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35–407 PDF 2007

LEGISLATIVE PROPOSALS ON GOVERNMENT–

SPONSORED ENTERPRISE (GSE) REFORM

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 15, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–15

(

(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 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 

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 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

March 15, 2007 ................................................................................................. 1

Appendix: 

March 15, 2007 ................................................................................................. 83

WITNESSES 

THURSDAY, MARCH 15, 2007

Cornick, Hon. L. Carter, General Deputy Assistant Secretary, Department 

of Housing and Urban Development (HUD) ...................................................... 19

Crowley, Sheila, President, National Low Income Housing Coalition ................ 71

Dalton, John H., President, Housing Policy Council, Financial Services 

Roundtable ............................................................................................................ 51

Fishbein, Allen, Director of Housing and Creidt Policy, Consumer Federation 

of America ............................................................................................................. 69

Flynn, Michael, Director of Government Affairs, Reason Foundation ................ 75

Gleason, Thomas, board member, National Council of State Housing Agencies ......................................................................................................................... 73

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

National Association of Home Builders .............................................................. 56

Kennedy, Judith A., President and CEO, National Association of Affordable 

Housing Lenders .................................................................................................. 68

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

Oversight (OFHEO) ............................................................................................. 17

Mudd, Daniel H., President and Chief Executive Officer, Fannie Mae .............. 54

Steel, Hon. Robert K., Under Secretary for Domestic Finance, Department 

of the Treasury ..................................................................................................... 14

Syron, Richard F., Chairman and Chief Executive Officer, Freddie Mac ........... 53

APPENDIX 

Prepared statements: 

Capito, Hon. Shelley Moore ............................................................................. 84

Gillmor, Hon. Paul E. ....................................................................................... 86

Pryce, Hon. Deborah ........................................................................................ 87

Waters, Hon. Maxine ........................................................................................ 90

Cornick, Hon. L. Carter ................................................................................... 97

Crowley, Sheila ................................................................................................. 108

Dalton, John H. ................................................................................................ 112

Fishbein, Allen .................................................................................................. 120

Flynn, Michael .................................................................................................. 128

Gleason, Thomas .............................................................................................. 138

Howard, Gerald M. ........................................................................................... 145

Kennedy, Judith A. ........................................................................................... 161

Lockhart, Hon. James B. III ............................................................................ 174

Mudd, Daniel H. ............................................................................................... 183

Steel, Hon. Robert K. ....................................................................................... 187

Syron, Richard F. .............................................................................................. 193

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Letter to Chairman Frank and Representative Kanjorski from the American Land Title Association .......................................................................... 228

Page

IV

Frank, Hon. Barney—Continued

Letter to Chairman Frank and Ranking Member Bachus from the Consumer Mortgage Coalition ............................................................................ 230

Clay, Hon. William Lacy: 

Responses to questions submitted to Hon. James Lockhart III ................... 243

Watt, Hon. Melvin L.: 

Responses to questions submitted to Hon. James Lockhart III ................... 259

Royce, Hon. Ed: 

Chairman Bernanke’s March 6, 2007 speech ................................................. 264

(1)

LEGISLATIVE PROPOSALS ON 

GOVERNMENT–SPONSORED 

ENTERPRISE (GSE) REFORM 

Thursday, March 15, 2007

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:04 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Present: Representatives Frank, Waters, Maloney, Watt, Meeks, 

Moore of Kansas, Hinojosa, Clay, Miller of North Carolina, Scott, 

Cleaver, Bean, Davis, Sires, Hodes, Ellison, Perlmutter, Murphy, 

Donnelly; Bachus, Baker, Royce, Gillmor, Biggert, Shays, Miller of 

California, Hensarling, Garrett, Pearce, Neugebauer, Bachmann, 

and Roskam. 

The CHAIRMAN. This hearing of the Committee on Financial 

Services will come to order. This is the second hearing we will be 

having before the committee on the question of the GovernmentSponsored Enterprises (GSEs). 

The chairman of the Subcommittee on Capital Markets, Mr. Kanjorski, had a very useful hearing on this on Monday. 

We hope to be voting on this bill in committee before the break; 

I think we set it for March 28th. We then hope to be able to go 

to the Floor; that is where we are. 

We have been working on this bill for some time. A version of 

this bill that is quite close to the bill that is before us passed this 

committee by a very large majority and in the House by a large 

majority in the previous Congress. 

It was largely bipartisan. There were some points of difference. 

I will note that a couple of the points of difference have been specifically addressed, not in the existence of the housing fund, but in 

how it is administered and calculated. 

There have been some other changes as well in conversation that 

I had with some consultation with the Minority, but I do not claim 

to date to have the full responsibility for this, but we did try to 

stay in touch with people. 

This was in December, so it was still when Mr. Oxley was the 

outgoing chairman. We had conversations with the Treasury Department, with various people; Under Secretary Steel was very important in that. 

We have the bill before us. The bill does several things that 

seemed to us important. First of all, it substantially enhances the 

2

power of the regulator. I do want to say that I think there has been 

a somewhat excessive debate over exactly what the powers of the 

regulator are. 

We currently have a regulatory structure that most of us agree 

gives the regulator less legal authority than he ought to have. Despite that, in the past few months, the regulator has ordered both 

Fannie Mae and Freddie Mac to do things that they did not want 

to do on their own because nobody ever has to order anybody to do 

what they want to do, except in circumstances which it would be 

inappropriate to discuss here. 

The fact is that even with the acknowledged less than full authority, both Fannie Mae and Freddie Mac complied. I think we 

ought to recognize that if you have a regulator and he has powers 

and he is determined to do something, he is probably going to be 

able to do that. 

We can set a framework and set some guidelines. Here are the 

guidelines that I want to set in the bill, and I think the bill does 

this. 

There are people who believe as a matter of economic philosophy 

that it is a mistake to interfere with the allocative function of the 

capital market by giving a preference to housing and particularly 

homeownership. That is a legitimate philosophical debate. 

By creating and continuing the GSEs, which get a certain advantage when they borrow in a marketplace because of arrangements 

that exist, and even more important, because of perceptions about 

those arrangements, including some misperceptions, I do not feel—

I try not to promulgate misperceptions, but I have no objection to 

benefitting from other people’s misperceptions, as long as their existence was not my fault. 

I think that is where we are to some extent with Fannie Mae 

and Freddie Mac. I believe the misperceptions are deeply rooted 

but it will not shake them by so designating them. 

That does give a preference in the capital market for housing—

homeownership but also rental housing—as we will get into. I understand there are people who are philosophically opposed to it. 

I believe some of the debate that happened last year and before 

came between people who shared the philosophical view that it was 

a mistake to have the allocative function in the capital market 

interfered with and those of us who said no, we like having this 

preference for housing. 

Then the question becomes okay, if you agree that it is legitimate 

to maintain the preference for housing, two sets of questions come 

up. Is there sufficient power of the regulator to make sure that as 

you go forward with this system, you do not run into problems 

within these two entities that could cause broader problems, safety 

and soundness issues. 

I believe in this bill, and I know the former chairman, Mr. Oxley, 

agreed with this. We believe strongly that the bill we had last year 

gave the regulator full power to deal with any safety and soundness issue, whether by raising the capital or reducing the portfolio 

or other means. 

Subsequent to that bill being passed, when Mr. Oxley believed as 

I did that we had reached that level, we have somewhat enhanced 

the power of the regulator. 

3

I do not think there was any room for doubt that the regulator 

has full powers under this bill to do what needs to be done for safety and soundness. 

We did disagree that they should be empowered to deal with 

something defined as ‘‘systemic risk’’ over and above safety and 

soundness. I will confess to being very skeptical that you can have 

entities that cause risks to the system when they themselves had 

no problems. 

I am trying to envision Samson in the Temple pulling down the 

walls and not getting hit in the head. I do not think you can destroy the entity and escape any damage yourself. We will discuss 

this. 

I have to say that this is an atmosphere of some sensitivity, and 

I would hope that we would get agreement, not just on the language of this bill, but agreement frankly among us, including the 

people here, as to what that means and how it will be interpreted. 

You can never write everything exactly. I think we need some 

common understanding of what we mean by this in the areas I am 

talking about. 

Full powers over safety and soundness, but not reaching the philosophical debate, and I think the philosophical debate gets into the 

systemic risk issue. 

Secondly, there is the question of housing. I will give myself an 

additional 2 minutes and then I will pass it onto the Minority. 

One of the arguments that has been made for changes is that 

Fannie Mae and Freddie Mac get the benefits that I talked about 

from the perception or misperception by the financial community, 

and too many of those benefits remain with the stockholders of 

Fannie Mae and Freddie Mac, and in past times, with even the 

CEOs of Fannie Mae and Freddie Mac, although stay tuned for the 

executive compensation legislation where we may deal with that in 

a broader sense. 

Under Fannie Mae and Freddie Mac’s past executives, not current ones, there was an abuse of compensation practices. There was 

also an argument that they shared too much of the money, that 

money was being held for Fannie Mae and Freddie Mac’s benefit, 

and not enough was being shared with the public purpose. 

There are two things you can do if you feel that. You can reduce 

what Fannie Mae and Freddie Mac are able to accumulate by cutting back on the portfolio or other ways, or you can allow them to 

continue that level, depending on how they fare in the market, but 

require them to share more of it with the public purpose. 

That is what we chose in the bill last year and we choose again 

in the bill that is now pending. That is the creation of the housing 

fund. Let me be clear. 

Fannie Mae and Freddie Mac have goals, and those goals are to 

help affordable housing. Affordable housing, as people who cover 

housing know technically has several subcategories. 

Affordable housing used to be for the goals housing aimed at people at 100 percent of the median. At the suggestion of people in the 

Financial Roundtable, and in particular, our former colleague here, 

Mr. Bartlett, we said no, that is not consistent. We generally say 

affordable housing has to be aimed at people at 85 percent of the 

median or below. We changed that in the bill to 80 percent. 

4

You cannot get much below people who are at 80 percent of median simply by the secondary market by buying loans. 

If you are going to reach people who are at low income, 50 percent, extremely low income, 30 percent of median and below, then 

there has to be an element of subsidy. You cannot do it just by 

loans. That is the distinction that some people fail to understand. 

This bill does enhance the goals. It does try to push Fannie Mae 

and Freddie Mac—it will push Fannie Mae and Freddie Mac into 

doing more in the 80 percent range. Nothing you can do with loans 

and repurchase of loans and securitization of mortgages reaches 

that low level. 

We then say yes, we agree that they are keeping more of the 

benefit than they should. We take a small part of that benefit and 

put it in the housing fund. 

I have to say here that some of my friends on the conservative 

side seem to me to be inconsistent. On the one hand, they are advocating very tough regulation for Fannie Mae and Freddie Mac, unlike any other private entity, because they have this governmentsponsored enterprise element. 

When it comes to regulating them, telling them how much capital they can have, what they can hold in their portfolio, what, in 

fact, activities they can engage in, they are public entities to be 

regulated. 

But when it then comes to how you deal with the profits they 

amass, all of a sudden they become private property, no trespassing, you will be electrocuted if you come on the land. 

They cannot be both. They cannot be wholly government sponsored for the purposes of regulating them and setting their capital 

standards, etc., but then private enterprise, so that you cannot take 

the money. We think that they are a mix, and reasonable activity 

is permissible in both cases. 

That is what this bill does. 

The Chair now recognizes the gentleman from Alabama. The 

gentleman from Alabama has used the power under the rule here, 

which we agreed to, to take an additional 10 minutes, so he has 

20 minutes. The gentleman is entitled to 20 minutes for an opening 

statement. 

I realize this is a lot for you all to sit and listen to, but this is 

an important bill. I do think it is important that we air these 

things. I assume you are all smart enough to figure that the morning was killed anyway, so it should not be a problem that you have 

to sit and listen to us. 

The gentleman is recognized for 5 minutes. 

Mr. BACHUS. I thank the chairman. I do not know whether it is 

a bigger burden on you to listen to me or to listen to the chairman. 

[Laughter] 

Mr. BACHUS. I will not ask you. 

Chairman Frank, let me start by thanking you for holding this 

hearing. This is a very important matter. It is important for the 

GSEs, Fannie Mae, Freddie Mac, and for our 12 Federal Home 

Loan Banks. It is also important for homeowners, for taxpayers, 

and for prospective homeowners. 

This committee has been working to enact meaningful reform of 

the GSEs and their regulator for years. This is not an issue with 

5

convenient answers. Actually, it is a subject where really every proposed solution raises some new difficult questions. 

Having said that, I do believe that we are close to our goal of 

GSE reform legislation. 

Promoting homeownership, especially homeownership for low 

and moderate income families, is a priority for the Republican 

members of this committee. Congress created the Housing GSEs to 

expand homeownership and meet the needs of any person who 

wants to live the American dream. 

We must balance that requirement with the responsibility of limiting risk to the taxpayer and the burden to the market. Fortunately, a strong bipartisan consensus exists around the issue of 

GSE reform. 

Events of recent years have led many to conclude that the current regulators are underfunded, understaffed, and unable to fully 

oversee the operations of these sophisticated entities. 

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

are large, complex financial institutions requiring a world class 

regulatory structure which is independently funded with all appropriate authority and independence. 

When the committee debated GSE legislation last Congress, I did 

join, as the chairman said, with a substantial number of my Republican colleagues in opposing the creation of a housing fund that 

would have been drawn from the GSEs after tax income and used 

to fund certain housing initiatives by outside parties, including 

nonprofit organizations and community development groups. 

This year’s bill includes a modified version of that proposal—one 

substituting a funding mechanism based upon the GSEs’ total outstanding mortgages. 

In the interest of fairness and accuracy, as Chairman Frank correctly stated, the language in this year’s bill is an improvement 

over last year’s version. 

While I respect Chairman Frank’s long-standing and sincere belief in the importance of creating this fund, I agree with the Congressional Budget Office that new assessments on GSEs would inevitably be passed along to their customers in the form of higher 

fees, therefore, raising the cost of purchasing a home or refinancing 

an existing mortgage. 

Additionally, many on our side of the aisle have serious questions 

about the ability of State housing bureaucracies to competitively, 

and let me stress that word, competitively, and efficiently deliver 

and monitor upwards of $500 million per year. 

Further, the proposed fund is extraneous to the task at hand, 

creating a world class safety and soundness regulator for Fannie 

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

Therefore, I must remain opposed to the inclusion of the proposed affordable housing fund in the GSE reform bill. 

We still have in our power the ability to pass a strong, very 

much needed GSE reform bill with overwhelming bipartisan support. All that would be necessary to achieve this goal is to de-link 

GSE reform from the proposed housing fund, and to make the latter the focus of a separate legislative proposal. 

Let me conclude by saying that I still believe we can address this 

honest philosophical disagreement in a manner consistent with the 

6

House Financial Services Committee’s long and unique history of 

bipartisan cooperation. 

Hopefully, we can move forward swiftly on the issue of GSE reform, and then tackle the separate question of expanding our Nation’s affordable housing supply in a manner beneficial to taxpayers, homeowners, and those who wish to rent in a manner consistent with free market principles. 

Again, Mr. Chairman, I thank you for holding this hearing, I 

commend you for this legislation. and I thank our witnesses for 

taking the time to be here. 

The CHAIRMAN. The gentlewoman from California is recognized 

for 5 minutes. 

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

appreciate the opportunity to hear from our witnesses today, and 

I appreciate the work that both you and Mr. Kanjorski have done 

in order to get us to this point. 

I am very, very interested in GSE reform for a number of reasons. I must share with you, Mr. Chairman and members, that despite the fact that I agree that there is a need for some reform, I 

have never been comfortable with the politics that led to this reform, the formation of FM Watch, and what that means, and what 

appears to have been a fight about market share, and a lot of concern about whether or not the GSEs were entering into the retail 

portion of this business rather than being confined to their mission. 

I am not so sure that much of this had not been about that kind 

of competition. 

I have paid some attention to this bill. It is a masterpiece of legislation that certainly I must spend a lot more time on. I have a 

lot of questions about OFHEO. I have had a lot of questions about 

OFHEO from the first time that I was introduced to exactly what 

they did and what they did not do. I am anxious to have the correct 

kind of oversight agency, but I still have questions. 

We talk about the new make-up of the board of the GSEs and 

taking away the President’s appointments, and I am not so sure 

that I agree with that. I want to raise the question about whether 

or not OFHEO has a board. Who oversees OFHEO? 

I am also concerned about some of the functions of HUD that will 

be removed from HUD to OFHEO, and I think that this committee 

has never resolved whether or not the accepted accounting principles and practices are consistent and that we really do understand them. 

I suspect that there will always be some questions about whether 

or not the accounting practices are the correct ones to be used because it seems to me that there are still things about the accounting practices that have never been resolved. 

We are all interested in safety and soundness. I know the constant refrain about the fact that these GSEs are too big and that 

God forbid, they should collapse, but it has been a lot more of the 

kind of negative questioning and the anticipated problems rather 

than any real problems within these GSEs as it relates to their 

soundness. 

I think they should have reasonable capital requirements, but I 

will be taking a strong look and discussing with you, my colleagues, not only that but other aspects of this legislation. 

7

Let me commend you, Mr. Chairman, on the housing trust fund. 

I think that was brilliant. I like the idea that we are going to help 

the GSEs realize their mission of more affordable housing. 

We have all constantly said to the GSEs that we want more done 

in low-income housing, and this certainly will help. 

I think we still have a long way to go to talk about how it gets 

managed. I think there are a lot of ideas about how that housing 

trust fund gets managed and what is the best way to get the resources to the people who can really do something about creating 

housing opportunities for our Nation. 

I look forward to that discussion and the information that will 

be shared with all of us by our colleagues about their experiences. 

Also, all of these agencies need oversight on diversity. One of the 

good things about the GSEs is our ability to talk with them about 

diversity and their responsiveness to us, where they come in and 

they show us their charts. They let us know about movement. They 

let us know about their efforts to have diversity within these huge 

corporations. 

The last time I talked with OFHEO, I do not think there were 

any African Americans in management, for example. I am not supportive of any oversight of any agency of government that is supposed to be doing the business of all the people that does not reflect 

the kind of diversity that will help me to understand that they 

know they are working for everybody. 

I will be raising these questions. I will be pushing very hard to 

make sure that we do some corrections. I am not yet sold on quite 

the way this reform has taken place. 

I yield back the balance of my time. 

The CHAIRMAN. I will recognize the gentleman from Alabama. 

We agreed under our rules that we would have 10 minutes of opening statements for each side, with either the ranking member or 

the chairman of the subcommittee or committee at his request to 

do an additional 10 minutes. 

The gentleman from Alabama now has time remaining. I am 

going to yield to the gentleman from Alabama and he can yield the 

time that is remaining to him as he wishes. 

Mr. BACHUS. Thank you, Mr. Chairman. Mr. Chairman, I plan 

to yield 3 minutes to Mr. Baker, 3 minutes to Ms. Biggert, 3 minutes to Mr. Royce, 1 minute to Mr. Gillmor, 3 minutes to Mr. Miller, and 1 minute each to Mr. Garrett and Mr. Neugebauer. 

The CHAIRMAN. The gentleman has permission to do that, and it 

is the timekeeper’s problem now, not mine. The gentleman may 

proceed. 

[Laughter] 

Mr. BACHUS. At this time, I yield 3 minutes to Mr. Baker, Congressman Baker. 

Mr. BAKER. Mr. Ranking Member, I know there are people asking for time. I do not need 3 minutes. I will take 30 seconds, if you 

would, in keeping your calculation, that will give you a couple of 

minutes to play with. 

Mr. BACHUS. I will yield such time as you may consume. 

Mr. BAKER. I will take 30 seconds. I want to thank you for the 

time. I want to thank the chairman for his good work on this imVerDate 0ct 09 2002 11:58 Jul 24, 2007 Jkt 035407 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\35407.TXT HFIN PsN: TERRIE
8

portant bill. We have come a long, long way over many, many 

years. 

Now is the time to get this done. I think this is an excellent 

product from a safety and soundness standpoint. Certainly, there 

are improvements that can be made to any bill that is offered. 

I look forward to improving it and more importantly, to hearing 

from our witnesses and learning more about the subject. 

I yield back. 

Mr. BACHUS. Thank you. That will free up time for one additional member. Ms. Biggert for 3 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and Ranking Member 

Bachus, for holding this hearing today. 

I would like to welcome today’s witnesses, Under Secretary Steel, 

Director Lockhart, and Assistant Secretary Cornick, our GSEs’ representatives, and all of the housing professionals who are here 

today. 

I look forward to hearing your views on the latest version of the 

bill. 

This is not a new bill or a new issue for those of us who have 

served on the committee since at least the 106th Congress. We held 

about 23 hearings and heard from well over 100 witnesses. In May 

of 2005, this committee reported out Mr. Baker’s bill, H.R. 1461, 

by a vote of 65–5. In October of 2005, the House passed the bill 

by a vote of 331–90. 

I supported Mr. Baker’s bill and commend him on his years of 

work on this issue. Our colleagues on the other side of the Capitol, 

however, failed to act on his bill during the last Congress, since we 

have returned for another round of GSE discussions. 

I would also like to thank Chairman Frank and Mr. Baker for 

introducing a GSE bill to establish a new and stronger regulator 

for the GSEs and the Federal Home Loan Banks. 

I hope that this legislation will give the new regulator crystal 

clear direction about its authority, available tools, and mission, so 

that it can guide the GSEs to be more effective for homeowners, 

market participants, financial institutions, and taxpayers. We also 

should aim to isolate this regulator from political influence. 

At this time, I have two concerns with the most recent version 

of the GSE reform bill. First, I hope we can take a closer look at 

the section of H.R. 1427 on program review and approval. 

I was active on this issue last Congress and I look forward to 

working with my colleagues to ensure that we strike the right balance, one that allows appropriate oversight, but does not impede 

the kind of innovation that ultimately is good for consumers and 

homeowners. 

Today, we should examine if the language as drafted is too ambiguous or if it will accommodate this important balance. 

Second, I am concerned about certain provisions in the affordable 

housing fund section of the bill—how this will establish a formula 

to allocate funds to States and Indian tribes, which would in turn 

determine which organizations receive the funds. 

I am not convinced that this is the best delivery method. Should 

the language be more specific and outline organizations that are 

appropriate to receive these funds? Should HUD play a more expanded role in the fund than the bill envisions? 

9

Should the affordable housing fund be modeled after the affordable housing program that is administered by the Federal Home 

Loan Banks? 

I hope today’s hearing will shed light on these specific issues as 

well as on other important provisions of the bill regarding mission, 

portfolio limits, and capital requirements. 

Again, I welcome today’s witnesses and thank Chairman Frank 

for holding this hearing. I yield back. 

Mr. BACHUS. Thank you. At this time, I yield 3 minutes to the 

gentleman from California, Mr. Royce. 

Mr. ROYCE. Thank you. Mr. Chairman, despite many of the improvements in this bill, and despite the improvements it would 

make on the regulatory structure of the GSEs, I am deeply troubled by two provisions. 

First, the legislation fails to give the regulator authority to take 

into account the systemic risk to the financial markets and to the 

housing sector when reviewing the size and scale of the GSEs’ retained mortgage portfolios. 

I think that is the whole point of regulating them. We do not do 

here what the Fed has suggested, and as we have heard from various experts, including the Fed Board, a failure by the GSEs to 

properly manage their large concentration of interest rate risk 

could de-stabilize the global financial system. 

In 2005, then-Fed Chairman Greenspan warned this committee—he warned us here—against passing legislation without 

giving the regulator appropriate authority to oversee systemic risk. 

My second pointis that I am adamantly opposed to the creation 

of an affordable housing fund. As I said last year, this fund is an 

experiment in socialism. We have a philosophical disagreement 

about this, and I will not belabor the point now, but this fund 

should not be included in legislation to improve the safety and 

soundness of the GSEs. This is essentially a poison pill provision. 

Mr. Chairman, I believe that last week Fed Chairman Bernanke 

provided a road map for a solution to both the systemic risk and 

affordable housing issues. 

As the Federal Reserve has not been asked to testify today, I 

would like to submit his March 6th speech entitled ‘‘GSE Portfolios, 

Systemic Risk and Affordable Housing’’ into the record. 

The CBO estimated that Fannie Mae and Freddie Mac shareholders benefit in the amount of $12.3 billion because of the enterprises’ perceived relationship to the Federal Government. 

The CHAIRMAN. Without objection, we will accept that document 

into the record. 

Mr. ROYCE. Thank you, Mr. Chairman. 

In light of this subsidy, Federal Reserve Chairman Bernanke’s 

latest proposal makes a great deal of sense because it allows the 

GSEs to use the subsidy for affordable housing by enabling them 

to purchase and retain mortgages extended only to households with 

below median income. 

This would do much more in addressing affordable housing than 

the fund contained in H.R. 1427. It would reduce the systemic risk 

posed by the retained portfolios, and I hope my colleagues will consider the approach advocated by the Federal Reserve Board, as I 

think it is most practical, and it is a very responsible solution. 

10

I would also end by commending you, Mr. Chairman, because 

you did put several things in this bill like setting minimum and 

risk based capital standards. You placed a troubled entity into receivership. You set up a system to review product approval and 

mission and to be independently funded outside the appropriations 

process. 

I agree with those changes that you put in the bill, but I raise 

these philosophical points because I think— 

The CHAIRMAN. If the gentleman will yield briefly, I appreciate 

that. I appreciate both his praising some elements but also maintaining his opposition. I need both to get this bill through. 

Mr. ROYCE. Thank you. 

Mr. BACHUS. Thank you. Mr. Chairman, we have 8 minutes remaining on our side. I would like at this time to assign 1 minute 

to Mr. Gillmor and 3 minutes to Mr. Miller following him. I will 

have an additional 41⁄2 minutes after that. Let’s do those two. 

Mr. GILLMOR. I thank the ranking member for yielding, and I 

commend the chairman for moving forward with this hearing. 

The issue of GSE reform is an extremely important one for the 

safety and soundness of our financial system. It is one that this 

committee has worked on previously. 

I think it is clear that we need a strong regulator. I think that 

regulator ought to have the authority to oversee the size and the 

types of activity. I think you can do that and let the GSEs preserve 

their very important mission of promoting housing. 

I also wanted to mention that I am very happy to see that the 

bill includes a provision that I had introduced last year requiring 

that these companies disclose their charitable contributions to 

shareholders. 

There is a lot of concern about corporate governance and a lot of 

management kind of forget that it is the shareholders’ money, and 

we are talking about billions of dollars here. 

I think it is very good that this principle is incorporated in this 

legislation; I would hope to see it extended in other legislation; I 

appreciate the opportunity; and I yield back. 

Mr. MILLER OF CALIFORNIA. Thank you. I commend Barney 

Frank and Mr. Bachus for bringing this bill forward. 

We have been dealing with this issue for quite a few years and 

dealing with safety and soundness on the part of GSEs and limiting risk. That is really, really important. 

We need to be careful not to hinder the basic innovation we have 

available through GSEs in doing that. We need to guarantee that 

mortgages are also accessible in the future. 

Increasing capital requirements when there is a risk is appropriate on a temporary basis, but there needs to be a very strong 

trigger that rolls back those increases once the issue has been resolved. We do not want to increase and yet leave it there without 

decreasing it when the issue has been taken care of. 

Conforming loan limits in high cost areas is a really growing 

problem. We talk about affordable housing, and in many ways, affordable housing is a matter of perspective based on where you 

live. 

11

OFHEO put out a chart that I think is very, very good. I am not 

talking about subprime loans. I am talking about jumbo loans in 

this country compared to conforming loans. 

Only 18.1 percent of jumbo loans are at a fixed rate compared 

to 82 percent in conforming loans. Much of the problem that we are 

facing in this country with foreclosures and defaults has to do with, 

I think, the lack of conforming in high cost areas. 

If you look at what the jumbo market is doing today, 34.9 percent of all the loans made are interest only ARMs, and 23.9 are 

negative amortization ARMs. If you look at the chart put out by 

Business Week in September of last year, you cannot see it, but the 

red you see on there is all California. 

That is the amount of foreclosures, and the high amount of foreclosures we are facing in this country, and they happen to be in 

the marketplace where conforming is not available and GSEs cannot do an adequate job, and even FHA, because the limits are set 

so low that they just do not work for California. 

This bill does something that is very, very good. It raises those 

limits in high cost areas. There has been quite a debate about 

subprime and the amount of risk associated with subprime and 

foreclosures today and defaults. 

I think what you are doing throughout most of this country has 

proved to be very good. Yes, there are some defaults, but when you 

look at it compared to the defaults we are facing in California because of the exotic loans that the jumbo loan market has created, 

we have to be able to effectively deal with that. 

I think we are at fault as Congress for not dealing with that. As 

with any legislation, there are parts of a bill that some of us do 

not like, but that is basically true of any piece of legislation we put 

forward in this country. 

We need to be very, very creative in GSEs. We need to also be 

able to expand the availability of GSEs. People in my district and 

my State should not be discriminated against just because they are 

a high cost area. That basically is what we face today. 

This bill resolves a lot of that. It goes a long way in creating basically fairness throughout this country on how we are going to provide government programs. 

I just commend the ranking member and the chairman for pushing this bill forward. I look forward to supporting it, and I yield 

back. 

Mr. BACHUS. Thank you. At this time, our last 41⁄2 minutes will 

be distributed to Mr. Garrett for 90 seconds, Mr. Neugebauer for 

90 seconds, and Mr. Shays for 90 seconds. 

Mr. GARRETT. Thank you. I would first note that the chairman, 

who earlier pointed out the contradictory views that some members 

have of the GSEs should look to the GSEs themselves, if they have 

contradictory views. Sometimes playing up their government role 

when that serves their purpose and playing up their private role 

when that serves their purpose. 

The chairman also pointed out some of the new actions by the 

regulator. I think that also shows the problem with this legislation, 

that without some specific benchmarks in place with regard to 

portfolio limitations, we may find ourselves in the same situation 

with another regulator down the road not implementing those 

12

when we are merely giving direction and not specific benchmarks. 

That is the second problem. 

The chairman also points out the reference to Samson and the 

Temple. I think that is also exactly a problem. When you disrupt 

a system, you do pull it down on your head. We must remember 

that Samson had his eyes gouged out. He was blind at the time. 

I think we are still blind in this situation, and when it falls on his 

head, it falls on the taxpayers’ heads in this situation. 

Finally, the chairman makes reference to the benefits to stockholders and the CEOs of the implicit government guarantee. He 

references only two solutions: reduce the portfolio; or share some 

of that public portion of the portfolio. 

There are two other ones. We could end the implicit backstop of 

that guarantee of the government to these GSEs, and fourthly, we 

can use what Chairman Bernanke said, to put limitations on that 

portfolio and put it right to low-income and affordable housing, and 

that would be a second and third way to make sure those profits 

do not go to the stockholders but go to the people that Congress 

intended. 

With that, I yield back. 

The CHAIRMAN. There is a vote. We can finish the opening statements; go vote; and then come back. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, and Ranking Member Bachus. 

I think one of the concerns I have is that as I have sat in the 

early days of the 110th Congress and the latter days of the 109th 

Congress, we have moved from our regulatory role to a management role. 

Congress is now not only trying to regulate companies, but now 

they are trying to manage those where we are trying to tell companies what they should pay their CEOs. Now we are saying to companies, and this particular entity, that we are going to put a tax 

on you. We are going to tax your portfolio based on the amount of 

business that you have on the books. 

We have gone from leaving that money on your balance sheet 

and being able to bring innovative programs to giving it to States. 

That is just additional taxation. 

I am very concerned about the direction that we are moving in 

with this bill in many areas. The fact is that we heard Secretary 

Jackson yesterday say to us, and it is a true statement, that today 

more people own a home today in America than any other time in 

the history of our market. 

We have some of the most robust markets in the world. We are 

the envy of the world, and particularly our mortgage market. As 

I travel abroad and talk to other countries of developing markets, 

they do not have the tools for housing that Americans have. 

I am very concerned about where we are moving in this direction. I am hoping we can, in the mark-up, make this bill get back 

to what it is intended to do, and that is to regulate rather than 

manage. 

I am very concerned that today as the capital markets are watching C-Span, they are packing their bags for other places that are 

more friendly to investment than I think this Congress is heading 

as far as making a fertile investment market where we have a very 

13

robust marketplace, but I think we are moving in a direction now 

that sends the wrong signal to these markets. 

What this bill is going to do is raise the cost of housing for the 

American people by the fact that Fannie Mae is a big player in a 

lot of the mortgages, and Freddie Mac, they are a very big player 

in that. 

I am very concerned about putting another tax on the American 

people in the form of a fee. 

Mr. SHAYS. Thank you, Mr. Chairman, and Ranking Member 

Bachus. 

First, Mr. Lockhart, thank you for your service to our country, 

as Executive Director of the Pension Benefit Guarantee Corporation, Deputy Commissioner of Social Security, and now Director of 

the Office of Federal Housing Enterprise Oversight, a constituent 

of mine. Had you chosen to be in the private sector, you could have 

had a much different return on your investment. Thank you for 

your service. 

I just want to say that in my judgment, GSEs have been getting 

away with not real life murder, but practically. I think they have 

been operated in a very corrupt way. They were exempted from the 

1934 and 1933 Acts. They were exempted from Sarbanes-Oxley. It 

was pressure by a number of people that finally got them to have 

to act like they were under the 1934 Act. When we did that, we 

learned how corrupt they had been operated. 

I am looking forward to them being cleaned up. The bottom line 

is that they could keep any profit and pass any loss onto the government, and they basically were able to keep this unique status 

by catering to the needs of Members of Congress, and they got 

away with it for many years. 

I am happy that reality has finally caught up with them and that 

we can protect the public and they can do the work they are supposed to do, and that is to help the low and middle income communities, as well as help the housing market in general. 

I thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. I will use my remaining 

time just to say I did want to acknowledge the gentleman from 

New Jersey reposed my accusation that some on the other side 

were being inconsistent by viewing Fannie Mae and Freddie Mac 

sometimes as purely private profit maximizing corporations and 

others as entities with a public interest, and he reposed by saying 

they were also inconsistent. 

I am glad to lump them altogether. I am glad to say that sometimes Fannie Mae and Freddie Mac are as inconsistent as members 

of the Minority. I have tried to be consistent. I will not use either 

of them as my standard for logic in this regard. 

Secondly, I did want to respond to the gentleman from Texas 

who said we were trying to set CEO salaries. No bill that I know 

of proposes to do that. We have talked about legislation that will 

let the shareholders vote on CEO salaries in an advisory capacity. 

The gentleman from Texas demolishes a strawman, and while we 

are at the break, perhaps they can sweep up the debris that would 

have accumulated. 

Also, I think we have seen—my last point is this, and the gentleman from New Jersey said, well, Federal Reserve Chairman 

14

Bernanke suggested a way to resolve this by having them do more 

with their portfolio. That is a fundamental misunderstanding of the 

need for affordable housing. 

You are talking about 80 percent of median and above when you 

talk about the portfolio. Those should be done by the sensible purchase of loans. 

When you are talking about people at 50 percent below, as we 

define low income, 30 percent below median, extremely low income, 

there is no way short of subsidy that you can do that. 

You may not want to have Fannie Mae and Freddie Mac contributing to alleviating the problem for people at that low end. Literally, no one who deals with housing thinks that by secondary 

market and securitization, you can get much below the 80 percent. 

We did lower it from 100 percent to 80 percent as the benchmark 

for the goals. 

It is simply not the case that you can reach the level of subsidy 

we hope to, the lowest income people, by using the normal 

securitization methods. 

Mr. SHAYS. Mr. Chairman, and Mr. Steel, I thank you for your 

service as well, another Connecticut resident. Obviously, I thank 

all. A great leader in our community. 

The CHAIRMAN. I was going to say, what about Cornick? Only 

people in Connecticut? 

[Laughter] 

The CHAIRMAN. Thank you, Mr. Cornick. The hearing will recess 

and we will come back. You will have to move to Connecticut to be 

thanked. 

[Recess] 

The CHAIRMAN. The hearing will reconvene. Please take your 

seats. 

We will begin the testimony. First, we have a panel of Administration officials. We will begin with Robert Steel, who is the Under 

Secretary for Domestic Finance in the Department of Treasury. 

Mr. Steel? 

STATEMENT OF THE HONORABLE ROBERT K. STEEL, UNDER 

SECRETARY FOR DOMESTIC FINANCE, DEPARTMENT OF 

THE TREASURY 

Mr. STEEL. Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee, for inviting me to appear today 

before you to discuss the very important issue of Housing Government-Sponsored Enterprise (GSE) regulatory reform. 

H.R. 1427 will significantly improve the supervision of GSEs. 

This legislation creates a strong regulator with authorities that are 

commensurate with other financial regulators’ powers, to ensure 

that the housing finance system remains vibrant. 

H.R. 1427 is a well-crafted and balanced bill. It has been a privilege working with the committee on this important effort, and we 

look forward at Treasury to continuing to do so. 

The United States has one of the most successful housing finance 

systems in the world. Our Nation’s housing finance system provides consumers with a wide range of mortgage finance options 

that open up the door for homeownership and access to normally 

illiquid housing wealth accumulated over time. 

15

The housing GSEs—Fannie Mae, Freddie Mac, and the Federal 

Home Loan Banks—are important components of our Nation’s 

housing finance system, as are federally insured depository institutions, mortgage banks, private mortgage insurers, mortgage brokers, and investment banking firms. 

Fannie Mae and Freddie Mac operate in the secondary mortgage 

market by providing credit guarantees on mortgage backed securities or by directly investing in mortgages and mortgage related securities through their retained mortgage portfolios. 

Recent accounting and corporate governance problems and regulatory oversight have limited the growth of Fannie Mae and 

Freddie Mac over the last few years. 

Nonetheless, they are still a significant presence in our Nation’s 

housing finance system. Together, Fannie Mae and Freddie Mac 

have about $4.3 trillion of mortgage credit exposure as of year end 

2006, which was about 40 percent of total outstanding mortgage 

debt in our country. 

The Federal Home Loan Banks also are significant participants 

in our Nation’s housing finance system, but they operate under a 

different business model than Fannie Mae and Freddie Mac. 

The Federal Home Loan Banks’ primary business is making advances or secured loans to member institutions that are involved 

in housing finance to various degrees. 

As of year end 2006, Federal Home Loan Bank advances were $641 billion, and they held total mortgage investments of $225 billion, and total assets of approximately $1 trillion. 

Treasury has continually stated that we have two core objectives 

regarding GSE regulatory reform. First, the need for a sound and 

resilient financial system, and second, increased homeownership 

opportunities for less advantaged Americans. 

In line with our core objectives, our reform proposals have been 

designed to minimize the risks that the housing GSEs pose to the 

financial system, and to focus the housing GSEs on that specific 

mission. 

It is widely recognized that there is a deficiency in the oversight 

and regulation of the housing GSEs, and Congress has worked to 

improve this situation. We at Treasury appreciate this effort and 

pledge to continue to work with you to establish a new regulator 

that has all the authorities necessary to oversee these complex and 

sophisticated institutions. 

Throughout the debate on housing GSE regulatory reform, Treasury’s focus has been on ensuring that the new regulator has all the 

powers, authority, and statute needed to do the job. 

In this regard, a core tenet of our position is that the new regulator’s powers should be comparable in scope and force to those of 

our Nation’s other financial institution regulators. 

In addition, the housing GSEs are different than a typical financial institution. It is just as essential that the new regulator have 

the appropriate authority to consider these unique characteristics 

of the GSEs and their housing mission. 

In terms of comparable powers, we must ensure that the new 

housing GSE regulatory agency has the following authority: it must 

have the flexibility to set both minimum and risk based capital requirements; it must have all the receivership authority that is necVerDate 0ct 09 2002 11:58 Jul 24, 2007 Jkt 035407 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\35407.TXT HFIN PsN: TERRIE
16

essary to direct liquidation of assets and otherwise to direct an orderly wind down in the event of the failure of an enterprise; it 

must be required to take mandatory receivership actions under certain circumstances; it must have the authority for approving new 

activities of Fannie Mae and Freddie Mac and ensuring compliance 

with their mission; and it must also have independent funding outside of the appropriations process, independent litigating authority, 

and other related powers. In other words, the full tool box of regulatory and enforcement skills characteristic of a financial regulator. 

In addition to ensuring comparable regulatory authority, the 

housing GSEs must also have unique characteristics that must be 

addressed in regulatory reform legislation. 

The housing GSEs were created to accomplish a mission and 

they were provided a certain set of statutory benefits to help in the 

accomplishment of this mission. The GSEs also greatly benefit from 

the market’s perception that the U.S. Government guarantees or 

stands behind GSE obligations, which results in preferential funding rates being provided to the GSEs. 

On behalf of the Treasury, I want to once again reiterate that the 

GSEs’ debt and other financial obligations are not backed by the 

Federal Government. 

As Treasury has previously noted, the combination of three factors of Fannie Mae and Freddie Mac’s retained mortgage portfolios 

warrant the attention of policymakers: first, the size of the retained 

mortgage portfolios of Fannie Mae and Freddie Mac, $1.4 trillion 

as of year end 2006; second, the lack of effective market discipline; 

and third, the interconnectivity between the GSEs’ mortgage investment activities and the other key players in our Nation’s financial system. 

The combination of these three factors causes the GSEs to 

present the potential for systemic risk to our financial system and 

the global economy. This view has not changed. Thus, other appropriate measures are needed in this legislation to take into account 

these unique characteristics of the housing GSEs. 

These essential components include that the new regulatory 

agency must be provided specific review authority over the retained 

mortgage portfolios of Fannie Mae and Freddie Mac. Such authority should establish a clear and transparent process based on direction from Congress on how the new regulatory agency will evaluate 

the retained mortgage portfolios in terms of risk and consistency 

with mission. 

There must be clarification that the government should not be 

involved in the appointment of directors to the boards of Fannie 

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

The Federal Home Loan Banks must be placed under the same 

regulator with Fannie Mae and Freddie Mac and then this new 

regulatory regime should be structured to take into account certain 

special differences between the Federal Home Loan Banks and the 

other GSEs. This would enhance the critical mass of financial expertise needed to oversee the GSEs. 

In conclusion, we at Treasury appreciate the efforts of the chairman and members of the committee in working towards achieving 

resolution of the housing GSE regulatory reform issue. 

17

H.R. 1427 will establish a new regulator with powers that are 

comparable to other financial institution regulators, which will 

greatly improve the oversight of the housing GSEs. 

We still have concerns with certain aspects of H.R. 1427. In particular, if an affordable housing fund is going to be part of this legislation, the fund must be controlled by the Federal Government, 

not by Fannie Mae and Freddie Mac. It must be temporary and 

capped. 

In addition, the provision increasing the conforming loan limit in 

high cost areas is inappropriate because there do not appear to be 

any problems in the provision of mortgage credit in these areas, 

and it could detract from the affordable housing ambitions of 

Fannie Mae and Freddie Mac. 

Nonetheless, the Treasury is supportive of the regulatory enhancements contained in this legislation as they are a significant 

improvement over the current law. Any efforts to limit these powers or weaken the new regulator would not be favorable. 

Thank you, very much. We look forward to continuing to work 

with you. 

[The prepared statement of Under Secretary Steel can be found 

on page 187 of the appendix.] 

The CHAIRMAN. Next is Director James B. Lockhart III, of 

OFHEO, and I would like to point out that, like Mr. Steel, he is 

from Fairfield County, Connecticut. 

[Laughter] 

STATEMENT OF THE HONORABLE JAMES B. LOCKHART III, DIRECTOR, OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT (OFHEO) 

Mr. LOCKHART. Chairman Frank, Ranking Member Bachus, 

members of the committee, and certainly Congressman Shays, 

thank you for inviting me here today to discuss the very important 

issue of GSE reform and H.R. 1427. I am grateful to you for your 

hard work in reaching what I believe is a balanced approach to 

needed reforms. It is time for action. 

Housing and homeownership are critical components of the 

American dream and the American economy. Together, the 12 Federal Home Loan Banks, Fannie Mae, and Freddie Mac, are involved in 46 percent of the total mortgage debt outstanding in this 

country. Their total debt and guaranteed MBS of $5.4 trillion is 

larger than the public debt of the United States. 

Like all financial institutions, the housing GSEs face a full range 

of risk, including market, credit, and operational risk, only on a 

larger and more concentrated scale. 

Fannie Mae, Freddie Mac, and several of the Federal Home Loan 

Banks have experienced serious difficulties handling those risks in 

the past. 

Current remediation efforts will help reduce but not eliminate 

those risks. OFHEO will be making its annual report to Congress 

in early April. It will show that Fannie Mae and Freddie Mac are 

making progress but still have many problems to correct. 

Their, and frankly OFHEO’s, performance fell far short of what 

Congress expected. In my view, the most important lesson learned 

is the compelling need for legislation. 

18

The new regulator must ensure that the GSEs operate in a safe 

and sound manner and support affordable housing and the liquidity and stability of the mortgage market. 

The new regulator must also understand the GSEs’ accountability to their shareholders to earn a fair return, and that the 

GSEs are not subject to the normal market disciplines. 

I am very pleased that there is a general consensus that the new 

GSE regulator’s authorities should be similar to those of bank regulators. Reform must be built on this bank regulator model. 

The new regulator must have regulatory, supervisory, and enforcement powers equivalent to the bank regulators, including receivership powers. Receivership powers provide one way to prevent 

problems in one financial institution from spilling over to others, 

and might enhance market discipline. 

As Controller General David Walker said, ‘‘A single housing GSE 

regulator will be more objective, efficient, effective, and prominent 

than the two separate bodies.’’ 

It is critical that the new regulator respect the differences and 

the similarities of the enterprises and the banks. Just like the bank 

regulators, the new GSE regulator needs to have both safety and 

soundness powers, as well as mission and new product authorities. 

It also needs independent litigating and budgeting authority. 

OFHEO is the only safety and soundness regulator that must be 

congressionally appropriated. Without relief from the continuing 

resolution, planned resources and critical supervisory areas will 

have to be cut this year. 

Minimum capital rules are lower than other financial institutions, and the risk based capital rule must be modernized. The regulator needs authority to adjust both the minimum and risk based 

capital requirements through an open rulemaking process, supplemented by the ability to respond quickly to changing conditions. 

From 1990 to 2005, Fannie Mae’s and Freddie Mac’s portfolios grew out of control; they grew tenfold to over $1.4 trillion. Over 

half of their portfolios are invested in their own MBS, and less 

than 30 percent meet HUD’s affordable housing goals. 

H.R. 1427 provides specific guidelines to the regulator of using 

an open rulemaking process to better focus the portfolios on their 

missions while considering the risk. This process needs to consider 

their ongoing support of the mortgage market. 

Last year, in 2006, despite the growth restrictions we have on 

their portfolios and stiff competition, their total book of business, 

including their unrestricted guaranteed MBS, grew 8 percent. 

It is time to move forward on legislation to create a new stronger 

GSE regulator, and assure the safety and soundness of the housing 

GSEs and their full dedication to their important mission of supporting the liquidity and stability of the mortgage market and affordable housing. 

Thank you. 

[The prepared statement of Director Lockhart can be found on 

page 174 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Lockhart. 

The final witness from the Administration is L. Carter Cornick, 

the General Deputy Assistant Secretary from the Department of 

Housing and Urban Development. 

19

Mr. Cornick? 

STATEMENT OF THE HONORABLE L. CARTER CORNICK, GENERAL DEPUTY ASSISTANT SECRETARY, DEPARTMENT OF 

HOUSING AND URBAN DEVELOPMENT 

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

Frank, Ranking Member Bachus, and distinguished members, I 

ask that my written statement be accepted for the record. 

The CHAIRMAN. Without objection. Let me say that any statements by any of the witnesses that they wish to insert will be inserted. 

At this point, I would ask unanimous consent also to put into the 

record the statement of the Consumer Mortgage Coalition. In fact, 

I would ask unanimous consent that members have general leave 

to insert any material they wish to insert, assuming that no one 

would abuse the privilege. 

Please go ahead, Mr. Cornick. 

Mr. CORNICK. Yes, sir. Thank you for the opportunity to speak 

today about H.R. 1427. This important regulatory reform legislation is needed to strengthen the Federal Government’s oversight of 

Housing Government-Sponsored Enterprises—Fannie Mae, Freddie 

Mac, and the Federal Home Loan Banks. 

The legislation improves the oversight of the GSEs by creating 

a regulator on par with the existing financial regulators. HUD fully 

endorses establishing a new regulator for all three that would combine safety and soundness authority with oversight of their respective housing missions. 

HUD is especially interested in ensuring that the new legislation 

continues to promote affordable housing, in part because of the Department’s well-established role in ensuring that the Nation’s affordable housing needs are addressed by both public and private 

initiatives, and in part because of a long held responsibility to regulate Fannie Mae and Freddie Mac. 

The last 10 years have been years of increased affordable lending 

for low-income and minority families in the conventional mortgage 

market. The Home Mortgage Disclosure Act data shows substantial 

growth in conventional lending to low-income and minority borrowers, and suggests that new affordable lending initiatives have 

had a positive measurable impact. 

Most agree that in addition to low interest rates, economic expansion, enhanced regulation of CRA obligations, and HUD’s affordable housing goals, all have contributed to a renewed emphasis 

on low-income and minority lending in conventional markets. 

Today is about how the GSEs will be regulated in the future, and 

so how the government will measure GSE performance in meeting 

the affordable housing objectives is important. 

The affordable housing goals have been a key focus of HUD’s regulatory oversight work. In 1992, Congress expressed concern about 

the GSEs’ funding of affordable loans for low-income families, particularly those living in inner city neighborhoods that had been 

redlined by primary market lenders. 

Congress called for HUD to establish their annual goals. In carrying out its responsibilities to set, monitor, and enforce these 

20

goals, HUD established progressively higher goal levels by regulation in 1995, 2000, and again in 2004. 

Since 1999, both GSEs have improved their performance significantly and in many cases, now exceed the conventional market for 

home purchase loans to very low and low and moderate income borrowers. 

We believe it is important with respect to the affordable housing 

goals in H.R. 1427 that the proposal retains the housing goals’ 

structure as a means of measuring GSE performance. In fact, there 

are some improvements over the current statute, including, as the 

chairman has pointed out, the establishment of an 80 percent income ceiling for defining under served census tracts, and providing 

monetary penalties for GSEs’ failure to achieve a housing goal. 

We think the structure of the housing goals as set out in the bill 

may not achieve the desired outcomes. I ask the committee to consider the following, starting with the single family goals. 

The single family very low income goal is targeted to a market 

that is very small. Currently, very-low-income borrowers account 

for only 6 to 7 percent of the conventional conforming market. 

Small markets like this provide very modest incentive for GSEs to 

develop products. As of 2005, GSEs already exceeded the conventional market for loans at this income level. 

Another thought. New goals exclude an important affordable 

housing market as we read it, the one to four unit single family 

rental properties. Even though these rental units are a very important source of affordable housing, in 2005, as many of you know, 

they accounted for 54 percent of all occupied rental units and just 

under half of those were affordable to very-low-income families. 

We hope your bill will encourage the GSEs to grow their single 

family rental business. 

Next, three separate multi-family goals will be difficult to establish because market data is not readily available. In the past, HUD 

has had to piece together estimates of the multi-family market 

from different sources. 

I also want to point out that H.R. 1427, as we read it, does not 

include overall standards for evaluating GSE performance in serving lower income families and their neighborhoods. 

Our experience shows there are effective tools for moving GSEs 

from sub-par to market performance across all their books of business, and we would like to see overall market based goals reinstated. 

We hope you will clarify the duty to serve provisions and the 

written statement expands on this point. 

HUD’s written comments for the record include additional analysis and data. I would also like to draw your attention to our written comments on the conforming loan limits. 

Before I close, I would like to comment on the affordable housing 

fund. With respect to the affordable housing fund, while HUD does 

not advocate for the creation of a fund, we share the view that any 

such fund should have a cap. 

We do think there are important improvements that need to be 

noted: the fund managed by the director rather than the GSEs; 

providing greater clarity for the recipients; and crafting a more precise sunset provision. 

21

Thank you for the opportunity to appear. I will be ready for questions. 

[The prepared statement of Assistant Secretary Cornick can be 

found on page 97 of the appendix.] 

The CHAIRMAN. Thank you. Let me begin with Mr. Steel and Mr. 

Lockhart. One of the debates we had was that I think it is generally agreed that there should be enhanced power on the part of 

whomever the regulator is to compel changes in the capital levels 

or in the portfolio from the standpoint of safety and soundness, affected also, of course, by mission. 

There was a legitimate philosophical debate as to whether, per 

se, the entities were too big. The question is whether the legislation 

should or should not give that authority. 

In the bill as introduced, at page 50, for later reference, authority 

to establish additional capital and reserve requirements, it says 

that the director can establish requirements with respect to any 

program or activity as he considers appropriate to ensure that the 

regulated entity operates in a safe and sound manner with sufficient capital and reserves to support the risks that arise in the operations and management of the regulated entity. 

There is a further paragraph on that. I read the one on Federal 

Home Loan Banks, with the GSEs, similarly. 

Standards by which the portfolio holdings are rated and growth 

of the portfolio holdings of the enterprises will be deemed to be consistent with the mission and safe and sound operations. 

It lists a number of factors. Liquidity needs, potential risk by the 

nature of the holding, and here is where we get to some controversy because of the interpretation, and I want to see if we can 

arrive at some agreement on this. 

Factor seven, number seven. Any additional factors the director 

determines appropriate except that the factor shall be consistent 

with the purpose of this Act and any authorizing sections. 

My understanding when we were working on this was that those 

specific numbered provisions really relate back to ‘‘A’’ in general. 

In general, shall by regulation establish standards by which the 

portfolio holdings are rated and growth of the portfolio holdings 

will be deemed to be consistent with the mission and safe and 

sound operations of the enterprises. 

In developing such standards, the director shall consider. The 

question was whether in referring to other factors, that would go 

beyond what was just in the opening paragraph. 

My intention was that those factors would be enumerated with 

regard to that opening paragraph. 

Mr. Steel, does that conform to your understanding? 

Mr. STEEL. Mr. Chairman, thank you. I think in that same paragraph, the duality of one mission, and two, safety and soundness 

is declared. 

The CHAIRMAN. Yes. 

Mr. STEEL. Both. Then there is further articulation via points 

one through seven, which you summarized. In addition, there will 

be additionally up above referenced a transparent process for development of guidance and rules and things like that. 

It is our view that these articulations are the right methodologies 

by which to empower the regulator. 

22

The CHAIRMAN. I understand that. When we talk about additional factors, would that include a view that these are just too 

large and they were interfering with competitive—what bothers me 

is the interpretation by some that additional factors could take you 

beyond safety and soundness and mission. 

Mr. STEEL. I think mission and safety and soundness capture everything. 

The CHAIRMAN. These articulations are in pursuit of the mandate 

to do safety and soundness and mission? 

Mr. STEEL. Yes. 

The CHAIRMAN. That was our intention. I appreciate that. Let me 

ask Mr. Cornick, and I appreciate your comments on the goals. You 

talked about one exclusion from the goals, on four unit, did I hear 

that right? I am inclined to agree with what you said. Would you 

elaborate on that? 

Mr. CORNICK. Yes, sir. What we have found as we looked through 

the legislation, and we are still going through it as much as we 

can, is that the goals are silent on the one to four unit rental property. 

The CHAIRMAN. I think it is on page seven of the written testimony; is that correct? I think we are in agreement here and we 

would want to accommodate that proposal, particularly my colleagues from Summerville and south Boston, Massachusetts, are 

not here, and if we did not do three deckers, I could not go home. 

Mr. CORNICK. I think one of the things that happens here is you 

have engaged in a deliberative process throughout. Obviously, the 

spirit and point is that we are in dialogue and working together 

and we just wanted to put that goal forward. 

The CHAIRMAN. I appreciate that. We will be glad to work with 

you on the goal. Again, there is a duality here. There are goals 

which Fannie Mae and Freddie Mac can have to advance by the 

loans they purchase. We believe there is a segment that needs help 

that I was about to say no one is going to lend to that segment, 

but actually, it turns out some people were willing to lend to very 

poor people, and we are in big trouble because of it. We do not 

want to start them buying more subprime loans. 

I appreciate those. We will be glad to work with you, Mr. Secretary. 

Mr. CORNICK. Absolutely. 

The CHAIRMAN. On making sure that we do the goals. I know we 

will hear later from some of the people from the various development communities, the affordable housing lenders, again about the 

goals. They are separate from although complimentary to the affordable housing fund. 

Thank you. The gentleman from Alabama. 

Mr. BACHUS. Thank you. I want to address one issue in my questioning because of limitation of time. Let me just read again what 

I said in my opening statement. 

I said that many on our side of the aisle have serious questions 

about the ability of State housing bureaucracies to competitively 

and efficiently deliver and monitor upwards of $500 million per 

year. We are talking about the housing fund and the State agencies 

distributing that. 

23

I am going to ask Under Secretary Steel and Assistant Secretary 

Cornick, as drafted, the legislation says the States will be allowed 

to decide which of its agencies should administer the program and 

allocate the grants. 

Do you believe this is an appropriate distribution mechanism for 

the fund if one is created, and are you confident that State housing 

agencies are capable of administering this new program in a way 

that ensures that funds are distributed competitively to deserving 

recipients? 

If not, what changes would you make in the housing fund? 

Mr. STEEL. I will begin, sir. I think that if we talk about first 

the housing fund at maybe a higher altitude and then come down 

to your specific question. 

Mr. BACHUS. Sure. I guess my question could just be are you 

comfortable with the housing fund. If not, how would you change 

it? 

One thing you said was you both would like to cap it, I understand. 

Mr. STEEL. Yes, sir. I think that when the history is told, that 

the key issue for Treasury was to drive the regulatory reform so 

as to have a strong regulator for the housing GSEs. 

As part of that, some people saw that the appropriate bridge in 

dealing with this issue for the GSEs should also deal with another 

part of the housing finance area, and there was birthed the affordable housing fund. That was as part of the process. 

That was not the original ambition, but that has developed. If 

that is going to be part of this, then the key issues for the Administration and for Treasury are that it not be controlled by the GSEs, 

that it be temporary, that it be capped, and not be part of a political process. 

If my memory is correct, it is Section 133, which lists about 

seven or eight specific attributes of the way in which the housing 

fund would be administered, and we are comfortable with that 

specificity so that we can be in favor of this. 

Mr. BACHUS. Are there any that you would add to that 133? 

Mr. STEEL. I think the ones articulated seem like the important 

ones to us. 

Mr. BACHUS. Mr. Cornick? 

Mr. CORNICK. Yes, sir. The first point is obviously the cap. From 

our perspective, certainty and stability go with such a feature for 

that fund. 

The second point that you raised, and it actually gets at some of 

what Ms. Biggert also pointed to, we look at this fund—the first 

thing is there is no daylight between anyone in the Administration. 

We are all supportive of the overall goals and the work that is before you. 

It is important to note that this fund is very distinct from safety 

and soundness and all of the regulatory concerns. It is a grant program. It is a grant program close to on the scale of a $2 billion 

home program, which we do run, I think, with some distinction. 

In the division of labor, we tend to believe at HUD that we do 

a very good job running these sorts of things. We understand that 

the proposal calls for the regulator and we are going to be cooperative in working with people to share the best of our knowledge. 

24

I think that one of the issues that you all speak to in the work 

that you put forward is capacity and making sure there is capacity 

and making sure that these funds are properly distributed, and you 

properly pointed to competitively. It is a very significant point. 

I think that is the best that I could offer at this juncture. 

Mr. BACHUS. Just to clarify, you both said you would like it to 

be temporary and capped. Would you elaborate on that? 

Mr. CORNICK. Sir, from my perspective, certainty and stability is 

what that introduces from our perspective. We think you do not 

want to inadvertently submit the GSEs or the fund to wild swings 

one way or another, depending on different conditions. 

Mr. BACHUS. Do you have a number in mind or could you come 

up with one? While you are thinking about that, I will ask Under 

Secretary Steel. 

Mr. STEEL. I think with regard to sunset, again, if my memory 

is correct, this expires as stipulated in 2012. The second is that the 

methodology—there was lots of discussion about the methodology of 

how to set the size of this housing fund. 

After lots of back and forth and good discussion which was helpful and educational, we basically drove it off the size of the portfolios, which is a less volatile and more predictable measure or 

metric. This is tied to something that is comfortable to us from that 

perspective. 

Mr. BACHUS. You said you would like a cap. 

Mr. STEEL. I think it is capped by being tied to the size of the 

portfolio. 

Mr. BACHUS. You are saying it is capped now? 

Mr. STEEL. It is capped by the arithmetic of the size of the portfolio, which will be a function of risk based capital and all the other 

aspects of the regulator, which makes us comfortable that this is 

a good compromise by which to determine a size. 

The CHAIRMAN. Before I recognize the gentleman, I am going to 

take just 30 seconds. 

Mr. Cornick? 

Mr. CORNICK. Yes, sir. The number that we had in mind that we 

have shared with the staff and talked with different folk is somewhere on the order of 525 to 550. 

The CHAIRMAN. I thank you. When you said it would be com- parable to $2 billion, you got my hopes up wildly. 

[Laughter] 

Mr. CORNICK. I was adding. 

The CHAIRMAN. Comparable in that it is one quarter as much. I 

suppose that is comparability. 

Mr. CORNICK. I was just adding years. 

The CHAIRMAN. Thank you. The only other thing I would say 

this, and briefly, we had cited that according to some of the critics, 

particularly of the GSEs, they receive an implicit subsidy, albeit 

once we say it, it is no longer implicit, but they receive a subsidy 

of $12.8 billion per year from the taxpayers. With $500 million, we are asking for about 4 percent of that. I 

think they are still getting off pretty good, and those who worry 

that we are unduly impinging, it does not seem to me that you can 

complain that they are getting a $12.8 billion subsidy from the taxpayers, and then begrudge $500 million for low-income housing. 

25

The gentlewoman from California. 

Ms. WATERS. Thank you, very much. I think that was a good discussion of the housing trust fund and the goals that have been set. 

While I had intended to talk a little bit more about that, I think 

it is just safe to say that many of us are extremely excited about 

the possibilities for this fund. 

I do believe that whatever needs to be done to work out the management of the fund will be done, and this will go a long way toward helping us all meet our goals. 

I wanted to take a minute, if I may, to ask a question or two of 

Mr. Lockhart. I see that in your testimony, you have indicated that 

the GSEs have made considerable progress and you are pleased 

with the progress they have made. I think it said you saw no reason why that should not continue. Is that true? 

Mr. LOCKHART. Yes, that is true. We are just finishing our exams 

for year end 2006. We will be publishing that in the next 3 weeks 

or so. 

It will show that they have made progress. I think the progress 

has been slower than we expected in the management team, but 

they are making progress. 

Ms. WATERS. What did you do to contribute to that progress? 

Mr. LOCKHART. Certainly, we have been very, very active in the 

remediation process with the management teams, and our examination teams have been in there pushing them forward, basically. 

Ms. WATERS. Could you be specific about any remediation that 

you have been involved in that has helped to improve the performance of the GSEs? 

Mr. LOCKHART. Both GSEs have put together plans about how to 

remediate their problems, and we have been very active in looking 

at those plans and working with them on the plans, and to the extent that they are not performing against the plans, we have certainly pointed that out to them. 

Ms. WATERS. Could you be specific about one of the remediation 

means or one area of remediation that you have been involved with 

that has changed the way they operate in any appreciable way? 

Mr. LOCKHART. We certainly have a whole series of different 

areas we have been involved with. 

Ms. WATERS. Just give me one. 

Mr. LOCKHART. Certainly the accounting, and the risk management. They have hired new risk management teams. We have been 

working with the risk management teams, market credit and especially operational risk management teams, and working with them 

to improve. 

Ms. WATERS. Can you tell me why you think the way the board 

is constructed for the GSEs needs to be changed? 

Mr. LOCKHART. At the moment, both Fannie Mae and Freddie 

Mac’s boards do not have any presidentially appointed directors. To 

me, the boards are working very effectively at the moment. 

The process is that they have head hunters who go out and really 

get very high quality people. We vet them to make sure that we 

think they are acceptable, and then they are voted in by the shareholders. 

26

The boards are working extremely hard at these two companies, 

given the amount of remediation to do, and we think it is an effective governance structure. 

Ms. WATERS. You think that for the future, the boards should 

have and keep the presidential appointees? 

Mr. LOCKHART. I do not think it is necessary and there are some 

conflicts of interest with presidential appointees, and to me, the 

more reasonable structure is to have directors elected by the shareholders. 

Ms. WATERS. Can you tell me why you believe that you need not 

to be reviewed and come under the appropriations process? 

Mr. LOCKHART. The appropriations process is a very cumbersome 

process for an agency that has to respond quickly to problems. We 

have been in existence for about 15 years. In 13 of them, we have 

had a continuing resolution. That makes it very hard to plan. 

At the moment, we are at last year’s budgeted amount of $60 

million. We asked for $67.5 million. Much of that is going to the 

litigation that we really have no control over, but we have to respond to the judges. 

Ms. WATERS. Is that not true of all the agencies of government 

that have to go through the appropriations process? 

Mr. LOCKHART. Many of them have similar issues, but I do not 

think the same. I think the better analogy is to all the bank and 

financial regulators, which do not have to go through the appropriations process. 

One of the reasons they do not is that they are funded by the 

institutions that are regulated, and they do not have an impact on 

the budget, and neither do we. 

Ms. WATERS. Do you think you should have a board of directors? 

Mr. LOCKHART. Yes, I think we should have a board of directors. 

Ms. WATERS. Have you recommended that? 

Mr. LOCKHART. Yes, I have. As Congressman Shays mentioned, 

I ran the Pension Benefit Guarantee Corporation, and during that 

period, we had a board of directors composed of three Cabinet secretaries, including the Secretary of the Treasury. 

Ms. WATERS. If I may, Mr. Chairman, I know my time is up, but 

what have you done about diversity at OFHEO? 

Mr. LOCKHART. First of all, I think diversity is extremely important. I came from the most diverse government agency, Social Security. We are working in our recruiting efforts and our training 

efforts to promote a more diverse workforce. 

Ms. WATERS. How long have you been working on it? 

Mr. LOCKHART. I have been there for 9 months. 

Ms. WATERS. You have not been able to find anybody in 9 

months? 

Mr. LOCKHART. We have been promoting people. In fact, I think 

you made a statement that we did not have an African American 

in management. We actually do. 

Ms. WATERS. You found one? 

Mr. LOCKHART. She is very, very talented, and came from Wall 

Street. 

Ms. WATERS. I know, I just said you found one. You have one? 

O-n-e. 

Mr. LOCKHART. One; yes. 

27

Ms. WATERS. Thank you. 

The CHAIRMAN. The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I would like to go back 

to the affordable housing fund section of the bill. As I said in my 

opening statement, HUD has the responsibility of establishing a 

formula to allocate funds to the States and to the tribes, and then 

they would determine which organizations receive the funds. The 

funds then go to the States. Mr. Cornick, what normally would the 

States do if that is the Administration that goes to—the funds 

would go to the States? 

Mr. CORNICK. Right, but under the Home Program—well, we 

have a couple. The Home Program works off of participating jurisdictions. The CDBG program works off of States as well as off entitlement communities, etc. And so we have a couple of different 

methods that substantial sums of HUD money are funneled out to 

the communities of State and local governments. We also work very 

closely with State housing finance agencies. 

As all of this relates though to the Affordable Housing Fund, one 

of the things that we are grappling with, we just had but a couple 

of days to go through the legislation ourselves, and what we wanted to do was just put forward some big picture points. I cannot 

speak exactly with precision about where and how this thing is 

working because our folks are still working hard to be sure that we 

understand all of the dynamics that are in play. But if you are willing, we would love—we are already working very closely with the 

chairman on a number of things that we discussed, we would just 

like to continue. We have some follow-up from yesterday with you 

as well. 

The CHAIRMAN. Would the gentlewoman yield? 

Mrs. BIGGERT. Yes. 

The CHAIRMAN. We are marking up—well, we are not marking 

this up, I take it back. We are not marking this up until the 28th, 

so there is plenty of time. 

Mr. CORNICK. Okay. 

The CHAIRMAN. And we will be open to this. The 28th is the day 

of the markup for this and that gives us plenty of time. 

Mr. CORNICK. That is very helpful. 

The CHAIRMAN. And I think all of us on both sides will be very 

receptive to specifics between now and then. 

Mrs. BIGGERT. Yes, I would appreciate that. 

Mr. CORNICK. Yes, ma’am. 

Mrs. BIGGERT. But just in general, do you think that this is the 

best delivery method so far? 

Mr. CORNICK. Well, I have betrayed a certain prejudice in that 

we are very proud of the work that we do, and we think that we 

have a pretty good set of systems that work well. By the same 

token, we are very respectful of the fact that what is proposed has 

some substantial support, and what we want to do is be productive. 

I have betrayed the fact that we feel that we could responsibly and 

efficiently produce some division of labor gains by using a system 

in a network that is very successful. But it is just for consideration. 

Mrs. BIGGERT. Well, do you think maybe then that you should 

have a more expanded role? 

28

Mr. CORNICK. We certainly would not be shy about it were it 

something that the Congress felt comfortable with. 

Mrs. BIGGERT. And what about modeling it after the Affordable 

Housing Program that the Federal Home Loan Banks administer; 

is that a possibility? 

Mr. CORNICK. I would have to get back with you on that because 

the truth is I am not smart enough how they do their work. 

Mrs. BIGGERT. Okay. I am concerned about the delivery just because we have seen what has happened in Louisiana particularly, 

that the money has gone down there and it has not been given out 

yet and has not started to be useful as it should be. 

Mr. CORNICK. Yes, ma’am. It is something that we have been 

working—you and the Secretary have talked about this very—we 

have been working very hard with them, and we just have some 

substantial challenges and we are just getting through them. 

Mrs. BIGGERT. Okay, then, Mr. Steel, would you have any comment on this from the point of view of the Treasury about using 

something like the Federal Home Loan Banks as administrators? 

Mr. STEEL. Thank you very much for the question. I think that 

there are several different ways we could go about this and discuss 

it. We are not opposed to that idea but the way as promulgated in 

the bill as written today is fine, also. And the key issue was the 

caveats that I described, and we walked through earlier, and this 

delivery mechanism as described by the States is fine with us. But 

if others are to be considered, that is fine too. 

Mrs. BIGGERT. Thank you. I yield back. 

The CHAIRMAN. I thank the gentlewoman. The gentleman from 

North Carolina. 

Mr. WATT. Thank you, Mr. Chairman, and thank you for— 

The CHAIRMAN. Gentlemen, just for a second, this is a very important piece of legislation. We have a long day of hearings, this 

is a very big committee, and unfortunately too many of the members pay attention, so we have long hearings and there is nothing 

I can do about that. I just want to tell people, for the convenience 

of the members and witnesses, that I plan to stay here all day and 

finish this. There is no need to take a lunch break, because it is 

not a markup situation; members can come and go. I say that for 

the benefit of the later witnesses, if they want to feel free to come 

and go, but it is—we are going to finish this hearing today, and 

people can adjust their lives accordingly. 

The gentleman from North Carolina. 

Mr. WATT. Can I steal that part of my time back from you? 

The CHAIRMAN. We just started now. 

Mr. WATT. Thank you, sir. Let me thank the chairman for convening the hearing. It is an extremely important hearing and an 

extremely important piece of legislation. I am a very hardy supporter of a stronger and more independent regulator, and I want 

to ask some questions in two areas related to the independence and 

the strength because some responsibilities go with being a stronger 

regulator. I have some concerns about the level of independence 

that I want to get on to the record here if I can. 

First of all, Mr. Lockhart, you are familiar with something called 

Operation Noriega, have you ever heard that term before? 

Mr. LOCKHART. No, I am not sure I have. 

29

Mr. WATT. Okay. There were reports circulated that somebody in 

the White House had more than a passing interest in how this new 

regulatory framework got formulated and may have had pretty aggressive interest in the reports that were done evaluating the GSEs 

performance. I also serve on Judiciary, and we have seen over the 

last couple of weeks revelations about the Administration being engaged in things, I mean the White House itself being engaged in 

things we thought were in many respects much, much more independent. Can each of the three witnesses give me assurances today 

that there are not e-mails, paper trails, interference from the White 

House, either in the reports that OFHEO has issued up to this 

point, the financial evaluations or reports, or in the shaping of reactions to the legislation here or legislation in general? Mr. 

Lockhart first. 

Mr. LOCKHART. Certainly, I am an independent regulator. In fact, 

I have been an independent regulator in three jobs in the government—at the PBGC and Social Security, as well as OFHEO—so I 

understand independence, and I think it is very important. 

Mr. WATT. You agree with me then that it would be inappropriate for somebody in the White House to be interfering in an 

independent regulator’s evaluation of conduct? 

Mr. LOCKHART. I agree with that and certainly in my 9 months 

there, there has not even been a hint of that. 

Mr. WATT. I think this would go back prior to your 9 months 

there, so I am seeking your assurance that that kind of inappropriate activity has not taken place to your knowledge prior to your 

9 months there. I want you to speak beyond your 9 months there, 

Mr. Lockhart. 

Mr. LOCKHART. Well, again, I can tell you the most important report we put out since I have been there is the special examination 

of Fannie Mae. 

Mr. WATT. I am talking about conduct that may have occurred 

prior to your being there, Mr. Lockhart. You are here on behalf of 

the agency. I am asking you about whether you have any knowledge of any e-mails, any correspondence whatsoever that may have 

even come close to the line about shaping the reports that OFHEO 

has issued? 

Mr. LOCKHART. No, I do not. 

Mr. WATT. Okay. And, Mr. Steel, Mr. Cornick, do you have any? 

Mr. STEEL. No, sir. 

Mr. CORNICK. Absolutely not. 

Mr. WATT. Now the second part of this inquiry that I want to be 

clear on is that there are some responsibilities other than independence that go with a strong regulator and there is some concern 

that some people have raised that in the conduct of OFHEO’s activities, it has released information, financial information, publicly 

and prematurely. I concede at some point all of this financial information must come out and be evaluated by the public since these 

are public corporations. My question to you, I assume you believe, 

Mr. Lockhart, that OFHEO is governed by those privacy provisions, 

non-disclosure provisions under 18 U.S.C., section 1905? 

Mr. LOCKHART. I am not sure of the cite, but I do believe that 

we are covered by privacy, yes, and we do keep the information priVerDate 0ct 09 2002 11:58 Jul 24, 2007 Jkt 035407 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\35407.TXT HFIN PsN: TERRIE
30

vate. A lot of our information is insider information and there are 

a whole series of rules around that as well. 

Mr. WATT. And to your knowledge has OFHEO at any point prematurely and in violation of any of this statute, or any other statute that you are aware of, released any information that it should 

not have, either before you got there or within the 9 months that 

you have been there? 

Mr. LOCKHART. I really unfortunately cannot speak before I got 

there on that kind of issue, but I can tell you what we have done 

while I have been there is that we protected the inside information. 

We do publish information about these two companies, we put out 

a quarterly capital report, which has information on them, and we 

are required by law to put this annual report to Congress that has 

information in it, which is somewhat different that the other regulators. 

Mr. WATT. And can I get your commitment to go back and review 

those prior disclosures so that we can be assured that this independence and this stronger regulation is accompanied by responsibility that is transparent also? 

Mr. LOCKHART. I certainly believe in that, and we will certainly 

look at that. I think it is very, very important for a regulator not 

to be political. 

Mr. WATT. Can I just ask him to do one other thing, I want to 

ask him a question, to take a closer look at the provisions of 18 

U.S.C., section 1905, and see whether there might need to be some 

clarification in this bill that we are considering that makes those 

responsibilities of OFHEO more concrete and transparent so the 

public has confidence not only in what the GSEs are doing but in 

what this stronger, more independent, more public and powerful 

regulator is doing? 

Mr. LOCKHART. I certainly will look at that. I have just been told 

that is the Trade Secrets Act you are talking about, that cite there, 

and certainly we will look at it. 

Mr. WATT. I think this goes well beyond trade secrets the way 

I read this. 

Mr. LOCKHART. We will certainly look at it. 

Mr. WATT. I thank the chairman for his generosity. 

The CHAIRMAN. The gentleman from Connecticut. 

Mr. SHAYS. Thank you, Mr. Chairman. Mr. Cornick, as you reviewed the law, is it your interpretation that the legislation would 

transfer fair housing enforcement away from HUD or are you concerned about it? 

Mr. CORNICK. Our attorneys recognize that we are just going 

over this and continue to do it. But currently the way we are reading H.R. 1427, there is a transfer of HUD’s fair lending, fair housing GSE oversight authority to a new regulator. 

Mr. SHAYS. And you would be opposed to that? 

Mr. CORNICK. Well, we would offer for consideration that we 

have a very established record in working that. We have been very 

successful enforcing the Nation’s fair housing and fair lending laws. 

Mr. SHAYS. So the answer is you would be concerned? 

Mr. CORNICK. Yes. 

Mr. SHAYS. Okay. 

31

The CHAIRMAN. Would the gentleman yield? Could we get the 

cite to that because we share that concern? Do you have the textual 

cite to that? 

Mr. CORNICK. Let me see, sir. 

The CHAIRMAN. If you do not, we will try— 

Mr. CORNICK. But I appreciate the question because it is important. 

Mr. SHAYS. Right, I think the committee will be concerned about 

that as well. Mr. Steel, if you would, section 115 of the bill requires 

Fannie Mae and Freddie Mac to register one class of stock under 

the 1934 Act. Why only the 1934 Act and why only one class of securities? 

Mr. STEEL. Thank you. The rules are specific that these institutions were exempt from the 1933 and 1934 Act, that is going back 

historically. They have chosen to voluntarily comply with the 1934 

Act. This is the current situation. It is not—and it is not something 

that we feel is required but should it be something that develops 

in the course of the bill, we would not be against it. 

Mr. SHAYS. Well, let me ask you a question, the 1933 and 1934 

Act have very real purposes, correct? 

Mr. STEEL. Yes. 

Mr. SHAYS. Fannie Mae and Freddie Mac are publicly traded, 

correct? 

Mr. STEEL. Yes. 

Mr. SHAYS. So isn’t there an argument that could strongly be 

made at the very least that they should comply like any other company that is traded publicly? 

Mr. STEEL. Yes, that argument could be made. 

Mr. SHAYS. But the Administration is remaining neutral on it? 

Mr. STEEL. We are comfortable with the way it is described now. 

Mr. SHAYS. Yes, unfortunately, before your time, folks were comfortable not having them under the law at all. And until we frankly 

forced them to have to disclose under the 1934 Act, and they said 

voluntarily they were doing it, like we did not have a right to make 

them, that is when we learned about all the problems. And it 

seems to me, and I will just publicly lobby you, I hope the Administration pro-actively engages in this and says, listen, let’s treat them 

like any other company. 

Mr. STEEL. Great. 

Mr. SHAYS. Let’s make sure they are under all the requirements 

that any other company would be. Mr. Lockhart, I would love to 

know about, GSEs are exempt from the privacy protection law enacted by Congress for other financial service firms in the GrammLeach-Bliley Act. Has OFHEO issued anything like the banking 

agency guidance or does this need to be addressed in our bill? 

Mr. LOCKHART. I really don’t know that and I will have to get 

back to you on that. 

Mr. SHAYS. Okay. 

Mr. LOCKHART. But if we need to get it in the bill, I know we 

put out guidances around privacy, whether they are exactly like 

the bank I am not sure. 

Mr. SHAYS. But do you think this is an issue that should be addressed? 

Mr. LOCKHART. Certainly, and we will look at it. 

32

Mr. SHAYS. Mr. Steel, I am sorry. 

Mr. STEEL. I think this is somewhat similar to the previous point 

that there has been exemption but it is certainly something to be 

considered, and we are glad to study and have conversations as 

things move ahead. 

Mr. LOCKHART. Could I make one point on the registration? 

Mr. SHAYS. Sure. 

Mr. LOCKHART. Actually, Freddie Mac is not registered yet. By 

the time they were going to register with the SEC, their financials— 

Mr. SHAYS. They could not comply. 

Mr. LOCKHART. They could not comply. 

Mr. SHAYS. Yes. 

Mr. LOCKHART. So once they get their financials in good shape, 

they are going to register. 

Mr. SHAYS. And that is a good qualification but it does not argue 

not for them to be— 

Mr. LOCKHART. Right. 

Mr. SHAYS. Okay. One last point, and it is to you Mr. Lockhart, 

OFHEO, everyone agrees that it is doing a much job under your 

management and significant changes, and I am not just saying that 

because you happen to be a constituent. I am not, that is the consensus. But what powers right now do you lack that you think you 

should have regardless of this bill that we are considering? What 

is the biggest area of weakness in your authority? 

Mr. LOCKHART. Well, we really don’t have the powers of a bank 

regulator and that is a whole series of powers, receivership, portfolio, capital. 

Mr. SHAYS. So there is a whole host of issues? 

Mr. LOCKHART. It is a very long list of issues and really has led 

to a weak regulator and so we have to sort of pick ourselves up by 

the bootstrap, if you will. 

Mr. SHAYS. The thing that concerns me is, as hard as we may 

work on this committee to get the job done, we cannot be certain 

what the Senate will do, and I think we are going to get out a good 

bill. So I am just interested in that. My time is up. Thank you, very 

much. 

The CHAIRMAN. I would just point out that by odd coincidence, 

the chairman of the Senate Committee is from, guess where? He 

is from Connecticut. Once again, maybe you can work with him. 

Mr. SHAYS. You know sometimes, Mr. Chairman, your Massachusetts accent I do not always understand. That is my problem. 

The CHAIRMAN. The gentleman from New York, which is where 

my accent is really from. 

Mr. MEEKS. Thank you, Mr. Chairman, thank you for holding 

this important hearing. I have some interest, and let me address 

my first question to Mr. Steel. In dealing with the Federal Home 

Loan Banks and the appointment of these independent public interest directors, I am concerned about their independence. And I 

know that 2 years had gone by and these positions had not been, 

only 40 percent of the director positions were vacant. No one was 

appointed to them. And then after a rule, and I think the rule was 

this past January, they came out with criteria that in the case that 

33

the candidate should include familiarity with financial and accounting matters. 

Now these are supposed to be public interest directors, and it 

seems to me if in fact you just specify you must have that particular background, are not we eliminating some of the independence? Because it seems to me then that the individuals can hire for 

the directors their cronies, the individuals that they know, either 

from the member banks, etc. Should there be another criterion in 

which we could also utilize individuals who will be appointed because of the public interest on the Federal Home Loan directorships? 

Mr. STEEL. Thank you. I think that the way I would answer your 

question is you would hope they are complementary skills, that in 

addition to the financial tools to be able to monitor the activities, 

that having people that have the public interest in their mind and 

things like that is an additional attribute that you would hope 

would be the case. But I think the idea that there should be people 

who do not have these other financial skills is a road that I would 

not want to go down. 

Mr. MEEKS. Do you think that these directors should be confirmed by the Senate? 

Mr. STEEL. Confirmed by the Senate? 

Mr. MEEKS. By the Senate? 

Mr. STEEL. I am sorry, by the? 

Mr. MEEKS. By the Senate? 

Mr. STEEL. I think that the best protocol is that they should 

come through the normal process and Senate confirmation is fine. 

Mr. MEEKS. Let me further ask Mr. Steel on the other matter of 

which— 

Mr. STEEL. I am sorry, I think I mis-spoke. They should not be 

confirmed by the Senate but instead come through and be approved 

by the board. And this gets into this issue, sir, that really Mr. 

Lockhart spoke about, which is complex, and that is these organizations, as the chairman said in his opening comments, are hybrids. They basically have private market and public policy ambitions too. But I think that the key issue here is that, as we have 

described, we need to continue to communicate that they are separate from the government and from a governance perspective so as 

to make clear that the financial tie, as described in the preferred 

cost of capital, is as clear as it can be, that is not the case. 

Mr. MEEKS. My concern just is that there is some independence 

and that we just do not have individuals deciding to elect individuals to the board who are just from those same circles because that 

is what becomes—that is who you know and there is no outreach 

to have some real independence of individuals who will be there 

specifically for the public interest. And I just think that we have 

to make sure that there is independence there. 

Let me just ask you, Mr. Steel, I know that last week Moody’s 

upgraded the rating for the Nation’s largest banks based upon the 

high potential of a government bail out. And the Treasury has justified limiting the portfolio of the GSEs due to a lack of market discipline based upon a perceived government bailout. My question, is 

should the same kind of restraints be placed upon the big banks? 

34

Mr. STEEL. Well, I think that there is a distinct difference, and 

it is a question I look forward to answering. The reality is that the 

cost of capital for other institutions in the financial marketplace 

goes up and down and their costs of borrowing go up and down. 

They are set by the marketplace, and they are not linked in the 

same way to the interest rate of the government. 

When you look at the cost of borrowing for the housing GSEs, it 

clearly does not represent the cost that it would be if there was not 

this determined link, this assigned link to the government. When 

you look at other large financial institutions, their costs go up and 

down depending on whether people perceive them as more risky, or 

less risky, and they really are subject to market type checks and 

balances. 

Mr. MEEKS. They are both regulated, I heard what you said, the 

difference, they are both being regulated. 

Mr. STEEL. Yes. 

Mr. MEEKS. Different agencies, both the industries and it seems 

like large sums of money but one you are saying is regulated closer 

or restricted more than the other? 

Mr. STEEL. The marketplace believes, and as I said in my opening comments and it was also referenced by others, the marketplace assigns a borrowing rate to the housing GSEs that is tied and 

infers a government backstop. I have declared that is not the case 

but that is the way it works so there is not the market check and 

balance that you would normally have when people tend to change 

their business model. 

Mr. MEEKS. I see my time is up. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from California. 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. I rather 

enjoy these hearings we have and the testimony from individuals 

from Washington, D.C. It reminds me of why I fly home every week 

because I do not want to develop a Washington mentality. Under 

Secretary Steel, what would you consider affordable housing? 

Mr. STEEL. Well, I think that Chairman Frank gave some descriptions earlier. 

Mr. MILLER OF CALIFORNIA. But what do you consider affordable 

housing? I know what he thinks. I heard your testimony, I want 

to know what you think. What do you think affordable housing is? 

Mr. STEEL. I think that when you look at the median price, and 

we basically go through the arithmetic and conforming loan limits 

and things like that, we have basically seen how it works out. 

Mr. MILLER OF CALIFORNIA. So you believe that median is some 

part of the definition of affordable housing, then why do you discriminate against areas like California in your comments? You do 

not have a problem with Guam. You do not have a problem with 

Alaska. You do not have a problem with Hawaii and these areas 

that are afforded a higher rate to fall under GSEs, you do not have 

a problem with that, but when I look at this chart that shows the 

States that are in trouble with foreclosure, California, but your 

comments actually discriminated against my State of California 

when we are trying to raise conforming loan rates in California. 

And all you have to do look at OFHEO’s chart to realize there 

is a huge need, and I think you need to read this chart before you 

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writing standards of the private sectors, they are not as rigorous 

as Freddie Mac and Fannie Mae are because Freddie and Fannie, 

82 percent of their loans are fixed rate loans, 18.1 percent of the 

other marketplace is fixed rate loans, and because of these loans 

that are being made out there in the private sector, people are in 

real trouble today. 

And yet in your testimony, you said, ‘‘There does not appear to 

be a problem in the provisions of mortgage credit in these areas 

and it could be a distraction from the affordable housing efforts of 

Freddie and Fannie.’’ What do you consider affordable housing? I 

was born in Huntsville, Arkansas, Madison County. My district is 

Orange County, California. Are you trying to tell me that affordable housing in Madison County, Arkansas, is the same as affordable housing in Orange County, California? That is a question. 

Mr. STEEL. No, sir. 

Mr. MILLER OF CALIFORNIA. Then how can you make a generic 

statement, as you did, that there does not appear to be a need or 

there is no apparent reason to stop discriminating against high-cost 

parts of this country and affording them the same opportunity as 

Madison County, Arkansas and other places that they can get an 

affordable house and they can go through Freddie Mac and Fannie 

Mae at a better rate. And if you look at historically, your problem 

loans, they have never been as problematic as what I am facing in 

California today with the jumbo market, even at Freddie and 

Fannie’s worst. 

So your comments to me, as I see it, you have a program that 

I fully support, that I believe works, and you are telling me that 

I am not as good as Guam, as Alaska, as Hawaii? How can you say 

that? And that is what you said? How can you say that? 

I want you to justify that on TV to the people I represent, and 

people in other high-costs parts of this country, that they are not 

as good as people in those areas and they should be discriminated 

against and not offered a loan that the Federal Government basically backs up and guarantees because we do, and the same taxpayers in my district are the same taxpayers in Alaska and Hawaii, why they are not qualified for the same kind? 

I am really upset about this, because we make these stupid—excuse me, we make these unacceptable Washington statements with 

a Washington perspective, that is why I think local housing authorities need more control and more leeway in determining the 

needs of the local people. We make statements like this, that there 

does not appear to be a need and you look at the charts, and the 

need is absolutely beyond question and the crisis is beyond question. These are not the crises and the defaults today, these areas 

are the crisis. The only red on this entire map of the United States 

is California and most of this country has availability of GSE loans; 

we do not. 

So you cannot tell me that an affordable house in Arkansas, or 

maybe some parts of Oregon where my family lives, are the same 

as an affordable home in California. I cannot buy a $300,000 house 

in my district hardly. If you can, it is in such disrepair that it is 

illegal to move into. You would have to go revamp it. So we have 

been fighting for years, and I commend the chairman for this, his 

efforts in this, too, to try to create some type of a system that is 

36

fair and equitable throughout this country but the concept that I 

have schoolteachers and firefighters and police officers driving 2 

hours back and forth to work each day because they cannot afford 

to buy a house in the community within which they live, yet if they 

get FHA availability and some GSE availability, you would move 

more people into homes with a safer, less risky loan. 

I apologize, I do not mean to offend you, but when you make 

statements like this, that somebody probably wrote and typed for 

you and you read in a meeting like this, and you tell me my people 

are not good enough, they are the same taxpayers as anybody else 

in this country because they happen to live in a high-cost area. You 

need to think about what we are trying to do in this country and 

that is provide liquidity in the housing market, and we are discriminating against most of the housing market in high-cost areas. 

And I am a little fired up, I know, Mr. Chairman, I do not want 

you to get too much exercise with your gavel there, but I would like 

you to re-think that. That is just not fair and it is just not equitable, especially when you are not the problem. 

The CHAIRMAN. Mr. Steel, I would not want to deprive you of a 

chance to respond if you are eager to do so. 

Mr. MILLER OF CALIFORNIA. I would love you to, please. 

Mr. STEEL. Well, I am happy to respond. First of all, I appreciate 

the perspective, and it will certainly be considered, and we will 

come back. I think, though, that the only thing I would challenge, 

sir, with all due respect, is it is not a question of being good. That 

is not the right way it was described. We are trying to develop a 

system for allocating and it is not a matter of assigning value to 

people or things like that. 

Mr. MILLER OF CALIFORNIA. Mr. Chairman, 5 seconds, please? If 

you can allocate it to Hawaii and Alaska and Guam, it should also 

be allocated to my part of California and over all of California. 

The CHAIRMAN. I would just say, if the gentleman would yield, 

I would just add to this and that allocation, I think, is not the right 

word. I do not see this as in any way zero sum, that is, it is not 

the case that doing the high-end loans in any way detracts, and indeed if we are looking at the goals, which are a percentage of overall loans, if we look at the Affordable Housing Fund, which is going 

to be fueled if we are successful by the portfolio, to some extent, 

the more loans they make in these high-cost areas, the more will 

be generated. So no one should see this as zero sum. The gentleman from Kansas? 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. And, Mr. 

Chairman, I want to commend you for this legislation, which I believe represents an important bipartisan compromise. H.R. 1427 

creates a strong new regulator for government-sponsored enterprises that will ensure the safety and soundness of these entities 

in our housing marketplace while also helping them fulfill their 

role in providing affordable housing opportunities for families all 

across our country. I hope this committee will be able to move forward after this hearing in marking up this legislation and moving 

it on its way to becoming law. 

The question I have for Mr. Lockhart is that the legislation we 

are considering today, sir, charges the new director with developing 

standards by which the enterprises’ portfolio holdings ‘‘will be 

37

deemed to be consistent with’’ their mission and safe and sound operations, as you read this language, do you believe it would permit 

the director to set quantitative standards, that is standards to prescribe a specific level or range for the portfolio holdings or does it 

contemplate standards that are more qualitative in nature? What 

sort of considerations should the director take into account in assuring the safety and soundness of the GSEs? 

Mr. LOCKHART. I think the legislation could set quantitative, or 

at least ranges, as well as qualitative standards. Certainly, I think 

the legislation gives very good guidance to the regulator that it 

should be looking at the liquidity of the market and the entities, 

it should be looking at the stability of the marketplace, it should 

make sure that they are able to securitize mortgages, which is 

their biggest business, and also they should consider the risk and 

very importantly affordable housing. The legislation requires that 

the regulator has to put the regulation out in about 180 days. I 

would hope that it could even be done quicker, and that there could 

be a really good dialogue about the various factors going forward. 

Mr. MOORE OF KANSAS. Thank you, sir. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. GARRETT. Thank you, Mr. Chairman. Thank you again, 

panel. First, dealing with the issue of the so-called housing program or as some of us call it a mortgage tax increase because in 

essence it is a tax on the GSEs and hence down the line to the 

eventual consumers. Maybe Mr. Cornick or maybe other members 

of the panel can answer this question, I am not talking about the 

programs that you run with regard to housing, but we have heard 

other testimony already with regard to the GSEs and that the private market basically is doing a better job when it comes to providing affordable housing than what the GSEs have already done 

so isn’t it implicit in this legislation that where it is saying that 

we are going to be adding on this housing program, isn’t it implicit 

in the legislation that we are saying that the GSEs have failed and 

we are trying to come with another solution since they did not do 

their job in the first place? 

Mr. CORNICK. Personally, I would not draw that conclusion. One 

of the things that we have found through our own goals— 

Mr. GARRETT. Well, if they were doing the job and they were providing it, they would be doing better than in the private market 

and we would not be looking to add another— 

Mr. CORNICK. That is where we are trying to get them and they 

are not currently there, that is true. 

Mr. GARRETT. Again with regard to this program, Mr. Steel, you 

were saying I think, maybe Mr. Lockhart you said this as well, I 

am not sure, that with regard to this program, it should be a temporary program, is that correct? 

Mr. STEEL. Yes. 

Mr. GARRETT. I have only been here in Washington for 4 years, 

maybe you can give me some examples other than tax cuts, which 

are set to expire and there is always an argument that they should 

be temporary by some sides of the aisle, can you give me some examples of other government programs that we have set up that 

have been temporary programs that actually are temporary? I am 

38

thinking of TRIO right now, which was supposed to be a temporary 

program, and we are seeing that going to continue on, but are 

there other programs that are truly established as temporary and 

then at the end they go away or do not they always just sort of stay 

around for good because once they leave, they begin a constituency 

for it? 

Mr. LOCKHART. I am newer than you and I do not have examples. 

Mr. GARRETT. Okay. Can anyone else give me examples so I can 

go home and say that yes— 

Mr. CORNICK. Yes, sir, I can give you one. 

Mr. GARRETT. Okay. 

Mr. CORNICK. Moving to Work at HUD, that is a demonstration 

program that I believe has a 10-year history. 

Mr. GARRETT. And then expired and did not morph into something else? 

Mr. CORNICK. It continues to be reauthorized or authorized 

through the appropriations process. 

Mr. GARRETT. Okay, so that is an example where we had a temporary program, it was supposed to be temporary— 

Mr. CORNICK. Actually, it has always been a demonstration, it 

has never grown into a full-fledged authorized stand-alone program. 

Mr. GARRETT. So maybe I should have some concern that even 

though both sides here believe that it should be temporary, it may 

not be. 

Mr. LOCKHART. One example would be the Resolution Trust Corporation, which was winding up the S&Ls. I think if you look at 

the President’s proposals, one of the proposals is actually to put 

forward a sunset commission to oversee these kinds of things to 

make sure that programs that are no longer necessary, are no 

longer working, are being shut down and that is happening in this 

Administration. 

Mr. GARRETT. That is something that I would totally agree with 

and if we have the authority in this committee, I would encourage 

the chairman—I do not think we do—to try to look into sun-setting 

a number of programs. Going over to a second area and that is the 

portfolios. Back in 1990, the portfolio amounts for Fannie Mae and 

Freddie Mac was $136 billion. By 2003, they were up to $1.6 trillion. 

And the reason I give 2003 data is because that is what I have 

in front of me because I understand that for both of those funds, 

we do not have total financials until 2004 and 2005. 

So my two questions for you are this, will shrinking their portfolios reduce systemic risk, (a)? And (b), can you really answer any 

of these questions when it comes to systemic risks and the size of 

their portfolio since we still do not even have data that is less than 

3 years old? And how do we move forward on any of this until we 

actually have that data? 

Mr. LOCKHART. Well, as the regulator, we do have the data, some 

of it may be still estimates but we do have the data, and we are 

certainly using that from a regulatory standpoint. The portfolios 

have come down about $200 billion since then and that is because 

the regulator took action and asked them to put up more capital 

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tainly, one has to consider the size of the portfolios as part of safety 

and soundness, and I think it is an important issue. 

The other thing about the portfolios is that it is just one of their 

two businesses. I think it is important to remember that this is 

about only a third of their total book of business and how they help 

the mortgage market. The other two-thirds is their guaranteeing of 

MBS’s and those guarantees have credit risks, just like their portfolio, but a lot less interest rate risk and operational risk. 

Mr. GARRETT. And I think I have time for just more question. 

Mr. Steel, you have not suggested any limit on the amount of the 

GSE obligations that a bank may hold, that was an idea proposed 

by the Clinton Treasury Department, I believe, and included in 

some prior versions of this legislation. Do you support such? 

Mr. STEEL. I think the key push for us has been, and will be, to 

have a strong regulator. And if we make the GSEs subject to good 

regulation with the right balance of both the size and the capital 

required, then that is the right anecdote for dealing with all the 

issues. 

Mr. GARRETT. Okay, thank you. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HINOJOSA. Thank you, Mr. Chairman. I want to thank you 

and Ranking Member Bachus for bringing this important issue for 

us to have this hearing on your bill. The outcome after this important hearing on reform of enterprises and Federal Home Loan 

Banks is very important to my congressional district, as well as to 

my State of Texas. I wish to ask my question to the Honorable Robert Steel, and also get input from The Honorable James Lockhart. 

Gentlemen, as you know, Chairman Frank’s legislation, H.R. 

1427, proposes a product review process for Fannie Mae and 

Freddie Mac that goes far beyond the bank regulatory model. National banks are not required by OCC rules to obtain prior approval for every new product that they introduce. Do you support 

this section of the H.R. 1427 bill? And, in your view, what justifies 

imposing a stricter regime on Fannie Mae and Freddie Mac? 

Mr. STEEL. Thank you. I think that the way I would think about 

this is really in the context of some of the earlier conversations. 

The housing GSEs are hybrid institutions and they have unusual 

characteristics. They are part private and part public in terms of 

the policy ambitions. And therefore we have said all along from the 

Treasury perspective that we think of the tools needed as in two 

parts. 

The first part are tools that are consistent with a strong banklike regulator. But, secondly, there are additional tools needed because of the special nature of GSEs and this product review is part 

of the special nature that we think is appropriate given this hybrid 

construct. Let me again reiterate that the development of rules in 

the open and transparent system will be a way for Congress to 

comment and have input on this and then the strong regulator will 

apply them over time. And that seems like the right prescription 

to go with this situation. 

Mr. HINOJOSA. Well, I am concerned that if you go too far, the 

low-income families in regions like the one I represent, where over 

40 percent are below the national poverty level, would never be 

able to own their dream home. And so I am concerned that you 

40

folks just might go a little bit too far to the right. And I would ask 

Mr. Lockhart, would you give me your views? 

Mr. LOCKHART. Well, first of all, I think regulatory review of new 

products is not unusual, either in banking or in the insurance industry. I am more familiar with the insurance industry. What is 

maybe a little different here is the more public nature of the reviews, but the regulator will put out a regulation, and certainly if 

there are private parts that should not be exposed to the public, 

that will not be exposed. 

But my view, again, is innovation is critical for these companies, 

and I think we have to encourage that. At the moment, unfortunately because of their problems, they are not really capable of innovating and so what we need to do is help get them fixed. And 

then I think this would be a very good process going forward to 

look at major new products. 

Mr. HINOJOSA. Well, I believe that to close that gap that has existed for far too long, we are going to have to be creative and innovative and be able to regulate them but, as I said earlier, not to 

go too far and not let them work and help us reach that goal. 

I want to continue and say that it seems to me that a financially 

healthy national bank does not have to obtain the approval of the 

Comptroller of the Currency or formally notify the comptroller before offering a type of mortgage that it had not offered before nor 

would a healthy bank need permission to start offering auto loans 

even though it had not done so before. I am concerned about an 

overly-bureaucratic bill approval process that might stifle innovation or harm the very reason we created Fannie Mae and Freddie 

Mac. So why treat Fannie and Freddie differently, and I address 

that to Mr. Lockhart? 

Mr. LOCKHART. Well, as Mr. Steel said, these are hybrid organizations, they have a very important public mission, and they have 

a very big role in the U.S. economy so we have to make sure, as 

part of regulatory review, that their new products are safe and 

sound. That is not meant to stifle innovation, it is just meant to 

make sure that they do not have safety and soundness problems. 

And I think, hopefully, a regulator can and has been able, will be 

able to work the balance between safety and soundness and innovation. 

Mr. HINOJOSA. Thank you for your response. I have already gone 

beyond my limit, and I yield back. 

The CHAIRMAN. I thank the gentleman. The gentleman from New 

Mexico. 

Mr. PEARCE. I thank the chairman for the hearing. I think my 

question, Mr. Steel, would be how do you perceive the secondary 

market in the reform bill, the bill that we have due, are GSEs 

going to stay involved in the secondary market? What are the applications that we need to face there, I think would be my question? 

Mr. STEEL. Well, I think that the clear issue here is that this 

proposal focuses on the issue of mission and the issue of safety and 

soundness. And the mission is clearly stipulated to be focused on 

extending credit for housing and so this does not limit their involvement in the secondary market. And that could continue but it 

will be up to the regulator to balance the business model with the 

41

appropriate risk-based capital and give him guidance and provide 

the right perspective so as to protect those twin, dual aspects. 

Mr. PEARCE. And you would see that flexibility to stay in or get 

out as being an appropriate flexibility, you think that flexibility is 

appropriately given? 

Mr. STEEL. Yes. 

Mr. PEARCE. Okay. Any other comments on the panel on this 

particular issue because I suspect we are going to hear more about 

this as we move forward because if see enough of it in the evening 

news, sometimes it percolates to a hearing, you never can tell? 

Mr. LOCKHART. Well, I certainly think that they have an extremely important role in the secondary market and this legislation 

that is proposed will only strengthen that role. They not only have 

a portfolio but, as I said earlier, they also are the major providers 

of securitized MBS’s that back up the mortgage market. So I think 

this bill will only strengthen them and strengthen their capability. 

Mr. PEARCE. Mr. Cornick, any comments? 

Mr. CORNICK. No, sir. 

Mr. PEARCE. If we could go just a little bit further and assess the 

strength—not just the strength of the market but the activity that 

goes into the secondary market? I come from a very poor district, 

probably $22,000 to $25,000 is our average income, and so secondary markets frankly play a very large role in seeing that people 

in New Mexico get access, so what happens if we constrict the secondary markets unnecessarily? Are there elements of the business 

world that are going to pick up those loans? 

I think that loan pool right now is about $700 million—$700 billion, excuse me, it is almost a trillion dollars to low-incomers and 

yet you can see it coming from the evening news, they think we 

ought to squeeze that down and shut it off, but it is going to affect 

people in the poor districts. And so what options do we have going 

into the future? What potential, what risks are out there in the 

market if we over-regulate and then what are the effects, if I could 

get some comment? 

Mr. LOCKHART. I think you have a very reasonable concern, that 

we do not want to over-regulate and we have to be cautious about 

what is happening out in the marketplace today. Freddie Mac and 

Fannie Mae are big players in the secondary mortgage market, including the kinds of securities you are talking about which are private label securities issued by issuers including Wall Street banks 

and other firms. They have been reasonably big buyers in that and 

they have actually been only playing at the very top level, the triple A tranche, but they do have between them probably $300 billion of private label securities and there is nothing in this bill that 

would not allow them to continue to do that. And then hopefully 

over time, they can develop capabilities to do even more. 

Mr. PEARCE. Mr. Steel, any comment? 

Mr. STEEL. I would agree. 

Mr. PEARCE. Okay, thank you, Mr. Chairman. I see my time is 

about gone. 

The CHAIRMAN. I thank the gentleman. The gentleman from Missouri. 

Mr. CLAY. Thank you, Mr. Chairman. Thank you for holding this 

hearing. Mr. Lockhart, Chairman Frank’s legislation, H.R. 1427, 

42

would set the capital levels for Fannie Mae and Freddie Mac. Congress set the capital levels in the 1992 legislation as well. While 

I support giving you bank-like authority to increase the capital levels when there is a serious safety and soundness condition, I am 

very concerned that you might over-interpret this authority to be 

broader and more than we in the Congress intend. 

What can you tell the committee today to give us assurances that 

we are all on the same page as to what authority we are giving to 

the new regulator and how you would use that authority if you 

were the new regulator? 

Mr. LOCKHART. The legislation gives the regulator, through an 

open rulemaking process the ability to look at not only the minimum capital rules but also the risk-based capital rules. On the 

risk-based side, the present rules were in that 1992 legislation. The 

model that is built out of it is not very effective and we will definitely be looking to make it more effective. 

On the minimum capital side, there is no doubt that there are 

limits in place. The minimum capital requirements are much lower 

than for any other financial institution but there is reason for that. 

And there are some other reasons that they potentially should be 

higher. As you probably know, at the present time, we have a 30 

percent add-on to that given the regulatory risk, which makes instead of 2.5 percent, 3.25 percent. And certainly that is a number 

that we are more comfortable with at the moment considering the 

situation. 

Mr. CLAY. Let me get some clarification from you, Mr. Lockhart. 

On January 19th, the ‘‘Wall Street Journal’’ Financial Services 

Brief read, ‘‘Fannie Mae OFHEO director reveals a net loss at 

Fannie Mae.’’ Did you announce Fannie Mae’s third quarter financial results in mid-January 2007 before Fannie Mae released them 

to the public and did Fannie Mae approve your release of this confidential information? 

Mr. LOCKHART. We released that information when we put out 

the capital report, which is a public document containing information given to us from Fannie Mae that we are required to put out 

quarterly. So we released that in late December. And through those 

numbers, it showed that Fannie Mae had a loss for the third quarter. We will be putting capital numbers out again at the end of this 

month. 

Mr. CLAY. And you are aware of 18 U.S.C., section 1905, as far 

as not being able to reveal statements of Fannie Mae? 

Mr. LOCKHART. I think it was mentioned to me earlier. 

Mr. CLAY. Okay, and your response earlier, I may not have been 

here? 

Mr. LOCKHART. My response is that the information you are talking about was already out in the public sphere because of the capital report that we put out. 

Mr. CLAY. Okay, thank you for that response. Mr. Steel, we are 

discussing GSE legislation that may lead to limits on GSE portfolios and activities. Fannie Mae and Freddie Mac may have used 

the wrong accounting treatment but they seem to be on the right 

path now. In a mortgage market downturn when many lenders will 

exit the market but the GSEs remain, why are considering proVerDate 0ct 09 2002 11:58 Jul 24, 2007 Jkt 035407 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\35407.TXT HFIN PsN: TERRIE
43

posals to limit GSE growth? What do you think the effect of these 

limits will be on the mortgage market and on borrowers? 

Mr. STEEL. I think the key issue that I would want to highlight 

is this is not an effort to limit the growth of participation. This is 

an effort to establish the right capital regimen and the right regulatory regimen and those twin things will make these GSEs stronger so that they can do their job better. And if you really are concerned for the longer term, intermediate to longer term, about their 

ability to be effective, step one is to have a strong regulator that 

applies the right capital regimen so people have confidence they 

can do their job. 

Mr. CLAY. And that still enables them to accomplish their mission of providing affordable housing to Americans? 

Mr. LOCKHART. Even more so to my mind. 

Mr. CLAY. Even more so? 

Mr. LOCKHART. Yes. 

Mr. CLAY. Because of the strong regulation? 

Mr. LOCKHART. Because of strong regulation and appropriate 

capital and the right presentation to the marketplace. 

Mr. CLAY. Thank you for that response. I yield back, Mr. Chairman. Thank you. 

The CHAIRMAN. The gentleman from Louisiana. 

Mr. BAKER. I thank the Chair. Just to quickly summarize, and 

I apologize for my absence, believe me I do not miss GSE hearings. 

I was over in Transportation on some Katrina-related matters that 

required my attention. But to summarize, we have enterprises that 

were created by acts of Congress who were given a privileged place 

in the market and, as a result, the market views these enterprises 

as low risk because there is the prospect that the U.S. Government/

taxpayer would step in, in the event of an adverse economic outcome and assume obligations of the enterprise, while at the same 

time, should the enterprises remain profitable, the shareholders of 

that enterprise enjoy those profits. 

So we have a unique business model in which it is a joining of 

public resources which generate profit for shareholders. That type 

of entity, in my opinion, requires us to act carefully because we are 

the ones who by statute created these two or three particular activities. The Federal Home Loan Bank of course, for the record, is 

not a shareholder-driven institution, it is even more unique. 

However, given that prospect and the changing nature of the 

business practice over the life of these enterprises has necessitated 

a change in the proper regulatory oversight. For example, in the 

years in which MBS did not exist and the enterprises did not buy 

their own, the risk profile of those entities in that day, in my view, 

was a great deal less volatile than it would be if considered today 

as enterprises buy more and more of their own MBS, bringing that 

risk on to the books, which they previously did not enjoy. 

And the reason why they do so of course is to enhance profitability. That has nothing to do with the provision of housing to lowincome people. In fact, when you go through a portfolio analysis 

and look at the numbers of mortgages held, which are 5 percent 

or less down payment, which I have drawn the conclusion that generally poor people do not have money, it is just me, that is where 

I wind up, and that means at the down payment level, they are 

44

going to have less involved in the deal than the person who is selling a home, capturing a profit and rolling that into the next one. 

But when you analyze the portfolio, and I will ask, Director, if you 

have a number that you could share with us, you would find the 

typical home mortgage value in that portfolio to be about what? 

Mr. LOCKHART. I think the average home mortgage values are 

between $130,000 and $150,000. 

Mr. BAKER. In most cases that represents a LTV of 70 percent 

or less by my calculation? 

Mr. LOCKHART. That is correct. 

Mr. BAKER. Which means if it is $150,000 and the person has 

$50,000 equity, that is a $200,000 house securing an $150,000 loan 

kind of average. So it is not the customary first-time home buyer 

that one might assume that these enterprises are principally engaged in. They are funding middle America’s homeownership opportunities. And when you look at their ability to meet the needs 

of low-income, minorities, first-time home buyers, however we 

choose to characterize it, in your view have they met or exceeded 

the traditional market performance or have they lagged behind the 

market? 

Mr. LOCKHART. It is a tough issue to say whether they have met 

the market performance. One issue is that it is hard for them to 

reach some of the really low-income borrowers. 

Mr. BAKER. And that goes to the risk requirement because when 

they buy subprimes, they only take Class A’s, they do not take the 

higher risk/lower credit score stuff in order to minimize their risk 

so their shareholders know their profit is not at risk and there is 

the inherent conflict as to why we need this regulatory change. 

Taxpayers and the Congress gave them this authority but required 

them the obligation, because of this privilege, to meet certain credit 

extensions that otherwise might not be met. 

But when we look at what they hold in their portfolio, it is not 

typically what we would expect if they were intending to meet only 

the low-income, first-time homebuyers’ needs. In fact, 60 percent of 

the mortgages held in the country are held by folks other than 

Fannie Mae and Freddie Mac, so that credit needs are now being 

met in a variety of new ways that are alternatives that did not 10 

years ago perhaps exist. 

One last thing, Mr. Steel, with regard to the minimum capital 

suggestion, some have argued that we need to consider alternative 

assets being placed in the pot that counts toward your Tier I capital requirements, such as subordinated debt. Some people call that 

‘‘funny money.’’ What I want to know is what is the position, what 

is your view of the current construct of the Tier I capital requirement, minimum capital requirement as it is now envisioned in the 

legislation? And should we consider the addition of ‘‘funny money’’ 

to meet those goals? 

Mr. STEEL. Well, I think that it is pretty clear in bank capital 

that subordinated debt would not be part of Tier I and so that 

should not be included as part of the Tier I capital. 

Mr. BAKER. So you feel the current construct of the minimum 

capital requirement is sufficient? 

Mr. STEEL. Yes. 

45

Mr. BAKER. Thank you, very much. I yield back, Mr. Chairman. 

Let me also thank the chairman for his leadership. 

The CHAIRMAN. I thank the gentleman as the first one who got 

us started in this area, and we appreciate the cooperation. The gentleman from Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. I too want to commend 

you, Mr. Chairman, for your leadership on this issue. It is very important. Mr. Steel, let me ask you this, why must the Federal 

Home Loan Banks be under this new regulator? There is clearly a 

difference here; the Home Loan Banks operate under a totally different business model, and they are not as risk prone. It just seems 

to me that that is not the way to go. Why are you persistent in 

wanting them under this new regulator? 

Mr. STEEL. Good, I will start, and maybe Mr. Lockhart will comment additionally, but I think that from my perspective this is the 

right umbrella regulator to get the housing GSEs and the Federal 

Home Loan Banks under this. I believe that enough of the same 

characteristics are existing between all three of these, and that this 

is the best tool for that task. There are differences, and several 

have commented, and that the two, Fannie Mae and Freddie Mac 

are more similar, but the Federal Home Loan Banks are sufficiently like this that we think this is the right way to approach it. 

Mr. SCOTT. But do not the Federal Home Loan Banks basically 

just primarily make secured loans to their member institutions 

who are involved in this as opposed to Freddie Mac and Fannie 

Mae who are involved in a myriad of things that pertain to much 

greater risk? And do not we run the risk, in putting these two basically apples and oranges together, of this not operating in the best 

interest of our consumers? 

Mr. STEEL. I think the real issue here, sir, is that the regulator 

will be able to adapt the rules and apply them to each of the entities so that they are in the right form. 

Mr. SCOTT. Well, tell me this, Mr. Steel, what is wrong with their 

current regulator? I would think that they are doing the job; there 

are not the same complaints that we get with Freddie and Fannie? 

Mr. STEEL. I think that the same rudiments of why we believe 

that we need a bank-like regulator with all the appropriate tools, 

and we have walked through the half a dozen characteristics, really 

apply here to the Federal Home Loan Banks also. 

Mr. SCOTT. Well, tell me this then, what regulatory authority 

that they do not now have, will this legislation would provide? 

Mr. LOCKHART. Well, I think the legislation really does make a 

lot of sense because they do have a lot of similarities. The FHLBs 

have portfolios. In fact, two of them got in very big trouble with 

the risk management around those portfolios. So they do have 

some very similar issues going forward. They are all housing GSEs, 

they are all in the marketplace, and it really makes a lot of sense 

to me to have one regulator, as Controller General Walker said, 

that oversees all the housing GSEs to try to bring more prominence 

to the issue and also to bring more efficiency and more effective 

regulating? 

Mr. SCOTT. Well, how do you see this benefitting the marketplace? 

46

Mr. LOCKHART. I think a more efficient regulator will benefit the 

marketplace. I think going forward that Federal Home Loan Banks 

understand that having a stronger regulator will help them retain 

their shareholders and their business. 

Mr. SCOTT. But is not the current regulator doing the job now? 

Where are they failing? I do not see where this problem is that it 

is necessary to take the Federal Home Loan folks and put them 

into this. If there was a problem with the current regulator, then 

I could see that but nowhere has that been pointed out. 

Mr. LOCKHART. Well, there are certainly issues at the moment 

around the capital and especially the risk related to the capital of 

the Federal Home Loan Banks. And, as I said, there were certainly 

several that had some significant problems. 

Mr. SCOTT. All right, well, let me go to another question I wanted 

to ask Secretary Steel. We have been on this issue of GSE reform, 

and last year the reform legislation died in the final hours of the 

session. And my question is, is this Administration committed, 

really committed, to negotiating in good faith to quickly finish action on GSE reform? 

Mr. STEEL. I am quite appreciative of that question. I pledge to 

you that Treasury, of which I am affiliated, is committed to that 

and would like—and is here today in support of the bill. And I believe, and you can—really in some ways the question might be better answered by Chairman Frank as to the commitment and seriousness of intent. And I pledge to you that is exactly why we are 

here and that we have worked hard to get to this place and look 

forward, as the expression was used, I think by the chairman, to 

getting the ball over the goal line. 

Mr. SCOTT. Well, are there areas that this committee is considering in this legislation that the Administration will definitely oppose? 

Mr. STEEL. I think that we have tried to talk—the things that 

are on the table today are things we have worked on. There are 

still some open issues but there is nothing that we see as being an 

issue that is discouraging to us to want to proceed full speed 

ahead. 

Mr. SCOTT. Are there areas that the Administration can find that 

is not included now that you would desire to be included? 

Mr. STEEL. Well, I think we specifically referred earlier to the 

Federal Home Loan Bank directors being appointed independently 

as opposed to from the government. And I think that would be one. 

And there are other nuances that we will discuss, but we have 

worked hard to get to this point and feel comfortable with where 

we are. 

Mr. SCOTT. Thank you, sir. I yield back, Mr. Chairman. 

The CHAIRMAN. Before recognizing the gentlewoman from Illinois, if I could respond. Yes, I would say to the gentleman there 

have been very good faith negotiations that have been very productive. I think the answer is that we are within reach in all these 

things. Let me summarize it this way, the experience I have had 

in a number of areas, but most importantly here in negotiating 

this, is one of the reasons why I am now convinced that having 

been involved in the financial services industry is better preparaVerDate 0ct 09 2002 11:58 Jul 24, 2007 Jkt 035407 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\35407.TXT HFIN PsN: TERRIE
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tion for being Secretary of the Treasury than either aluminum or 

railroads. 

[Laughter] 

The CHAIRMAN. I would also, just if I could speak a little further, 

say that as far as the Home Loan Banks are concerned, several of 

us, the gentleman from Pennsylvania who chairs the subcommittee 

now and myself, originally took the position that the Home Loan 

Bank should not be included and some of the Home Loan Banks 

came to us and said, ‘‘But if you set up a new structure and we 

are excluded, it will look funny and people will wonder why we are 

excluded.’’ And there were some, obviously not all, who feared that 

they would then be at a disadvantage in the raising of capital because they would not be under the same secure regulator. 

By the way, regarding Sarbanes/Oxley, etc., an acknowledgment 

that being well-regulated is an advantage in trying to raise capital 

because of the confidence it instills in investors, so many of us 

wanted to keep the Home Loan Banks out. However, many of them 

came to us and said that they wanted to be in. Now, some of them 

say that they want to be out again, and there was a problem here, 

which is that legislating is different than playing with a yo-yo, and 

you have to accept that some things only go one way. 

I would note, however, that there is one very important similarity between the Federal Home Loan Banks and the GSEs, or at 

least I hope there will be at the end of this year—the Federal 

Home Loan Banks have had, since the late 1980’s or early 1990’s, 

thanks to Henry B. Gonzalez’s leadership, an Affordable Housing 

Program which comes from the profits of private sector entities. It 

has been very well run. Many people do not know about it because 

good news is not news and there have not been scandals. And a 

significant of units have been built. In my area, the Boston Home 

Loan Bank has been a superb supporter of affordable housing. 

So when people talk about the Affordable Housing Fund to 

Fannie and Freddie, this is not some new idea; it is explicitly copied from the idea and the very good experience of the Federal 

Home Loan Banks. 

The gentlewoman from Illinois. 

Mr. BAKER. I just want to make one little quick observation regarding my experience on inclusion or not to include. I was lobbied 

very strenuously not to include, we do not like it, we do not want 

to be part of it, but if you are going to do it, put us in it. 

The CHAIRMAN. The gentlewoman from Illinois. 

Ms. BEAN. Thank you, Mr. Chairman, for the hearing and thank 

you to the panel for your testimony today. I have two questions 

that I wanted to address to both Director Lockhart and Secretary 

Steel. 

If I can ask them both and then you can each give your response, 

that would be helpful. While it is understandable why an institution’s capital requirements might be increased to address specific 

concerns, maybe they are not current, they need remediation, they 

lack appropriate controls, my question is, in those situations would 

you support returning to the statutory minimum levels once those 

conditions have passed? 

That is the first question. And the second is are there any circumstances where you would by regulation permanently increase 

48

capital levels above Congress’ mandated statutory minimum capital 

levels? 

Mr. LOCKHART. The minimum capital rules were set 15 years 

ago. These companies have changed pretty dramatically since then, 

and I think you have to reevaluate at the minimum capital rules. 

I am not saying they have to be increased but I think they need 

to be reevaluated, and particularly, I think, the operational risk 

that they have so manifest over the last 3 or 4 years may mean 

that there may have to be some extra charge. It may not be the 

30 percent, it could be lower, but going forward I think there is 

such a large operational risk component to these two companies, 

and they are in the process of remediating it but it will never go 

away, so I think it is important as we go forward to just reexamine 

at the minimum numbers. 

Ms. BEAN. Let me just come back before I go to Mr. Steel. So you 

are basically not necessarily supporting going back to the original 

levels once the conditions have been met? 

Mr. LOCKHART. I am not not supporting it at this point, but I 

think it is certainly an issue that we have to look at given the large 

risk that these companies are taking. 

Ms. BEAN. Can you be more specific of what specific instance you 

would make those increased levels permanent? 

Mr. LOCKHART. Well, I think it would be done through, as the 

legislation states an open rulemaking process. There would be discussed in that process, reasons for increasing it if that is what we 

thought was appropriate. And then we would go back and forth, 

and I think we could get a lot of input from a lot of different players. 

Ms. BEAN. Okay. Mr. Steel? 

Mr. STEEL. I think really that I approach it in a little bit of a 

different lens, but I think maybe to an answer that will speak to 

the question. I think that the regulator should be given the right 

tools and then by dint of the transparent rulemaking process, a 

sense of how people would like those tools to be applied and then 

have the judgment of the regulator solve the puzzle. And proscribing in advance whether it should be permanent or not permanent, roll-back or not roll-back, is the wrong strategy. The regulator, as developed by the bill, is empowered by, and takes great 

advice from, the transparent rulemaking process and then has the 

responsibility to apply the right capital relative in a risk-based approach to the assets. 

Ms. BEAN. If I have a couple of seconds, let me ask a further 

question to both of you as well. In Chairman Frank’s legislation, 

H.R. 1427, it charges the new director with developing standards 

by which the enterprise’s portfolio holdings would be deemed to be 

consistent with their mission and safe and sound operations. Is 

your reading such that systemic risk can be interpreted to be a factor or standard by which the portfolio can be reduced or capped? 

Mr. LOCKHART. My reading of systemic risk is it is part of a regulator’s job, it is part of safety and soundness, that you have to 

make sure that they do not have a problem that could spread risk 

to the rest of the financial system. And so from that standpoint, 

yes, if they for some reason had assets in their portfolios that could 

49

cause them a dramatic problem that would spread to the rest of the 

financial system, it would have to be considered. 

Mr. STEEL. Yes. 

Ms. BEAN. Thank you. I yield back. 

Mr. LYNCH. [presiding] Thank you. Does the gentleman from Colorado have a question? 

Mr. PERLMUTTER. Thanks, Mr. Chairman. And I will get back to 

systemic risk in a second. This is for all three of you, what do you 

consider the role of the director to be with respect to goals that are 

going to be established for low-income, moderate—low-income, 

moderate, four-plexes, all that sort of stuff? And I am going 

through this statute just as you all are and I am on about page 

150, okay, what do you consider the role to be, what do you expect 

to do if we pass this legislation? 

Mr. LOCKHART. Well, first of all, it is a well-trodden path. HUD 

has looked and worked on that for many years, and I think they 

have developed a good program. That program would actually be 

brought over to their new regulator; it would be merged into the 

new regulator. But obviously the legislation has different rules and 

so working with the legislation, the new regulator would be guided 

by the legislation and work towards making sure that the two enterprises meet their affordable housing goals. 

Mr. PERLMUTTER. So on an annual basis you would establish 

goals? 

Mr. LOCKHART. We would establish goals in accordance with the 

proposed legislation, yes. 

Mr. PERLMUTTER. And if we added something about energy-efficient mortgages to this legislation, would you consider that as 

being a goal, if we added that as a goal? 

Mr. LOCKHART. I had not really thought about that. I would have 

to get back to you on that one. 

Mr. PERLMUTTER. Okay. There has been a lot of conversation 

about the—I think I come to this with some skepticism, I have not 

been in the Congress before and I have not heard all the ‘‘parade 

of horribles,’’ I have our briefing packet that says that Fannie Mae 

overstated its earnings by $5 or $6 billion, and I am not quibbling, 

it is a lot of money, but against $1 trillion or $2 trillion in assets, 

it is like five/one-thousandths or something like that. And that 

Freddie Mac, did it understate its earnings by $5 billion or $6 billion, is that right? 

Mr. LOCKHART. Well, certainly both companies did not comply 

with GAAP and misstated earnings. Yes, Freddie’s was more of an 

overstatement and Fannie’s was an understatement. The proper 

comparison to me is their capital and not their assets and in both 

cases it was a major portion of their capital. And the capital there 

is really what we are protecting. 

Mr. PERLMUTTER. Okay, so let’s talk about capital for a second. 

As I understand it under this legislation there is risk-based capital 

and then there is minimum capital, and I am not quite sure—my 

experience has been more with credit unions and banks where they 

I think—I do not know if it is by regulation or by statute that they 

have to have like a 5 percent capital minimum. And then they, 

based on their board of directors, can increase or lower it. If they 

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50

lators. What is the minimum capital for Fannie Mae and Freddie 

Mac today? 

Mr. LOCKHART. The minimum capital requirement, the one comparable to your 5 percent—and many banks hold well over 6 percent, as you know—is 2.5 percent. The Enterprises also have to 

hold .45 percent or 45 basis points against their mortgage-backed 

security guarantees. 

Mr. PERLMUTTER. And then I heard you say that right now because of regulatory risks, you are 30 percent above that? 

Mr. LOCKHART. Right. 

Mr. PERLMUTTER. What is a regulatory risk and does that have 

anything to do with a systemic risk? 

Mr. LOCKHART. The reason for putting on the additional 

requirment was operational risk, and it was related to the fact that 

these companies could not produce financial statements, their internal controls were not there, the risk management was not there, 

their systems were not there, and they were high risk. And so that 

extra 30 percent was put on which makes, I think I said earlier, 

3.25 percent. 

Mr. PERLMUTTER. Do you think that the minimum capital for 

these organizations needs to be increased or are you okay with that 

2.5 percent except for when there is this regulatory risk factor? 

Mr. LOCKHART. I think it has to be looked at. 

Mr. PERLMUTTER. That is a good answer, it has to be looked at, 

considered by you as the director or how will that minimum capital 

be determined? 

Mr. LOCKHART. Again, the way we would look at it is as we look 

at other financial institutions. We look at the risk inherent in these 

two companies, and we will go through that process. And if we 

think there needs to be a change, we would go through an open 

rulemaking process and there would be comments on any proposal 

and then we would go through the normal process. 

Mr. PERLMUTTER. Okay. This gets more to the systemic risk, and 

I would like all three of you to comment on it, but somebody said 

this is a huge problem, there is a systemic risk, and I can tell you 

walking the precincts of Arvada, Colorado, regulation, re-regulation 

of Fannie Mae did not come up once. I had a lot of other things 

that came up a number of times but not this. What difference does 

this bill make to a resident of Arvada, Colorado? How is it going 

to save them from something? 

Mr. STEEL. Well, I will start, I think, if that is okay. I think this 

is a good example, and I am sure you are right that this did not 

come up when you were walking among your constituents, but this 

is the right way of dealing with this before it is a problem. We can 

look at this and Federal Reserve chairmen, the last two, have come 

and talked in this group to you about this in the House, and we 

are completely consistent with their view that these are issues that 

need to be dealt with before they are a problem. 

And there are two aspects to this, one is the systemic, but, two, 

they will be better able to do their job over time with the right capital and the right regulator, and we should deal with it now before 

it is a problem and when your constituents do not talk to you about 

it. And if your constituents never talk to you about because the 

right moves were made today, that would be a win. 

51

Mr. PERLMUTTER. Okay. Sorry, I was just going to ask about systemic risks. 

Mr. CORNICK. Mr. Chairman, would I be able to respond briefly? 

Mr. LYNCH. Very, very, very briefly, thank you, yes, please? 

Mr. CORNICK. On the issue of the regulator set, monitor, enforce, 

we would just offer that there is missing an overall affordable 

housing goal that would apply broadly speaking, we speak to it in 

the written testimony at length and hope you would refer to that 

and would just echo what Treasury said, the cost of not doing 

something is profound. 

Mr. LYNCH. Okay, I thank the gentleman. I thank the gentleman 

from Colorado. I think this panel has suffered enough, I think we 

should thank you for your attendance and your willingness to work 

with the committee. This is an ongoing process. I am told by the 

Chair that we will continue to reach out to you and ask for your 

advice and recommendations with respect to this bill, and we look 

forward to our working togther on this. Thank you. 

Mr. CORNICK. Thank you, very much. I just want to put forward 

to your staff the fair lending cite, page 151 of the bill, section 131. 

Mr. LYNCH. Okay. 

Mr. CORNICK. Transferring authority for fair housing and fair 

lending to the Director from the Secretary. 

Mr. LYNCH. We will accept that into the record, without objection. 

Mr. CORNICK. Thank you. 

Mr. LYNCH. Thank you. The next panel consists of the Honorable 

John Dalton, president of the Housing Policy Council, Financial 

Services Roundtable; Mr. Richard F. Syron, chairman and chief executive officer of Freddie Mac; Mr. Daniel H. Mudd, president and 

chief executive officer for Fannie Mae; and Mr. Gerald M. Howard, 

executive vice president and chief executive officer for the National 

Association of Home Builders. 

First of all, let me welcome you to the committee. I am told that 

we may have some votes on the Floor in the near term. However, 

in the interest of time, I would like to offer a 5-minute opening 

statement to each of the panelists. Again, thank you for your willingness to come before the committee and help us with our work. 

And I would like to begin with Mr. Dalton. 

STATEMENT OF JOHN H. DALTON, PRESIDENT, HOUSING 

POLICY COUNCIL, FINANCIAL SERVICES ROUNDTABLE 

Mr. DALTON. Thank you very much, Mr. Chairman, Ranking 

Member Bachus, and members of the committee. 

I am John Dalton, president of the Housing Policy Council of the 

Financial Services Roundtable. Thank you very much for the opportunity to present the views of the Housing Policy Council on the 

supervision and regulation of Fannie Mae, Freddie Mac, and the 

Federal Home Loan Banks. 

I have a prepared statement for the record, and I’d like to summarize the key points of that testimony. The Housing Policy Council or HPC is part of the Financial Services Roundtable. HPC is 

comprised of 23 of the Nation’s leading mortgage lenders. We estimate that our members originate over 64 percent of the home 

mortgages in this country. Our members support a competitive, 

52

well-regulated marketplace that provides mortgages and financial 

products that American consumers want and need. 

The Housing Policy Council continues to strongly support enactment of legislation to strengthen the regulatory oversight of the 

housing GSEs. That regulation is long overdue. The housing GSEs 

are an important part of our Nation’s housing finance system. 

The members of the Housing Policy Council do a significant 

amount of business with Fannie Mae and Freddie Mac. Those two 

GSEs are the largest purchasers of the conforming mortgages originated by the members of the Housing Policy Council. 

Many of our members are also members of the Federal Home 

Loan Bank System. We have a strong interest that these housing 

GSEs be healthy and responsible business partners. Legislation to 

strengthen the supervision and regulation of housing GSEs will not 

only safeguard our housing finance system, it will also help consumers who seek to become homeowners and it will protect the interests of all taxpayers. 

Frankly, the current system for regulating and supervising 

Fannie Mae and Freddie Mac is just not up to the task. 

Mr. Chairman, earlier in my career, I served as chairman of the 

Federal Home Loan Bank board and president of Ginnie Mae. I 

have firsthand experience in the authority that a Federal services 

regulator must have in order to be effective and the tools that are 

necessary. The present regulator’s authority to oversee Fannie Mae 

and Freddie Mac is simply not adequate. 

Mr. Chairman, we have the strongest banking system in the 

world. It is also strongly regulated. It is time for the housing GSEs 

to have that same type of world-class regulation. 

This committee has worked hard on this issue for a number of 

years. It is now time to complete the task. We urge the committee 

to act on reform legislation as soon as possible so that a bill can 

be finalized in this session of the Congress. We also urge the committee to resist proposals to water down this reform legislation or 

weaken the authority of the GSE regulator. 

The Housing Policy Council and the Financial Services Roundtable believe that GSE reform legislation should contain the following key provisions: 

First, a strong independent regulator. Legislation should create 

an independent regulator for Fannie Mae, Freddie Mac and the 

Federal Home Loan Banks. A single regulator will ensure that each 

of these institutions will be examined on a comprehensive basis 

and will permit examiners and analysts to share relevant operational and other information as necessary. An independent regulator will ensure that the agency will not be subject to undue political influence. 

Second, comprehensive supervisory and regulator powers. The 

new regulator must have clear, strong and broad regulatory and 

supervisory powers that are comparable to the powers Congress 

has given to the Federal banking regulators. This must include the 

authority to both set risk-based and minimum capital for the GSEs 

and to place a troubled housing GSE into receivership if necessary. 

And finally, independent funding. 

Mr. LYNCH. Mr. Dalton, if I could ask you, there’s a 5-minute 

time limit, which you have long since exceeded. Perhaps we could 

53

reach some of that during your testimony. And if I could, ask you 

just kindly and respectfully just to sum up. 

Mr. DALTON. I’ll be glad to. 

Mr. LYNCH. Thank you, sir. 

Mr. DALTON. In short, we believe that H.R. 1427 includes the 

compromises that are worked out by this committee, led by Chairman Frank, and the Treasury that you heard from in the previous 

panel, and that bill is a clear improvement over current law. 

While we have concerns with some specific provisions, we recognize that this effort has been a long, hard fight. It would be a mistake to make the perfect the enemy of the good. It is now time to 

enact legislation to improve the regulatory structures for the GSEs. 

Mr. Chairman, I salute you for the leadership that you have 

demonstrated in getting us to this point. I want to thank Ranking 

Member Bachus and also particularly Congressman Baker for the 

leadership that he’s shown on this issue for some time. 

I think this legislation will indeed help consumers, the housing 

economy, and the GSEs. We urge the committee to approve H.R. 

1427 and to resist any amendments that would weaken the authority of the new Federal regulator. Thank you very much. 

[The prepared statement of Mr. Dalton can be found on page 112 

of the appendix.] 

The CHAIRMAN. Thank you. We have a couple of votes, and then 

we will be back. I thank the panel members for staying. We’re 

going to go vote, and we will come right back and get right to it. 

There are two votes, which should take about 20 minutes. We 

should be back in about 20 minutes or less. 

[Recess] 

The CHAIRMAN. An explanation is owed. The Appropriations 

Committee was reputedly close to finishing the supplemental appropriation, and the vote was held up because of that. And apparently everybody was afraid that if they had gotten close to a vote, 

but left and came back, people would have thought of new reasons 

not to be close to a vote. We regret the inconvenience to these witnesses in the next panel. Some of us did not think it was a good 

idea to hold it up this long, but that’s for another day. 

I believe we had heard from Mr. Dalton. Next, Mr. Richard 

Syron, who is the CEO of Freddie Mac. 

STATEMENT OF RICHARD F. SYRON, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, FREDDIE MAC 

Mr. SYRON. Thank you, Chairman Frank, Ranking Member 

Bachus, and members of the committee. I appreciate the opportunity to appear before you today, and I’ll be very brief. 

GSE regulatory reform is vitally important to the Nation’s economy and to its homeowners. I must say I’m a victim of my circumstances like all of us and my views have been profoundly 

shaped by my experience as a Federal Reserve and Treasury official where I learned the critical need of balancing adequate capital 

and safety and soundness with sufficient credit flows, particularly 

in times of economic transition in different markets such as the 

housing market is in today. The recent downturn in the housing 

market is slowing GDP growth. Mortgage delinquency rates are up, 

particularly in subprime. 

54

Now Congress created the GSEs to help cushion U.S. housing 

markets from economic disturbances like these. When housing activity contracts, Freddie Mac and Fannie Mae increase their relative provision of funds to the mortgage market, and the opposite 

obviously applies when the market is expanding vigorously from 

the private sector. This ability to provide stability to the market is 

what, in my mind, makes the GSEs a congressional success story. 

To be clear, Freddie Mac supports regulatory reform that ensures 

both the continued strong franchise and mission achievement. 

Many proposals are under consideration, and it is my hope that 

each will be measured against the twin criteria of safety and 

soundness and mission as well. This inevitably involves striking a 

delicate balance. 

In a number of cases, we believe the proposed legislation would 

strengthen GSE regulation without upsetting that balance, but certain combinations of provisions, depending on how they’re interpreted and implemented, could significantly—I said ‘‘could’’ not 

‘‘would’’—impair either our ability to remain financially viable or to 

serve our mission or both. 

Now I’m not talking about short-term concerns. GSE legislation 

has been many years in the making, and once it happens it seems 

to me it’s unlikely to be revisited very quickly. And I do have every 

confidence that Congress will strike the right balance. 

A few weeks ago, Freddie Mac announced that beginning in September of this year, we will restrict our subprime ARM purchases 

to mortgages that have been written at a fully indexed level, and 

with tighter underwriting requirements. We also announced efforts 

to develop model subprime products that we hope will provide safer 

funding alternatives for the consumer. 

These steps will help stabilize the subprime market while ensuring sustainable homeownership. In my mind, that’s what the GSEs 

are all about, but we can only serve this function if we have the 

right capital and the operational flexibility to respond quickly to 

market transitions. Business cycles will come and go but these economic realities should not keep families from achieving their goal 

of homeownership. 

I know in some areas my views are controversial. My purpose in 

raising them is not to be quarrelsome or make myself unpopular, 

rather it’s because the issues before this committee are so important that I think it would be unfair and irresponsible of me in my 

duties to you to shy away from candor. 

In closing, let me affirm that Freddie Mac is a creature of the 

Congress, and we are committed to doing what you want us to do. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Syron can be found on page 193 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Syron. 

Next, Mr. Daniel Mudd, the CEO of Fannie Mae. 

STATEMENT OF DANIEL H. MUDD, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FANNIE MAE 

Mr. MUDD. Thank you, Mr. Chairman, and Ranking Member 

Bachus, for inviting me here today. 

55

Our company is making progress. We still have much more to do. 

High on the list is working with Congress to adopt a bill that will 

strengthen GSE regulatory oversight. I would mention that there’s 

a backdrop to our discussion today, which is the troubles in the 

subprime market. 

As for Fannie Mae, although this is a market where we play a 

very limited role consistent only with our very strong anti-predatory standards, I do want to assure you that we are doing what we 

can to help homeowners to stabilize the market and to avoid foreclosures. And if anyone wonders what the alternatives are to a 

market with well-regulated GSEs playing a stability and liquidity 

role, we now have reality TV with respect to subprime. 

So if anyone wonders why Fannie Mae has taken the positions 

we have on GSE regulatory reform legislation, it is precisely so 

that we can continue to serve markets, especially in times of upheaval. We would like our portfolio to be able to provide liquidity 

when the market needs liquidity. We would like our capital structure to allow us to provide the maximum amount of capital to housing and to communities. 

We would like our product approval process to allow us to respond quickly to market needs and constantly roll out and modify 

affordability products, and we would like to have a world-class regulatory oversight regime to ensure that we attain all these goals 

in a safe and sound manner. 

So let me reiterate what we’ve said consistently over the past 2 

years. We support the creation of a stronger, independently funded, 

bank-like regulator that combines safety and soundness supervision with authority over mission and activities, and we seek to 

play a constructive role in that process. 

Let me touch quickly on capital, portfolio, products, and the fund. 

We support capital authority, and we believe reform legislation 

should provide the GSE regulator with a clear process that ensures 

proper deliberation, consultation and fairness before capital requirements are changed. Clearly any increase in our minimum and 

risk-based capital levels would adversely affect our ability to fulfill 

the mission you gave us, so the capital levels established by Congress should be the norm, not the starting point. 

We feel the best way to address that in legislation would be to 

require the regulator to withdraw any special capital requirements 

when the circumstances that gave rise to those requirements no 

longer exist. 

With respect to the regulation of our portfolio, we also support 

an approach similar to that exercised by bank regulators. Bank 

regulators have consistently taken the approach that asset growth 

by itself does not cause safety and soundness risks but only unplanned or poorly managed asset growth. 

To that end, the legislation should identify the specific safety and 

soundness factors that would lead to regulatory limits on the size 

or growth of our balance sheet. We believe that systemic risks 

should not be included in these factors unless bank regulators 

agree on the method for applying such a standard to all financial 

institutions. 

On new product approval, bank regulation also provides a useful 

guide. Submitting every new product to public review and comment 

56

would entail submitting our customers’ proprietary new products to 

public review and comment. This would not only be cumbersome; 

it would present serious competitive concerns. And again, our regulatory regime should be no different. 

Certainly, significant new programs should be pre-approved, but 

not the literally thousands of new products that we offer. 

Finally, Fannie Mae supports the creation of an affordable housing fund similar to that provided in H.R. 1461 that passed in the 

last Congress, and we continue to believe that GSEs should manage the fund. I believe that you want us to care what happens to 

the grants and investments made under such a program to ensure 

that they are effective community building blocks, and not simply 

a levee on our business. Of course, all of the fund’s activities should 

be regulated, disclosed, reviewed, and supervised by a new regime. 

To conclude, yes, we have a mission and a business, and when they work together, everyone wins. The $20 billion we have invested in the Gulf since the storm is an important example of our 

company using all the tools at its disposal—portfolio, capital, products, people, and speed—to serve a public need even as it serves 

its shareholders. Our regulator should have the tools it needs to 

make sure that we do that safely and soundly to fulfill this dual 

promise. 

Thank you for the opportunity to be here today. 

[The prepared statement of Mr. Mudd can be found on page 183 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Mudd. 

Next, Mr. Gerry Howard, who is the executive vice president and 

chief executive officer of the National Association of Home Builders. 

STATEMENT OF GERALD M. HOWARD, EXECUTIVE VICE PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF HOME BUILDERS 

Mr. HOWARD. Thank you, Mr. Chairman. I am pleased to be here 

on behalf of the National Association of Home Builders. 

The GSEs were chartered by Congress to serve a critical public 

purpose. That public purpose at the time was to provide liquidity 

in the conventional housing markets. Subsequently an additional 

mission was added to the GSEs, the mission of focusing on affordable housing. The instant legislation that we’re here to discuss 

today must take into account the preservation of those two important missions as it also seeks to balance the very important and 

much needed safety and soundness of entities as big as the GSEs. 

I would like to make 6 points with respect to the instant legislation. 

First, on the structure of the regulator, NAHB supports the provisions in H.R. 1427 that would establish a standalone regulator 

outside of any Cabinet department or regulatory agency. NAHB 

also supports the bill’s inclusion of a deputy director for housing 

mission, but we’d also like to see the restoration of two independent advisory board members with housing experience to further enhance the mission for the focus of the agency. 

Second, on capital requirements, NAHB supports the fundamental principal that adjustments to minimum capital requireVerDate 0ct 09 2002 11:58 Jul 24, 2007 Jkt 035407 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\35407.TXT HFIN PsN: TERRIE
57

ments must be temporary and that the regulator should deal with 

longer term risks though the risk-based system. 

In addition, all changes to GSE capital, risk-based and minimum, 

should be undertaken through the regulation that provides public 

notice, comment except in emergency situations of course where increases could be instituted and then reevaluated in a subsequent 

review and comment period. 

NAHB appreciates that H.R. 1427 establishes criteria for temporary increases in minimum capital that are exclusively focused 

on safety and soundness while providing a process where temporary capital increases would be regularly reviewed and returned 

to the statutory level once the triggering issue has been resolved. 

Third, NAHB appreciates that portfolio provisions contained in 

the bill have no hard limits or criteria mandating huge reductions, 

which would have significant adverse effects on the mortgage finance system. Both Fannie Mae and Freddie Mac hold sizeable 

portfolios of mortgages and mortgage-backed securities, which play 

an important role in stabilizing the supply and reducing the costs 

of housing credit. 

The provisions also do not directly reference the systemic risk, 

which has been a rallying cry for critics advocating major shrinkage in the enterprise’s portfolios. However, as we have stated publicly before, the vagueness of some of the criteria for portfolio regulation has led our members to express concerns that such language 

could be subject to overly broad interpretation, and we appreciate, 

Mr. Frank, your questioning the prior panel on this very subject. 

Fourth, in the area of program approval, NAHB supports a process that is sufficiently rigorous to ensure charter compliance and 

safety and soundness while facilitating the ability for the GSEs to 

engage in program, product, and technological innovation needed to 

address the market needs in a timely manner. NAHB feels the 

process contained in the bill passed last year is superior to that 

contained in the current legislation. 

Fifth, NAHB supports the high-cost area provisions that have 

been addressed by you and earlier by Mr. Miller in his questioning. 

NAHB believes that H.R. 1427 would allow the conforming loan 

limit in the high-cost areas the flexibility needed so that the GSEs 

could be providers of housing in high-cost areas such as Massachusetts and California. 

And finally, while the GSEs’ advantages should be preserved, 

NAHB believes that the GSEs can and should do more to accomplish their affordable housing mission. As such, we support the establishment of a new affordable housing fund contained in H.R. 

1427 as well as the bill’s tougher affordable housing goals. 

On the affordable housing fund, NAHB believes that it is imperative that the money therein be used for sticks, bricks and mortar, 

that it not go to overhead or any other purpose. Further, we believe 

that there should be a competitive process so that the fund is used 

most cost-effectively and that the most housing possible is developed and built due to the expenditures from that fund. 

Thank you, Mr. Chairman, and I look forward to answering any 

questions. 

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

145 of the appendix.] 

58

The CHAIRMAN. Thank you, Mr. Howard. 

You had a point in there about the high-cost areas that I want 

to pursue, and I appreciate your raising it. I think we may need 

to do further definition. 

There are a lot of us who, as far as housing policy is concerned, 

can’t think of a single housing policy elsewhere in the country 

where we use a flat dollar figure for the whole country. But I guess 

maybe, was it having the same dollar amount that applies to the 

greater Boston area as to Omaha would make about as much sense 

as paying the same Section 8 rents in Omaha and Nebraska. 

Houses aren’t mobile and therefore housing prices don’t have 

that same uniformity. You do raise an important question about 

how we measure that, and I agree with that. Although the proposal 

you made is to do it on a statewide basis; obviously we wouldn’t 

want to apply it statewide. If there are some areas in the State 

that are high cost and others that aren’t, you don’t apply it. 

We need to further refine that, and I agree. Certainly our intention is, to the extent that you can identify median house prices in 

as small an area as possible—let me put it this way. We want to 

apply the high-cost loan limit as narrowly as possible. Our job will 

be to work together with people, and we have time to do this, so 

that we get the best preexisting statistical measure of house price 

costs in particular area. 

I assume we must have that for SMAs and SMSAs, and if we do, 

that’s what we would do. So we do agree that it has to be applied 

more narrowly. 

The other issue you raised on your testimony—on page eight—

and I appreciate that you alluded to my discussion of that with Mr. 

Steel, and there is some ambiguity in the language. There is a section that says that the regulator is, in dealing with the portfolio, 

to be focused on mission and safety and soundness. And then as 

you noted—those factors. Actually there were two, any potential 

risks posed by the nature of the portfolio holdings and any additional factors. It seemed clear to me that we intended those to be 

within the limitation of safety and soundness of mission. 

You raised that before, and I was pleased to see Mr. Steel agreed 

to that. It may be that that needs to be made clearer, but I do 

think that’s the common understanding. I appreciate it. 

Mr. Steel acknowledged that, and with that, it’s possible to do a 

better directing job. But we want to be clear, we are talking here 

in terms of safety and soundness of mission. These are not ways 

to bootleg back in concerns about interfering with the purity of the 

market’s allocative function or systemic risk more broadly defined, 

and I appreciate that. 

Let me just say to Mr. Mudd and Mr. Syron, as you know when 

we originally passed the bill that had a housing fund, an affordable 

housing fund, it did have you in charge. And it is not that people 

lack confidence in your management skills that has led me to have 

to support changing that. It is that they have indeed great confidence in your skills, and they think that you are smart enough 

to decide between members who have influence and members who 

don’t. 

And look, I have to be honest about this. There is no purely objective way to dispense a limited pot of funds. We are talking about 

59

maybe $500 million. If we had 4 times that much, we wouldn’t 

meet the need for 30 percent, 50 percent of median. And what they 

are saying is that—and it has nothing to do with the skills. They 

don’t want to enhance your political situation. 

You know, there’s a song, I saw some reference to it. Tom Lehrer 

had a song, ‘‘The Old Dope Peddler’’, about doing well by doing 

good. People of a certain age will recall that. They are afraid that 

if you dispense the affordable housing funds you will be doing well 

by doing good. 

And let me even put it this way. Even those who would accept 

the purity of your motives, to some extent it is protecting you from 

us. That is, we will retain a jurisdiction over you because you have 

these Federal charters. 

And I think people are foreseeing a day, clearly not now but at 

some point in the future, where an influential member of this committee who had in his district a housing proposal about which he 

or she cared deeply approached you to make that point clear. 

Well, as I said, from the standpoint of efficiency—and certainly 

the Federal Home Loan Banks Program is run by them, but I cannot make effective arguments against that. That’s our problem. 

I will say this. We have in the housing fund, let me say it publicly, in the first year, I think we have pretty much agreement for 

those of us who want a housing fund, it’s going to go to Louisiana 

and Mississippi, and it’s going to go because—to the Louisiana and 

Mississippi State housing authorities in a ratio—we’ve talked to 

members is what we intend, three to one Louisiana and Mississippi. 

You know, the Administration’s figures were more than half of 

the rental units in New Orleans were destroyed. And where more 

than half of the rental units are destroyed, a voucher program 

doesn’t do you a great deal of good because it’s going to increase 

demand without meeting that supply need, so we need to deal with 

that. 

Beyond that, we have in there the housing—let me urge people 

now, the disposition of the Housing Trust Fund that we vote if we 

vote a bill now is not going to take effect for more than a year because in the first year, the money will go to Louisiana and Mississippi. I’m ready to keep talking. We have to do something in the 

bill, and I want to make sure that we do something that doesn’t 

mean that CBO gets its hands on it, if we ever want to use it again 

we get a budget score. 

But there’s some flexibility on that. And I’ll urge people, we intend to continue to work with people, but we will not reach the 

point of distributing the housing fund, if we have one, beyond Mississippi and Louisiana until sometime in the next calendar year. 

And we will work on that. 

I think there is agreement that we want it to go for housing. I 

do say, you remember when we did it last year there weren’t sufficient restrictions and some—while this committee rejected a proposal to restrict it, there was a proposal adopted by that fount of 

housing expertise, the Rules Committee, which adopted the bill and 

then did not let it come up to a vote. And they said an organization 

seeking to build housing could only receive the funds if it was an 

organization whose primary purpose was housing. 

60

Now one of the problems is that we have a number of religious 

institutions in this country who do a great job of building housing. 

In my home area and Mr. Syron’s, we’re both familiar with the 

Boston Archdiocese, an office of urban planning which has done a 

great job of building housing. But I have to say that as good as the 

Boston Archdiocese has been at building housing, they cannot 

claim that housing is their primary purpose. God is their primary 

purpose. Housing might come a strong second, but no religious organization could agree that housing was its primary purpose. That 

was part of the problem. 

We will work closely together, but I hope you understand what 

the problem is with regard to your doing it. Once we get past the 

philosophical argument, I think we will be able to work this out. 

Mr. Bachus. 

Mr. BACHUS. Thank you. The mortgage market has undergone a 

lot of rapid changes in the products they’ve offered recently. How 

do the GSEs help provide a stable housing marketplace? I’ll ask 

Mr. Syron first. 

Mr. SYRON. Well, sir, I think you raise an absolutely valid and 

very important point that has to be the context for considering this 

whole piece of legislation. And that is, if you went back 25 years 

ago, and this is very relevant to the concerns in subprime now, institutions made loans, they put them in portfolios, and they held 

them. 

Now we’re in a world where, quite honestly, pieces of loans—I 

happen to have a conforming loan on something—I don’t know 

where the pieces of that loan are. They’re scattered all over the 

world in CDOs and everything else. 

In this kind of world, and there have been experts like Lew 

Ranieri who have commented on it, it’s harder and harder to get 

a discipline on the market, because quite candidly, we are a creature of the Congress. When you have us, I think, it’s probably fair 

to say you’re able to have very substantial influence over us. We 

control much less of the market now than we used to. For example, 

in our retained portfolio, and I know there’s been a lot of concern 

about that, the retained portfolio used to be 21 percent of the mortgage market, and now it’s down to 13 percent. If we’re trying to 

dominate a market, Dan and I are going in the wrong direction. 

So I think what we have to do is to provide leadership in the 

market, develop new products, which I know both institutions are 

trying to do now, having hopefully a chance to address some of the 

problems in the subprime market, and hopefully to be enough of a 

factor that the ability to sell to us influences people’s behavior. We 

don’t have as much influence in that regard as we used to have. 

Mr. BACHUS. Mr. Mudd? 

Mr. MUDD. Thank you. We basically do two things. We provide 

affordability and we provide stability, and we do it through two 

businesses. There’s a popular myth that these two businesses are 

like two businesses in a holding company and they’re divisible. But, 

in fact, Ranking Member Bachus, they basically do the same thing. 

They provide affordability and stability. The guarantee business 

enables lenders to take the loans they have, package them up, sell 

them into the market, and get money back so they can reissue the 

debt and originate more mortgages. 

61

On the liquidity side, when there’s a crisis or an interruption in 

the market and there’s a need for capital to come in so that those 

funds continue to flow, that’s when that other business of ours, the 

portfolio, steps in and is able to provide the liquidity so that you 

see through most of the recent financial interruptions the flow of 

funds into the mortgage market stays very level and very stable. 

Mr. BACHUS. So is it your testimony that during this recent 

subprime lending problems that you all provided stability or that 

you’ve been a positive influence? 

Mr. MUDD. Mine would be slightly different. We said a couple of 

years ago that this market was evolving in a direction that we 

didn’t like. The layering of some of the products presented excessive risk to consumers. We stepped away from it. 

What happened was, the market went around us, and there were 

arguments that I think you’ve heard that say you don’t need the 

GSEs. Others can perform this function. That’s what happened. 

Others performed the function, and a lot of risk went out into the 

marketplace. Now some of those chickens are coming home to 

roost, and you’re seeing a disruption in the subprime market. 

That said, I’m not at all happy about that, and I think there is 

a role the GSEs can play. We have provided liquidity. It’s tightened 

up in the multi-family market. We’ve provided it there. We’ve put 

together something we call rescue mortgages to help people who 

are getting hit by a reset in subprime to refinance their mortgage 

so they don’t lose their home in the process. Yes, we can play a 

role, and we’re spooling up to do that. 

Mr. BACHUS. All right. Mr. Howard, what impact have the current problems in the subprime market had on your industry, particularly maybe the production of new homes? 

Mr. HOWARD. Mr. Bachus, the home building industry is quite 

concerned about this issue really for three reasons. The first is, as 

you know, we’re in a downward cycle in the industry in and of 

itself. There’s a lot of inventory already on the market. This 

subprime issue in addition to potentially leading to restrictions in 

the capital markets and the mortgage markets themselves, number 

one. Number two, this could lead to significantly more units being 

thrown back into the marketplace, which we don’t need right now. 

And number three, it could lead to an overreaction by the Congress 

which could impede the ability of the mortgage markets to recover 

from this crisis. 

So, we think that there are three concerns that we have, and 

we’re working and look forward to working with you and others to 

sort of correct the situation. 

Mr. BACHUS. Do you think that the current affordable housing 

fund as it’s set up will provide equal access to both profit and nonprofit entities? 

Mr. HOWARD. We’re concerned about that, sir. We think, as I 

mentioned in my oral testimony, that when you’re talking about 

the creation of a fund, and taking money from these two entities, 

that we have a responsibility to ensure that the money is as best 

spent as possible. And to us, that means a competitive process, 

open up to for-profit and not-for-profits, whoever can build the most 

best housing with that money should be awarded it. There should 

62

be no distinction made between profit or not-for-profit. It simply 

should go to the production of housing. 

Mr. BACHUS. Okay. I think my time has expired. 

Mr. KANJORSKI. [presiding] I think I will direct my attention first 

to getting the opinion of the panel on the selection of representatives for the boards of directors for both the Federal Home Loan 

Bank System and Fannie Mae and Freddie Mac. Does anyone want 

to express an opinion on that? 

Mr. SYRON. Well, sir, I will express not necessarily an opinion 

on—because I think ultimately, this is a question for the Congress. 

But I think one of the inherent difficulties that putting presidential 

appointees brings up has to do with everything else, and that is 

that these are interesting institutions. 

We have three responsibilities: we have a responsibility to safety 

and soundness; we have a responsibility to mission; and we have 

a responsibility, because we are publicly chartered, shareholderowned corporations, to our shareholders. 

Now, in that regard, there’s been an enormous amount of research that’s been done, and a lot of opinions, a lot of case law that 

says that the obligation of directors of a Freddie Mac or a Fannie 

Mae is identical to the obligations of a director of General Motors, 

or AT&T, or anyplace else. 

And I think, you know, our world is one in which we are always 

not maximizing one of these things. We’re trying to balance between the three. And a complexity I think, and it’s much more so 

for shareholder-owned corporations like ours, than it would be 

maybe for the Home Loan Banks—a complexity for us is I can see 

those directors, if they were quote/unquote ‘‘political appointees’’ 

and sent to carry out—I’m not saying this would be the case—sort 

of a mission or a direction that might be different than that for the 

shareholders. Why I’m making this up, to some extent, I’m looking 

at how that could be contradictory to their obligation to shareholders, and maybe that has something to do with the nervousness 

and concern about this. 

Mr. KANJORSKI. Do you have—maybe I do not understand the 

similarities and differences between Fannie Mae, Freddie Mac and 

normal corporations, public corporations. But your corporations 

have a special mission. 

Mr. SYRON. Yes we do, sir. 

Mr. KANJORSKI. That is beyond and different from just profit for 

shareholders. 

Mr. SYRON. That’s absolutely true, sir, and I think the issue is 

how we properly balance that. And I will freely admit, at least in 

my own institution, I didn’t think we did properly balance it. 

Mr. KANJORSKI. So if we had really effective outside appointed 

directors, we may have heard of some of the problems at the two 

organizations a little earlier here in Congress or in the White 

House? 

Mr. SYRON. Well, I think they could have been a voice for other 

kinds of approaches. But those people—it’s very, very difficult for 

the directors. And, you know, we recruited essentially almost an 

entirely new board of directors, and I’d put them up against boards 

of directors of any corporation in the world, but they are always 

having to judge that their actions—and they are fully cognizant of 

63

the broader public purpose of these organizations—that whatever 

they do has to be consistent with shareholder value as well. Because as you know, our corporation has been sued by shareholders 

in a class action suit. Fortunately, we’ve resolved that. 

Mr. KANJORSKI. So it would be reasonable for me to conclude as 

to whatever the Congress decides on that issue, it would be acceptable? 

Mr. SYRON. Sir, I think that is ultimately a question for the Congress. We’re a creature of the Congress. We should do what the 

Congress tells us, and I totally agree with the Congress resolving 

it. 

Mr. KANJORSKI. Very good. 

Mr. MUDD. Congressman, I would agree. I’ve seen it both ways. 

I’ve seen our board operate with presidentially-appointed directors 

and without. It’s worked in both ways. I would just echo Mr. 

Syron’s comments in that they are very complicated companies. 

And to ensure that any directors who come in have some tenure 

and have some background are important factors I’d consider. 

Mr. KANJORSKI. On that issue, would you—rather than a yearly 

appointment, would you recommend a 2- or 3-year term? 

Mr. MUDD. If the debate was the tenure, I think longer would be 

better than shorter, yes, sir. 

Mr. KANJORSKI. Very good. How about Home Loan Banks? Does 

anyone—I know no one is a specialist, but—yes? 

Mr. HOWARD. Mr. Kanjorski, with respect to the Home Loan 

Banks, and we also think that it has merit with respect to Fannie 

Mae and Freddie Mac, one of the elements to their boards which 

we think has served them quite well is the appointment of public 

interest directors, and in this instance, public interest directors 

who have experience in the provision of housing. 

We think that has been a very effective element to their boards, 

and we would encourage its continuation as well as an implementation of that kind of a board member for the other GSEs, too. 

Mr. KANJORSKI. All right. There are some elements in Washington that are expressing the opinion that we need more expert 

members of the board, and the outside appointees do not necessarily meet that level of criteria. And my counterargument to 

that, obviously everyone knows where I stand on this, for continuation and furtherance of those outside appointments. 

But does anyone there see the likelihood that if we either took 

them off the board, made no outside presidential appointments, or 

if we allowed the institutions to guide and identify the appointments, would that not over a period of time lead to an incestuous 

type relationship internally within those organizations? 

Mr. SYRON. Well, sir, one thing that we have done, and I want 

to be sure I’m answering the right question. I’m addressing kind 

of our current board now, is that we have a nominating and governance committee. In 2004, we totally redid our entire governance 

process. I don’t select board members for the board. 

As a matter of fact, my role is, if they want, for me to get in 

touch with people, but it’s very much—and we’ve been religious on 

this, as I think we should be, making up for some of the things 

that you allude to perhaps in the past—that it is our nominating 

and governance committee that actually interviews potential direcVerDate 0ct 09 2002 11:58 Jul 24, 2007 Jkt 035407 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 K:\DOCS\35407.TXT HFIN PsN: TERRIE
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tors; that’s all made up of independent directors now, and then 

makes a recommendation to our board as a whole on how they do 

that. But they are not in any sense a choice— 

Mr. KANJORSKI. Sort of like the AG’s office, the chief of staff 

makes the inquiry? 

[Laughter] 

Mr. SYRON. Well, it’s—we don’t have one person. 

Mr. KANJORSKI. No, I appreciate that. I am just trying to be humorous. We have to find something in this town to be humorous 

about. 

Does anyone have—my last question. Anything that has been 

missed in the bill that perhaps we should pay more attention to or 

that would be more efficient or effective for the organizations to be 

regulated? Do you see anything there that we have missed? 

Mr. SYRON. No, sir, I don’t see anything that you missed. I would 

just make one plea in this entire issue, is that these institutions 

and the way that they were created—now I think they’ve done a 

lot of good. They’re not without a lot of controversy. But they inevitably involve a lot of balance. 

It’s just like the issue in the subprime market, making sure that 

people can get into homes, but not that people who can get into 

homes can’t afford to stay in them. 

So, the only issue I would raise is that as we go through this, 

we are continuously aware that, you know, we have these multimissions, and we’re always balancing one against the other, and we 

want to be sure we can address all three. 

Mr. KANJORSKI. Thank you, sir. 

Mr. MUDD. I would add that it’s a comprehensive bill and it’s just 

important to keep in mind in the process that it’s both a mission 

and it’s a business, and both of those things have to be successful 

for the other one to work. 

So, if that’s my version of balance, I think it’s very important. 

If the costs of maintaining the regime, if the costs of compliance 

become so high, that obviously has an effect on the business, and 

that then impacts the amount of money that we can drive back into 

housing. 

Mr. KANJORSKI. All right. 

Mr. HOWARD. And from our perspective, Mr. Kanjorski, we’d like 

to see the regulator include people with housing expertise in addition to financial expertise, just as we mentioned with the boards, 

we think it’s important that the regulators understand the complexities of the missions as well. 

Mr. DALTON. Mr. Kanjorski, from our perspective, we think that 

the bill is balanced, and that it’s appropriate. You’ve addressed all 

the major issues, and we’re in support of the legislation. 

Mr. KANJORSKI. Thank you. And now I am in support of my 

chairman. 

The CHAIRMAN. Mr. Dalton, I appreciate that, and I appreciate 

your calling it balance, but just don’t call it fair and balanced, because— 

[Laughter] 

The CHAIRMAN.—then you’ll make some of us very uncomfortable 

at the company in which you will be putting us. I appreciate this. 

Let me just to follow up on what Mr. Howard said about housing 

65

people. Yes, I would make another plea, although because of the 

First Amendment, it is purely oratory. 

I wish the media would assign some people who specialize in 

housing to cover this issue. One of the things we have suffered 

from is that, understandably, there’s coverage from people who do 

the financial aspects, and these are important financial entities. 

But they are housing entities. And the people who cover this often 

know a great deal about the financial side but not as much about 

housing. And I think we would benefit if there was more attention 

to the fact that these are major housing entities. 

I mean, we do have on our next panel, and I apologize for the 

fact it’s delayed, groups that are especially concerned with housing, 

who know a great deal about it. And it’s not surprising that Fannie 

Mae and Freddie Mac are among their major foci because of what 

they do. 

Mr. HOWARD. From your mouth to the editors’ ears, Mr. Chairman. 

The CHAIRMAN. Thank you. I will say it again, Mr. Howard, because you know we continue to work with the home builders, I do 

want to note, and I don’t think this is competitive, but I note the 

presence of my colleague from Indiana who represents a large number of manufactured housing places, and we do want to stress 

again to both Fannie Mae and Freddie Mac that we think in this 

overall balance, there’s room for some manufactured housing along 

obviously with the major reliance we have on home building, and 

we hope that as we go forward, we will get that full attention. I 

know that’s something that Mr. Donnelly continues to remind us 

of, as does Ms. Carson, also from Indiana. But Mr. Donnelly has 

Notre Dame and mobile homes to worry about. 

[Laughter] 

Mr. DONNELLY. What a way to be famous. 

The CHAIRMAN. I thank the panel. And it wasn’t all bad that we 

waited so long, because you had a lot fewer people to ask you questions. 

Mr. BACHUS. Mr. Chairman? 

The CHAIRMAN. The gentleman from Alabama. 

Mr. BACHUS. Thank you. Could I follow up? 

The CHAIRMAN. Sure. 

Mr. BACHUS. One thing I don’t know, were you present when 

Roger Ailes received that First Amendment award Monday night? 

The CHAIRMAN. Was I present when Roger Ailes—no, I was not. 

Mr. BACHUS. I thought maybe you walked out with Senator Kennedy and— 

The CHAIRMAN. No, I did not. I was not there. I do like comedy 

shows, but I wasn’t invited to that one. 

[Laughter] 

Mr. BACHUS. Mr. Dalton, he was talking about fair and balanced, 

so I thought I’d better ask you a question. 

Mr. DALTON. Sure. 

Mr. BACHUS. And I knew that the appointments would come up. 

I just didn’t think it would take this long. So I’m not going to ask 

any questions on that. But is voluntary SEC filing sufficient by the 

GSEs, do you think? 

66

Mr. DALTON. Mr. Bachus, I think so. I mean, I don’t have any—

we don’t have any strong feelings in terms of requiring compliance 

with 1933 and 1934. 

Mr. BACHUS. Okay. Are the GSEs’ portfolios any more risky than 

a bank’s portfolio of loans? I mean, well, a bank portfolio which is 

not just loans. I mean, I guess Freddie Mac and Fannie Mae, it’s 

mostly interest rate risk, I would think. 

Mr. DALTON. Well, the risk is that their portfolios are primarily—they’re in the mortgage sector of the market, whereas 

banks are completely diversified, and they’re all over the lot. So, 

there is risk in that one sector of the marketplace, and that’s 

wherein lies the risk. 

Mr. SYRON. Can I just add something? 

Mr. BACHUS. Yes. 

Mr. SYRON. I’m sorry. I didn’t mean to interrupt. 

Mr. BACHUS. Mr. Syron. 

Mr. SYRON. Sir, we are in one sector of the marketplace, but it 

is generally considered, and if you look at the Basel II standards 

which the international regulators been working on for over 30 

years, they would say that it’s the lowest risk asset in the marketplace. 

Mr. BACHUS. And that’s what this committee has argued, that it 

is the least risky, unless you engaged in subprime or some questionable adjustable rate mortgages, like we’ve seen recently. 

Mr. SYRON. And our loss rate, at least I can speak for Freddie 

Mac, our loss rate historically has been 1 basis point. The loss rate 

of commercial banks in the same product has been 14 basis points 

historically, and I think all products, and I think this has only gone 

over the last 20 years, has been 83 basis points. 

So, you know, 1 basis point to 83 basis points is a pretty big difference. 

Mr. BACHUS. Almost no default. 

Mr. SYRON. Almost none. 

Mr. BACHUS. And you have not engaged in the subprime market? 

You hadn’t gone there to a great extent. Is that right? 

Mr. SYRON. No, sir. Yes, sir, that’s true. We have bought in part 

for goals purposes AAA tranches of some of these mortgage securities which we think are very secure. But I do think that it’s our 

obligation, and it’s consistent with what we did a few weeks ago, 

to really see, and we have people I think at both institutions working assiduously at trying to develop, you know, getting into the 

subprime market. 

But this again, sir, demonstrates the balance issue. To get into 

that, right, is definitely more mission-friendly. It’s a little less 

shareholder-friendly, and some could say, well, gee, is it as safe 

and sound? But we do feel if you set us up and this is a primary 

obligation of ours, we are going to search for ways to serve that 

market. 

The CHAIRMAN. If the gentleman would yield, that’s why in the 

paragraph that Mr. Howard and I were talking about where the—

which sets the portfolio, it mentions safety and soundness and mission, and that’s to prevent safety and soundness from being in effect a way to stay away from anything that’s lower income and 

67

risky. That’s why safety and soundness and mission are the 

linked—the lodestars there. 

Mr. MUDD. On the answer for Fannie Mae, on behalf of 

subprime, is that it’s important to remember there is subprime and 

there is predatory. Subprime simply means— 

Mr. BACHUS. Oh, absolutely. 

Mr. MUDD.—you have a credit blemish, and we think those people are part of the market. It’s less than 2.5 percent of our book. 

It’s 80 percent insured. It’s highly unsubordinated. We’ve been in 

it very carefully, consistent with some very strong anti-predatory 

lending guidelines we have. 

Mr. BACHUS. In fact, I would take the position that the CRA in 

1977, I think—they did actually when it said that you could not 

discriminate against low-income populations or neighborhoods, 

those neighborhoods, our experience is their credit ratings are 

somewhat less than perfect, so there is probably on banks, and I 

would say, Mr. Dalton, there’s probably an obligation to make 

loans, subprime loans, on behalf of the financial institution. 

But let me ask this question. This is a follow-up on what you just 

said, maybe. There are new affordable housing goals in this legislation. How can—and Mr. Frank said—this is Chairman Frank—others have thought, how can the two GSEs better focus on low-income families in underserved areas than you’re doing now? How 

would you do a better job than you’re doing now? 

Mr. MUDD. We do a lot already. We financed about $8 billion 

below 30 percent of AMI. So we have a representation there that’s 

about similar to where the population is. That said, we do agree 

that an affordable housing fund, if structured properly, could be an 

effective way for us to play a larger role. 

Mr. BACHUS. How would you change the affordable housing fund 

to serve some of your lower-income, underserved areas? 

Mr. MUDD. Well, it seems to me that the issues in lower income 

housing exist now in this country because housing has done so well 

in specific geographical areas. Each of those areas has a different 

and specific set of needs. Some may be manufactured housing. 

Some may be rental housing. Some may be something else. But if 

the—if our companies were able to bring the full set of resources, 

not just a housing fund, but maybe equity investments or maybe 

loans or maybe other products, to the table, you could really begin 

to turn around communities. 

So that was what I was trying to express in my testimony. 

Mr. DALTON. Mr. Bachus, if I could just make one point, sir, with 

respect to your question concerning the SEC registration. 

Mr. BACHUS. And I didn’t mean to hit you— 

Mr. DALTON. No, no. That’s fine. I just want to let you know that 

our members do support registration under the 1934 Act. 

Mr. BACHUS. So the exemption pitch should be eliminated, in 

your opinion? 

Mr. DALTON. We support registration under the 1934 Act, yes, 

sir. 

Mr. BACHUS. And I apologize for coming in with little— 

Mr. DALTON. No, that’s fine. 

Mr. BACHUS.—differences. 

68

The CHAIRMAN. I thank the panel, and we will call the next 

panel. 

The CHAIRMAN. Be polite to each other later. Sit down and let’s 

get started here. We’re running late. 

We will now begin. We’ll ask that doors be closed. Our last panel, 

again, we regret that we were held up. But even though there are 

not a lot of members here, this is going to be a very important part 

of the record, and we appreciate it. And I assure you that what 

you’re saying will have an impact. We begin with Judy Kennedy, 

who is the president and CEO of the National Association of Affordable Housing Lenders. Ms. Kennedy. 

STATEMENT OF JUDITH A. KENNEDY, PRESIDENT AND CEO, 

NATIONAL ASSOCIATION OF AFFORDABLE HOUSING LENDERS 

Ms. KENNEDY. Thank you, Mr. Chairman. I won’t take too long 

on this, but you got me off on a tangent when you were talking 

about the song you remembered. 

Think back for a minute, because it is the 30th anniversary of 

CRA. And by the way, that’s pearls; I didn’t bring any today. 

But think back to where you were 30 years ago. Barbra 

Streisand and Robert Redford were young and attractive and 

starred in ‘‘The Way We Were.’’ Carole King had issued her first 

album. Anyway, it’s a long time. 

But in the 30 years since CRA was enacted, the path to helping 

low- and moderate-income people become homeowners and have 

apartments they’re proud to call home has been incredibly wellforged. Unfortunately—and by the way, I hope you look at the back 

of my statement, there are pictures of some incredible properties— 

The CHAIRMAN. Are there pictures of Robert Redford and Barbra 

Streisand? 

Ms. KENNEDY. No. I hadn’t had that thought. 

The CHAIRMAN. Let’s get to housing. 

Ms. KENNEDY. Curtis Johnson Homes Preservation in LA and on 

and on, a beautiful one from Boston, by the way. 

I want to say this. I want to say that the primary market for affordable housing is very evolved. It’s very sophisticated, and it’s 

very constipated, after 20 to 30 years of making loans on properties 

affordable to people under 80 percent and under 50 percent of area 

median income, sometimes without subsidy in certain parts of the 

country. 

Unfortunately, Fannie Mae and Freddie Mac are still AWOL on 

support for these loans, so the current goals, which we now know 

from documentation that they continue to fudge, have really not 

worked. Your proposed reform, I think, will be a good beginning to 

getting Fannie and Freddie back on the path to affordable housing 

and should make an enormous difference. Let me put it in perspective. Last year alone insured institutions made over $300 billion of 

single family loans to people who earned under 80 and under 50 

percent of area median income. That was about 23 percent of the 

total. Nonprofit lenders alone made over $70 billion of private capital loans for housing affordable mostly to people under 60 percent 

of area median income. 

So we could do so much more if Fannie Mae and Freddie Mac 

were present in the market. When Freddie Mac brags about the 

69

fact that their losses are one basis point, I think that sums it up. 

Thirty years ago, insured institutions were told that the trade off 

for Federal insurance was that they meet the credit needs of the 

entire community. 

Today, the GSEs don’t meet the credit needs of the entire community, and frankly, that requires large institutions—the biggest 

banks in America, including in Chairman Frank’s home State—to 

have somebody on the road like a Fuller Brush man, peddling loans 

door-to-door across the country to try to get more capital to replenish the supply of affordable loans. 

Our members have done private placements of their loans and 

mortgage-backed securities. Fannie Mae and Freddie Mac not only 

don’t buy many mortgages, they don’t buy the AAA-rated tranches 

of securities backed by multifamily loans on affordable properties. 

Unfortunately, we have recently learned that Fannie Mae and 

Freddie Mac have been the primary enablers of subprime lending. 

For 5 years, the best seller servicers of Fannie Mae and Freddie 

Mac have complained to them that the GSEs refuse to buy a CRA 

loan because the borrower need to pay 32 percent of his income 

monthly for a mortgage payment rather than the 30 percent or 

whatever the GSE guideline is now. 

So primary lenders often are limited in the amount of those loans 

they can make, and the borrower walks down the street to the competitor of Fannie and Freddie’s best seller servicers and gets a ‘‘piggyback’’ adjustable rate loan that Fannie and Freddie are financing. The chickens have come home to roost. We now know the outcome; 44 percent of all subprime issuances in 2004 were financed 

by Fannie and Freddie. 

Worse, the GSEs actually used these AAA-rated tranches of securities backed by subprime loans that the advocates say are 80 percent explosive, half of which Freddie Mac has estimated are to borrowers who qualify for prime loans. So while Fannie and Freddie 

have been missing from the primary market for consumer friendly, 

legitimate, CRA-credited loans that our major insured institutions 

and their nonprofits are making, they have been the principal financiers of subprime loans. As the entity that has the AAA-rated 

tranches, the GSEs themselves probably are not at risk, but everyone else in the chain, including the borrower and the community, 

suffers. 

As a good first step to help restore balance to the mortgage market, H.R. 1427 aligns the goals of the GSEs with those of the 

banks. Thirty years after CRA and 15 years after Congress told 

Fannie and Freddie to support this market, it’s about time. 

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

161 of the appendix.] 

The CHAIRMAN. Thank you. 

Mr. Fishbein. I’m sorry. I didn’t introduce you fully. Alan 

Fishbein is director of housing and credit policy at the Consumer 

Federation of America. 

STATEMENT OF ALLEN J. FISHBEIN, DIRECTOR OF HOUSING 

AND CREIDT POLICY, CONSUMER FEDERATION OF AMERICA 

Mr. FISHBEIN. Thank you, Mr. Chairman, and Ranking Member 

Bachus. We appreciate the invitation to testify here today. We comVerDate 0ct 09 2002 11:58 Jul 24, 2007 Jkt 035407 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 K:\DOCS\35407.TXT HFIN PsN: TERRIE
70

mend the members of the committee and both of you in particular 

for your diligence and particularly your perseverance in working to 

develop improved regulatory oversight of the three GovernmentSponsored Housing Enterprises. 

Consumers have a huge stake in the outcome of GSE legislation. 

These entities are extremely valuable to the Nation’s housing finance system, making important contributions to expanding the 

mortgage market, and increasing homeownership levels. Their 

business model requires that all three operate as for-profit entities, 

however it is their public mission and affordable housing mandates 

as prescribed by Congress that make the GSEs unique and that ultimately justifies their government charters and the benefits afforded them through this status. 

Strengthening financial oversight to ensure the GSEs’ ongoing 

safety and soundness is a very worthwhile public policy objective. 

We believe that such legislation can and should be achieved in a 

manner that is consistent with these entities’ congressionally chartered status, their housing mission, and affordable housing activities and urge that the committee follow this course. 

Accordingly, we support revising the present regulatory structure 

in the creation of a new independent regulator with jurisdiction 

over all three housing GSEs. We also believe that both financial 

and mission oversight should be performed by the same regulator. 

It is also critical that the new financial oversight powers provided 

are commensurate and appropriate to the tasks at hand while not 

unnecessarily diminishing the ability of the GSEs to continue to 

perform their vital housing mission. 

Reaffirming and strengthening the GSE’s mission and related affordable housing activities should also be a central part of any new 

regulatory regime. Current consideration of GSE legislation provides an important opportunity to accomplish this objective, we believe, for all three GSEs. And Mr. Chairman, we especially thank 

you for working to ensure that mission considerations and important new affordable housing mandates are a vital part of GSE legislation. 

With a few notable exceptions, the bill introduced last week, HR 

1427, largely tracks the provisions that were part of the legislation 

passed by this committee and the House in the last Congress. And 

I want to summarize my written testimony in which we focus on 

the bill’s affordable housing provisions. 

First, we agree with the underlying premise of the bill that these 

mandates serve an important public purpose and have increased 

GSE activities in serving low- and moderate-income and other underserved households and communities. At the same time, we 

share the view that this can be improved upon and expanded to encourage deeper and more consistent focus by the GSEs on segments 

of the market with the greatest needs. These three entities have 

accomplished a lot over the years, but we believe they are capable 

of doing much more. 

Second, the affordable housing goal structure that applies to 

Fannie Mae and Freddie Mac would benefit from tighter targeting. 

It would encourage them to step up their activities with respect to 

lower income households. So would the provision in the bill to establish a more comprehensive multifamily purchase requirement 

71

and one that would create a statutory duty to serve requirement 

for certain specified affordable housing needs. 

We are also pleased that the bill would create a single family 

home refinance goal for low-income households. Such a sub-goal 

would help protect low-income consumers from falling victim to 

predatory lenders that are extremely active in this segment of the 

market, and enhanced GSE presence in this market can help provide these borrowers with safer and more sustainable loan options. 

In my written testimony, I also make a number of recommendations for refinements to the provisions in the bill. 

Third, we are very supportive of the establishment of an affordable housing fund through specified annual contributions from the 

two enterprises. Such an entity, we believe, would provide an invaluable source of funds for extremely-low-income and low-income 

households not served directly through the mortgage market. 

Fourth, my written testimony also suggests some additional 

items we would recommend for consideration for incorporation in 

the bill. In particular, we believe there should be more transparency to the public regarding the GSE’s activity in fulfilling their 

affordable housing mandates, and we suggest some steps and ways 

to achieve that. 

Further, we believe that additional public purpose requirements 

are warranted to help ensure a greater portion of the Federal 

Home Loan Banks’ core business and mortgage purchase programs 

be devoted to the needs of lower income households. Accordingly we 

recommend that the bill include provisions directing the new regulator to establish performance goals that would help accomplish 

this purpose. 

We welcome additional opportunity to submit comments after 

this hearing on some other aspects of the bill because this is complicated legislation. But let me wrap up by saying we thank you 

again for the opportunity to offer our views on this important subject and we look forward to working with you and other committee 

members as the bill progresses. Thank you. 

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

120 of the appenidx.] 

The CHAIRMAN. Thank you, Mr. Fishbein. The committee will be 

glad to receive any further information. 

Next, Sheila Crowley, who is the president of the National Low 

Income Housing Coalition. 

STATEMENT OF SHEILA CROWLEY, PRESIDENT, NATIONAL 

LOW INCOME HOUSING COALITION 

Ms. CROWLEY. Thank you, Chairman Frank and Ranking Member Bachus, for the opportunity to testify today. My testimony will 

focus only on the proposed affordable housing fund, which is a top 

priority for the National Low Income Housing Coalition. 

We view the affordable housing fund as an important new contribution to the solutions to the affordable housing crisis in our 

country. And while the affordable housing crisis has many dimensions, the fundamental problem is the mismatch between what people earn or otherwise have to spend for their homes and what 

housing costs. 

72

The people for whom this mismatch is the most acute are those 

with the lowest incomes, precisely who the affordable housing fund 

is intended to help. All of the fund would produce or preserve 

homes that are affordable to extremely low and very low income 

households. Extremely low income households are those with incomes at or below 30 percent of area median. In Boston, those are 

households with incomes at $25,000 a year or less, and in Birmingham, that’s $17,000 a year or less. These are elderly and disabled people on fixed incomes or people in the low wage workforce. 

Extremely low income renters are the only group of people in the 

United States for whom there is an absolute shortage of housing 

units. There are 9,022,000 extremely low income renter households 

and there are only 6,187,000 homes renting at prices these households can afford if they pay the standard of 30 percent of their income for their housing. This is a shortage of 2.8 million units. 

Higher income people may not always have the choice of homes 

that they prefer and in some markets there may be shortages affordable to people in higher income groups, but these 9 million 

families are the only ones who are playing this very dangerous 

game of musical chairs. 

What are the consequences of a housing shortage of such proportions? Well, most of these families spend way more than they can 

afford for their homes. Seventy-one percent of all extremely low income renters in the United States pay more than half of their income for their housing. This is up from 68 percent in 2001, so the 

numbers keep growing. And this leaves very little left for other 

basic necessities, forcing impossible choices. 

Otherwise, adults have to work two or more jobs, leaving little 

time for their children, or they are prey to unscrupulous landlords 

who can run substandard housing, or they’re living in overcrowded 

conditions or they move from one short-term dwelling unit to the 

next making employment and education very unstable, and ultimately people end up becoming homeless. 

And so the ultimate consequence of this housing shortage is 

homelessness in the United States. This is a housing shortage 

that’s not going to be solved by the very robust and remarkable 

U.S. housing market. I’m not a housing finance person, but I can—

my basic economics understanding is that, given that there is a 

huge demand for housing, rental housing, for the extremely low income population that they could afford, if somebody could make 

money building and operating that housing, they would have figured out how to do so by now. 

It hasn’t happened. We need a government solution. Nor can the 

housing problem be solved by the existing Federal, State, and local 

programs. And I’ll be happy to go into greater depth about the 

state of our current programs. Given the size of the deficit and the 

constraints on Federal spending, we have to figure out some way 

out of this problem, and the affordable housing fund is doing that. 

It is not a new concept. It is a conceptual cousin of the affordable 

housing program of the Federal Home Loan Banks. Fannie Mae 

and Freddie Mac would be required to contribute revenue to a fund 

that is administered by the new regulator that this bill establishes. 

73

And in the first year, these funds would be directed to the Gulf, 

which we support. We do suggest expanding the eligible States to 

include Texas and Alabama. 

The Affordable Housing Fund is intended primarily for capital 

grants to produce and preserve housing for extremely low and very 

low income families. Under the homeownership provisions, funds 

could also be used for downpayment and closing cost assistance. 

There is also a provision that not less than 10 percent of the funds 

are to be spent on homeowner activities. 

We suggest a change that would assure that the majority of the 

funds are actually spent on physical housing units, the construction 

or rehabilitation of units, and this can be achieved by setting a cap 

on the amount of funds that can go towards homeownership. 

One of the most controversial questions about the affordable 

housing fund was whether or not these funds could be used for 

anything other than bricks and mortar capital costs. HR 1427 

makes it clear what can and cannot be done with the funds, so let 

me assure any members of the committee who are concerned about 

the potential uses or misuses of these funds that there is no one 

who is more dedicated to assuring that doesn’t happen than the 

National Low Income Housing Coalition. 

I just want to close by congratulating Chairman Frank and Mr. 

Watt and Mr. Miller and Mr. Baker for coming together to sponsor 

this important bipartisan legislation. The history of Federal housing legislation is that the very best bills have been bipartisan, and 

thank you for continuing in that tradition. 

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

108 of the appendix.] 

The CHAIRMAN. Thank you. 

Next, Thomas Gleason, who is listed here as a board member of 

the National Council of State Housing Agencies, but is incidentally 

the president of Mass Housing, our State housing finance agency 

in Massachusetts. 

Mr. Gleason. 

STATEMENT OF THOMAS GLEASON, BOARD MEMBER, 

NATIONAL COUNCIL OF STATE HOUSING AGENCIES 

Mr. GLEASON. Thank you, Chairman Frank, and good afternoon. 

The CHAIRMAN. I understand that you have to leave to catch a 

plane, so whenever you have to leave, you can go ahead. 

Mr. GLEASON. Okay. Thank you. 

The CHAIRMAN. I know where you live, so if I need you, I can 

find you. 

[Laughter] 

Mr. GLEASON. Thank you very much. Chairman Frank, Ranking 

Member Bachus, and members of the committee, good afternoon. 

My name is Tom Gleason, and I am the executive director of the 

Massachusetts Housing Finance Agency. 

Thank you for inviting me here today to testify on behalf of the 

National Council of State Housing Agencies in support of the Federal Housing Finance Reform Act of 2007. We commend the chairman and members of the committee for recognizing in this legislation the need to sustain and strengthen Fannie Mae and Freddie 

74

Mac in their affordable housing mission while preserving the GSE’s 

safety and soundness. 

NCSHA strongly supports the bill’s creation of the affordable 

housing fund, capitalized with annual contributions from Fannie 

Mae and Freddie Mac. I believe this is a modest assessment of the 

GSEs’ resources that is fully appropriate given the many advantages that they have through their Federal charters. 

NCSHA believes that the affordable housing fund should be administered by States for several important reasons. Specifically, 

States are in the best position to prioritize housing needs across 

their jurisdictions. States have a proven track record of allocating 

housing resources fairly and effectively. States have become the 

central point through which all Federal and State housing resources are now coordinated, and perhaps most importantly, State 

housing agencies have the technical expertise necessary to structure complex housing finance transactions that will get housing 

built and keep it affordable over the long run. 

I think that the most important role that I can play here this 

afternoon is to offer some specific examples of how these funds 

might be utilized. In Massachusetts, our State legislature created 

several years ago an affordable housing trust fund. The fund’s flexibility is its greatest strength. 

One example of this flexibility is a project known as Maverick 

Landing. It’s a 396 unit HOPE VI development in East Boston. The 

rehabilitation of this property turned some of Boston’s worst housing into some of its best and has spurred the development of market rate housing along what was once an abandoned waterfront 

area in the City of Boston. 

The combination of tax-exempt financing, HOPE VI funds, State 

housing trust funds, and green building resources has proven to be 

so successful that Maverick Landing was named the number one 

affordable housing development in the country this past year by Affordable Housing Finance magazine. 

Another example is Project Place, a development in Boston’s 

south end. It has used State funds, new market tax credits, home 

resources, and green building grants to create 14 units of affordable housing. All 14 units will be targeted to formerly homeless individuals, all of whom will have incomes at or below 30 percent of 

the median income. 

Project Place is a mixed-use development that brings together 

housing, commercial space, and resident services, including job 

training. This is housing at its very best, and this is housing that 

changes people’s lives. 

These kind of developments are the future of affordable housing 

in Massachusetts and, in fact, all across the country. The affordable housing fund envisioned in this legislation would be a perfect 

complement to what is already being done in all 50 States and 

would allow even more of this housing to be built. 

As importantly, it would allow us to go deeper, to reach even 

more people at very low incomes who are not being adequately 

served at this time. Beyond all of this, States are best— 

Mr. BACHUS. Mr. Chairman, I missed a point. Could he—would 

it be proper for him to back up about 30 seconds and replay that? 

The CHAIRMAN. Certainly, if Mr. Gleason would do that. 

75

Mr. GLEASON. Mr. Bachus, anything specific that I can— 

Mr. BACHUS. What you proposed as a perfect compromise? 

[Laughter] 

Mr. GLEASON. I was saying that I thought the affordable housing 

fund, as envisioned in this legislation, would be the perfect complement to what is already going on from our perspective in all 50 

States all across the country. And, as importantly, it would allow 

us to go even deeper than we are already doing, to reach down and 

serve people with very low incomes who aren’t currently being adequately served. 

Beyond all of this, I think States are best able to respond quickly 

to emerging problems that threaten housing affordability in their 

States. Massachusetts, like many States, has thousands of homeowners who have fallen victim to subprime loans. The ‘‘American 

Dream’’ of homeownership has, for them, become a nightmare. 

In Massachusetts, 12 percent of the mortgages are subprime, yet 

they represent 70 percent of all the foreclosures that are taking 

place in our State. States could use a portion of the new grant 

funds to respond to problems like this. Saving these homeowners 

from foreclosure will be difficult but critical, not only to the homeowners themselves, but to the economy of our State. 

NCSHA also strongly supports the bill’s affordable housing goals 

provisions and urges this committee to encourage continued and 

expanded GSE investment in housing credits and bonds by awarding the GSEs goal credit for these investments. 

Finally, NCSHA supports the GSEs’ conforming loan limit increase. Seventeen percent of Massachusetts cities and towns have 

median home sale prices that are above the existing loan limits. 

We need to encourage homeowners to seek out safer mortgage 

products, and this is one very important way to do that. 

I thank you for your time this afternoon, and NCSHA stands 

ready to assist you in any way possible to move forward this important legislation. 

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

138 of the appendix.] 

The CHAIRMAN. Thank you. We appreciate your patience. Next, 

Mr. Michael Flynn, who is the director of government affairs at the 

Reason Foundation. 

STATEMENT OF MICHAEL FLYNN, DIRECTOR OF 

GOVERNMENT AFFAIRS, REASON FOUNDATION 

Mr. FLYNN. Thank you very much, and I appreciate the special 

obligation on the last speaker on the last panel of a long hearing 

day, so I will be brief in my remarks. The committee has my full 

written remarks and also a list of studies and research the Reason 

Foundation has done. 

Chairman Frank, Ranking Member Bachus, and members of the 

committee, thank you for the opportunity to be here today. My 

name is Michael Flynn, and I am the director of government affairs 

for the Reason Foundation. 

Reason is a nonprofit, nonpartisan think tank that, for more 

than 40 years, has researched the consequences of government policy and worked to advance liberty and develop ways for the market 

to improve the quality of life for all Americans. 

76

My remarks will concentrate on the affordable housing fund. 

Reason has published several studies on the issue of affordable 

housing and housing policy with a special focus on California. As 

a matter of policy, we have very significant concerns about this proposed new fund. In many parts of the country, as you know, the 

unavailability of affordable housing is a very serious concern. 

In California, where Reason is headquartered, the demand for all 

housing outstrips the supply by half-a-million to a million units. 

Unfortunately a new Federal affordable housing fund will not fix 

this situation. In the end, we believe it will fail. It will not fail because of a lack of resources, it will fail because it doesn’t address 

the fundamental problem; there are too few housing units being 

built to meet the demand. 

Simply put, this policy fails three tests: it ignores the real problem; it creates a veneer for action, which may stymie more substantive reforms; and it also creates a host of unintended consequences that not only could distort the housing market but also 

further waste and misuse of these funds. I’ll discuss these briefly. 

In recent years, the Nation has experienced a burst of homebuilding. New construction, however, has not met this demand. It 

is not for a lack of capital. There is nothing in the fundamental economics of housing that would skew building towards any particular 

segment of the market. Housing would be no different from every 

other sector of the economy but for one factor, and it’s government 

policy. 

It’s no small irony that while this committee meets to deliberate 

and decide how to further affordable housing in this country, there 

are governmental bodies everywhere meeting to consider new 

growth limits, new growth boundaries, increased impact fees, more 

stringent zoning requirements, prevailing wage laws, new environmental regulations, open space requirements, or building standards. While many of these may seem individually reasonable, taken 

together they have a cumulative effect. Today it is increasingly expensive, cumbersome, and time consuming to build a single family 

dwelling. 

Reason Foundation did a study of price trends, just real quickly, 

in Washington and Florida State, that found that 20 to 25 percent 

of the increase in housing prices in those States was due to the 

statewide growth management law. Growth management land use 

restrictions artificially limit the supply of housing that can be built. 

The result of this higher level of regulation is to make building 

lower and middle income housing, which already involves very thin 

profit margins, economically risky and less viable. 

This causes a ripple effect that is felt all the way down the housing ladder. Middle income and young professional families, who 

otherwise might move to larger homes, are priced out of that market and as a result they seek out older, smaller homes and push 

up those prices beyond families who could otherwise afford it. 

I realize my time has dwindled, and I do want to say that I have 

a good, finely calibrated, Irish sense of fatalism, and I realize that 

my testimony here today is not going to alter you from moving forward on an affordable housing fund. But I would like to say two 

things. One, again, no matter how much money the Federal Government puts in there, you’re going to run into the real architects 

77

of housing policy in this country, and that’s State and local officials. And as long as they’re able to continue to have land use restrictions and regulations, you’re not going to crack that knot. 

I hope that this is not another case where we declare victory and 

go home, where we think we passed this fund and the issue is resolved and all we’ve done is put the crisis off for another day. 

I also think there are very, very real concerns about how this 

money is spent. In the past, housing programs have been a fount 

of misuse and even fraud. I do think you need to look to put very, 

very particular requirements on how that money is spent. 

I’d be remiss if I did not quickly mention one particular organization, ACORN, who has carved a very lucrative niche out of housing 

programs over the years. ACORN is a national conglomerate, an 

umbrella group of about 70 different organizations— 

The CHAIRMAN. Mr. Flynn, if ACORN were here, I’d allow you. 

I don’t feel comfortable in this hearing listening to an attack on an 

organization that’s not represented. They have no particular stake 

in this, and I don’t think that’s appropriate. 

Mr. FLYNN. I understand that. I only want to stress that there 

is a very, very real need to put very clear restrictions on how this 

money is used so that it is not misused, and that there has been 

a pattern in the past of misuse. I’m not singling out any; I just 

used it as an example. Make sure you restrict that. 

[The prepared statement of Mr. Flynn can be found on page 128 

of the appendix.] 

The CHAIRMAN. No, to the contrary, Mr. Flynn. You did single 

one out. 

Mr. FLYNN. Because I was going to go through some particular 

facts. 

Mr. BACHUS. Mr. Chairman, do you yield? 

The CHAIRMAN. Yes. 

Mr. BACHUS. I think that we, in our testimony, do single out organizations and things. And these are our witnesses, and I know 

that the chairman disagrees with what the gentleman said, but— 

The CHAIRMAN. The gentleman’s time has expired. I think I 

haven’t sat while anybody attacked an organization that wasn’t 

here, wasn’t represented. It’s irrelevant to the issue before us in 

my judgment because we aren’t talking about empowering any particular organizations. And I would extend the same courtesy to any 

organization that was being criticized without an ability to respond. 

Mr. BACHUS. Would the gentleman yield? 

The CHAIRMAN. Yes. 

Mr. BACHUS. While I have great respect for you as chairman, I 

will tell you that some of our members—and their concern is that 

this money will go into organizations like ACORN as opposed to for 

bricks or mortar, and don’t feel like that is legitimate. 

The CHAIRMAN. I understand that, and so they adopted an 

amendment that kept money from going to the Catholic Church, 

the Methodists, and a whole range of other organizations. So I appreciate the concern, but I—one, we are not here, I think, talking 

about any particular organizations. We’re talking about a bill 

that’s—it’s very different. 

78

You were talking about Fannie Mae, and you were referring to 

a bill which said that Fannie Mae and Freddie Mac would distribute themselves; today we’re talking about the State housing finance agencies. And if people want to warn them about dallying 

with these—organizations, it’s a different story. But the policy 

issue is separate from an attack on an organization, a very critical 

attack on an organization not here represented, not able to defend 

itself. I don’t see any reason why our hearing should be a forum 

for that. 

The general principle is not at issue here. 

Mr. Flynn, do you want to summarize? 

Mr. FLYNN. Again, I think it is—this money, let me just say—

in a sense, we’re shadowboxing here with this kind of proposal. 

And we are thinking we can throw some money into the issue, that 

somehow that will take care of it, but again, we’re not actually fundamentally dealing with what causes the problem of affordable 

housing. 

And I hope that as you go forward in this you will look into what 

kind of regulations and restrictions State and local governments 

put into this area, what they do with the money, so that this is not 

just somewhere where we declare victory and go home and put off 

the crisis until another day. 

[The prepared statement of Mr. Flynn can be found on page 00 

of the appendix.] 

The CHAIRMAN. I’ll begin with the questions. First, Mr. Flynn, did you hear anybody say that if we got this $500 million we could, 

(a), declare victory and go home, (b), resolve the problem? Excuse 

me, has anyone in your hearing engaged in the kind of hyperbole 

you have just rebutted? 

Mr. FLYNN. No, but I also do not—I have not heard anything 

about what growth restrictions do. 

The CHAIRMAN. I understand that. But that’s a separate question. I will get to that in a minute. 

Mr. FLYNN. That’s the question. 

The CHAIRMAN. I will get to that in a minute, but I am objecting 

to this argument by hyperbole, this strawman. No one says this is 

going to—no one who is knowledgeable thinks it’s going to solve everything; no one thinks that we’re going to declare victory and go 

home. I think some find that helpful. 

Now as to growth, let me ask you because this would be, I think, 

a problem for some of my Republican friends. I agree with you, 

those growth restrictions are a problem. I have complained about 

them a great deal. They are almost all at the State and local level 

and county level. Do you advocate the Federal Government overturning State, local, and county zoning restrictions? 

Mr. FLYNN. No, not at all. However— 

The CHAIRMAN. Okay, thank you. 

Mr. FLYNN. But I also don’t know that you want to reward those 

officials with extra money so that they never bear the cost of what 

recessions could pass. 

The CHAIRMAN. Well, of course, by definition, the bill wouldn’t be 

doing that because if you did this right— 

Mr. FLYNN. We don’t know how the money is going to be divided 

in the bill. 

79

The CHAIRMAN. Well, I know something about how State housing 

authorities work. And I would say this; by definition, those people 

who exclude affordable housing by their zoning aren’t going to get 

it. And in fact, you’re being illogical here, it seems to me, because 

you say, well, they’re going to exclude it. If they exclude it, they 

don’t get it. It’s only the people who include it, who get it. If they 

have zoned it out and made it impossible for us to build that there, 

then they don’t get it. 

Mr. FLYNN. Well, but this always goes to a very inherent—a misconception of this entire debate is that somehow affordable housing 

is new housing. 

The CHAIRMAN. Excuse me. You’re changing the subject. 

Mr. FLYNN. No, I’m not. 

The CHAIRMAN. That’s not the question about whether or not 

it’s—you were asking me—yes, I was asking you about local zoning 

restrictions, and you said, no, you don’t want the Federal Government to overturn these restrictions, but you don’t want us to reward them. And I’m saying nothing in this bill would allow us to 

reward them. In fact, the money would go to places that hadn’t 

done that. 

Let me just turn to Mr. Gleason now on the—and I appreciate 

it because one of the things that was raised by Mr. Howard was 

making sure that we get it right when we talk about the high end 

loans, the jumbo loans here, and you talked about 17 percent of 

Massachusetts cities. 

I take it from that, that preexisting statistics would allow us to 

decide where the a median house price would trigger the higher 

loan and where it wouldn’t. Is that correct? 

Mr. GLEASON. Yes, Chairman Frank, it would. My number of 17 

percent of our cities and towns in Massachusetts was based on data 

from 2006. 

The CHAIRMAN. All right. So I just want to take—I don’t mean 

to get specific. We will make sure, in the bill, as we write it, that 

the issue Mr. Miller talks about, the issue of the high cost areas, 

that we as nearly as possible use preexisting statistics so those 

only apply to where they are justified. I appreciate that. 

Mr. Bachus. 

Mr. BACHUS. I thank the chairman. You know, this committe, I 

think the chairman has said, I have said, and some of these panelists have said, that we try to work in a bipartisan way to address 

different issues. One issue here is the safety and soundness of the 

GSEs. 

The chairman feels very strongly about the need for an affordable housing fund, and members of the minority recognize the need 

for affordable housing. And I will say that the testimony of Ms. 

Crowley, Dr. Crowley—I won’t speak for all the members of the minority, but I will say that I see the greatest need is what you said 

the greatest need of; it’s people who can’t afford homeownership. 

We talk a lot about homeownership, and that’s the best thing. I 

mean for most people, that’s the ultimate goal. But as you say, 

there are elderly, disabled, people on fixed income, or people in the 

low wage workforce where really homeownership, at least for some, 

will not be, it was and it is—but for most it is not the best option, 

and that option is renting affordable housing and not rundown diVerDate 0ct 09 2002 11:58 Jul 24, 2007 Jkt 035407 PO 00000 Frm 00083 Fmt 6633 Sfmt 6633 K:\DOCS\35407.TXT HFIN PsN: TERRIE
80

lapidated housing as we’ve all seen in Birmingham. I think that’s 

a real problem. 

And I will say this. The option for a lot of those people is public 

housing. And quite frankly, a lot of times that’s unsafe because 

maybe the management is not there and it’s—regrettably it is. 

I recently saw some statistics from the State of Georgia where 

they profiled the prison population, and it was just amazing how 

many of the young men, young boys who were raised in public 

housing projects, in just a few of them, ended up in the penitentiary. It was just an amazing number. 

Ms. KENNEDY. Mr. Bachus, along those lines, if you look at page 

eight of my testimony, I’m particularly proud of a new development 

in Montgomery, Alabama. We have a picture of Rosa Parks Homes 

there. 

This is the new face of affordable housing. It’s a beautiful, three 

story, red brick building that—Mr. Gleason’s counterpart for Alabama brought together 34 banks and formed a consortium patterned on the Massachusetts version. And these 34 banks with low 

income housing tax credits and the State of Alabama’s tax abatement created the first elderly and disabled affordable rental property in the City of Montgomery that people are proud to call home. 

Mr. BACHUS. I don’t think that anybody on this committee, if 

they knew the facts, would oppose a project like that. I can’t imagine them doing that. 

The CHAIRMAN. I’ll give you a couple. 

Ms. KENNEDY. If they saw the picture, they wouldn’t. 

Mr. BACHUS. You would get your great majority, in my opinion. 

The CHAIRMAN. That I might. 

Mr. BACHUS. One of the debates on New Orleans was do we build 

it back just like it was when there were tremendous problems 

there. That’s a debate for another day, but maybe—you know, 

hearings don’t always convince me of anything. 

But Ms. Crowley, you said that the affordable housing fund is 

the conceptual cousin of the highly successful affordable housing 

program of the Federal Home Loan Bank. I’m going to give you 

that. You know, I may be criticized by some of my colleagues, but 

I will sign on to 98 percent of that. 

Ms. CROWLEY. Okay. 

Mr. BACHUS. We are concerned—I am concerned that this fund 

will not be that effective. And I know that, Mr. Gleason, you want 

the money to come to the States, you represent the people who 

spend it in those States, so I’m not going to ask you for your opinion. Well, I will. In fairness, I’ll ask you for your opinion, but what 

is this money—but you know, that money goes to banks, member 

banks, and they’ve been very efficient in creating projects, I think, 

that you’ve talked about Ms. Crowley, very, very, very efficient. 

If we design this program, what—and a number of people would 

say, well, you can’t take it from one GSE and give it to another, 

but if we’re doing a short-term program, we’re talking about a temporary program for 4 or 5 years, that program is very proscriptive. 

It has none of the problems that members on my side fear, you 

know, other than those that just simply say that it’s going to raise 

the costs to all homeowners. 

81

But what if we did that? What if we took that money and put 

it into the affordable housing program of the Federal Home Loan 

Bank? You’d have to—we have the Louisiana, Mississippi thing, 

but even have them address that— 

The CHAIRMAN. That’s just for the first year. 

Mr. BACHUS. Just for the first year. What if we did that as a bipartisan solution that most members could take? 

Ms. CROWLEY. Here is what’s exciting about your question. It is 

that we’ve gotten past the notion that we should have the fund and 

now we’re just talking about the mechanics of getting the money 

out. And that’s really a wonderful step forward that really makes 

us very, very happy. 

Our view of how to get the money out is that we should figure 

out how to get it out quickly and efficiently to the people who can 

get the housing built in the most—in the quickest way and do the 

best job. And you can—and I’ve been in these discussions for a couple of years now about what all the options are. And you can do 

your pluses and minus signs on every single one of those various 

options. And the whole issue of having it be also run through the 

Federal Home Loan Banks or the Affordable Housing Program is 

one very good option. 

There are others that people have talked about. I think that is—

I think that we have reached a point where we’ve agreed that it 

shouldn’t be Fannie Mae and Freddie Mac doing it. I think everybody has agreed to that, and I think that the remaining questions 

are simply things that are logistical to work out. 

Now I know my friends at the State housing agencies feel very 

strongly about State housing agencies doing that. And our members, we have some members who think that their State housing 

agencies are wonderful and we have some members who think 

their State housing agencies are not so wonderful, so it does vary 

considerably from State to State. 

It is certainly a very valid option, if that answers your question. 

The CHAIRMAN. Would the gentleman yield to me, because I 

would say this—we want to look at all of these things, and I think 

we may not get—since we’re going to go Louisiana and Mississippi 

in year one, we don’t have to resolve this in a definite way right 

away as this goes forward. But I would say this. I don’t believe that 

any of the restrictions people have been looking to put into the bill 

before are in that. That is, I think the Federal Home Loan Banks 

do a very good job without any restrictions of the sort about how 

they can do it—it’s a pretty general thing. I like that idea, but it 

also, if you look at it, it does not have any of these, ‘‘You can’t give 

it to this one, you can’t give it to that one.’’ Nature took its course 

there in a very good way. 

Ms. CROWLEY. Right. 

Mr. BACHUS. Well, I’m just saying, instead of building a whole 

new—I know that you could probably—another way to split this 

baby is to, if it can be split, is to give part of it to the State. And 

then after 5 years you could look at it and see if it worked, you 

could see what worked best. But as far as the—I’m talking about 

a bill that you get out here, get out here quick and pass. 

Ms. CROWLEY. Those are really good questions for us to be talking about at this point. 

82

The CHAIRMAN. And I want to say, I would again just repeat, in 

the first year, the fund is going to Louisiana and Mississippi in 

that three-to-one ratio. I think we will be—the Senate is going to 

take this bill up; we’re going to go to conference, I believe, and I 

don’t think—and there’s no urgency to solve where it goes in years 

two through five, because it’s a 5-year thing, as of now, and I want 

to look at that. And frankly, if that helps us get this whole thing 

forward, you know, there’s something to be said for that. 

Mr. BACHUS. I think that what I would say to the panelists and 

to the chairman is what it helps us with is to get it not only passed 

the House put perhaps, I think, if the House had a very good vote 

then it might help the Senate pick it up. And it would certainly, 

some of the questions that my House Members have— 

The CHAIRMAN. That the gentleman from Alabama would go 

home and do what a good citizen would do and write his Senator. 

Mr. BACHUS. I’m not talking about—Mr. Chairman, I’m not talking about— 

The CHAIRMAN. Let me just— 

Mr. BACHUS. I’m talking about—support. 

Ms. CROWLEY. Can I comment on Mr. Bachus’s comment about 

some people needing to be in the rental market? That’s absolutely 

true, and that’s why we need a strong rental housing sector because you have to have a balanced housing sector. 

But the way that it’s so imbalanced now is that the people who 

are in the rental housing market who have the potential of perhaps 

becoming homeowners, not people on fixed incomes but who have 

the potential of becoming homeowners, they have no hope of doing 

that because they are spending so much of their income on that 

rent that they can’t save; they can’t get ahead. And if they have 

the ability to have a stable rental home, establish a good record as 

a good renter paying their rent that they could afford and did that 

over time, then in fact they would be very good potential prospects 

for the homeownership market, but under the current situation, 

they have no hope. 

The CHAIRMAN. I appreciate that. One of the things we will be 

looking at when we revisit the credit is part of the problem with 

people establishing credit. People who have been paying their rent 

regularly and their utility bills and everything else—we should find 

some way so that that can be taken into account in terms of credit 

ratings. 

Thank you, very much. The hearing is adjourned. 

[Whereupon, at 3:52 p.m., the hearing was adjourned.] 

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A P P E N D I X

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