may wish to consider creating this same incentive for the GSEs that you have for 

the banks, that they not only be adequately capitalized, but also, 

in fact, well capitalized, to create a strong bulwark against any call 

on the taxpayer. 

H.R. 1427 is a significant improvement over the prior approach 

to new product review, because it provides for full prior review by 

the regulator, and public notice and comment of new GSE ventures. 

Congress, when you last looked at this issue—did so in GrammLeach-Bliley in 1999—and you then required the Federal Reserve 

and the Treasury to issue public notice and comment of any significant new ventures for financial holding companies. That is how 

Congress learned of the proposal to permit real estate agency and 

brokerage powers. It is how other interested parties became engaged, and it is the same early warning process that should apply 

15

to the GSEs, especially in light of their far greater market power 

than any single private sector institution would have. 

H.R. 1427 has a compromise approach on the portfolio that gives 

the regulator considerable discretion, as Chairman Bernanke has 

suggested, that this be used to focus on affordable housing. And 

certainly, there is a good deal more that could be done to serve underserved borrowers in a safe and sound way by Fannie Mae and 

Freddie Mac. 

Some have suggested that this portfolio limit is not bank-like, 

that nothing like that applies to the banks. And I would just like 

to mention that, indeed, there are numerous express statutory provisions about what banks may hold, and how much they may hold. 

Draw your attention, for example, to the provisions in GrammLeach-Bliley that dealt with holdings of private equity, and the 

prohibition against banks holding any form of assets related to 

commerce. I know those are the major three controversies. But if 

I may, I would like just quickly to mention two other critical provisions in H.R. 1427. 

One is in section 102, which details the prudential standards, 

rules, orders, or guidance that the new regulator must issue. This 

is stronger than the Senate bill, which made it discretionary. It is 

important to keep not only the firm directive to the regulator to 

issue these standards, but the full list that you have in the legislation, to get a rule book in place as quickly as possible for all of the 

GSEs that approximates the standards in place for insured depositories and their holding companies. 

Finally, the House bill also has extensive provisions related to 

GSE corporate governance, expressly governing Fannie Mae and 

Freddie Mac. These, too, should be retained because we know from 

sad experience the significant problems at these enterprises, and 

the lack of market discipline that applies to them. 

Any questions about the statutory authority of the regulator to 

ensure effective corporate governance at the GSEs should be retained. 

I very much appreciate the opportunity to appear here today, and 

I would be happy to answer any questions you may have. 

[The prepared statement of Ms. Petrou can be found on page 69 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Ms. Petrou. Our 

final witness, Mr. Scott Stern, chief executive officer, Lenders One, 

and chairman, National Alliance of Independent Mortgage Bankers. I will just add I didn’t believe you were old enough to hold that 

role. 

[Laughter] 

Chairman KANJORSKI. It has been proven to me that you clearly 

are a Wharton man. Anybody who is a Wharton man certainly is 

qualified. 

STATEMENT OF SCOTT STERN, CHIEF EXECUTIVE OFFICER, 

LENDERS ONE, CHAIRMAN, NATIONAL ALLIANCE OF INDEPENDENT MORTGAGE BANKERS 

Mr. STERN. Thank you. Chairman Kanjorski, Representative 

Renzi, and members of the subcommittee, my name is Scott Stern, 

and I am chief executive officer of Lenders One of St. Louis, MisVerDate 0ct 09 2002 17:32 Jun 14, 2007 Jkt 035404 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\35404.TXT HFIN PsN: TERRIE
16

souri, and chair of the National Alliance of Independent Mortgage 

Bankers. We appreciate the opportunity to present our views on 

the impact of proposed legislation on the GSEs. 

Since this is the first time our group has testified in front of this 

committee, let me say a quick word about Lenders One. We are the 

Nation’s largest mortgage cooperative. We play a unique role in the 

mortgage industry. Much like the agricultural co-ops that enable 

family farms to survive in an era of large-scale agri-business, Lenders One permits locally owned mortgage bankers to compete in a 

rapidly changing marketplace. 

We are owned by 100 shareholder companies who collectively originate $40 billion annually in mortgages, including low income 

and minority lending. We have originated almost 2 million home 

loans since 2000. The mission of Lenders One and AIMB very informs our analysis of GSE legislation. 

Like everyone at this table, we support a strong regulator with 

appropriate powers to regulate the safety and soundness and mission-related activities of the GSEs. Our written testimony outlines 

our more specific positions on issues such as portfolio, capital, loan 

limits, and program approval. So we will focus today on what we 

believe to be the most crucial aspect of the discussion. 

If anyone needed to be reminded why Congress created the 

GSEs, you need look no further than the front page of the Wall 

Street Journal on most any day of the past 4 weeks, or look at 

CNBC, where it seems that every 20 minutes or so they run a segment called ‘‘Mortgage Meltdown,’’ a term for which you will find 

41,000 hits on Google this afternoon. Or, at this front page headline in yesterday’s New York Times, ‘‘Mortgage Crisis Looms.’’ 

I don’t personally believe we are approaching a broader mortgage 

crisis, but there is clearly a growing perception that we could be 

headed in that direction. But my confidence in the Nation’s housing 

finance system remains high. Tomorrow, I will go back to St. Louis, 

and I and my member companies are going to keep making mortgage loans. Why am I so confident at this time of market uncertainty? 

Because even at this time of insecurity about the mortgage markets, I know with complete and utter certainty that if I make a 

good loan, I will have a buyer: Fannie Mae and Freddie Mac. I 

can’t make a loan unless I can sell that loan. 

You see, that’s the way the mortgage business works. And even 

though, in some segments of the market, investors are disappearing faster than an ice cube on a hot summer day in D.C., 

I know Fannie Mae and Freddie Mac are going to be there to buy 

my loan. That’s why they were created, and that’s the brilliance of 

the system set up by your predecessors almost 80 years ago, at the 

establishment of Fannie Mae, and the concept of a governmentsponsored secondary market. 

While other investors can and do walk away, Fannie Mae has to 

be there. Simply put, Fannie Mae and Freddie Mac are the firewall 

that safeguards the Nation’s housing finance system, and its borrowers, from market shocks and excessive volatility, by providing 

confidence in mortgage capital markets. 

I will frankly tell you that the GSEs are not our biggest business 

partner for our companies. Really, not even close. But they are, 

17

nonetheless, crucial to me and my members in the housing finance 

system. Our confidence that the GSEs will be there at a size and 

strength that enables them to keep the market stable, even in volatile conditions, is what makes the system work. To us, keeping the 

GSEs at a vigorous scale and strength to safeguard that confidence 

is what the debate over a GSE bill is all about. 

We support the general approach of H.R. 1427 introduced last 

week by Chairman Frank. The bill would create the strong regulator we have all supported. However, we do believe the bill requires certain clarifications to ensure that the new regulator’s 

power and authority is never used to diminish the one sector of the 

housing finance system best shielded from market uncertainty. You 

will find our detailed positions in our written testimony. 

Mr. Chairman, we appreciate your leadership on this matter, and 

we are grateful for the opportunity to share our views. 

Chairman KANJORSKI. Thank you very much, Mr. Stern. Without 

objection, the written statements of all the witnesses will be placed 

in the record in their full text. 

And I have one other unanimous consent to insert into the hearing record statements from: The National Association of Federal 

Credit Unions; The National League of Cities; The American Bankers Association; The Pennsylvania Bankers Association; and The 

Asian Real Estate Association of America. Without objection, they 

will be inserted in full in the record. 

I think it would be fair to comment that the seven witnesses, so 

far, liked the product as introduced on Friday by Mr. Frank. Is 

that a reasonable statement? And we just have a few disagreements, or twitches that should be made or considered? 

I want to address myself to Mr. Connelly. I am one of the individuals who has been struggling over the appointment of members 

to the board, both to the Federal Home Loan Bank and to Freddie 

Mac and Fannie Mae, and your observation that members of the 

board should be elected, as opposed to being appointed, interests 

me. 

I totally agree with that concept, except that the peculiarity of 

these organizations, having an outside mission created by the Congress, I feel that there is less likelihood of an incestuous relationship existing if the outside appointees are made, in fact, by the normal members of the regulatory board. They have interests slightly 

different, in terms of mission, and whether or not, over a period of 

time, particularly the Federal Home Loan Bank system could be 

lost in its mission without any way of the Congress or anyone else 

correcting the mission, or bringing about or even finding out that 

the change of the mission has occurred. 

Why do you find it so difficult to have either the nominating 

process that is suggested in the bill, or the old process that the regulator make the appointment of the outside directors? 

Mr. CONNELLY. Well, Mr. Chairman, first I think that we’re in 

a new environment today, coming under SEC registration. It is important that the Federal Home Loan Banks should have the ability 

to pick the brightest and the best, and most representative of the 

constituencies, the skill set that are required. 

Chairman KANJORSKI. Who is the constituency, though, in your 

mind? 

18

Mr. CONNELLY. Well, there is a mission, you know. The mission 

is to serve the credit needs, and what not. The cooperative nature 

of the system suggests that it is owned by the bank members and 

insurance company members. However, we are very mindful of the 

mission to provide for the credit needs of our communities that we 

serve, as well as the housing mission, the affordable housing program, which we think is a model program. 

And it just—under the current proposal, providing several suggestions, which is essentially what this amounts to, doesn’t necessarily guarantee that we get the most qualified people for the 

board. And it perhaps dilutes the pool for future appointments, because if you don’t happen to be in the first successful round of people who are selected, you may not be willing to stand for consideration the next time around. 

Chairman KANJORSKI. Well, you know, I had a long discussion 

with the present regulator on that very issue not too long ago. 

Sometimes there is a tendency to define the most qualified as either academically most qualified, business success most qualified. 

And of course, the mission involves the involvement with the 

community, with economic development and with housing. And 

very often, the appointments are not necessarily those that would 

be made to private boards, but come from the billing associations, 

the Realtors, and average people in the community, to get input on 

the mission from those types of people. 

On the other hand, the present regulator suggested how nice it 

would be if college presidents, for instance, could be put on the 

board. I don’t want to denigrate my opinion of college presidents, 

but very often I find them captives of the establishment, and the 

very point of the mission is to make sure that these entities don’t 

become captives of the establishment. 

So if you empower the internal board to make the appointment 

of the outside board members, their natural inclination will be to 

add to the board people more like themselves, who are part of the 

establishment. And over a period of time, it seems to me that they 

will naturally gravitate toward not necessarily attending to the 

mission of housing or economic development, but will attend to the 

mission of profit. It’s very tempting. 

Not that I am against profit, but we didn’t establish this as an 

entity for pure profit. Because if it is pure profit, then the private 

sector should run the operation, and we should step out of it. On 

the other hand, I’m a very strong supporter of the cooperative system, of the Federal Home Loan Bank system. 

So my question to you is, even though you disagree with what’s 

in the bill, is it so fundamental a disagreement on your part that 

we should scratch the bill if it’s in there? 

Mr. CONNELLY. No, I think the bill is more important than anything at this point in time. As a member of the board of the Federal Home Loan Bank of Boston, though, I can tell you that we 

have identified the skill sets that are critically necessary to complement the board. 

Somebody, for instance, who is familiar with not necessarily all 

of the public appointees, but someone certainly who is familiar 

with the securities business, somebody who understands the particular nuances of leveraging, of hedging, should be represented 

19

from among those many people that would constitute the public interest directors on the Boston board. 

Chairman KANJORSKI. Why shouldn’t that be an appointment of 

the board, of the regular election process, to get that kind of expertise? 

That point was made to me, to appoint someone who understands derivatives. And quite frankly, my response to that was I 

think the present directors are paid, about $19,000 a year? If you 

could find an expert on derivatives for that price, you should hire 

him and recontract him out, because— 

Mr. CONNELLY. Point well taken, Mr. Chairman. 

Chairman KANJORSKI. My intent in structuring these appointments is to make sure that, regardless of what political party controls the Congress, or what political party controls the White 

House, that over a long period of time the mission remain in the 

public interest for housing and for economic development. 

Mr. CONNELLY. And I think we— 

Chairman KANJORSKI.—including that broad knowledge base into 

the board, sometimes even anti-establishment type individuals, 

may be very helpful. 

Mr. CONNELLY. I couldn’t agree with you more in that respect. 

Chairman KANJORSKI. Very good. Now, the one other question 

that I am also—I am past my 5 minutes. I am verbose. That is the 

pleasure of the Chair. 

The one question that you raised, Mr. Menzies, is something that 

we have not passed over lightly, and that is to try and see whether 

we could eventually consolidate GSEs under one jurisdiction, and 

particularly as they apply to farm credit. 

I guess I have to plead a little ignorance in what you anticipate 

the Agriculture Committee doing, or being requested to do. Are 

they enlarging the loan capacity of farm credit agencies to circumvent the banking system? Is that what your primary thrust is? 

Mr. MENZIES. Mr. Chairman, ‘‘circumvent’’ probably wouldn’t be 

an apt description. However, we believe the farm credit system, 

which is the only retail, direct-to-the-consumer GSE, does, in fact, 

wish to expand its income source, and does, in fact, wish to expand 

its role, if you will, by lending beyond its original mission to just 

support farming. 

And we believe that they would like to go into small business 

and lending into other activities that, currently, the banking industry supports quite nicely. That’s the basic issue. 

Chairman KANJORSKI. What— 

Mr. MENZIES. The question is, do we need the farm credit system 

of this Nation to further expand its retail influence into small businesses and the like? 

Chairman KANJORSKI. So it’s not just who may have jurisdiction 

over these entities here in the Congress that you’re worried about? 

There is a thrust to substantially change and enlarge the mission 

of these entities, is that correct? 

Mr. MENZIES. Yes, sir. That is correct. 

Chairman KANJORSKI. Well, I have the assurances of the chairman of the Agriculture Committee that it is an issue that he is 

aware of. But quite honestly, I tend to sympathize with his position, and that is that we have cut out a lot of issues in the 110th 

20

Congress, and that may just be one issue too far, but that we 

should keep it in view, and try to coordinate something eventually. 

Watch it, and we will have to watch in this committee, and in 

the Congress, that something isn’t in the Agriculture bill that goes 

way beyond anyone’s intentions. 

Mr. MENZIES. If it remains on your radar screen, we will be 

grateful. 

Chairman KANJORSKI. It is. I know how active all of you are in 

the use of the Federal Home Loan Bank system for rural and exurban economic development, and I see a great void in the Federal 

system and in the private sector. 

Financing is much easier in urban areas; as you move out from 

the urban areas, it’s much more difficult. Even our government 

programs are much more difficult to comply with. And it seems to 

me that since the populations have been moving out of cities into 

urban and suburban areas and rural areas, that we develop means 

and mechanism, both in the private sector and in government-sponsored enterprises, to have a uniform standard to meet these needs 

that are less shocking. 

I will give you an example—the rural development program, and 

business loans, and business guarantees. They are great on paper, 

except they really don’t apply in most areas—particularly Pennsylvania, because Pennsylvania is a State of very small communities—but, they are bunched up alongside other communities 

which are really tied into a very large community. 

By virtue of the fact of their structure, they have been barred 

from giving government guarantees, even in communities of 2,000 

or 3,000, if they are considered to be in an urban area, which nobody can quite define to me. They just have a map, and they say, 

‘‘If you fall in the yellow, you’re in an urban area,’’ and yellows 

usually are wherever there are masses of people, including the 

rural and suburban and ex-urban areas around concentrated cities. 

It would just seem to me that what I am trying to do is create 

the availability of community and economic development funds on 

a rather uniform basis with a relative cost that is similar, regardless of the size of the entity, or population of the entity making the 

loan. The reason for this is so that we can get the marketplace to 

really function well, that you don’t have to start sitting down with 

a pencil and a paper, and try to figure out where you have to move 

your business in order to qualify for what type of loan, or what 

type of interest rate, etc. 

But I do want to assure you that we are paying particular attention to the fact that, in an ideal world, if we were starting everything again, all of these financial institutions should be incorporated within the jurisdiction of this committee, so we could handle them more fairly. But if you know anything about the Hill, once 

a designation of jurisdiction is made, it takes extreme seniority and 

a little help from God to change that jurisdiction. But we’re working on it, and we are optimistic. 

Mr. MENZIES. Thank you. Thank you, sir. 

Chairman KANJORSKI. Now that I have exceeded my 5 minutes, 

Mr. Garrett of New Jersey? 

Mr. GARRETT. Thank you, Mr. Chairman. Again, thank you to 

the members of the panel. And as I indicated at the outset, I had 

21

the opportunity, as I guess you have, to try to go through this over 

the weekend. Even after the testimony, I still have some serious 

concerns with the legislation, as it now stands, and hope that we 

do not rush to judgement on it, and move too quickly on the matter. 

I will note, on the positive side, that there are a couple of elements to the bill that I agree with, that we have a much stronger 

capital requirement in the legislation, that I believe also addresses 

the issue, as has been addressed by this panel, of a clear line on 

the primary and secondary mortgage market activities. 

But in regard to the issue discussed here, the portfolio issue, and 

also one of their core functions of the GSEs, my initial feeling is 

that the legislation really doesn’t go far enough in reigning them 

in, and may, in fact, encourage the GSEs to actually expand on 

their portfolios even further. The Federal Reserve indicated that, 

‘‘The GSEs’ portfolios appear to have no material effect on the cost 

or availability of residential mortgages.’’ 

In fact, Chairman Bernanke, in a speech last week, noted, ‘‘Contrary to what would be expected if the GSE portfolios lowered the 

funding cost of mortgages, over the past decade or so the spread 

between yields on 30-year fixed rate mortgages and treasuries of 

similar duration has tended to rise in periods in which the GSEs 

have increased the share of single family residential mortgage held 

in their portfolio, and to fall when the GSE share has fallen.’’ 

He went on to specifically state, ‘‘Due to the GSEs’ support for 

affordable housing,’’ and he answered his own question by saying, 

‘‘At the present time, Fannie and Freddie fail the test.’’ 

So, I believe this bill will unwisely tie the amount that the GSEs 

hold in their own portfolios to what they contribute to low-income 

housing. And I have said this in the several hearings that we held 

on this last year, when we talked about this new function of GSEs, 

as far as what I call a mortgage tax increase, the housing fund, 

that may have a negative impact on the overall housing market, 

as well. 

Basically, as Mr. Stern has said, we have seen rises and declines 

in the housing market. Is this the time that we want to be adding 

yet another tax, overall, which eventually goes down to the consumers? 

So, I will initially just turn to the panel, if you would wish to address either one of those issues, as far as this mortgage tax increase that this bill would include, and the fact that we may be exacerbating the problem of the portfolio size, as well. 

Mr. ROBBINS. Let me comment, if I could. The GSEs’ portfolios 

are needed for liquidity in the marketplace to support it. If we go 

back to 9/11, the meltdown of—the liquidity crisis in 1998, the 

First Gulf War, the market was disrupted by those events, and can 

be disrupted by other cataclysmic events. 

Mr. GARRETT. I appreciate that comment, and actually, Mr. Stern 

was making that same sort of suggestion earlier, in his testimony, 

that as any day you said you open the paper, it goes up and goes 

down, what have you, as far as overall economy in the housing 

market. 

The testimony that we received on this issue in the past when 

that was raised was just contrary, unfortunately, to what you’re 

22

saying and what Mr. Stern was saying. What this testimony and 

the evidence indicates, reports and studies of GSEs says that instead of stepping into the market to pick up where you would hope 

that they would do the good job that they are supposed to by their 

mission, instead what they do, in essence, is to cherry-pick the 

market, and that the private market still has sufficient capacity to 

address it, but the GSEs basically come in as the suitor of the best 

portion of the market, and takes that. And that is what they have 

been holding primarily in their portfolio, even during those downtimes, when we wish that the GSEs were doing the job which was 

the core mission to satisfy the underlying market. 

Mr. ROBBINS. I appreciate what you’re saying, Representative. 

What I was saying is in this particular case, there was a day or 

two immediately following all of those events where there was no 

market, other than Fannie Mae and Freddie Mac. The private market was not there to support—I sold mortgages through those markets. And that’s the kind of events that need the liquidity that we 

are talking about. 

What the MBA proposes is that a world-class regulator— 

Mr. GARRETT. Yes, but again, that goes to what—Chairman 

Greenspan testified on those points, because we addressed the 

exact same points after the fact. 

Mr. ROBBINS. Well, I can tell you, after the First Gulf War, there 

was no market for 2 days following the announcement of the war. 

The mortgage-backed securities market was unavailable, while it 

tried to reprice itself. 

Mr. GARRETT. And GSEs were in during those 2 days, picking up 

all those periods? 

Mr. ROBBINS. That’s correct. 

Mr. GARRETT. And that lasted after the 2-day period? 

Mr. ROBBINS. They posted a price, if memory serves, the afternoon that it was announced, and had a price the following morning. 

But beyond that issue, that’s why we feel that a world-class regulator should make the determination on what that portfolio size 

should be, and what the leverage should be on that. We know that 

outstanding mortgage debt is going to grow, according to Harvard 

University, some $20 trillion over the course of the next 20 years 

or so. 

And so, it is inconsistent today to sit there and think about what 

would be the right number to attach to the GSEs. That’s why a 

strong regulator, world-class regulator, should be there, both as the 

market rises and falls in size, or rises and falls, should be the one 

to make that determination. 

Mr. GARRETT. Okay. I saw a lot of other hands. 

Mr. MENZIES. I would be the very last to question Mr. 

Bernanke’s economic logic on the rise and fall of prices in the secondary market. As a community banker, I do know, however, that 

we need access to that market. And the 5,000-some community 

banks that belong to ICBA are basically small banks. We are little 

banks, and I don’t know what we compose of the total secondary 

market, but it’s not a whole lot; it’s a fairly small percentage of the 

whole. 

So, having access to that market is critical. If you were to theorize that reducing the size of the portfolio, and setting capital limVerDate 0ct 09 2002 17:32 Jun 14, 2007 Jkt 035404 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\35404.TXT HFIN PsN: TERRIE
23

its, and reducing the quantity of loans that Freddie Mac and 

Fannie Mae can guarantee would, in fact, improve market prices, 

that is possible, I guess. 

Mr. GARRETT. Well, no one is suggesting that would reduce the 

amount of loans that they are—would be able to go secure from 

them, but simply that they would no longer be holding the mortgages as they have, but instead would do what their core function 

is, to securitize those loans. 

Right now, one of the other testimonies was a testimony that 

they are only holding around a third of their loan in their—which 

is basically their core function—the secondary market loans. 

By reducing their overall portfolio to just a limitation in that 

area, how would that reduce your ability of liquidating in a market, 

if they were securitizing the rest of the market? 

Mr. MENZIES. Well, yes, if you believe that is the case, then that 

would not hurt community banks. I think our concern is that it 

could hurt community banks if it reduced our access to the market. 

Mr. GARRETT. Yes. Thank you, Mr. Menzies. Mr. Price? Yes, sure. 

Mr. PRICE. Yes. If I could speak briefly to the point? 

Mr. GARRETT. Sure. 

Mr. PRICE. The Home Loan Banks are—and historically have 

been—a source of liquidity. In fact, they were an initiative of Herbert Hoover. And in December of 1931, he proposed both the Home 

Loan Bank Act, and something called the Reconstruction Finance 

Corporation. And on January 22, 1932, both bills were passed on 

the same day, by the Congress. 

The purpose of both, the Home Loan Bank Act and the Reconstruction Finance Corporation, RFC, of which Roosevelt made 

much greater use later, was to provide liquidity to the financial 

system. And the Home Loan Banks were limited at the time—as 

until recently—to the thrifts, whereas RFC made liquidity available to commercial banks, insurance companies, railroads, and 

through the banks for public finance to municipalities, as well. 

So, historically, our mission has been liquidity. And that is what 

we continue to be. We are an accordion. We will close down our balance sheet if members say, ‘‘We don’t need the money,’’ we don’t 

roll over our loans. We will go to the market immediately to fund 

a loan if a community bank comes into us at 3:00 in the afternoon. 

We are in the market through our combined office of finance multiple times every day. 

So, liquidity is our business, and we think that, at least as far 

as the primary market is concerned, that that’s why we are here, 

and that’s why we are a tool of great usefulness to the folks you 

see around the table. 

Mr. GARRETT. Well, would any of you, then, short of having a set 

number—as I think Mr. Menzies and other have stated, that you 

wouldn’t want to have the lack of flexibility by the regulator—

would any of you adopt an approach that Chairman Bernanke has 

suggested to address the issue of the affordable housing end of it, 

which he said—and I sort of alluded to this—he said, ‘‘A straightforward means would be of anchoring the GSE portfolios to a clear, 

public mission would be to require Fannie Mae and Freddie Mac 

to focus their portfolios almost exclusively on holdings and mortVerDate 0ct 09 2002 17:32 Jun 14, 2007 Jkt 035404 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\35404.TXT HFIN PsN: TERRIE
24

gages or mortgage-backed securities that support affordable housing.’’ 

And then he points to your point, ‘‘The evolution of mortgage 

markets since the GSEs’’—since back then—‘‘were created, strongly 

suggests that a concentration on affordable housing products would 

provide the greatest public benefit. Markets for the more highly 

rated assets, including most residential mortgages and the pools of 

the MBSs backed by such mortgages, have become extremely deep 

and liquid. With more than $25 trillion in outstanding instruments, 

these markets are international in scope, and market participants 

include thousands of banking organizations,’’ and so on. 

So, his suggestion is that in the other market that the liquidity 

is much greater. But at that area that you’re talking about, which 

was the original mission, is not so much. So does anybody want to 

comment on Chairman Bernanke’s suggestion, maybe we should 

not put a limit on it, total number on it, but give the regulator 

some direction, as far as what the portfolio should be aimed at? 

Mr. CONNELLY. We support—America’s Community Bankers supports a Federal Home Loan Bank like an affordable housing program that the regulator would have the power to oversee. And I 

think we have seen it work so well with the Federal Home Loan 

Bank system, where the Federal Home Loan Bank’s contribution is 

tied to its profitability, along with its other obligations, and what 

not. And we have—there are so many creative programs that have 

come about as a result to create housing for low and moderate-income people. 

And maybe one of the more spectacular examples would be something like an equity builder program that the Boston bank has created, where it helps people who wouldn’t be able to get into the 

market. It helps them with a portion of the downpayment, and a 

portion of money to help cope with discounted entrance fees, legal 

fees, and what not. 

So, I think the model that is working would be the Federal Home 

Loan Bank model, and we would encourage the committee to look 

at that model. 

Mr. STARK. Representative Garrett, if I could also comment, the 

portfolio, to kind of look at it for what it is, is a source of revenue 

for the GSEs. But they do use that revenue to build the size and 

scale to be relevant, and to provide liquidity to the marketplace. 

The holding of mortgage assets is somewhat of a zero sum game. 

If you take assets away from one entity, such as a GSE, it doesn’t 

disappear; it is reallocated. And in the case of the American housing finance system, it would be reallocated to large-scale American 

financial institutions and global financial institutions. 

The only difference is those financial institutions don’t have a 

charter, or a mission to serve the housing finance system, whereas 

Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system do. To arbitrarily limit the size of their portfolio based on the 

size of their affordable housing mission, or their affordable housing 

loans, limits their revenue that they could make, and it limits the 

service that they can provide to the housing finance system, in general. 

The NAIMB and Lenders One would strongly oppose a policy to 

limit the size of their portfolio to their housing, low-income— 

25

Mr. GARRETT. They could still increase, if they were just earmarked for the affordable housing segment, but I appreciate your 

comment. 

Mr. ROBBINS. Could I add just two more very quick comments to 

this? 

Number one, we have seen the largest mortgage markets in history over the last 5 years—international buyers come into our marketplace and purchase strips of our securities to sizes never seen 

before, but that’s no guarantee that those same investors are going 

to support this market to the size and extent that they have for the 

last 5 years. 

It is incredibly important that the GSEs maintain some flexibility relative to the size of their portfolios if, in fact, an American 

real estate-based security does not become the most popular financial asset to buy in the world. Number two, in many States, $417,000 is affordable housing. 

Mr. GARRETT. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Garrett. Mr. Lynch? 

Mr. LYNCH. Thank you, Mr. Chairman. First of all, since we have 

hashed this bill out in the past, we certainly have fallen to focusing 

on those few areas that we still have some level of discontent on, 

and I think that’s good. 

Let me begin by saying, Mr. Connelly, you have at least three 

branches of South Shore Savings Bank in my district. I know you 

have one in Stoughton, you have one in Braintree, and you have 

one in—let me think, where else—East Bridgewater. 

Mr. CONNELLY. Glad you’re keeping track. 

Mr. LYNCH. You do a good job. Mr. Chairman, Mr. Connelly is 

our version of George Bailey. I don’t know if you saw that movie, 

‘‘It’s A Wonderful Life.’’ He is a good corporate citizen, and not only 

in the financial sense, but also like a lot of our bankers, our community bankers, very much involved in the civic life of our communities, and the charities, as well. 

But it’s important that we get this legislation right. Mr. Stern 

was kind enough to mention the article yesterday by Gretchen 

Morgenson in the New York Times about the looming mortgage crisis, and of course, she was speaking directly about the subprime 

market, but I think it affects all of us here. 

Since we are looking at this new regulator model, I wanted to 

ask a few of you—and, Mr. Robbins, you had mentioned in your 

written remarks—which were very good, by the way—about the 

bright line distinction that you would like to maintain between the 

GSEs and the primary market, and now we have a situation where 

we have had a fairly sharp uptick in the number of delinquencies 

associated with subprime mortgages. We have had two dozen mortgage lenders either fail or close their doors. 

We are waiting, as Ms. Morgenson noted yesterday, for the rating agencies—Moores, and Standard and Poors—to downgrade a lot 

of these mortgage-backed securities in the coming weeks and 

months, which I know as a former—I used to sit as a director on 

a pension fund—it will require a lot of our pension funds and insurance companies, because they’re not allowed, under their guidelines, to hold lower classes of securities once they’re downgraded; 

they will have to sell. 

26

That whole downgrading and sell-off is likely to drive these securities even further downward, and I am just concerned that may 

have a dramatic effect, generally, on the distribution of capital for 

mortgages. 

I would like to ask all of you, what do you see the effects of that 

being on your businesses, at least in your part of this mortgage industry? And what might we do here, in drafting this legislation? 

Can we learn some lessons from this meltdown in the subprime 

market? Is there something we can do to guard against that? Or, 

should we? Some people may say that this is the market just working, so leave it alone; this is the way it happens. 

But I would like to get your thoughts on it, if I could. 

Mr. CONNELLY. Mr. Lynch, from our perspective, I think probably 

the strongest thing that this committee could do would be to appoint a world-class regulator with the appropriate powers to oversee and regulate good behavior. 

Mr. LYNCH. But, Mr. Connelly, that would necessitate—well, it 

would be in conflict with the idea that the regulator should not be 

active in the prime mortgage market in a way—the—some of the 

failings of these mortgages in the subprime market are happening 

in the origination process, where you have people who shouldn’t be 

getting loans but are, in fact, getting them. 

It deals with the new program issue about new programs coming 

out, and you’re going to have a regulator back here, saying, ‘‘No, 

that’s not an approved product,’’ so it’s going to affect some things 

that are helping our low- and very-low-income folks out there. 

It’s just that some of what you’re asking for and agreeing to may 

have an effect on some of the issues that you’re concerned about, 

and I’m wondering how that’s going to play out. 

Ms. PETROU. It would seem to me, sir, that the key issue, as we 

look at the subprime situation, first from the GSE point of view—

and there I think it’s quite troubling—we don’t have good numbers 

from Fannie Mae, and Freddie Mac. As you know, that’s part of the 

problem this legislation is hoping to solve. 

But if you accept for the moment that the subprime sector is about $1 trillion, and then you look at the numbers that are available on the holdings of private label securities that Fannie Mae 

and Freddie Mac have, the bulk of which—again, we’re not sure, 

may come from that market, and probably do—Fannie Mae and 

Freddie Mac seem to have about 25 percent of the subprime, secondary market. 

Now, they are holding only the AAA traunches, i.e. the highest 

quality, or the lowest risk pieces. But behind that, are the mortgages themselves, and the borrowers. And I think what really concerns me is that we need to bring together in a new regulator, 

someone who looks both at the risk pieces, but also at the market 

issues. 

Because if a GSE is holding a AAA traunch, it may be protected. 

But that doesn’t mean a vulnerable borrower whose mortgage was 

booked without any regard to capacity to repay is facing foreclosure. And that is a real tragedy. So we need to bring that together in a far better regulator than we have now, in my opinion. 

Mr. LYNCH. Well, thank you. Mr. Stern, do you have anything to 

add? 

27

Mr. STARK. It’s our opinion, in looking at this issue, that, in 

many cases, it was not actually the product, an individual product, 

responsible, but in fact, a layering of risk—in many cases, loan-tovalue, credit, documentation. 

We believe that a lot of the products in the marketplace now 

were responsible for increasing homeownership in minority borrowers, and across America, such that we now have the highest 

homeownership rates that we have ever seen. 

We do believe that there are aspects, in terms of education, and 

in some cases, that we need to do a better job of policing our own 

industry for our long-term reputation, to make sure that when a 

borrower achieves the American dream through purchasing a home 

and getting a mortgage, it’s for the intention of them being in the 

mortgage for a long time, because we do know some of these products contain features that set the borrowers up for risk. 

However, with regard to program development, we believe the 

regulator should only oversee program development when there is 

an issue of safety and soundness, or the mission, as it relates into 

the GSEs, their role in providing assistance for origination, technology such as DU, for example, should not go through the laborious process of full posting and comment review, which takes a 

long time. 

Mr. LYNCH. Right. And just in closing—I agree with most of what 

you just said—but I think that one of the financial analysts yesterday in that New York Times article said that about 20 percent of 

the subprime, actually BBB bonds, that had been issued during 

2006 will be downgraded in the next few months. 

Also, I think it was noted that some of these loans were no 

money down, some of the loans were so-called—this is the term 

they used—‘‘liar loans,’’ where there was very little information 

that was required in the application for the loan, and very little 

verification of an ability to repay. 

I am just concerned that we might not—if we’re going to maintain that bright line between the GSE operating and the secondary 

market, and we still have these flaws in the origination process in 

the primary market, that we still may be having these problems, 

and I’m just wondering if there is a way we can get at that. 

Mr. ROBBINS. Yes. Mr. Chairman, a couple of thoughts. And to 

frame the size of the issue, to begin with, there are approximately 

50 million home loans in the United States—13.5 percent of those 

are subprime loans, with a foreclosure rate slightly over 4 percent 

today. 

Mr. LYNCH. That’s for the whole market? 

Mr. ROBBINS. That’s for the subprime market, alone. The highest— 

Mr. LYNCH.—say 12.9 percent, almost 13 percent— 

Mr. ROBBINS. That’s total delinquencies. 

Mr. LYNCH. Yes. 

Mr. ROBBINS. I’m talking about loans actually entering foreclosure. 

Mr. LYNCH. Oh, I see. Okay. 

Mr. ROBBINS. The highest in the modern-day era, which includes 

hybrid loans, was in 2000 at 9.35 percent of all loans entering foreclosure. Today, because of mitigation techniques that the industry 

28

uses, about 50 percent of the subprime loans that enter foreclosure 

actually go through the entire process, and only about 25 percent 

of all loans. 

That being said, if you said that the all-time high was exceeded, 

and 10 percent of all subprime loans went into the foreclosure process, something like 5 percent will ultimately be foreclosed against, 

which means that about 95 percent of the recipients of subprime 

loans will ultimately be successful homeowners. 

This is important, only out of the respect that we know that 45 

percent of the loans that were made were to people or borrowers 

to buy homes. And so—and those were people that, in all probability, could not use traditional sources in order to obtain that. 

Mr. LYNCH. Right. 

Mr. ROBBINS. That being said, there is absolutely no question 

that there were lenders with this product that got very aggressive 

in their underwriting, in order to grow a market share, as happens 

in those kinds of cycles, and ultimately, the market being extraordinarily efficient, has punished them pretty severely, if not totally, 

for that aggression. 

The market itself, as I said, is extraordinarily efficient. It is 

much faster than most regulators and legislators in the sense that 

it—the aggressive parts of those products, or product features, have 

already been curtailed dramatically by institutional investors all 

around the world. 

And, quite frankly, the loans that are being made today, including subprime loans made today, are probably the best group of 

loans that have been made in the last 5 years, so we would argue 

that the market is extremely efficient, and has already moved to 

correct the mistakes that were made by the more aggressive companies. 

Mr. LYNCH. That’s a fair answer. Thank you, Mr. Chairman. I 

yield back. 

Chairman KANJORSKI. The gentleman from Colorado, Mr. 

Perlmutter. 

Mr. PERLMUTTER. Thanks, Mr. Chairman, and I am going to 

apologize, because I’m about 10 steps behind everybody here. We 

are talking about Friday’s bill as compared to last year’s bill, and 

my first question is, what were the excesses of Fannie Mae, or 

Freddie Mac, or the Federal Home Loan Bank organization that 

we’re trying to solve by the bill that was coming down the pike last 

year, and has that been improved this year? 

Mr. Stevens, or Mr. Robbins, could you tell me what those excesses are that we’re trying to do by this super-regulator, just to 

get me into the right timeframe here, because we’re talking about 

the subprime loans, and subprime loans, that’s today’s problem. 

And you know, we had a lot of money chasing some lousy loans, 

quite frankly. That’s the problem there. 

And, Mr. Stern, you know, you have Fannie Mae and Freddie 

Mac backing you up on many loans. You also had some other securities buyers backing you up on other kinds of loans. Fannie Mae 

and Freddie Mac, I have always understood had certain qualifications, and you had to have a certain quality factor to your loan before they would purchase it in the secondary market, and maybe 

29

some of these other companies were buying, you know, slightly 

crummier loans. 

But my question is, what were the excesses that created this 

need in the first place, for a super-regulator? 

Mr. ROBBINS. I think, first and foremost, the super-regulator was 

there to take a look at a host of different things. 

The first one is the size of the portfolio. Does the size of the portfolio, and the leverage behind that portfolio, contain systemic risk, 

and if it does, does it need to be paired down to a size that meets 

market demand, but is not a portfolio used for investment purposes 

in order to inflate earnings? 

Mr. PERLMUTTER. Was that more of an accounting issue, that 

they were inflating the—what was the problem there? How does 

this regulator now stop Fannie Mae or Freddie Mac from inflating 

their earnings? 

Mr. ROBBINS. Because they have the ability to control the size of 

those portfolios by ordering them, as an example, as a bank regulator would do as they supervise a bank, order them to downsize 

the size of their portfolio, and to shed themselves of certain assets. 

In other words, they would determine the size that portfolio 

would need to be, in order to meet its market demands and provide 

liquidity to the system. 

Mr. PERLMUTTER. Okay. 

Mr. ROBBINS. Number two, they would determine what their—

whether they are holding true to their mission charter. That is, 

providing low- to moderate-income housing, and providing liquidity 

to a system. 

They would determine whether they were operating within their 

secondary market charter, or they were moving more into the primary market, which—the concern then becomes they are—they 

enjoy certain benefits that would represent unfair competition, 

moving into a primary market, and essentially threatening organizations that operate within that area. 

So, a big piece of this resolution would be control products, do 

those products represent safety and soundness concerns? Size of 

portfolio control, mission control, primary versus secondary market 

activities, monitor low-income housing goals. Are they realistic? In 

other words, it’s important that they be goals that are obtainable 

at some point, without destroying the primary market. 

Mr. PERLMUTTER. The bottom— 

Mr. ROBBINS. Those kinds of issues. 

Mr. PERLMUTTER. The bottom line being if they’re going to get 

assistance from us, as the United States of America, they need to 

stay within their mission and not grow their portfolio just to be the 

biggest, you know, underwriter in the world, or whatever? 

Mr. ROBBINS. And, ultimately, not present some kind of a systemic risk to the system, which is one that would affect the overall 

financial system—i.e., the name systemic behind it. In other words, 

if the GSEs were to implode for some reason, it could have a rippling effect through the entire economy. 

Mr. PERLMUTTER. Do you think the bill that Chairman Frank 

filed on Friday, do you think it handles this key piece, you know, 

the excess of just growing too large, or trying to go into areas that 

thy weren’t initially supposed to go into? Does it handle that? 

30

Mr. ROBBINS. I think that the Mortgage Bankers Association is 

pleased with the bill, the way that it has been released. 

Mr. PERLMUTTER. Now, I have—that was just sort of getting me 

on the same page with everybody. 

I am sort of a child of the 1980’s. When there was plenty of bank 

regulation and thrift regulation, and banks were failing, and thrifts 

were failing, and mortgage banks were failing, you know, so you 

can regulate like crazy sometimes, and still, the market turns on 

you. It might be a product that is bad, or it’s just a bad time. 

Is there discretion within—are we, in this legislation, setting 

down firm numbers, or are we giving the regulator plenty of discretion, and he is going to allow the individual Fannie Mae, Freddie 

Mac, Federal Home Loan Banks some discretion to develop or deal 

with their portfolios? Are we setting it down? 

Because we had to change a lot of laws back in the 1980’s to drop 

interest rates and things like that. Does my question make any 

sense? I mean, is there flexibility in this bill, or are we trying to 

legislate, instead of provide the regulator with some discretion, 

which then can allow the Fannie Mae, Freddie Mac, and the bank 

boards some discretion? Mr. Stevens? 

Mr. STEVEN. Well, I think the bill—you know, again, it just came 

out Friday, so we’re still looking at it. But I think, overall, from 

what we can gather, this bill does do just that. It doesn’t over-regulate; it gives the regulator the authority to make the proper adjustments. I think that’s what is key in keeping the housing market 

moving forward. 

I think it does accomplish that, it doesn’t over-regulate, and I 

would say that, you know, that is something that is a fine line, and 

we want to be cautious of it. 

Mr. PERLMUTTER. And then, just as a follow-up, Mr. Menzies, I 

can tell you that with respect to the farm credit system, they—we 

should take care of this first, and then deal with that later, because 

they will fight like crazy to stay where they are, just having been 

interviewed by them on the campaign trail, so— 

Mr. MENZIES. The chairman was perfectly clear about that. 

Mr. PERLMUTTER. Okay. 

Mr. MENZIES. Thank you. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

Chairman KANJORSKI. Mr. Murphy? 

Mr. MURPHY. Thank you, Mr. Chairman. I wanted to return for 

just a moment to Mr. Lynch’s line of questioning, so that maybe 

I can better understand the limitations of GSE reform, as it relates 

to the topic du jour of subprime lending. And maybe this is to the 

panel, but specifically to Ms. Petrou and Mr. Connelly, who both 

suggested that part of our response to the subprime lending issue 

is a world-class, or effective, regulator. 

And given the fact that GSEs, as Ms. Petrou said, hold only 

about 25 percent of the subprime loans, only that top traunch 

that—are sent out into the market. Beyond that top level of 

subprime loans, what is the ability of GSE reform to really affect 

some of the issues happening at the origination of many of these 

subprime loans? 

It just seems that maybe we do need to have a broader conversation about a more comprehensive regulatory system that takes into 

31

consideration many of the excesses within the subprime market. I 

just am not seeing right now that GSE—or maybe I should ask the 

question. What are the limitations of reform of GSEs, in terms of 

some of the things we have been seeing within the subprime market? 

Ms. PETROU. The limitation, I think, is that the GSEs are only 

a part of the market, and so that which is not theirs would not be 

affected by the GSE regulator. 

But a good regulator looking at both credit risk and market risk, 

and ensuring that the GSEs meet their mission, which is not only 

to serve affordable housing, but also to support a liquid and, importantly, stable residential mortgage market, would make a great difference. 

As has been said on this panel, mortgage brokers and many 

mortgage banks originate mortgages to sell. If they cannot sell 

them, they will not make them. If they cannot sell—if a mortgage 

secondary market purchaser looks at this and says, ‘‘Wait a 

minute. The income line on this mortgage is blank, this is a stated 

income loan yet this is’’—I just was reading today a story about an 

89-year-old home health care worker who refinanced her mortgage 

into a hybrid ARM, raising her mortgage payments from about 

$800 a month to $3,000 a month. 

Now, that loan was originated and sold into the secondary market, because no one was looking carefully at its terms. A good regulator for the GSEs who says to them, ‘‘These are unsafe, unsound, 

predatory loans, you may not purchase them,’’ would have a major 

impact on the market, as a whole, because if they can’t sell them, 

they won’t make them. 

Mr. MURPHY. So, some of this is doing a better job of a regulator 

deciding what gets into the secondary market, rather than trying 

to influence origination? 

Ms. PETROU. Yes, sir. 

Mr. ROBBINS. The GSEs are not a regulator. They are an investor 

in mortgages. And the real answer, I mean, to the question that 

you have asked, is that the GSEs had no supervision over the 

subprime lenders, even remotely, because they originated a class of 

product that the GSEs were not purchasing, I mean, other than in 

an—out of the marketplace, in a AAA strip. So, they really fell 

under, if you will, the radar screen, relative to regulation in that 

respect. 

Mr. MURPHY. Right. And I’m sorry if I misspoke. I certainly understand that the GSEs aren’t regulators. But I guess that was the 

point of my question, is to make sure that we are not expecting this 

reform bill to have, you know, a major impact on the issue of 

subprime lending. 

My second question is more to Mr. Menzies. You specifically 

raised a concern that GSE reform may have some impact on the 

ability of small, community banks to access that secondary market, 

and I would maybe just ask you to expand on that concern. 

Because as someone new to this issue, the question how much a 

secondary mortgage holder may be able to keep in their portfolio 

versus how much they may be able to securitize doesn’t strike me 

as a barrier to access from smaller banks. It merely is a question 

of how much the GSE may be able to hold, and how much they 

32

may be able to send out for securitization. So, maybe just speak a 

little bit more on how portfolio standards are going to limit a small 

bank’s ability to get into that market. 

Mr. MENZIES. As Mr. Stern pointed out, when you contract the 

GSE, or reduce its portfolio, you reduce its income, you reduce its 

ability to have liquidity and flexibility, and the like. 

It may well be that, by saying you can only have so much in portfolio, that you don’t restrict access of community banks to the capital markets. But the reality is that the lion’s share of portfolio 

loans are coming out of the larger institutions, not the smaller institutions, so, our concern would be that, however it goes down, we 

continue to have access to those markets, and that the bill doesn’t 

unintentionally create an environment that supports the larger volume institutions and doesn’t support the smaller volume institutions. If we do $103 million worth of loans over a 4- or 5-year period of time, that is somewhat beneath the drop in the bucket. It’s 

really a very small amount of money. 

So, it may be that, by restricting portfolio size, it doesn’t reduce 

liquidity or access to the markets for community banks, but that 

certainly is our concern. 

Mr. MURPHY. And is there anything beyond giving more flexibility on portfolio standards that we could do within this legislation 

to make sure that small lenders with very small pieces of the pie 

still have access to the secondary market? 

Mr. MENZIES. Absolutely. We have lived, since the 1980’s, when 

it all came apart, in a world of risk-based banking, and you can 

promulgate legislation and capital requirements that are truly riskbased, not just arbitrary, or some number. 

I have lived in a risk-based world for the past 15 years, and it’s 

worked quite nicely, thank you. I think that our regulators have 

done a great job of looking at our risks, at telling us what risks 

were acceptable, and telling us what risks were unacceptable, and 

there certainly would appear to be some risks that have gone into 

the GSEs that today, in hindsight, may be unacceptable risks. But 

risk-based capital should drive the capital requirements of the 

GSEs, I believe. 

Mr. MURPHY. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you. We now have an opportunity 

to go to the other side of the aisle. And before I recognize Mr. 

Baker, may I say that his time spent on this issue over the last 

7 years may be coming to a final, successful conclusion. 

So, I welcome my good friend from Louisiana, who is a major 

contributor to this process now. Mr. Baker? 

Mr. BAKER. I thank the gentleman for his kind words. Actually, 

I started causing trouble almost 15 years ago on this subject, and 

it’s amazing to me that we are now talking, still, about a bill. But 

I know the gentleman’s leadership will cross the finish line. 

I wanted to return, just for a minute, for just a broad statement 

about the purpose of the underlying legislation, which is regulatory 

in nature, and to review the facts that for some time, the enterprises engaged in leveraging resources that were inherently guaranteed by the taxpayer for the charter purpose of facilitating firsttime ownership opportunities for those otherwise not likely to get 

access to affordable credit. 

33

On review of their practice, however, we found, over time, that 

their involvement in minority, women, first-time homebuyer participation not only did not lead the market, but in fact, trailed the 

market, and that the apparent utilization of the taxpayer guarantee was transferred over to the shareholder side, which enabled 

the enterprise, in good and bad financial markets, to make significant profit. 

That, then, led some to question, ‘‘Where is the regulator in all 

of this? Shouldn’t we get these folks focused on their mission? And 

is it the right use of a taxpayer guarantee to make shareholders 

double digit rates of return, when the rest of the market is going 

sideways?’’ The answer, generally, was, ‘‘Well, we at least ought to 

look at it.’’ And I think, now, with the underlying bill, we have provided the regulator with some tools to make some of those judgements. 

As to the problems of the existing portfolio and its distribution 

in the market, there is one very clear point that has always troubled me—and I don’t believe it was mentioned here today—and 

that is among our insured financial institutions, for meeting their 

tier one capital requirements, about 70 percent or more of those institutions now meet those capital requirements by holding GSE securities. I was told by an FDIC person some time ago not to worry, 

that was really broad GSE debt. So I took great comfort in the fact 

that must have meant Farmer Mac. So I knew I wasn’t worried, 

then. 

Despite that fact, a significant amount of Fannie Mae and 

Freddie Mac debt are held by financial institutions as collateral for 

the day in which the bank has a difficult circumstance on its hand. 

Secondly, when MBS was first developed and sold earlier, 

Freddie Mac and Fannie Mae representatives indicated they would 

not consider purchasing their own MBS, which now we know they 

do quite readily. 

And one may argue that a large portfolio makes a great deal of 

sense if you’re in the midst of a liquidity crisis, because the Chinese currency goes sideways. But the idea that several billion dollars of dollars of your own mortgage-backed securities are held in 

your own account does nothing but transfer the risk that was originally designed to be moved to the broader market; it is now 

brought back onto the books in order to yield the higher earnings 

that are provided by holding that MBS in portfolio. And it does 

nothing for housing—nothing. 

And so, the debate over portfolio today, which a few years ago 

was repeal of the line of credit, which before that was some other 

issue, really is diversionary from the underlying purpose of the legislation, which is to have a gatekeeper worthy of its merit, standing 

between the activities of these enterprises, which are shareholderowned, and business-driven institutions, and the guarantees of the 

United States taxpayer, which stands behind the hopefully unlikely, not to be expected sideways event which could occur at some 

point, therefore minimizing the scope of loss, with a regulatory 

shop of significant competency. 

I believe that the bill now drafted and pending before the committee to be considered within the next week or so to be a good 

product, on the regulatory side. I don’t know whether or not we 

34

have gone quite far enough on the portfolio side, although I recognize that is somewhat of a managerial decision. 

Since the enterprises were constructed to help get access for lowincome individuals to housing, there should be some inherent risk 

involved in that portfolio, if they are facilitating product that enables that to occur. That’s a balancing act, as against the shareholders, who are expecting financial reward for a well-managed 

company, and not to take unwarranted risk. 

So, there is a managerial conflict we cannot preclude, nor should 

we try, I think, in a policy to step in between good management 

and shareholder resources, and tell them, ‘‘You simply cannot do 

this.’’ 

I think the bigger question, which hopefully will not be drawn 

into this discussion, is what constitutes inappropriate lending practices? What constitutes predatory? What is it that people are doing 

in the market that is not already a violation of Federal or State 

law, and let’s get after that. That seems to be a much more difficult 

task in designing and coming up with the appropriate remedy. 

But I do believe it is important for members of the committee to 

revisit the initial underlying issues for having the bill at all. The 

bill is needed to ensure that taxpayers are protected from hotshot 

management, and let me just say one quick word on that point. 

There were 5 years of financials which enabled, because of hitting the earnings per share target, to the one-ten-thousandth of a 

cent accuracy—and I was told it was a statistical fluke, it just happened—that triggered $250 million in bonuses paid out to top executives over a 5-year period, on which there is now significant 

question as to if the financials were accurately accounted for. That, 

in itself, should be enough for this committee to act in a meaningful way. 

But there are far more issues than just fudging the books and 

not providing the adequate incentives for individuals to get access 

to housing. And I believe the bill which the chairman has before 

the committee today is an excellent first start, and I hope we do 

not step aside from the principal goal. 

And with that statement, I just wanted to ask, is there anything 

in the regulatory side of this bill that causes any of you at the table 

any discomfort? Anything we missed? 

We hadn’t talked, I don’t think, much about portfolio regulation, 

but I believe putting that authority in the hands of the director, 

given the authority the new director will have, is quite sufficient. 

Anybody want to comment? 

Mr. CONNELLY. Mr. Baker, America’s Community Bankers thinks 

that the bill is a great start. 

And I am delighted that you pointed out that for several years 

Fannie Mae and Freddie Mac haven’t been able to produce financial statements. This clearly represents a huge internal control 

issue. What additional justification for better regulation is needed, 

when you think about it? 

Mr. BAKER. Well, my comment would be if any other public company had a multi-year, multi-billion dollar misstatement of financials, and could not certify their accounting, I don’t know how they 

would effectively survive on Wall Street, going into year six. But 

that only points out, I think, the belief that many have in the marVerDate 0ct 09 2002 17:32 Jun 14, 2007 Jkt 035404 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\35404.TXT HFIN PsN: TERRIE
35

ket that the U.S. Government will stand in and do what’s necessary, in the event bad things happen. And that’s what we have 

to fix. Anything else? 

Mr. STERN. Mr. Baker, just to respond to different sides, you 

know one part of the mortgage industry a lot better than I do. And 

I know the origination side very well. And just a view from what’s 

going on in the market, for a second. You had talked about the role 

of the GSEs, and their effectiveness in creating—in providing low 

to moderate-income housing, and their success in their mission. 

The reality of the recent marketplace is borrowers had choices. 

You could have a GSE loan with 5 percent down, or a private loan 

with zero percent down. Well, what do you think the borrowers 

took? They took the zero percent down. They could have a loan 

with full pay stubs and bank statements and tax returns, or they 

could have a loan with no pay stubs and bank statements and tax 

returns? Well, what do you think the borrowers took? No pay stubs, 

no bank statements. 

So, the GSEs market share was affected not because they lowered their standards, or because they weren’t doing their mission, 

but because products existed that said to the borrower, ‘‘You don’t 

need a downpayment, you don’t need tax returns, you don’t need 

bank statements.’’ And look what happened. 

It was not the GSEs and—but—and their performance, and their 

achievement of their mission where the problem has been. In fact, 

I would say if there was anything that the GSEs have done incredibly well, it is the products they put into the marketplace, and the 

regulations they have which give us suitability and uniformity with 

investors across the world. But we are going to go through a correction in the private marketplace, the unregulated marketplace. But 

if anything, it is not the GSEs, and their area of product. 

We do applaud the efforts of a strong, world-class bank-like regulator, for purposes of things like their accounting. But, if anything, 

I think that the GSEs are doing well. It is their products and the 

role they are playing in the market, in that regard. 

Mr. BAKER. If I will—my time has long since expired, and just 

with the deference with the chairman, I have some differences with 

the statement in that I do believe that when you look at the number of mortgages held in portfolio by the GSEs over time, you will 

find them to be less than 2 percent, in most cases, of the kinds of 

individuals that they should be helping. And you will find that, in 

most cases, the average housing cost is somewhere north of 

$200,000, with 2 working incomes, the dog, the cat, the Chevrolet, 

and the Ford. 

It is middle America that makes up Fannie Mae’s portfolio, and 

that’s where they make their money. And the mismatch which 

caused the trouble was internal managerial fluffing to get the numbers where they needed to be to make themselves look right, and 

that’s what caused the ultimate demise. It wasn’t a market failure, 

it was a managerial failure that got them to this point in time. 

Chairman KANJORSKI. Thank you, Mr. Baker. Finally, Mr. Price? 

Mr. PRICE. Mr. Chairman, I can’t speak to Fannie Mae or 

Freddie Mac, but Mr. Baker, before you came in, there was some 

discussion about the public independent directors. And in response 

36

to your question, let me raise one thing for the consideration of the 

committee. 

Our bank, like all the other Home Loan Banks, has been very 

seriously taking its responsibilities to find appropriate skill sets—

that were alluded to earlier by panelists here—for members of the 

boards to be appointed or selected as the independent directors. 

One thing we are finding, even looking at non-establishment figures, Mr. Chairman, is that many of the people whom we had 

short-listed as having competencies in either rehabilitation housing, home building, community development, public finance, derivatives in complex financial instruments, audit and accounting, we 

are finding that the bulk—more than 60 percent of the folks that 

we had first thought might make great directors—are disqualified, 

because the statute evidently says that no person may serve as a 

public independent director who owns one share of any member institution of the Home Loan Bank in that geography. 

So, if you had a community development person, an executive director of a local community development authority, who happened 

to own a share of stock in Sovereign Bank in Pennsylvania, or a 

community bank, or Citibank, which is one of our customers 

through Delaware, they would be disqualified to serve. 

So, I simply put that in front of the committee for consideration 

as part of this legislation. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Price. And now, finally, 

the gentlelady from New York, Mrs. Maloney. 

Mrs. MALONEY. I thank you, Chairman Kanjorski, and I thank 

all the panelists today. And first, I want to congratulate Chairman 

Frank, and really, Congressman Baker, for their introduction of the 

GSE reform bill, and compliment Mr. Baker for his long-standing 

leadership. 

I think this is a strong and balanced bill, which builds on the bill 

we passed last year, and I also want to compliment Chairman Kanjorski’s work with Treasury. I fully support it. 

When I first came to Congress, the very first bill I voted on—the 

one that I remember—was the bail-out of the S&Ls, the savings 

and loans, to the tune of billions of dollars. It was a tough thing 

for a freshman who won by less than 1 percent to vote on, but I 

voted on it, and we bailed them out. But still, I believe strongly in 

strict regulation and strong attention to safety and soundness. 

And I am particularly concerned with the safety and soundness 

provisions in this bill, the capital, new product review, and portfolio proportions that the witnesses commented on. I would like to 

build on the questions of Mr. Lynch, Mr. Perlmutter, and Mr. Murphy, and ask Ms. Petrou, all—happy St. Patrick’s Day, by the way, 

Mr. Murphy—by the way, I wanted to ask Ms. Petrou about the 

closely related safety and soundness issue, which is the GSEs’ involvement in the subprime market, and their exposure to the crisis 

that is going on in the market right now. 

Freddie Mac announced that they will no longer buy subprime 

hybrid mortgage loans, and they basically said that they would follow the guidance that came out from some of the regulators, that 

they would—you should no longer issue loans that the consumer 

cannot pay for. 

37

And I would like to ask Ms. Petrou if you believe that the other 

GSEs should follow Freddie Mac’s leadership in basically saying 

that they will adhere and follow the new guidance. As you so eloquently said earlier in response to Mr. Murphy, if you don’t buy the 

product, they’re not going to make the product. 

And as was pointed out by the gentleman recently, Mr. Stern, 

you were saying they are selling loans where you don’t have to 

show your income, you don’t have to show any record of making 

your sales, of being loyal—your creditworthiness. So, if you don’t 

have any creditworthiness, should we be surprised that there appears to be a crisis in the market? 

I, too, read the article that Ms. Petrou talked about. It was on 

the cover of the Wall Street Journal. I would like to put it in the 

record, with unanimous consent, where basically, a woman had an 

$800 a month loan, and she is older and confused, and they ended 

up selling her a $4,000 a month loan, which she could not afford, 

and she is in the process of losing her house. 

So, I would like to hear your comments, and anyone else’s comments, on having the GSEs follow the guidance that has come out 

from the regulators, which Freddie Mac has voluntarily adhered to. 

Ms. PETROU. Thank you. I think it is a very good thing that 

Freddie Mac has made this statement about hybrid ARMs, and the 

qualifications it will look to, that the banking agencies Friday a 

week ago came out with standards, and OFHEO a while ago asked 

Fannie Mae and Freddie Mac to comply with the guidance issue 

last year on traditional mortgages, and one would expect that it 

would likely do the same, once the banking agencies finalize the 

subprime guidance. 

But what really concerns me is not so much looking forward, but 

looking at where we are now, and saying, ‘‘Oh, heavens, I just 

won’t buy any more hybrid ARMs, you know, with stated income, 

and all of these other criteria.’’ Well, what about the borrowers who 

are in them now, and the risks which were palpable and obvious 

then? 

And I think that speaks to the urgent need for good regulation, 

because we have a lot of hurting homeowners out there. And forward-looking reform is critical, but we also need to think through 

why we are where we are, both from the borrower and the lender 

and the GSE point of view, because it is a very distressing picture 

at this point. 

Mrs. MALONEY. Well, following up on your statement, why do you 

think we are where we are? 

Ms. PETROU. There was another very good article in the New 

York Times on Sunday by Ben Stein, who said that too many teenagers were running things. I think I’m up in age now where I agree 

with that. 

People forgot that subprime is higher-risk. Higher risk means 

more losses. Lack of documentation invites fraud. Lack of riskbased capital—Mr. Menzies is very right about that. The OFHEO 

risk-based capital rule now does not capture credit risk. It is ratings-based. 

This was an issue built in by Congress when you enacted the 

1992 Act without the ability—which, of course, could not have been 

done—but by hard-wiring the GSE capital rules in 1992, they do 

38

not capture market realities now, and they do permit a tremendous 

amount of gamesmanship, regulatory capital, arbitrage, and perhaps creating undue market incentives for inappropriate risk taking. 

Mrs. MALONEY. I would say that in the past it was very uncomplicated. I grew up in a small town, and our neighborhood community banker knew everyone. He knew their credit depth. He knew 

everything about them, and he didn’t give out loans that they 

couldn’t pay back. 

And to what extent do you think the increase in loan originators, 

entities offering homeowners mortgages made possible by the huge 

growth of the GSEs, how much do you think these sort of new loan 

originators have contributed to the present subprime problem, and 

what can we do about it through GSE regulation? 

We certainly want to expand available credit, but expanding 

credit is really, in some cases, in conflict with safety and soundness. Have we gone too far in allowing so many entities to get involved? I invite anyone on the panel to respond. 

Mr. MENZIES. If I could speak as a community banker, we do 

know most of our customers on a personal basis. And we do write 

subprime loans, but we don’t put them in the secondary market. 

We may do 100 loan to value loans, as a community bank, and 

Daddy will guarantee 20 percent, and the kids will do 80 percent, 

and we will put it on our books, and after 3 or 4 years, when the 

double income has grown up, then it goes into the secondary market. And we do that on a regular basis. 

ICBA Mortgage Corporation generated about an $800 million or 

$900 million mortgage portfolio with RMS, our servicing vendor, 

over about a 6-year or 7-year period of time. And that mortgage 

portfolio that came strictly from community banks was the best 

performing portfolio in the entire $30 billion RMS portfolio. 

Community banks generally write the 30-year, 15-year, fixedrate, plain vanilla ordinary loan, and don’t generally get into the 

subprime type credits. So, my answer would be to appoint a strong 

regulator, and make that strong regulator do risk-based capital allocations, the same way I do. If I write a loan, and the FDIC comes 

in and they look at it, and they say, ‘‘We don’t like that loan,’’ then 

I have to appropriate more in reserves. And they grade my risks, 

based on the risks that we take. And we set aside reserves, based 

on the risks that we take. 

So, my perspective would be risk-based capital, and a strong regulator. 

Mrs. MALONEY. To some extent, the affordable housing goals set 

for the GSEs, our intention with any tightening of credit, no matter 

how necessary, and is there enough guidance and authority in this 

bill to allow the new regulator to properly shape that balance? Anyone? 

Ms. PETROU. I would say that the new bill, as I quickly read it 

over the weekend, contains language that does, first of all, I think 

aligns the GSE affordable housing goals better with those applicable to banks under the Community Reinvestment Act, so that the 

definitions of low and moderate income are more appropriate. I 

think that will help serve the market better. 

39

But the regulator does have the authority to review those goals, 

and reset them, if safety and soundness concerns are presented. 

Right now, that is not possible, because the goals are solely under 

the guidance of HUD, and HUD is not a safety and soundness regulator. So that balance, under current law, does not properly exist. 

Mrs. MALONEY. Do you think we should write legislation that 

would apply the guidance rule that Freddie Mac is now following, 

do you think we should legislate it so that all housing GSEs must 

follow it? Would that bring more safety and soundness to the markets? 

Mr. ROBBINS. It—I would argue—well, number one, Freddie Mac 

said that they would continue to buy hybrid loans, but only ones 

that were underwritten at the fully indexed rate. 

Mrs. MALONEY. Right. 

Mr. ROBBINS. The problem with underwriting loans at the fully 

indexed rate is that it will literally take away the opportunity for 

thousands of homeowners to purchase homes. I went through some 

statistics earlier that are in the record for your observation, and I 

want to go over them again and take—but one of the things that 

we need to separate in our minds is the difference between loan 

products that were used to help homeowners get in homes and 

predatory loans. They are two different types of issues. 

Predatory loans—the 80-year-old, or 85-year-old lady—are unconscionable, and everybody in the industry wants to see the perpetrators of those kinds of loans dealt with. 

The products that help homeowners get into homes are the issue, 

and we would argue that loan products, whether they are 228s or 

negatively amortized, or interest only, used properly, are extremely 

valuable in getting homeownership to near-record levels, where it 

is, especially with minority Americans, and would argue that it 

would be improper to put undue restrictions on loan products, 

other than dealing with the people who use them improperly. 

Mrs. MALONEY. But, basically, the guidance, as I read it, said 

you don’t give a loan to someone who can’t pay for it. And I think 

that makes common sense, that we don’t give a loan to someone 

who can’t pay for it. 

Mr. ROBBINS. We— 

Mrs. MALONEY. In other words, if you have a law student who 

is going to be paid a lot of money next year, they can take the hybrid loan. But if you have an 85-year-old woman on a fixed income, 

you don’t sell her a loan that she can’t pay. 

To me, it seemed like good guidance that made common sense, 

and— 

Mr. ROBBINS. We at the Mortgage Bankers Association absolutely agree with you. I can tell you, from personal experience—I 

have been in the mortgage banking business for 36 years—a foreclosure costs us $40,000. And so, our economic interests are 100 

percent aligned with the borrowers in this case. 

And as I had mentioned earlier, there were some aggressive players in the industry who wanted to grow market share. They did sell 

through very aggressive underwriting, and are paying the price for 

that today. And so, underwriting a loan, and providing that instrument to people who you think have the capacity to repay that loan, 

are still imperative within this industry. 

40

Mrs. MALONEY. Well, my time is up. I thank the chairman for 

this hearing, and all of the panelists for testifying. 

Chairman KANJORSKI. Thank you. Just an observation on your 

question, if you can’t get a loan if you can’t pay for it, it seems to 

me that the U.S. Government should have a tough time getting a 

loan. 

[Laughter] 

Chairman KANJORSKI. Having made that observation, I do want 

to ask one other question, something that is the jurisdiction of this 

subcommittee—insurance. 

Has anyone done an analysis of the credit problems in the 

subprime lending market, and its draw on mortgage insurance, 

whether or not that will risk the mortgage insurance firms, and 

therefore, expand the risk to otherwise good paper in the marketplace? 

Ms. PETROU. Mortgage insurance firms generally do not provide 

coverage on subprime mortgages. Their focus is on the prime market. So, the immediate concern for the private mortgage insurance 

industry is not significant. 

However, there is considerable concern for the Federal Housing 

Administration, because the FHA and the Federal Government do 

back many loans which might be, by virtue of the risk of the borrower, considered to be subprime. 

Chairman KANJORSKI. Very good. 

Mr. STERN. Just to reinforce, we do a limited amount of subprime 

loans, but to concur, those ones typically do not need private mortgage insurance, so the subprime loans are not a drain on the mortgage insurance market. 

Chairman KANJORSKI. Very good. Thank you. Mr. Baker, do you 

have any other questions? 

Mr. BAKER. I just want to thank you for your leadership on this, 

and I look forward to working with you, Mr. Chairman. 

Chairman KANJORSKI. Mr. Garrett, I want to thank all the members that were here. This is a tough day to have a hearing, a Monday, when they are in travel. 

I particularly want to take this opportunity to thank the panel, 

and make an observation, because so much of the panel is involved 

with community banking, either directly or indirectly. Although I 

don’t necessarily have the most famous reputation in town as an 

advocate of community banking, I want to disgorge that thought 

process. 

In reality, I am interested in the proper operation of the Federal 

Home Loan Bank system, and the success of Freddie Mac and 

Fannie Mae. It is primarily because I am acutely aware, coming 

from Pennsylvania, of how intricately involved and successful the 

community banks are in providing for an area that otherwise 

would not be provided for, if we had to rely on the huge institutions 

of this country. 

So, the fact that so many of you have connections, interests, or 

represent the community banks, I want to thank you for your testimony. We certainly want to take that into consideration. This is obviously not a credit union bill, this is a community bank bill, and 

we are going to protect the community banks in this instance, as 

41

we would the credit unions, if they had an issue here. So, thank 

you very much. I appreciate your attendance. 

The Chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses, and to 

place their responses in the record. This hearing is adjourned. 

[Whereupon, at 4:18 p.m., the hearing was adjourned.] 

(43)

A P P E N D I X

March 12, 2007

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