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58–052 PDF 2010

FHFA OVERSIGHT: CURRENT 

STATE OF THE HOUSING 

GOVERNMENT SPONSORED ENTERPRISES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MAY 26, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–142 

( 

(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 

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 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 26, 2010 ..................................................................................................... 1 

Appendix: 

May 26, 2010 ..................................................................................................... 41 

WITNESSES 

WEDNESDAY, MAY 26, 2010 

DeMarco, Edward J., Acting Director, Federal Housing Finance Agency 

(FHFA) .................................................................................................................. 10 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 42 

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

Marchant, Hon. Kenny ..................................................................................... 45 

DeMarco, Edward J. ......................................................................................... 47 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

DeMarco, Edward J.: 

Written responses to questions submitted by Chairman Kanjorski ............. 57 

(1) 

FHFA OVERSIGHT: CURRENT 

STATE OF THE HOUSING 

GOVERNMENT SPONSORED ENTERPRISES 

Wednesday, May 26, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:02 p.m., in room 

2128, Rayburn House Office Building, Hon. Paul Kanjorski [chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Sherman, Lynch, 

Scott, Maloney, Donnelly, Childers, Adler, Himes; Garrett, Castle, 

Royce, Biggert, Capito, Hensarling, Gerlach, Campbell, Neugebauer, Posey, and Jenkins. 

Also present: Representatives Watt and Marchant. 

Chairman KANJORSKI. Good afternoon. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises will come to order. 

Pursuant to committee rules and prior discussions with the ranking member, each side will have 15 minutes for opening statements. Without objection, all members’ opening statements will be 

made a part of the record. I yield 5 minutes to myself for an opening statement. 

We meet this afternoon to examine the Federal Housing Finance 

Agency in its oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System. This hearing is the fourth in a series the Capital Markets Subcommittee and the full Financial Services Committee have, so far, convened in this Congress to examine 

the future of housing finance. 

The Housing and Economic Recovery Act of 2008 created the 

Federal Housing Finance Agency and gave the regulator many new 

powers. At the request of then-Secretary Paulson, the law also authorized the Treasury Department to provide emergency backstop 

liquidity for Fannie Mae and Freddie Mac. Within weeks of enactment, policymakers in the Bush Administration decided to place 

the two Enterprises into conservatorship and make available government support. Since then, the two Enterprises have worked to 

improve the quality of loans they buy and to end problematic programs. 

2 

The Treasury Department has also purchased $144.9 billion in 

senior preferred stock of Fannie Mae and Freddie Mac. In addition, 

the government has purchased more than $1.3 trillion of the Enterprises’ mortgage-backed securities. Together, these sizable commitments have helped to preserve housing credit during tough economic times. 

As our housing markets have begun to stabilize, the government 

has now started to scale back its efforts. Specifically, at the end of 

March, the Federal Reserve ended its program to purchase mortgage-backed securities. Going forward, we must continue to return 

to the private sector those functions that properly belong with the 

private sector. We need to closely monitor the mortgage rates and 

investor demand, as well. 

Chairman Frank has noted that two important points of consensus have emerged from our two most recent hearings on the future of housing finance. First, the Enterprises’ major losses have 

come from their pre-conservatorship activities. Second, the major 

players in our housing markets have agreed that we could cause 

considerable economic harm if we simply abolished Fannie Mae 

and Freddie Mac without putting something new in their place. I 

very much agree with both assessments. 

We will, in the near future, complete our work on the Wall Street 

Reform bill. During these debates, some have regularly sought to 

use questions about the future of Fannie Mae and Freddie Mac as 

a toxic poison pill to forestall progress on this must-pass legislation. I find this situation very unfortunate, as the bill includes important provisions to alter the securitization process, impose risk 

retention requirements, and strengthen rating agency accountability. Once we resolve these baseline policy issues, we can turn 

our full attention to broader questions about how to reorganize our 

housing finance system. 

Today’s testimony will help us to determine how to move surgically and strategically on these important matters. It will help us 

to decide what elements of our housing finance system we need to 

keep and what aspects we should discard. In the months ahead, I 

plan to convene more hearings on these matters. 

Before closing, I want to express my disappointment at the failure of our witness to respond to the request to address the issues 

related to the Home Valuation Code of Conduct in his written testimony. The House-passed Wall Street Reform bill contains my comprehensive appraisal independence and regulatory reforms, which 

many view as fixing the Code’s implementation problems. 

The bill also includes Congressmen Miller and Childers’ amendment to sunset the Code. Because Congress is very focused on 

these issues, we need an update from the regulator. 

In sum, today’s hearing is part of a deliberative process that will 

ultimately lead to a new housing finance system. My goals in these 

debates are to limit taxpayer risk and establish a more stable, 

long-term funding source to help hardworking, responsible middleclass American families to buy a home with an affordable mortgage. I look forward to the testimony. 

Now, I would like to recognize the ranking member, Mr. Garrett, 

for 31⁄2 minutes. 

3 

Mr. GARRETT. I thank the chairman. And just as an aside, before 

I begin, I would just like to comment on the chairman’s comments. 

There are those of us who say, yes, reform needs to be done, and 

we do support moving reform legislation through the House and 

the Senate. But we see no reason why it cannot include reform of 

GSEs at the same time. 

But I do thank the chairman and I thank the witness who is 

here today. During normal times—well, actually, I should step 

back. When Congress passed the Housing and Economic Recovery 

Act, we created a new regulatory body for the GSEs called the 

FHFA. In that legislation, there is a requirement that the head of 

the FHFA comes before Congress once a year. And I was going to 

say during normal times, a once-a-year requirement for such an appearance might be reasonable. But under current circumstances, 

when, quarter after quarter, the American taxpayers are forced to 

hand out literally billions and billions and billions of dollars to 

keep Fannie and Freddie solvent, this requirement is really not 

sufficient. 

Currently, Fannie and Freddie are costing us more than all the 

other bank bailouts combined. That is why I am pleased to cosponsor legislation that’s being introduced today, I believe, by my good 

friend from Texas, Mr. Hensarling. And that would require the Director to come to Congress and testify every time Fannie and 

Freddie thinks they need an additional infusion of taxpayer bailout 

funds. 

Too many times when this committee has been debating the 

problems with the GSEs, the focus has been on past mistakes instead of the future. Regardless of whose fault it was that these two 

entities encouraged the creation of the subprime housing crisis and 

the collapse of our financial sector and the economy, there is a litany of problems that need to be addressed by this body, and we 

need to do it today. 

So, no matter how much my colleagues on the other side of the 

aisle attempt to ignore these problems, they really do persist. 

And when the Administration and the Majority are faced with 

problems of Fannie and Freddie Mac and what are they going to 

do about it, it seems up until now, they turned a blind eye to it. 

We need to have more and more oversight hearings, and create an 

independent inspector general within the FHFA. They have turned 

a blind eye to those ideas. 

When Fannie and Freddie need to be put on budget, so that taxpayers know what they are exactly on the hook for, as my bill 

would do, well, they have turned a blind eye to that, as well. 

When we had an opportunity to stop the bailouts and end additional taxpayer losses, well, they turned a blind eye to that. 

And when we have an opportunity to address the future of these 

entities in the regulatory reform bill, well, we have seen what has 

happened in the Senate; they have turned a blind eye to that, as 

well. 

My friends in the Administration and the other side, the Majority, continue to ignore and delay dealing with these problems. But 

at some point in time, they are really going to have to open their 

eyes to reality. In fact, the only time that this Administration or 

Congress will do anything about the future of these two entities is 

4 

when they say they need an increase in the bailouts of the GSEs, 

and the fact that they’re receiving them and receiving them from 

the taxpayers at further risk with their ineffectual mortgage modification programs. That’s basically just throwing good money after 

bad. 

So, when it’s all said and done, the bailouts of Fannie Mae and 

Freddie Mac will go down as the most expensive bailouts of this 

crisis by wide margins. However, this Administration and this Congress just want to keep acting like there is really no problem, and 

keep turning a blind eye to it. 

So, I look forward to today’s hearing, and hope that this is a sign 

that this committee is starting to get serious about addressing the 

multitude of serious issues relating to Fannie and Freddie, and the 

future of housing finance in this country. 

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

Chairman KANJORSKI. Thank you, Mr. Garrett. Next, we will 

hear from the gentleman from California, Mr. Sherman, for 3 minutes. 

Mr. SHERMAN. Thank you, Mr. Chairman. I want to bring up two 

issues. 

The first is this new predatory financial scheme called the private transfer fee covenants. Under these covenants, buried in the 

loan documents or sale documents is a requirement that for 99 

years, whenever the house is sold, a percentage of the sale price 

needs to be mailed to some Wall Street investor. This is a new private real estate transfer tax with the money going to Wall Street. 

It’s my understanding that the FHFA has refused to participate 

in such transactions. I would hope that the Fannie and Freddie 

would do likewise. This is: first, a matter of consumer protection; 

second, a matter of avoiding undue complications in what is already a very complicated transaction; and third, a matter of the security of the GSE, in that this impairs the value of the home. 

Second, we have a fragile recovery. Nothing could destroy this recovery more than a double-dip in home prices. We need to stabilize 

home prices. Home prices reflect and home values reflect transactions. Transactions have to be financed. And for middle-class people, all financing today goes through Fannie, Freddie, or FHFA. 

What we will see at the end of the year is a dramatic decline in 

the size of transactions that Fannie, Freddie, and FHFA can deal 

with in high-cost areas. In Los Angeles, where it’s 729, 750, that 

drops probably to 625, but perhaps into the 500’s if Congress does 

not act this year. And that would devastate southern California. It 

would—nothing is more likely to push us into a double-dip recession. 

I want to commend to my colleagues the Sherman-Miller bill that 

would say that we simply do not have a decline in these conforming 

loan limits. It is my understanding that the GSEs actually make 

a profit on those loans that are over $417,000 and as high as 

$729,000. 

And second, I want to advise my colleagues that whereas in some 

rural parts—and even some urban parts—of this country, a home 

that sells for $417,000 is a mini-mansion. Even today, in Los Angeles, in New York, in San Francisco, working class people struggle 

and save and they have to buy a home for $500,000 or $600,000. 

5 

The economy of the area is built on that. And if we say, ‘‘No, your 

home is too lavish because it sells for more than $417,000,’’ that 

doesn’t apply to my district, where such a home is certainly not 

lavish. I yield back. 

Chairman KANJORSKI. Thank you. Now I will recognize the gentleman from California, Mr. Royce, for 21⁄2 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. Once upon a time, the 

GSEs were involved in securitization of loans here in the United 

States. They weren’t involved in arbitrage, they weren’t leveraged 

100-to-1. They weren’t buying massive amounts, trillions in 

subprime loans. But Congress did get in the act in 1992, passed the 

GSE Act, and changed a lot of that. 

One of my more vivid memories is the Federal Reserve coming 

here and warning us that we faced systemic risk if Fannie and 

Freddie collapsed because of the subprime loans that were mandated on them by Congress—subprime and Alt-A had to be half of 

the loans—that this would be a systemic shock that would affect 

the financial system, and we would end up with a collapse in housing; in 2002, 2003, and 2004, we were warned by the Fed on this. 

Because of the legislation that was passed, that is why the GSEs 

became the largest purchasers of junk mortgages. That is why, in 

those portfolios, they held those junk mortgages that they purchased at the end of every quarter. And this meant that, despite 

the low quality of the loans, millions of Americans—the perception 

at the time was, well, maybe a million Americans have a mortgage 

now that they otherwise could not afford, even though 30 percent 

of those transactions every year were people flipping homes within 

6 weeks. 

Well, pairing those affordable housing mandates with the GSE 

excessive leverage was a toxic combination that was at the heart 

of the housing bubble. When we tried to reign in the GSEs by decreasing those mortgage portfolios—that they held in their portfolios, our efforts were blocked because they were viewed, unfortunately, as a tax on subsidized housing. They weren’t, but the argument went out, and the Democrats in the Senate were able to stop 

legislation from reaching the Floor. Chris Dodd played that role at 

the time. And my legislation here on the House Floor failed. 

Going forward, we must reconsider the flawed notion that zero 

downpayment loans and subprime and because everybody has to 

own a house—you’re going to create the moral hazard of a system 

like this that tries to trump economic reality. Because, in the end, 

the Fed is right. You will face that systemic risk, as we did here. 

And that is, I think, the one thing that we might glean out of this 

that would keep us from allowing an institution to so overleverage 

in the future. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Royce. Now, we will hear 

from the gentleman from Georgia, Mr. Scott, for 3 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman, and it’s good 

to have this timely hearing. 

I think one fact that certainly pervades our thinking today is this 

monumental loss of value in our homes—over the last 3 years, $9 

trillion in value. Nothing has been more devastating to our homeowners than the fact—to see how their most basic investment for 

wealth building, that they have lost so much value in their homes. 

6 

And I think that is a challenge for us to look at, all of us that are 

involved in this, of how we can recover that and assist our homeowners in recovering the lost value. It’s going to be difficult. 

But we have come through a period where we have had these adjustable mortgage rates that have come through with teaser rates 

that were used that ballooned the payments up over the last 3 

years. And we are paying the price for that now. 

But we do have a rather structured oversight with the new supervision of the FHFA, and as we know, it was structured to regulate the operations of the GSEs and to ensure that another financial crisis like this does not happen on our watch. 

And so, it’s very important that we examine very carefully how 

we got into this situation. It’s the best way of determining how you 

get out. 

And in addition to this structured oversight, we have to continue 

to be alert to economic indicators—again, learn from our past experience in this financial system. For example, in my own home State 

of Georgia, we continue to lead the country in bank failures. And 

that must stop. 

But I think we can learn from what happened in my State of 

Georgia, where 32 banks—32 banks—collapsed within the last 2 

years alone, to see what we must not do, and to see what we can 

correct and also to see, as we move on, how we can help. These 

were small, these were basically largely community banks who 

make up 85 percent of lenders that hold stock in Fannie and in 

Freddie, and also worked to bring access to capital to many of my 

constituents. 

It is a fact that we know—and maybe we can do something about 

the fact—when smaller banks would be so overleveraged. And the 

one fact we found out of a common characteristic of these small 

banks in Georgia was that most of them had nearly or over 80 percent of their loans, of their lending capacity, in real estate. And 

they really manifested the real estate bubble, and it burst on them. 

We have some very serious questions that we need to take a look 

at. There is one question that I hope we can deal with, in terms 

of looking at the role that the Federal Home Loan Banks can play, 

which have done an admirable job in this crisis, and I think have 

a lot more that they can offer in the housing financial system. And 

I think we should use and look to them, and build on the good 

work that they have done. 

And then, the overall question of what role should government 

play? What role should we play in this entire reform of the GSEs 

to make sure that they are adequate sources of liquidity? These are 

very important questions. Learn from the past. Look from the past, 

look how we’re going forward. 

This is a very timely hearing, Mr. Chairman, and I look forward 

to hearing from Mr. DeMarco. 

Chairman KANJORSKI. Thank you very much, Mr. Scott. Now, we 

will hear from the gentlelady from Illinois, Mrs. Biggert, for 21⁄2

minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. Since entering into 

conservatorship in the fall of 2008, U.S. taxpayers have propped up 

Fannie Mae and Freddie Mac to the tune of nearly $150 billion. 

And taxpayers are on the hook for $5 trillion in outstanding mortVerDate Nov 24 2008 17:50 Sep 28, 2010 Jkt 058052 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\58052.TXT TERRIE
7 

gage obligations. Let me repeat that number: Taxpayers are on the 

hook for $5 trillion. 

Edging out private sector mortgage market participants, Fannie 

and Freddie guaranteed or financed over three-quarters of new single-family mortgages in 2009. And I have said it before and I will 

say it again. Taxpayers deserve to know where their dollars are 

going, what risk they are being exposed to, and how these institutions are being managed or mismanaged. 

On May 6th, the Oversight and Investigations Subcommittee 

held a hearing entitled, ‘‘The End of Excess, Part One: Reversing 

Our Addiction to Debt and Leverage.’’ During that hearing, we 

learned about our country’s unsustainable levels of debt, a barrier 

to our future economic prosperity. High taxes, inflation, and higher 

unemployment rates will be the byproducts of the current Administration’s fiscal irresponsibility. 

Linked to this irresponsibility is the Administration’s unlimited 

guarantee of the debt of Fannie and Freddie. During the O&I hearing, I cited a Wall Street Journal article that said that Fannie and 

Freddie were twice as leveraged as Bear Stearns. Yet the Administration has not appointed an inspector general to provide objective, 

independent oversight over the Federal employees who now control 

the GSEs. 

It is inconceivable that the officials managing these liabilities 

would not be allowed to do so without proper transparency, independent oversight, and thorough reporting to Congress and the 

American people. Thus, I asked the GAO to expand their study on 

leverage, as mandated under EESA, to include a review of the balance sheets of the GSEs. We expect the GAO to produce that important study in the coming months. 

A thorough examination by the GAO is critical in ensuring that 

Congress and taxpayers understand how the markets collapsed, 

what risk taxpayers are still being exposed to, and how to keep it 

from ever happening again. In the meantime, it is unacceptable 

that the Administration continue to kick the can down the road 

and still have no firm exit strategy to spare taxpayers from future 

losses associated with Fannie and Freddie. 

Republicans are ready to address this problem and get taxpayers 

out of this mess. And with that, I yield back. 

Chairman KANJORSKI. Thank you, Mrs. Biggert. We will now 

hear from the gentlelady from West Virginia, Mrs. Capito, for 2 

minutes. 

Mrs. CAPITO. Thank you, Mr. Chairman, for convening this hearing today. The committee will be having more hearings on the future of housing finance and the role of Government Sponsored Enterprises Fannie and Freddie, while we are sitting here today with 

the Director of the Federal Housing Finance Agency. And thank 

you for coming. 

The future of regulatory reform is looming over Congress. The 

Senate has acted, and we are now headed to conference. Unfortunately, neither the House nor the Senate package addresses one of 

the most major causes of the financial downturn: the role of Fannie 

and Freddie in our mortgage markets. These entities now owe—as 

we have heard from several others—the taxpayers a total of $147 

billion. And last Christmas Eve, it was announced that we were reVerDate Nov 24 2008 17:50 Sep 28, 2010 Jkt 058052 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\58052.TXT TERRIE
8 

moving any limits on the Federal funds to cover the losses of the 

GSEs. 

This is a missed opportunity for our Nation. The troubles in the 

mortgage markets were at the root cause of the financial downturn. 

Yet the current Administration does not seem willing to acknowledge the serious need to start working on a plan for the future of 

housing finance. 

House Republicans on the Financial Services Committee worked 

together on a list of goals and principles for GSE reform. We stand 

ready to work with our colleagues to properly reform the GSEs and 

create a system where the taxpayers are no longer on the hook for 

the losses of Fannie and Freddie. 

Again, I thank the chairman, and I look forward to the testimony 

from Director DeMarco. Thank you. 

Chairman KANJORSKI. Thank you very much, Mrs. Capito. Now, 

we will hear from the gentleman from Massachusetts, Mr. Lynch, 

for 2 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman, for holding this important hearing. I want to thank Mr. DeMarco for appearing as a witness and offering to help the committee with its work. 

I think we have all learned much more about the mortgage 

securitization process since the financial crisis began, and just how 

central a role it played in the meltdown. Through investigative reports that we have received before this committee, as well as in the 

popular press, such as in in-depth accounts like Michael Lewis’, 

‘‘The Big Short,’’ and Andrew Ross Sorkin’s, ‘‘Too Big to Fail,’’ we 

have seen just how much took place in the dark, without proper 

oversight from the regulators, and in some cases under morally 

suspect circumstances. 

The way that mortgage-backed securities have been created, 

packaged, marketed, and managed has shed a great deal of light 

into how the system worked and how a lot of people made a lot of 

money from it. Unfortunately, Fannie Mae and Freddie Mac were 

not immune to this. They may have come late to the game, but we 

know that Fannie and Freddie began to enter the subprime and 

Alt-A markets just as the subprime market was tripling in size. 

Rather than guaranteeing these less creditworthy loans, Fannie 

and Freddie increasingly purchased, and actually held in their 

portfolios, many securities backed by subprime and Alt-A loans. 

Fannie and Freddie should have never been allowed to purchase 

such dangerous and risky loans. I know they were concerned about 

losing a big part of the market, but the housing finance system 

that was created in the wake of the Depression to promote homeownership led to the rise of the middle class. But the mortgage 

markets have changed a great deal over the last 25 years, and it’s 

clear that the change is needed, and new structures need to be established. 

I agree with the decision to deal with Fannie and Freddie separately from the financial regulatory reform bill considered by this 

committee. However, as that process winds down with the appointment of a conference committee, I think the time has come to address this important issue. 

9 

I look forward to an informative discussion on the future of housing finance and the current state of the Government Sponsored Enterprises, and I thank the chairman for the time. I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Lynch. Now, 

we will hear from the gentleman from Texas for 21⁄2 minutes. Mr. 

Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. I can’t help but notice that yesterday, the full Financial Services Committee had a 

hearing on a $350 million—with an ‘‘M’’—housing proposal, and 

here we are today, at the subcommittee level, having a hearing on 

a program that has now cost taxpayers $147 billion and, as the 

gentlelady from Illinois so aptly pointed out, $5 trillion on the 

hook. 

I have been informed that this is a required hearing under 

HERA. And if that is indeed correct, I lament the fact that we don’t 

have greater participation, and are not doing this at the full committee level. This is something I don’t understand, which, as our 

ranking member has pointed out, is one of the reasons I have introduced H.R. 5391, the Federal Housing Finance Oversight Board Increased Transparency Act, to ensure that any quarter that either 

of the Government Sponsored Enterprises requests more taxpayer 

bailout money, we will have testimony received at the full committee level. 

If there are any two institutions that demand more accountability and more transparency, it’s the Government Sponsored Enterprises and, as many of my colleagues have pointed out, the most 

polite term I can think of is ‘‘curious’’ that we would have major 

financial reform legislation—some of the most major legislation in 

decades—dealing with our financial crisis, and somehow Fannie 

and Freddie are left out of the mix. This I don’t understand. 

Now, the distinguished chairman of the Senate Banking Committee said, ‘‘Well, this system is very complex.’’ And so the answer 

from the Senate side is that, ‘‘We will conduct a study.’’ The answer 

from the Administration is, ‘‘We will monitor.’’ And the answer 

from the House is, ‘‘We will exempt them from the purview of this 

legislation,’’ and allow the taxpayer hemorrhage, unfortunately, to 

continue. 

Mr. Chairman, that is simply unacceptable. Fannie and Freddie 

were at the ground zero of the economic crisis. This is the most expensive bailout—more than AIG, more than GM, more than Chrysler, more than any other bank—and here we are, again, having a 

hearing relegated to the subcommittee level. And these two financial Frankensteins that have wreaked so much havoc on our economy can no longer be ignored. 

With that, I yield back the balance of my time. 

Chairman KANJORSKI. Thank you, Mr. Hensarling. We will now 

hear from the gentleman from Texas, Mr. Neugebauer, for 2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. And like my other 

good friend from Texas, I am a little surprised, too, that we aren’t 

having this hearing in the full committee when you look at the 

amount of risk that the taxpayers are already at, and what they 

have already put into this. 

10 

Twenty months and at least $145 billion later, taxpayers are asking what they’re getting for their money that they put into Freddie 

Mac and Fannie Mae. They not only own 80 percent of these companies, but they continue to report quarterly losses in the billions 

of dollars. As long as these losses continue, the government has 

pledged unlimited supply and support of taxpayer dollars. 

While Congress and the Administration continue to put off planning for the future of Fannie Mae and Freddie Mac, we can’t afford 

to put off the oversight of the hundreds of millions of dollars that 

are already at risk and continue to climb. We need to understand 

how these entities are operating today, and what risks they are 

taking, and whether their losses are in the older mortgages or if 

they’re in the newer mortgages, as well. 

We need to know how the GSEs plan to manage the risk of their 

large portfolios, especially since the Treasury relaxed the benchmarks for portfolio reduction. 

With Fannie Mae and Freddie Mac responsible for three-quarters 

of the mortgage market, and functioning as wards of the state, we 

need to know whether these companies are being run to minimize 

further losses to the taxpayer, or as tools to carry out the Administration’s policy goals. 

The GSEs can’t be shut down overnight, but we can start phasing down the size now, until we get a plan in place. When is Congress going to put a limit on taxpayer support and set a deadline 

for winding these companies down? 

With that, I yield back my time, Mr. Chairman. 

Chairman KANJORSKI. I thank the gentleman from Texas. Are 

there any other requests for time on the Democratic side? I see 

none, so we are ready to take the testimony from our witness. 

Today, we have Mr. Edward DeMarco, Acting Director of the 

Federal Housing Finance Agency. Thank you for appearing before 

the subcommittee today. Without objection, your written statement 

will be made a part of the record. You will be recognized for a 5- 

minute summary of your testimony. 

Thank you, Mr. DeMarco. You have the floor. 

STATEMENT OF EDWARD J. DEMARCO, ACTING DIRECTOR, 

FEDERAL HOUSING FINANCE AGENCY (FHFA) 

Mr. DEMARCO. Thank you, Mr. Chairman. Chairman Kanjorski, 

Ranking Member Garrett, and members of the subcommittee, 

thank you for inviting me to speak on the current state of the housing GSEs: Fannie Mae; Freddie Mac; and the 12 Federal Home 

Loan Banks. 

My written statement provides a detailed report. Yesterday, 

FHFA released its annual, ‘‘Report to Congress’’ which provides detailed summaries of our annual examination findings at each of the 

housing GSEs. 

I will briefly summarize key points in three areas: the purpose 

and goals of FHFA’s conservatorships; findings from FHFA’s oversight of the GSEs; and principles and issues that may be considered by Congress when contemplating the future of the GSEs. 

Beginning with conservatorship, the Enterprises have been in 

conservatorship since September 2008. The purpose of conservatorship is to preserve and conserve each company’s assets to enable 

11 

them to fulfill their mission and mitigate the systemic risk that 

contributed to instability in financial markets. The 

conservatorships have been effective to date, instilling confidence 

in the market that the Enterprises are capable of fulfilling their 

statutory role. 

Although the Enterprises’ substantial market presence has been 

a key step to restoring market stability, neither company would be 

capable of serving the mortgage market today without the ongoing 

financial support provided by the Treasury Department. Including 

the amounts requested at the end of the first quarter, the Enterprises will have drawn nearly $145 billion. 

While reliance on the Treasury Department’s backing will continue until legislation produces a final resolution of the Enterprises’ future, as conservator, FHFA is limiting the Enterprises’ 

risk exposure by preventing them from entering new lines of business, ensuring that the new business they are taking on is profitable, and minimizing losses on mortgages originated pre-conservatorship by executing an aggressive program of loss mitigation 

that ranges from loan modifications to graceful options for homeowners to exit their homes, short of foreclosure. 

Let me briefly summarize some key points from yesterday’s annual report. While housing finance continues to depend critically on 

the Enterprises, FHFA rates both Fannie Mae and Freddie Mac to 

be critical supervisory concerns, mainly due to continuing credit 

losses associated with the 2006 and 2007 books of business, as well 

as forecasted losses yet to be realized. FHFA expects the high delinquency rates to continue for these older books of business, due 

to uncertain house price paths, weak employment, and continued 

economic uncertainty. 

Another problem faced by both Enterprises relates to their high 

degree of operational risk and limits to their operational capacity. 

With regard to the Federal Home Loan Banks, FHFA is looking 

for the Home Loan Banks to return to more traditional operations 

and activities, with a focus on advances to member institutions, 

and a gradual reduction in investment portfolios which are not 

needed to support core business activities and safety and soundness. 

The Federal Home Loan Banks’ advance business continues to 

experience no credit losses, but it is shrinking. Advances fell to 

$572 billion, as of the end of March, which is down 9 percent from 

the prior quarter, and 30 percent from a year ago. Advances are 

now down 44 percent from the peak in 2008, and are at the lowest 

level for the system since the third quarter of 2004. 

The Federal Home Loan Banks face continued challenges from 

past investments and private-label mortgage-backed securities. At 

some banks, these investments have caused them, either voluntarily or as a result of supervisory action, to limit or suspend dividends, and to stop redemptions and repurchases of stock. 

Before turning to the future of the GSEs, let me pause, Mr. 

Chairman, on one other topic you asked me to address—and I do 

apologize for it not being addressed directly in my written statement—as you know, in 2008, FHFA’s predecessor agency entered 

into an agreement with the Enterprises and the State attorney 

12 

general of New York that resulted in the Home Valuation Code of 

Conduct, or HVCC. 

The purpose of the HVCC was to enhance the standards for appraiser independence. The Code has improved the independence of 

the valuation process: a critical element in assuring homeowners 

pay a fair price for properties, and that investors have confidence 

in mortgages backing securities they purchase. The Code has also 

aided efforts to combat mortgage fraud, a leading contributor to the 

housing finance crisis. 

Last week, I announced that, given the conservatorships, I did 

not deem it appropriate for the Enterprises to fund the independent valuation protection institute envisioned in the agreement. 

Instead, each enterprise will soon be announcing a complaint process. 

When the Code expires in November, I expect its benefits to continue into the future, as the standards that developed from the 

agreement have been incorporated directly into the Enterprises’ 

seller-servicer guides. 

A word about the future. Despite the current benefits in the marketplace resulting from the Treasury’s support for Enterprise activities, conservatorship is not a long-term solution. Legislation is 

needed to change the institutional framework for housing finance. 

Without disrupting the fragile recovery of our housing finance system, the role and the function of the Enterprises needs to be debated and decided upon. 

To start, Congress and the Administration need to clearly define 

the proper public policy objectives and the degree and characteristics of government involvement in the housing finance system to 

best serve those objectives. 

I look forward to working with the subcommittee and the full 

committee on legislative action to restructure the housing finance 

system, including an ultimate resolution of the Enterprises, and a 

consideration of the Federal Home Loan Banks. 

Thank you for this opportunity, and I would be pleased to answer 

questions. 

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

47 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. DeMarco. I 

think we all have a few questions here, and I will yield the first 

5 minutes to myself for some of those questions. 

As I understand your oral testimony, it is your opinion that we 

cannot just dismiss the existence of Fannie and Freddie without 

major disruptions within the mortgage market? 

Mr. DEMARCO. That’s correct, Mr. Chairman. There needs to be 

a solution—a system that—on the other end, so that we can preserve ongoing liquidity and stability in the mortgage market. 

Chairman KANJORSKI. Are you aware of the preliminary findings 

from the special commission appointed to determine the cause of 

the credit crunch that occurred some 18 months ago, where they 

indicated that it is not their opinion that Fannie and Freddie were 

major contributors? 

Mr. DEMARCO. Mr. Chairman, I am familiar with some of the 

documents and reports they have put out. I do know that they have 

13 

not yet finalized any of their conclusions or recommendations, but 

they are rolling things out on an interim basis, yes. 

Chairman KANJORSKI. Great. Would you agree with me and some 

in the Administration that before we take any final action on the 

existence of Fannie and Freddie, construct institutions to replace it, 

or provide procedures to make up for the deficit that would occur 

if those institutions were to disappear, that we should wait for the 

final approval of the commission or the final findings of the commission, so that we get the benefit of the best thinking on the subject? 

Mr. DEMARCO. I understand that the commission is looking at 

the full range of involvement and causes of the crisis. How Congress and the Administration determine to wait for findings of that 

is up to them. 

I think currently there is plenty that we can be talking about, 

and I am pleased that you have invited me here today, Mr. Chairman, to begin talking about the future of the housing finance system, because I do believe we need to take this up directly and get 

on with it. It will be a difficult challenge, but it is one that we need 

to be working on now. 

Chairman KANJORSKI. In that regard, have you, yourself, concluded any particular recommendations that you could make to this 

subcommittee or the full committee, as to what can be done? 

Mr. DEMARCO. Not a particular recommendation or form or 

structure, Mr. Chairman. In my written statement, I outlined several things that I believe are important for all policymakers to consider. 

I think fundamentally—and one thing that I am pleased about 

as I listen to commentary, both from Members of Congress and 

from the Administration—is that what we’re looking at here is not 

what to do with Fannie and Freddie. The question before us is 

what should be the future of the housing finance system in this 

country. And the place to start there is what are the government’s 

public policy objectives, and given those objectives, what do policymakers conclude about the proper role of the government in our 

housing finance system? 

Starting with the answers to those questions, one can then move 

into what are the institutional arrangements, the charters, and the 

regulatory structures that accomplish the objectives. But one first 

has to determine what are the objectives that we have in mind, and 

what’s the proper role of the government to achieve those objectives. Those are challenging questions, right there. 

Chairman KANJORSKI. Very fundamental questions. 

Mr. DEMARCO. Yes, sir. 

Chairman KANJORSKI. Do you suggest we go down to the fundamentals before we try to construct a rescue? 

Mr. DEMARCO. Yes, sir. Because, my view—sometimes this is 

talked about as the reform of the GSEs. Whether it should be the 

reform or the complete changing of the model is really part of the 

question before us. 

And I think that by having answers to those two fundamental 

questions I have, policymakers would be informed as to whether 

we’re reforming Fannie and Freddie, or whether we are fundamentally changing the institutional structure—whether to have a govVerDate Nov 24 2008 17:50 Sep 28, 2010 Jkt 058052 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\58052.TXT TERRIE
14 

ernment sponsored enterprise, as we have known those two to be, 

is what we want going forward is really part of the question. And 

I think it should be in that larger context. 

Another thing I would note, Mr. Chairman, is the institutions 

that today are serving our housing finance system so critically— 

and it has been mentioned by a number of the members in their 

opening remarks—FHFA, Fannie Mae, and the Federal Home Loan 

Banks were all created in the 1930’s as Congress’ response in the 

1930’s to the Great Depression. 

These are institutional arrangements and determinations about 

the role of government in housing finance that were decided upon 

by past Congresses. And here we are, 80 years later, and we are— 

those institutional arrangements, those structures are with us 

today and are holding up our housing financing system. 

I do think that taking a careful consideration of what we are 

doing in defining the future of the housing finance system is important, because the decisions that, with all respect, that this body 

will be making in the coming months could be with us for many 

decades. And I think getting this right is an important thing. 

Chairman KANJORSKI. Thank you, Mr. DeMarco. I see my time 

has expired. The gentleman from New Jersey is recognized for 5 

minutes. 

Mr. GARRETT. And I thank the chairman. Okay, so what I hear 

from your answers so far is that while the commission is out there 

and doing the studies and what-have-you, you apparently concur 

with the testimony we had from Chairman Bernanke who was 

here, saying that this was important enough and significant 

enough, as far as the cost that it’s incurring to the taxpayers, and 

the risk going forward, that we need to be dealing with this situation today, as opposed to waiting until next year or any other time. 

Is that— 

Mr. DEMARCO. I believe we should be discussing this now, and 

developing the models and the options that are out there. I believe 

that certain industry groups have actually come up with some 

thoughtful proposals, and academics and others have, as well. The 

GAO has presented them. And I think that the more we can be 

talking about and laying out what these options are and what the 

possible approach is— 

Mr. GARRETT. Right. 

Mr. DEMARCO. —with respect to these fundamental questions 

is—we should be doing it now. 

Mr. GARRETT. Right. And just like with what’s—the House has 

already moved, the Senate has already moved an entire financial 

reform piece of legislation that basically rewrites laws that have 

not been changed in 50, 60, 70 years. We did that without the benefit of waiting for any commission to come through, and I think we 

could probably do the same thing here. 

Your opening remarks made—and I couldn’t find it exactly just 

in here; I heard you say it, though, as far—is that the conservatorship has a measure of effectiveness. Right? I don’t remember the 

exact term that you used. 

Mr. DEMARCO. Yes. 

Mr. GARRETT. But how do you measure effectiveness in the sense 

that we are spending close to $200 billion now, and if we do ask 

15 

you to come back every single time that they ask for more money, 

we will be seeing you frequently. 

Mr. DEMARCO. Right. 

Mr. GARRETT. So, how do you measure—I can be quite effective 

if I have—given an unlimited amount of money to spend in the 

housing market. 

Mr. DEMARCO. When the conservatorships were announced, my 

predecessor, Director Lockhart, made clear—as did Secretary 

Paulson at the time of the announcement—that the conservatorship action was being taken because the Enterprises were in a situation in which they were going to be withdrawing from the housing 

finance market, and that given the state of the economy and the 

critical role that they played, where they were situated in the marketplace and where there were not other secondary market institutions, that by establishing the conservatorships and the Treasury 

backstop, there would continue to be a functioning mortgage market. 

So, I think that the effectiveness, Congressman, comes in the fact 

that we do have a functioning mortgage market today, that nearly 

5 million people were able to refinance their mortgages in the last 

15 months or so. This would not be possible without conservatorship. 

Mr. GARRETT. Let me get to that, the idea of the functioning of 

the marketplace. 

Right now, the FHA is insuring—I don’t know the numbers— 

around 30-some-odd percent or more of the new mortgage market, 

and there is a question by some people, why is so much going over 

there? And some people would say it’s because, well, the rest of the 

investors are not really ready to enter the market right now because of all of the other factors. 

But others suggested that it’s because of actions actually by the 

GSEs. And I will just throw out one to you right now, and that’s 

the loan level price adjustments, suggesting that by—and maybe 

you can walk me through this quickly, because I don’t have much 

time—basically what that is doing is it’s saying that with those— 

I’ll just say it this way—higher costs of going into the GSEs, hey, 

then sure, we’re going to push all the business into the 100 percent 

guarantee of the FHA. 

Can you walk us through quickly as to why it is necessary that 

you still have that as a market—the Administration tells us things 

are being—leveling out in the marketplace. 

Mr. DEMARCO. So one of the reasons that the Enterprises have 

drawn $145 billion from the Treasury is poor underwriting and 

poor pricing of credit risk. So credit risk by the Enterprises had 

been underpriced, prior to conservatorship. And, prior to conservatorship, the Enterprises began making adjustments to that in 

their pricing mechanisms, including through the use of loan-level 

price adjustments. 

Those things are being reviewed and adjusted from time to time 

by the Enterprises, but it’s a result of underpricing of credit risk— 

Mr. GARRETT. But the credit risk going forward is better, right, 

because you have full underwriting, so you’re just— 

Mr. DEMARCO. Yes, sir. It is. And so, actually, when one looks 

at something like the average guarantee fees that the Enterprises 

16 

are collecting, they are not going up the way you might expect because the way the loan-level price adjustments work, they—it’s 

higher prices on higher-risk mortgages. Because the Enterprises 

are, in fact, booking lower-risk mortgages than before, the lower 

prices are what’s applying to that flow of business. 

Mr. GARRETT. Yes, but you know, the Wall Street Journal just 

had a piece on this a day or so ago. And they point out, as far as 

that—the risk base that you’re doing there is quite extensive or 

broad, I guess, would be the terminology, and so that—so what 

you’re really doing is adding additional burden to a much wider 

spectrum than maybe you should be doing, just to pay off what 

you’re telling me now is the bad loans in the past. 

Mr. DEMARCO. All I can tell you, Congressman, is that we are 

aiming for the Enterprises to be pricing their business—first of all, 

that we have underwriting standards that are prudent and sounder 

than they were, and second, to be pricing their business so that 

they are covering their costs, their expected losses, and an appropriate rate of return. 

Mr. GARRETT. Thank you. 

Chairman KANJORSKI. The gentleman from California, Mr. Sherman, is recognized for 5 minutes. 

Mr. SHERMAN. Thank you. First, I want to set the record 

straight. Chairman Oxley, the former Republican Chair of this 

committee, had an excellent bill to provide additional controls for 

the GSEs. It was passed through the House, supported by a bipartisan group, and then the Republican-controlled Senate refused to 

take up the bill. And there was no Democratic announcement of a 

filibuster threat. It was the Bush Administration that opposed that 

bill. And now, as former chairman of this committee, Mr. Oxley has 

made it plain his frustration at the time with the Republicans in 

the Senate and the Administration. 

If only we had had a unicameral legislature, we might have 

avoided the problems we face in our economy today. 

Now, it—the GSEs are criticized for being the largest purchaser 

of subprime mortgages. Being a Californian, I know how it feels to 

be the largest in every category. We have the most left-handed people, we have the most right-handed people. The GSEs are so large 

compared to anybody else, particularly now, that they’re the largest 

in every category, which is a misleading statistic. 

It’s my understanding that the GSEs have $5 trillion of mortgage 

securities for which they are at risk, and that only 10 percent of 

that book is subprime or Alt-A. So 90 percent prime is better than 

just about any other real estate lender I am aware of. 

Now, we face the risk that the conforming loan limit will drop 

precipitously at the end of this year if the bipartisan Sherman-Miller bill is not adopted, or some other legislation. And, not only 

would the conforming loan limit in high-cost areas drop from 729 

down to 625, in many of those high-cost areas it would drop even 

lower, into the 500s. That would be a sudden, immediate shock to 

every attempt to sell real estate in a high-cost city, the 10 largest 

metropolitan areas, or the most expensive metropolitan areas. 

And I would like to ask Mr. DeMarco, what effect would it have 

on the value of the risk that Fannie and Freddie takes guaranteeing $5 trillion in mortgage-backed securities, if there was a sudVerDate Nov 24 2008 17:50 Sep 28, 2010 Jkt 058052 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\58052.TXT TERRIE
17 

den precipitous January 1st decline in the value of properties, not 

only in my district but throughout the 10 largest metropolitan 

areas in the country? 

Mr. DEMARCO. So, Mr. Sherman, certainly one of the things that 

affects their losses on defaulted loans is what’s going on with house 

prices. And so I appreciate the concern that you have raised. 

I would actually, though, like to provide you with a clarification 

I think would be helpful to you. It is true—it’s certainly my understanding—that at the end of this year, that the way the law works, 

that the conforming loan limit going into 2011 would be governed 

by HERA. And so, the temporary increase that has allowed certain 

parts of California to have a conforming loan limit of $729,000 

would reduce. 

But FHFA has already announced and had the view, with respect to the conforming loan limit, that—in cases where it would 

go down, that the house price index goes down, the conforming loan 

limit would actually stay where it is, not go down. But before it 

could rise again, whatever that house price decline was that had 

taken place would need to have been recovered. 

Mr. SHERMAN. I’m going to have to interrupt, because I have to 

sneak in one more question. 

Mr. DEMARCO. Okay, so we’re not— 

Mr. SHERMAN. But it’s my understanding the maximum would be $625,000, though. 

Mr. DEMARCO. Yes, sir. 

Mr. SHERMAN. Right? 

Mr. DEMARCO. Yes, sir. 

Mr. SHERMAN. So at least it would be a precipitous drop, $729,000 down by $100,000. And if that’s just cut by 2 or 3 percent, 

the value of your $5 trillion portfolio, we would lose a whole lot of 

money. 

Now let’s move on to this predatory finance scheme, these transfer taxes. 

Mr. DEMARCO. Right. 

Mr. SHERMAN. I described them in my opening statement. They 

are a hidden burden on homeowners. And my question is, what do 

you expect Fannie or Freddie to do, as far as their policy? Will they 

accept mortgages which have this hidden provision that nails 

homeowners with this secret tax and impairs the value of the security? Will they be participants in such transactions? 

Mr. DEMARCO. Congressman, we are actually looking at this 

right now very closely. I must tell you that I am very troubled by 

what I am seeing and learning about this. And I would expect that 

the Enterprises and the FHFA will have something to say about it 

in the near future. 

In terms of coming out with a promulgation or a policy, I would 

like to know a little bit more about what it is we would be getting—what it is that is taking place, to know what the proper response is to it. But I am very concerned, and I think we will have 

a response shortly. Before I ban something, I would like to know 

what it is I am banning. 

Mr. SHERMAN. Good. 

Chairman KANJORSKI. The gentleman’s time has expired. I will 

recognize the gentleman from California, Mr. Royce, for 5 minutes. 

18 

Mr. ROYCE. Yes, I appreciate that opportunity, because again, for 

those of us who wanted to save Fannie and Freddie, in terms of 

their securitization, I remember very well in 2005, the whole debate. We had the Federal Reserve up here. We had the Chairman 

of the Federal Reserve tell us at the time that this legislation that 

was in the House would increase—basically, would increase systemic risk. 

Why? Because the legislation we were trying to pass out of the 

House would have prevented the regulators from touching the portfolios of Fannie or Freddie. They couldn’t regulate them for systemic risk. It would have prevented them from raising their capital. It would have prevented the regulators from doing anything 

to threaten to place them into receivership, to get them back in 

line. 

I remember Chris Shays sitting here and asking the hands to go 

up in the audience: ‘‘How many of you are lobbyists for Fannie and 

Freddie?’’ And as he said it, virtually every hand went up. 

That was the bill we passed into the Senate, and that is why the 

Treasury opposed it, that’s why the Fed opposed it, that’s why the 

Senate Republicans opposed it. That’s why they put an alternative 

bill out of committee in the Senate, in order to regulate Fannie for 

systemic risk. 

And, sure enough, that’s why, if you pick up Congressional Quarterly in 2005, you can see the Democrats in the Senate talking 

about preventing that bill from coming to the House Floor, filibustering that bill from coming to the Senate Floor. 

So, for those of us who were here at the time, involved in that 

debate—I remember this very vividly—the reason it’s important to 

me is because this collapse in housing, at least this element of 

what contributed to it, could have been handled, had we listened 

to the regulators. 

So, I want to get back to a comment for our witness, our guest 

here. I wanted to ask you. Your predecessor, Mr. Lockhart, was of 

the belief that the separation of the two regulatory responsibilities—mission oversight on one hand and safety and soundness on 

the other—was problematic when it came to regulating the GSEs. 

As he put it, ‘‘A separation of such responsibilities among GSE regulators helped cause their downfall. You can’t really separate that.’’ 

So, as you know, HUD was enforcing the affordable housing 

goals, akin to mission oversight. And FHFA’s predecessor was focusing on safety and soundness. So, I was going to ask if you would 

agree, Mr. DeMarco, with Mr. Lockhart’s testimony here before us 

in the House, did the model with competing regulators also help 

cause their downfall? 

Mr. DEMARCO. Yes, sir. 

Mr. ROYCE. Thank you. I raise this because Congress is on the 

brink of applying this failed model to the rest of the financial services sector, through the creation of a CFPA. It is not hard to imagine altruistic goals being pushed by this consumer financial product 

agency or bureau. You can see them, how they would push those 

goals, like the affordable housing goals, and how it could have unintended consequences. 

If you take the provision in the House bill that requires equal access to all products without defining equal access, clearly language 

19 

like this enforced by an agency not focused on safety and soundness could raise issues down the road. And this is why regulators 

have told us, ‘‘It is better to allow the safety and soundness regulator preemption to regulate these institutions, rather than set up 

competing regulatory agencies.’’ As we have done many times, I 

would caution this body against taking this approach. 

I also wanted to ask you—today, it’s widely understood that in 

order to grow and expand their profits, Fannie and Freddie dramatically grew their mortgage portfolios, which were funded implicitly by the government and by subsidized debt. Even then, it was 

understood that the retained portfolios did very little to promote affordable housing, but did a lot to benefit the shareholders and executives at the firms. 

Looking at where they are today, what is the purpose of the 

GSEs’ retained portfolios, other than the fact that they really can’t 

be unloaded right now? Why would they continue in the future to 

build up a retained portfolio? If I could ask you, Mr. DeMarco? 

Mr. DEMARCO. Certainly. So, in fact, they will not be building up 

their retained portfolio. We have them on a path to be reducing 

their retained portfolio at a rate of at least 10 percent per year, 

going forward. 

What’s going on with their retained portfolio today, sir, is when 

a mortgage is in a mortgage-backed security and it goes delinquent, 

in order to undertake a loan modification or some kind of foreclosure prevention action with that mortgage, or if the mortgage is 

delinquent past a certain amount of time, the mortgage needs to 

be removed from the security. And at that point, it does need to 

be put on the balance sheet of the Enterprises. 

So, there is a legitimate purpose served there for that type of 

transaction. That is what we are doing with respect to the portfolio. 

And I have communicated that publicly and to the Enterprises, 

that the use of their portfolio, the growth in it, is actually to have 

capacity to bring these delinquent mortgages on to their balance 

sheet so that they can actually—to undertake foreclosure mitigation actions. 

Beyond that, sir, our goal is for the portfolios to be gradually 

shrinking, as I say, at a rate of at least 10 percent per year, and 

that is in the preferred stock purchase agreement between us and 

the Treasury Department. 

Mr. ROYCE. Thank you, Mr. DeMarco. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Now, I will recognize the gentleman from 

Massachusetts, Mr. Lynch, for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. Mr. DeMarco, do we look 

like we’re going to make that 10 percent for the next year, the reduction of the portfolio? 

Mr. DEMARCO. Sir, the way this works is that their portfolio for 

the end of 2010 is supposed to be 10 percent less than the maximum allowed for 2009. The maximum allowed in 2009 was $900 

billion. So by the end of this year, it needs to be— 

Mr. LYNCH. I don’t have a lot of time. Could you tell me— 

Mr. DEMARCO. The answer is it would be $810 billion or less, sir. 

Mr. LYNCH. What’s that? 

Mr. DEMARCO. It will be $810 billion or less. 

Mr. LYNCH. Is that 10 percent? 

20 

Mr. DEMARCO. That will be less than 10 percent of the prior 

year’s cap. 

Mr. LYNCH. Okay. Because I know right now, based on the numbers that we have, the GSEs remain the dominant source of funding in the secondary mortgage market. I think we’re doing between 

80 and 90 percent of all conforming loans. 

So, in addition to that, I know the Treasury has pumped in— 

well, actually, the Fed and the Treasury have pumped in a total 

of $1.35 trillion in mortgage-backed securities. So, while we talk 

about reform, it’s ironic that the GSEs sort of followed the private 

market into subprime and Alt-A because they were afraid of losing 

the market share. And now, we have all the market share. 

And I am just wondering. If we are going to go to this—and I 

think we need to look at a different model. And I am wondering, 

how do we get there? With all you’re doing right now, and with everything we have piled up here, how do we get to a better place 

where this is all—we have some private-label responsibility here, 

and everything is not on the GSEs. I just don’t see how we can go 

from one to the other. I think we probably have to have a transition, some type of intermediate step or movement in some direction, so that we can move to that different model. 

I know you talked earlier about—in your testimony—about different mortgage industry experts, academics who have talked about 

a different model, and you’re looking at it. Do any of those models 

stand out as being more promising, in your mind? 

Mr. DEMARCO. To take a slightly different tack on that, sir, I believe that the question about whether we can have a functioning 

and robust secondary mortgage market operated by and served by 

private firms is something that I believe we can have. And I think 

that there are models available that would allow for the future secondary mortgage market to be served by private firms operating 

with their own at-risk capital. 

Mr. LYNCH. Even though, in the recent crisis, it was really the 

GSEs that followed the private label into the riskier market? 

Mr. DEMARCO. An important thing to understand about the GSE 

model that we had, besides the subsidies and the excessive leverage that was in place, was that it was a system in which, by law, 

there were just two of them. We did not have entry and exit from 

the market. We did not have a more normal competitive marketplace in providing this function, because the government had provided a set of rather extraordinary benefits, but it had provided 

them just to two companies, and only two companies could have access to those benefits. 

Mr. LYNCH. Are there any specifics, other than just saying, 

‘‘Sure, we can build a system on’’—with private entities here? 

Mr. DEMARCO. You asked about the transition, sir. And the senior preferred stock purchase agreement that is in place today may 

be part of helping Congress to think through this transition. Because that support offered by the Treasury Department remains in 

place while these companies are operating in conservatorship. 

So, new mortgage activity that is being undertaken by Fannie 

and Freddie is being supported with that backstop, which helps 

provide an element of stability, as one thinks about building a 

transition plan to the future. 

21 

Mr. LYNCH. Okay, thank you. I see my time has expired. Thank 

you, Mr. Chairman. I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Lynch. Now, 

we will hear from the gentleman from Texas, Mr. Hensarling, for 

5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. Good afternoon, Mr. 

DeMarco. You were last here in February. 

Mr. DEMARCO. Yes, sir. 

Mr. HENSARLING. And when you were here, I shared with you a 

quote from Charles Haldeman, the CEO of Freddie Mac. He was 

quoted in the Wall Street Journal as saying, ‘‘We are making decisions on loan modifications and other issues without being guided 

solely by profitability that no purely private bank could ever 

make.’’ 

Knowing that, cumulatively, Fannie and Freddie have now cost— I believe, according to your testimony—$145 billion and counting, 

at the time I shared that with you, you said you were unaware of 

the quote, and that you would check with Mr. Haldeman and talk 

to him. I think you said, ‘‘I will have to check that quote and talk 

to Mr. Haldeman.’’ I assume you did that. Can you report on your 

conversation with Mr. Haldeman? 

Mr. DEMARCO. Yes, sir, thank you. I would be pleased to. I have 

followed up with Mr. Haldeman. And he explained to me what he 

had in mind. 

First of all, the loan modifications in that quote is in brackets. 

So I am not sure what the reporter was putting in there. But what 

Mr. Haldeman reported to me was that the example that he had 

in mind, the issue he had in mind, had to do with low-income housing tax credits, of which Freddie Mac had roughly $3 billion worth. 

And we were, at that point, working with the Treasury Department 

regarding the disposition of those assets. And as has been made 

quite clear— 

Mr. HENSARLING. Okay. So, Mr. DeMarco, essentially he was relaying to you that his comments were taken out of context. Is that 

a fair assessment? 

Mr. DEMARCO. Whether it’s out of—no, I don’t believe that’s a 

fair assessment, sir. But he had something specific in mind, which 

is if they were operating as a private company, they would have 

sold those $3 billion worth of tax credits. It was in the best interest 

of the taxpayers, determined by the Treasury Department, for 

them not to— 

Mr. HENSARLING. Let me continue on this line of questioning. In 

your testimony, in defining your mission, you stated the purpose of 

conservatorship is to preserve and conserve each company’s assets 

and mitigate the systemic risk that contributed to instability and 

financial markets. I am trying to figure out to what extent those 

are complementary goals, to what extent are those competing goals, 

particularly when I think in terms of what the Administration is 

doing on the HARP program. 

The latest report that I have had on Fannie and Freddie—and 

you may have more up-to-date data—is that the redefault rates for 

their loans after 12 months after modification both exceed 50 percent. That may be a fourth quarter 2009 number. Do you have anything more recent? Is that at least a ballpark figure? 

22 

Mr. DEMARCO. Yes, sir. I do. Let me say, though, with respect 

to the systemic risk, you asked whether those were complementary 

or not. I believe they are, because Fannie and Freddie actually own 

or guarantee a little over half the mortgages in this country. Anything that brought stability to the housing finance system was certainly going to be a positive contribution— 

Mr. HENSARLING. I guess, Mr. DeMarco— 

Mr. DEMARCO. —to their assets. 

Mr. HENSARLING. —what I’m trying to figure out, if more than 

half of these loans redefault after 12 months, how is that preserving the assets of Fannie and Freddie to where the taxpayer can 

ever expect to even receive pennies on the dollar? 

Mr. DEMARCO. Let me give you some updated data, sir. I don’t 

have 12-month redefault rates in front of me. I do have 3-month 

and 6-month after modification data in front of me. 

And so, with respect to modified loans, 3 months after modification, in the fourth quarter of 2008, the percentage of modified loans 

that were still performing 3 months later was about half. It was 

49 percent. At the end of 2009—so 1 year later—77 percent of 

modified loans were still performing 3 months after modification. 

Mr. HENSARLING. Mr. DeMarco, if you could at some time, 

maybe—so we’re comparing apples to apples— 

Mr. DEMARCO. Sure, certainly, sir. 

Mr. HENSARLING. —I would love, perhaps in writing, your latest 

data— 

Mr. DEMARCO. I would be glad to do that, Mr. Hensarling. 

Mr. HENSARLING. —on the 12-month— 

Mr. DEMARCO. And I would add, as I noted in my written comments, I would like to, in response to concerns that have been 

raised, be making some of this information more clear on a regular 

basis by FHFA to Congress and to the public. 

Mr. HENSARLING. Mr. DeMarco, some have maintained that all 

of Fannie’s taxpayer hemorrhage, or problems resulting from the 

past, the most recent reports I have seen from the Congressional 

Budget Office show taxpayers will lose an additional $64 billion in 

the 10-year budget window that we are presently in on new mortgage originations. 

Am I somehow misinterpreting what the Congressional Budget 

Office says, that also does not have the reputation for being overly 

pessimistic? Is this—indeed, are they predicting $64 billion of loss 

on new mortgage originations? 

Mr. DEMARCO. I’m sorry, sir. Off the top of my head I’m not sure 

what the CBO’s most recent projection is. I could certainly verify 

that and get right back to your office. I don’t have that right in 

front of me. 

Mr. HENSARLING. If you could, please, because it seems like the 

hemorrhaging is certainly not over, certainly not on old mortgages, 

but also on new mortgage originations, according to the Congressional Budget Office. 

Mr. DEMARCO. Right, and I certainly make clear in my testimony 

that there are still losses to come with respect to the pre-conservatorship book of business at each— 

Mr. HENSARLING. But this is post. Anyway, if you could check on 

that, I would— 

23 

Mr. DEMARCO. Certainly, sir. 

Mr. HENSARLING. I see I’m out of time. Thank you, Mr. Chairman. 

Mr. DEMARCO. I would be happy to do that, Mr. Hensarling. 

Chairman KANJORSKI. The gentleman from Georgia, Mr. Scott, 

will be recognized for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. Mr. DeMarco, I want to 

get a clear picture of where we are now with these GSEs. In 1932, 

the first to come on board were the Federal Home Loan Banks to 

deal with the liquidity issue in the system through secured loans, 

and they used 12 regional banks. Then, in 1938, we brought on 

Fannie Mae to give credit to banks to secure loans for the middle 

class. In 1970, we brought on Freddie Mac to give credit and access 

to, basically, savings and loans operations. 

Given where we are now, what is your vision for each of these 

three entities, going forward? And I am specifically concerned 

about what role do you see for the Federal Home Loan Banks going 

forward, and then following that, Fannie and Freddie. 

Mr. DEMARCO. Thank you, sir. With respect to the Federal Home 

Loan Banks, I think, in fact, the Federal Home Loan Banks mission, which, as you noted, was given to them in 1932, has served 

them and the Nation’s financial system very well during this housing crisis. 

What we saw in the fall of 2007 and again in the fall of 2008, 

when there was a great deal of illiquidity in the marketplace, is 

that the Federal Home Loan Banks were able to provide, immediately, liquidity to their members. And so, their advances book 

grew from, let’s say, $600 billion to $1 trillion in a very short period of time, and that was serving their mission, and it was very 

important to our financial system. It worked very well. The liquidity crisis has gone, and they have shrunk. 

I believe, going forward, that they certainly remain a viable part 

of our financial system. It’s something for Congress to consider as 

it takes up the future of housing finance, but their core business 

of advances seems to me to remain a viable and important contribution to the financial system. 

With respect to Fannie Mae and Freddie Mac, I believe that 

there is a range of options available, post-conservatorship, that 

move away from the government sponsored enterprise model that 

we have had all these many years. There are a variety of options 

available, and I do believe that that’s an important part of the discussion in the coming year. 

As I have already mentioned, one of the things that I would hope 

to see is if any sort of a private sector model is followed, that there 

be greater freedom of entry and exit, so that there is more competition in the marketplace provided by securitizers of mortgages. 

Mr. SCOTT. Fannie and Freddie continue to absorb additional 

losses as real estate prices keep dropping nationally, as I alluded 

to in my opening remarks. How much, if any, additional aid do you 

feel Fannie and Freddie will require to survive? 

Mr. DEMARCO. That’s a very difficult question to answer, Congressman. As we look at various ways this could turn out, three of 

the key factors are: first, what happens to house prices, particularly—and this is not just at a national level—what happens to 

24 

house prices in certain parts of the country, particularly, the harder-hit housing markets in the country; second, what happens to 

employment, because employment is, certainly at this point, a key 

factor in a household’s ability to pay their mortgage; and third, 

what happens to interest rates. 

And so, there is a variety of scenarios we look at. In my judgment, the more likely scenarios are that they will incur some additional losses based on their pre-conservatorship book of business, 

but that those losses will not exceed the original—the $200 billion 

that had been put in place through this senior preferred agreement. 

But beyond that, I don’t have a point estimate for you, sir. 

Mr. SCOTT. One of the other things I do want to call to your attention, as I mentioned before, that I am very concerned with, is 

I don’t think we are putting enough attention or trying to figure 

a way to deal with this very disheartening reality that so many of 

the American people are faced with, in seeing this extraordinary 

drop in the value of their home, which is the basic unit of wealthbuilding in this country. 

What are your recommendations? What are your suggestions? 

Have you given any thought to what we can do? Even if it’s from 

the standpoint of simply developing a stronger appeal system for 

a homeowner who receives word that his property has fallen this 

much in value, yet, at the same time, he is paying this huge mortgage on a value that was up here, and now it’s down there. What 

can we do to address this phenomenon? 

Mr. DEMARCO. I think that the start is sounder underwriting 

practices within our housing finance system. I actually think that 

is the place to start. In some of the States in which we have seen 

the most dramatic increase and then the most dramatic decline in 

house prices, there has been a great deal of speculation and investor activity that was riding this up, and has contributed to the collapse. 

And so, I think that more prudential underwriting is certainly 

the place to start. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Scott. Now, we will hear 

from Mr. Neugebauer from Texas for 5 minutes. 

Mr. NEUGEBAUER. Yes. Thank you, Mr. Chairman. I have been 

kind of trying to go through some of these charts. But I think—I’m 

looking at a Freddie Mac chart, on page 19, and it’s talking about 

single-family credit guarantee portfolio characteristics, and it talks 

about book year. 

And so, for the book year 2010, I guess 3 percent of the total 

portfolio was originated in 2010. And, if I’m reading this right, in 

2009, 25 percent of the outstanding balance was originated in 2009. 

That’s double what, when you look historically at what was even 

happening in 2008, 2007, 2006, 2005. And, in fact, it says, less 

originated before 2004—26 percent of the portfolio was originated 

before 2004. 

And what I heard you say is you’re charging a lower-risk premium on these loans that you’re processing now because they are 

less risky, in your estimation, and so you are charging a lower-risk 

premium. The problem is that, at a very accelerating rate, we are 

25 

increasing the contingent liability of these two entities, because 

they are basically the major market for securitization right now. 

I think the question is, what if you’re wrong with this risk premium again? 

Mr. DEMARCO. Sir, the earlier question had to do with loan-level 

price adjustments that had been put in place, essentially increasing 

the fees charged for mortgages. And this is a—sort of think about 

it as a matrix pricing that, as the risk characteristics of the mortgage go up, the greater is the added fee or risk premium that’s attached. 

Those loan-level price adjustments are still in place. The response I gave earlier had to do with relative to the mortgages that 

were being booked in 2006, 2007, the risk characteristics have improved. And hence, on average, the guarantee fee income is going 

down, because it’s a higher quality book. But it’s a risk-based pricing scheme that’s there, it’s not a reduction, per se, in the premiums that are being charged. In fact, it’s an increase relative to 

where things were in 2006. 

Mr. NEUGEBAUER. Well, I think I understood that perfectly, and 

I think my question still holds. What if your model is not correct, 

and we have, in one year, increased the exposure by—in that entity 

in 2009 for the first—I don’t know if this is the first quarter. It’s 

through March 31st, I assume you’re on a fiscal year—that means 

it’s 28 percent of—since this entity went into conservatorship, we 

have increased the exposure by 28 percent using this risk model, 

right? 

Mr. DEMARCO. I see your question, Congressman. I can report 

that the early payment default on new mortgages, mortgages that 

had been originated since the start of 2009, the early payment default rates on those mortgages are equivalent to what we saw in 

2003, which was a very strong performance vintage for the Enterprises. And it is dramatically less than was the case for the mortgages originated in the couple of years prior to conservatorship. 

So, the early performance of these mortgages are, in fact, the 

way we would expect, based upon the modeling work that has been 

done and the improved underwriting of the mortgages. 

Mr. NEUGEBAUER. And so, then the question I have is, do these 

entities—is anybody doing a budget for these entities? Do you have 

a budget? 

Mr. DEMARCO. Each company prepares a budget, yes. 

Mr. NEUGEBAUER. Could I have a copy of that, please? 

Mr. DEMARCO. I will look into that, sir. 

Mr. NEUGEBAUER. Yes. And then the next question is that if— 

is there an interest rate sensitivity analysis of the portfolio? 

Because, at the rate that some of these rates that were originating now—what the potential—because you’re taking a credit 

risk and an interest rate risk, particularly on your portfolio. 

Mr. DEMARCO. Yes, sir. In fact, I discussed that in my written 

testimony, and also there is a discussion of it in the annual report 

that we sent up to Congress yesterday. 

It is, in fact, the case that a great deal of mortgages are coming 

on at lower interest rates. And if there is a dramatic rise in interest rates going forward, that would extend the duration of these 

mortgages, and that’s an important risk element for the companies 

26 

to be managing, with regard to how they fund and hedge their retained portfolio. 

And as—not just as conservator, but as the regulator of the two 

companies, I have a staff of people who are paying attention to that 

on a daily basis, and observing the business decisions of the companies, and overseeing, as a prudential matter, how they are managing the interest rate risk of their retained portfolio. 

Mr. NEUGEBAUER. I would like to see some more recent analysis. 

And then just one final question. If you could, also furnish me 

with information on when you look at the losses. Is this—are these 

companies making a net operating profit? And if they are, fine. But 

in the credit losses, how much of those losses are coming from the 

portfolio, and how much of those losses are coming from the guaranteed portfolio? 

Mr. DEMARCO. We will put that together. Of course, their quarterly statements are filed with the SEC. And what’s driving the financial performance of the company are the credit losses on the 

mortgages. And the credit risk is there, whether it’s guaranteed on 

an MBS, or whether that mortgage is retained in their portfolio. So 

that’s the key driver of the financial— 

Mr. NEUGEBAUER. But I think this committee—it would be beneficial for us to see where those losses came from, the guaranteed 

portion of the portfolio or from the portfolio that was retained. 

Mr. DEMARCO. Very good, Congressman. I will see what we can 

do. 

Chairman KANJORSKI. The gentleman’s time has expired, and we 

will now recognize the gentlelady from New York, Mrs. Maloney. 

Mrs. MALONEY. Thank you, Mr. Chairman, and welcome, Mr. 

DeMarco. 

I represent New York City. And, as you know, New York City 

has a growing problem of overleveraged multi-family properties, including Stuyvesant Town and Peter Cooper Village, which is in the 

district that I am honored to represent. Stuyvesant Town and Peter 

Cooper Village are rent-stabilized developments, housing over 

25,000 of my constituents. 

As you may be aware, Stuyvesant Town and Peter Cooper Village 

was sold by Metropolitan Life to a private entrepreneur. And they 

were financed in the secondary market by Fannie and Freddie. The 

business model that came forward was that in order to make the 

payments, the loan-to-debt ratio was so high that the only way 

they could make it was for the entrepreneurs to aggressively turn 

over affordable housing to market rate units in order to increase 

the rental income. 

What was surprising about this particular deal is that Fannie 

and Freddie received affordable housing goals credits for their investment into Stuyvesant Town and Peter Cooper Village, yet the 

business model was such that the only way it could survive was to 

evict the tenants and move it from affordable housing to market 

rate, which was totally opposite of the mission and goal of Fannie 

and Freddie. 

What I find particularly onerous about it is that they received 

housing goals credits for this project, when the only way it could 

survive was to turn affordable housing into market rate, high-income housing units. 

27 

The tenants went to court, and they won. And the entrepreneurs 

were stopped from their proceeding with their eviction practices, 

and the project is moving forward. 

I find this distressing, because Fannie and Freddie were used for 

the opposite goal of their mission. So I wanted to know, as you 

know, these GSEs invested in the secondary market on the 

Stuyvesant Town debt. Can you describe those transactions? Are 

you familiar with this case? 

Mr. DEMARCO. A bit, Representative Maloney, I am. So, this was 

not a direct purchase or guarantee by Fannie or Freddie. They, in 

fact, purchased commercial mortgage-backed securities, senior 

tranches of commercial mortgage-backed securities, and in the pool 

of mortgages that underlied those securities were certain of the 

properties in Peter Cooper Village, and so forth. 

And so, they had some interest in those properties as part of that 

pool. And yes, I do understand that HUD provided housing goals 

credit at the time of the purchase for them. I share your concern 

that, since the purpose of housing goals is to be providing affordable housing, it seems questionable to be providing housing goals 

credit when the intent is, in fact, to turn the property into something other than affordable housing that would meet the definition 

of the goals. And so that is something for us to be looking at. 

With respect to housing goals currently, we have a proposed rule 

that we issued earlier this year— 

Mrs. MALONEY. Before we get to that rule— 

Mr. DEMARCO. Yes. 

Mrs. MALONEY. —I am interested in this particular, specific 

project, because it really tells more about the goals and the activities and the success than talking about the goals in the future. 

How much did Fannie and Freddie know about the deal underlying these transactions when it invested in the debt? Were they 

aware that the only way it could be successful was to evict the tenants that were there? How much did they know? 

Mr. DEMARCO. I do not know what the business people at Fannie 

and Freddie, at the time they purchased these securities, knew or 

thought about the— 

Mrs. MALONEY. Can you get that information to the committee? 

Mr. DEMARCO. I will look— 

Mrs. MALONEY. The paperwork involved. 

Mr. DEMARCO. I will look into that, yes, ma’am. 

Mrs. MALONEY. And one of the aspects of Fannie and Freddie’s 

investment that I think shocked a number of people was that, although the owners knew that they would have to aggressively turn 

over affordable housing to market rate units in order to increase 

the rental income, Fannie and Freddie received affordable housing 

goal credits for their investments. 

Can you elaborate on FHFA’s process for providing affordable 

housing goal credits? What are the factors you use to decide what 

gets credit and what doesn’t? Because, obviously, projects like this 

should not get credit in the future. And have you changed your 

processes any? How did they get affordable housing goal credits 

when, obviously, they had to turn it into high-income property to 

succeed? 

28 

Mr. DEMARCO. I would be happy to provide in writing for you 

how the goal credit is actually assessed on any property, not just 

this. 

Mrs. MALONEY. Can you tell us? 

Mr. DEMARCO. Generally, it has to do with—we collect data on, 

with respect to multi-family, what are the rents that are being 

charged in the units, and how do those rents compare to area median income? 

Mrs. MALONEY. So, in other words, you take a snapshot of what’s 

happening right then. You don’t look at the whole project, the debt, 

and other things, of how it has to be done in the future? 

Mr. DEMARCO. That is— 

Mrs. MALONEY. So that process needs to be changed. 

Mr. DEMARCO. That’s correct. 

Mrs. MALONEY. My time has expired? 

Chairman KANJORSKI. The gentlelady’s time has expired. I now 

recognize the gentlelady from Illinois, Mrs. Biggert, for 5 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you, Mr. 

DeMarco, for being here. In February, my colleagues and I introduced H.R. 4581, the Fannie Mae and Freddie Mac Accountability 

and Transparency Act, and then requested you to take a look at it 

and give us a redline on the bill. I think that was in February, and 

it’s almost June. Are you going to send us the redline on the bill, 

or have you looked at it? 

Mr. DEMARCO. Congresswoman, we will get right back to you on 

that, because we certainly have. And forgive me if we have not responded in a timely fashion on that. 

Mrs. BIGGERT. Thank you. Is it important for the FHFA, which 

now runs the GSEs, to have a watchdog or independent body reviewing the work? 

Mr. DEMARCO. I believe, yes, it is helpful and appropriate for the 

FHFA to have an overseer, and that would be—as it would with 

any other Federal agency—the Inspector General. And, as the 

HERA act actually requires, not only that FHFA have an inspector 

general, but that that inspector general be a presidentially-appointed, Senate-confirmed individual. 

We have been—the Administration did recently nominate an individual, a career official at the Justice Department, to be the inspector general. The gentleman’s name is Steve Linnick. His paperwork has been forwarded to the Senate Banking Committee, and 

I look forward to the committee’s quick action on his nomination. 

Mrs. BIGGERT. Good. Have you talked to the Senate at all about 

it, or do you know when it will be scheduled? 

Mr. DEMARCO. Yes, we have been in communication with the 

committee. I don’t know the schedule; that’s the committee’s decision. 

Mrs. BIGGERT. Okay. Actually, Fannie and Freddie and the FHA 

are essentially the only games in town on home mortgages today. 

And I guess you could say they constitute about 90 percent of the 

market. Is this helping the market, or is it subverting it? 

And what steps has the Administration taken, or what steps did 

they plan to take to bring back the private sector capital back into 

the mortgage market? 

29 

Mr. DEMARCO. I think, in the near term, the actions that have 

been taken have brought an important measure of stability to the 

country’s housing finance system. I think that folks are able to purchase more houses, to refinance their mortgages, and that has been 

the result of an array of government interventions to bring support 

to the housing finance system. 

With respect to the Administration’s plans to exit and to restore 

more normal order and greater private participation, I would have 

to defer to the Administration on that. 

Mrs. BIGGERT. So you haven’t discussed that with— 

Mr. DEMARCO. No, ma’am. Secretary Geithner and other members of the Administration have certainly testified before Congress 

on their plans to bring forward a proposal, and they have published 

a document for public comment raising a series of questions about 

the future of the housing finance system, so they are gathering 

input. But I don’t have any particular insight into their timing or 

particular plans. 

Mrs. BIGGERT. Thank you. How leveraged were Fannie and 

Freddie? 

Mr. DEMARCO. Excessively. 

Mrs. BIGGERT. Okay. 

Mr. DEMARCO. By statute—the Congress created OFHEO back in 

1992. It hardwired into the statute the minimum capital requirements for Fannie and Freddie, setting it at 2.5 percent for on-balance sheet assets, and 45 basis points for mortgages that were 

guaranteed by the companies through mortgage-backed securities. 

This was an excessive degree of leverage. It’s something that multiple Administrations had testified about, raising concerns about. 

It’s certainly something that FHFA’s predecessor agency, OFHEO, 

had testified repeatedly was problematic, and made it very difficult, if not impossible, for them to carry out their responsibility 

of assuring safety and soundness. 

I would say that Congress has addressed that in the HERA legislation, giving FHFA far greater authority with respect to setting 

capital standards. Unfortunately, it came too late. 

Mrs. BIGGERT. Thank you. Thank you, Mr. Chairman. I yield 

back. 

Chairman KANJORSKI. Thank you very much, Mrs. Biggert. And 

now, we will hear from Mr. Childers of Mississippi for 5 minutes. 

Mr. CHILDERS. Thank you, Mr. Chairman, and I appreciate you 

holding this hearing today. And, Mr. DeMarco, thank you for being 

here. 

Mr. DEMARCO. Thank you, sir. 

Mr. CHILDERS. I have been, between appointments, trying to 

watch what you had to say from our office, on the monitor, and I 

guess I just want to thank you for your leadership, first of all. 

Mr. DEMARCO. Thank you, sir. 

Mr. CHILDERS. I sit before you today as a veteran Realtor and a 

real estate appraiser for some 32 years. I have long been an advocate for the real estate industry and the—strengthening homeownership in rural America a long time before I came to Congress. And 

I have been here about 2 years, and I plan to be more so now. 

I want to talk to you about HVCC, specifically. Since HVCC has 

been implemented, many—most rural appraisers—who, in my opinVerDate Nov 24 2008 17:50 Sep 28, 2010 Jkt 058052 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\58052.TXT TERRIE
30 

ion, are people who have the best and most accurate knowledge of 

their rural market area—are being replaced by appraisers, quite 

frankly, from usually an urban area, many times out-of-State, 

many times out of the area, and they are being replaced with appraisers who are not familiar with the market area. 

I have talked to these appraisers all across my State and, quite 

frankly, because of my background in real estate, I think is why 

some across the country in rural areas chose to speak to me about 

it. I guess, in short, I just want to tell you I don’t think it’s working, and I think it is negatively affecting the real estate industry. 

I think it is negatively affecting small businesses being—appraisers, specifically. I have heard from appraisers. Basically, if they’re 

not with one of these appraisal management companies, they’re 

somewhat left out. 

I have so many problems with the appraisal management companies themselves that I won’t go into today for the sake of time. But 

I would just like to hear your thoughts about how the current and 

future changes to HVCC will affect rural appraisers, because I 

have a great concern for rural appraisers, not only in the State of 

Mississippi, but across this great country. 

And I would also like to know, how would FHFA implement the 

HVCC sunset provisions in section 4312 of the Wall Street Reform 

and Consumer Protect Act, if the bill is passed, or if the upcoming 

conference report includes this provision? 

Mr. DEMARCO. Fundamentally, the HVCC was about assuring a 

set of standards whereby the investor in a mortgage could be assured that the appraisal that went into the mortgage—the loan underwriting had been done independently. That’s the fundamental 

premise here, is to be able to establish a set of processes whereby 

the appraiser is independent, and not subject to undue influence by 

an interested party in the transaction. I think that’s an important 

goal, and it’s one the HVCC was designed to address. 

The HVCC was not designed to favor appraisal management 

companies versus other appraisers. The difficulty of doing appraisals in the kind of housing market that we have had cannot be overstated. When you have a market in which there are a great deal 

of delinquent loans, there are foreclosures, you have declining 

house prices, economic uncertainty. Coming up with appraised values on houses is difficult. 

I am not aware of particular differences between rural and urban 

areas, and I would be glad to have my staff follow up with you to 

find out if there are particular things with regard to appraisals in 

rural areas that we should be more aware of. I would welcome that 

opportunity to follow up and get that information. But I think that 

what we are trying to achieve with the Code, and what I think will 

live on beyond the Code, is the importance of there being independence in the appraisal process. 

One other thing I would say is that the Code does not address 

where the appraiser is from that is doing the appraisal, but it does, 

by reference, bring in the code of conduct for appraisals, which includes that any appraiser needs to be familiar with their local area. 

So bringing in an appraiser from many miles away who is unfamiliar with the local market is a problem with—of appraisal standards outside of the Code, and it is problematic, and should be a 

31 

concern. But it is not something that the Code itself deals with directly. 

Mr. CHILDERS. Thank you. I would be less than a decent Representative if I didn’t say that in the State of Mississippi, which 

is the people who hired me, my State was not a State with excessive foreclosures. And, quite frankly, I have to defend those appraisers. They didn’t do anything wrong, in my opinion. And the 

law will take care of that. We have a fine real estate commission 

in our State that, if you don’t do right, they will pull you out, make 

no mistake, and put you on the road doing something else. 

And so, I just feel like they are being punished, and I just have 

some great concerns about it. 

Mr. DEMARCO. Okay. Thank you, sir. 

Chairman KANJORSKI. We will now hear from Mr. Posey for 5 

minutes. 

Mr. POSEY. Thank you, Mr. Chairman. Director DeMarco, I want 

to bring to your attention a recent policy change by Fannie Mae 

that, in my State, could affect borrowers who are in trouble. 

Fannie Mae implemented spending cuts to contract borrowers 

going into foreclosure on May 1st. And I am informed that Fannie 

Mae officials have decreed that: one, no law firm can give more 

than 50 percent of its service of process business to one firm, no 

matter how well their firm performs, or what the cost is; and two, 

the new pricing structure is suitable for the lowest-cost firm, but 

obviously could adversely affect a borrower. And there are lots of 

ramifications to that, as you well know, probably better than me. 

I just want to note that Florida is a judicial foreclosure State. 

That means in person. And recently, this committee passed a bipartisan amendment—it was the Marchant-Klein amendment—in 

the FHA Reform bill to devote more funds to in-person contact. The 

intention was twofold: number one, to reduce unnecessary foreclosures; and number two, to reduce FHA losses, which the American taxpayer ultimately has to foot the bill for. Fannie Mae just announced an $11.5 billion first quarter loss, and asked the Treasury for another $8.4 billion infusion. So members of this committee surely recognize the need to reform Fannie 

Mae and stop the hemorrhaging as soon as possible. 

That said, it doesn’t seem to make sense to cut funds that helps 

borrowers, hopefully to reduce foreclosures and to reduce future 

Fannie Mae losses—particularly in Florida, which again, has the 

second highest foreclosure rate of all the States. My Florida colleagues—Congressman Klein and Congresswoman Kosmas—and I 

last week sent a letter to Chairman Frank and Ranking Member 

Bachus, and we requested a 120-day stay on the Fannie Mae policy 

change so that there would be time to review it and the ramifications that it might have more closely. 

And the question I have now is, of course, whether or not you 

will support that stay. 

Mr. DEMARCO. So, Congressman, I am going to have to get more 

familiar with the particulars of the policy change that you are describing to have an opinion. 

Florida is perhaps—if I might turn it around, I could use some 

help here—because Florida, as you noted, is a judicial State. And 

this is a State that, as is noted in my written statement, represents 

32 

a considerable portion of the losses that Fannie Mae and Freddie 

Mac have been absorbing. And despite the tremendous efforts that 

each company is taking to find foreclosure alternatives for troubled 

borrowers, there is still a great deal of properties that need to go 

through foreclosure in Florida. 

And because of various protections and the way the system 

works—and, frankly, that the court system is overwhelmed, the 

number of foreclosures coming through—this, I fear, is hurting 

neighborhoods in Florida because it is taking so long— 

Mr. POSEY. Yes, it’s destroying a lot of neighborhoods. 

But my point is, where does FHA get off telling the people who 

are working the foreclosures—hopefully trying to stop them—that 

they can’t use a particular firm? 

It could be the low bidder. Let’s suppose there is one that 

charges, hypothetically, $1, one that charges $2, and one that 

charges $3. And let’s suppose they give all their business, 400 cases 

a year, to the firm that charges $1. That’s $400. We have FHA saying, ‘‘No, there is no way. You have to pay at least 50 percent more 

than that.’’ Actually, you have to pay 100 percent more for half of 

your cases if you’re over the 300 mark. It just defies logic that you 

would try and—so minutely manage the process down there. 

And I don’t see any upside to it. I was thinking that maybe there 

was some logic behind it that would be good for the consumer, but 

I don’t see that anywhere. 

Mr. DEMARCO. Okay. Well, I would be happy to look into this. 

You have mentioned FHA several times, and that would be within 

HUD, so that’s a different jurisdiction than me. If you’re talking 

about a Fannie Mae or Freddie Mac policy— 

Mr. POSEY. Right. 

Mr. DEMARCO. I would be happy to look into it, sir, and find out 

what the particulars are. But I am—forgive me, I am not aware 

enough of the details of what you’re describing for me to have a 

ready answer for you. 

Mr. POSEY. Okay. 

Mr. DEMARCO. But I will look into it. 

Mr. POSEY. Thank you. And I guess you will mail a copy to the 

chairman, and the chairman will get it to us. 

Fannie Mae, Freddie Mac, and FHA are essentially the only 

games in town right now, constituting over 90 percent of the market. And I was wondering if you think that’s helping the market 

or hurting it. And I think I already know the answer, but I want 

to get your opinion. 

And I want to know what steps the Administration plans to take 

to entice some private sector capital back into the mortgage market. 

Mr. DEMARCO. In the near term, I believe that the role Fannie, 

Freddie, and the FHA have played has brought a great deal of stability to the country’s housing system, so it has been a positive. 

Long-term, I believe we need to figure out what the future is, so 

that there can be much more of a return of private businesses and 

private capital to the housing market. 

With regard to the Administration’s plan, I am sorry, I’m a regulator, I’m not part of the Administration. I’m not an Administration 

33 

official. So I would have to defer to them in terms of what their 

plans and timeline are, sir. 

Mr. POSEY. And that’s a good answer, because nobody who has 

appeared before us yet in any sector has had any kind of a plan. 

So I guess that’s fair enough. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Posey. Now, the gentleman from Delaware, Mr. Castle, will have 5 minutes. 

Mr. CASTLE. Thank you, Mr. Chairman. Mr. DeMarco, several 

questioners ago you indicated that Fannie—I think you said Fannie 

and Freddie would reduce their retained portfolios by 10 percent 

per year. Did I hear that correctly? 

Mr. DEMARCO. Yes, sir. 

Mr. CASTLE. How will they do that? I don’t quite know what assets they are going to be reducing, and who wants them. 

Mr. DEMARCO. It will generally be accomplished through the normal run-off of their mortgage books, so mortgage loans that are 

paying down. 

Mr. CASTLE. So mortgage loans that are paying down and paying 

off, or somebody—or they’re sold, or whatever it would be? 

Mr. DEMARCO. Yes, sir. 

Mr. CASTLE. Okay. What are Fannie and—I don’t want specifics 

on this, but in general—Fannie and Freddie’s requirements to accept mortgages, or to purchase mortgages into their portfolios? 

You have indicated they are excessively leveraged. Others have 

said that the collapse of Fannie and Freddie was a failure of management. But at some point somebody has to make the decision 

that they are going to acquire a mortgage, or do whatever they are 

going to do. Is this just a failure of good decision-making? Or is it 

blamed on the collapse of the real estate market in this country? 

It just seems to me that there were missteps that were made— 

and perhaps they’re still being made, I have no idea how it’s going 

today. 

Mr. DEMARCO. In 2004, 2005, 2006, and so on, we saw the emergence of a private-label mortgage-backed security market, not just 

for subprime mortgages, but for other non-traditional mortgages, 

which are called Alt-A mortgages, low documentation mortgages. 

So, as this emerged, as an alternative to the conforming conventional market, Fannie Mae and Freddie Mac, over time, did make 

management decisions to lower their underwriting standards, adjust their pricing so as to remain what they saw as competitive in 

the marketplace. They also became purchasers of the senior 

tranches of these private-label mortgage-backed securities, both for 

purposes of meeting certain housing goals, and for the purpose of 

profitability. They thought that they could make money on those 

investments. 

These were, in fact, business decisions made over time. Like 

many other participants in the housing market, they under-estimated the credit risk that they were undertaking, and they certainly did not have enough capital to support it. 

Post-conservatorship, they’re not leveraged in the sense that the 

Treasury backstop is there to bring shareholder equity basically to 

zero, but they are operating in conservatorship with much tighter 

underwriting standards, and more appropriate risk-based pricing, 

34 

so that they are able to serve their statutory mission of providing 

a liquid and stable secondary mortgage market as we go along now, 

but do so in a way in which they are not adding to the losses that 

they incurred in their book of business, pre-conservatorship. 

Mr. CASTLE. Thank you. This is going to have to be a little bit 

vague, because I don’t quite understand it at all, but I am curious 

about the timeline for revamping the GSEs. And I ask that in conjunction with the financial regulatory bill that has been passed in 

the House and the Senate, and it’s now going into conference, in 

which the statement has been made, ‘‘We just can’t deal with the 

GSEs in this piece of legislation,’’ which I thought we should have 

dealt with. 

And the discussion has been from the Administration—and 

maybe you’re not even involved in this, I don’t know—but that 

there is going to be a redoing of Fannie and Freddie, in particular, 

recommended at some point. But it wouldn’t be part of that bill, 

it would be some time in the future. 

You can comment on that, but I would be curious as to what— 

whether or not there is a timeline for doing anything different with 

Fannie and Freddie, or just letting them work out their problems, 

such as the way you have just described in the previous answer. 

Mr. DEMARCO. I can’t speak for the Administration’s timeline of 

coming before Congress with a specific proposal. They have said 

that they will. 

I would say that, as I have said earlier, conservatorship is not 

a long-term option. And policymakers are going to have to deal 

with the future of the housing finance system. And, in that context, 

deal with the—what is the post-conservatorship world for the Enterprises and, more generally, for the secondary mortgage market. 

But I don’t have a specific timeline. That’s for policymakers to 

develop and act upon. 

Mr. CASTLE. Going back, what, 40 years ago or whenever Fannie 

Mae was created, and then Freddie Mac thereafter, as we all know, 

the U.S. housing finance market was basically funded by, I guess, 

demand deposits from banking institutions in this country. And 

then we got into this whole business of using Fannie Mae and 

Freddie Mac, which had some advantages, obviously, and some disadvantages. 

But is there a better mortgage finance model than securitization, 

or does this securitization provide some sort of stability or liquidity 

to the banking institutions, and therefore should not and is not 

going to go away? Or could we revert to some sort of a just demand 

deposit circumstances? 

Mr. DEMARCO. I would be awfully cautious about returning to a 

demand deposit-based system of financing housing. The thrift crisis 

in the late 1970’s and into the 1980’s demonstrated the considerable risk that can be realized if one if funding a 30-year asset with 

basically overnight money. The interest rate risk of trying to finance a 30-year mortgage with short-term deposits is considerable, 

and the costs of properly hedging that are very difficult. 

What securitization does give the Nation’s homeowners is the following. I think of it as that is the—those are the—that’s like the 

plumbing that connects, on the one hand, individual housing transactions across the country, the average size of which is only 

35 

$200,000 per mortgage. But when you aggregate that across the 

United States, it’s a single-family mortgage market of roughly $10 

trillion. 

And so, what securitization—the power of securitization is it’s a way of aggregating all of these $200,000 transactions that add up 

to a cumulative amount of $10 trillion, and then securitization allows one to tap into global financial markets, to institutional investors, not just in this country but around the globe, that can deal 

with the interest rate risk of a 30-year fixed-rate mortgage, and 

have the capacity and have the capital to want to fund in that kind 

of volume. 

And so, securitization can be a powerful element to enhancing 

our financial system and providing great benefit to homeowners because it provides a channel to connect from that individual transaction to the size of investment that institutional investors around 

the globe want. 

The trick here, and what we have to improve upon, really, is how 

does one assure these global investors that are going to have no 

idea about the actual credit worthiness of any individual borrower 

of $200,00, what are the credit protections that are in place so that 

the owner of that mortgage-backed security can have confidence in 

the credit characteristics of the pool of mortgages? 

Now, in the GSE model, that was looked upon as the backing of 

the GSEs. But we had this very awkward and unfortunate framework in which investors relied on not just the guarantee of Fannie 

and Freddie, but the implicit guarantee of the Federal Government 

if anything happened to Fannie and Freddie. And, quite to our regret, that implicit guarantee had ended up being realized. 

I think what Congress is grappling with in the future of the 

housing finance system, is what is going to replace that model of 

a Fannie and Freddie GSE guarantee and an implicit government 

backstop behind it, so that in the future, we can continue to be able 

to tap into global capital markets to finance housing in this country, but do so in a way in which we have better managed who owns 

the credit risk, and how that credit risk is being managed, and 

what kind of private capital is supporting it. 

Mr. CASTLE. Thank you. I yield back, Mr. Chairman. 

Chairman KANJORSKI. I recognize the gentlelady from New York 

for several questions. Mrs. Maloney? 

Mrs. MALONEY. Thank you so much, and that was a very good 

explanation, Director DeMarco. Thank you for your service. 

I would like to get back to the rather startling example in 

Stuyvesant Town and Peter Cooper, where the financing from 

Fannie Mae and Freddie Mac enabled a situation where affordable 

housing was in the process of being converted to high-income housing, and many people were forced out of their homes, or evicted. 

Looking back on it, do you believe Fannie and Freddie should 

have received housing goals credit for their investment in the 

Stuyvesant Town/Peter Cooper deal? 

Mr. DEMARCO. To the best of my knowledge, the awarding of 

housing goal credit on the transaction was done in accordance with 

the rules and the policies that were in place at that time. So it was 

not inappropriate, given the way the housing goal framework and 

policies existed at that time. So, the answer then is no. 

36 

But I share with you the concern about transactions that are, in 

fact, aimed at turning affordable housing into something else, and 

whether there is a way of, whether through policy or regulation or 

legislation, avoiding that peculiar outcome, where one is awarding 

affordable housing goal credit on a transaction that is designed, in 

fact, to turn the housing into something other than affordable 

housing. 

I would note that we have a proposed rule out—the comment period is closed and we are evaluating it—regarding the housing goal 

rules going forward. And in that we have raised the question as 

part of the comment period about whether commercial mortgagebacked securities, such as the ones Fannie and Freddie purchased 

in the instance you’re referring to, should get housing goals credit 

at all, regardless of what the investor’s intent with respect to the 

property is. 

And so, that’s a question that we raised in our proposal. 

Mrs. MALONEY. I will look forward to commenting on it, and I believe many people will comment on it. And recently, Chairman 

Frank and I sent you and others a letter, urging you not to give 

credit for projects that are, in fact, converting affordable housing 

into market rate, high-income housing. 

Last week, I introduced H.R. 5361, the Responsible GSE Affordable Housing Investment Act, and the goal of this bill is to take 

away the incentive for GSEs to invest in properties and projects 

that would lead to an aggressive turnover of affordable units to 

market rate. It does so by giving the FHFA authority to reduce 

credits for those investments that do not lead to an increase or 

preservation of affordable housing, and by requiring GSEs to do 

better due diligence when they are investing in the secondary market, and to obviously not just look at the snapshot of the day, but 

how the financing affects the overall project. 

Simply put, if the rental income at the time the deal is done is 

not enough to satisfy the debt service, then the GSEs should not 

receive affordable housing goals credits for those investments. 

The bill does not prohibit GSEs from investing in those properties. It merely says that they can’t receive a housing goals credit 

for those investments. 

Mr. DeMarco, what is your view of the bill, or the goals of the 

bill? Do you think it gives the FHFA the right authority to ensure 

that GSEs invest in properties that actually increase affordable 

housing? 

Mr. DEMARCO. Mrs. Maloney, I appreciate that our staffs have 

had productive discussions about this. I am sorry I have not reviewed all of the provisions of the bill you introduced last week, so 

I don’t have a particular response. But I do know that we have had 

some productive exchanges about it. 

And, as I have already said, I certainly share the overriding principle here, which is awarding goals credit on properties that are designed, in fact, to turn affordable housing into not affordable housing is something that we need to figure out an appropriate way of 

fixing. And I look forward to us continuing that discussion, so that 

we can be constructive— 

Mrs. MALONEY. Thank you, that’s constructive. 

Mr. DEMARCO. —in this area. 

37 

Mrs. MALONEY. I know the FHFA just issued its proposed housing goals for 2010 and 2011, and I believe the public comment period has ended. How did stakeholders respond to the proposed 

goals? Can you tell the committee what changes were made to the 

goals from the previous years? 

Mr. DEMARCO. Because this is in a rule-making process, I can’t 

comment on the decisions that we are in the midst of making in 

response to the comments. The comments that we received are 

available on our Web site. 

As you did note, the comment period is closed, and we are looking to go through the comments and then make appropriate adjustments to our proposal, and then we will be publishing a final rule. 

Mrs. MALONEY. Thank you very much, and I look forward to continuing to work with you for the housing goals of—and certainly 

the goal of more affordable housing. Thank you very much. 

Mr. DEMARCO. Thank you. 

Chairman KANJORSKI. Thank you, Mrs. Maloney. We will recognize the gentleman from New Jersey. 

Mr. GARRETT. Just for one last question. Can you remind me— 

and we may have discussed this in the past—can you just sort of 

walk me through the methodology you use on hedging—on your interest rate risk? And who it is—the second half of that, I guess, 

would be who is on the other side of that? 

Mr. DEMARCO. There are some big banks and financial institutions on the other side. And a lot of this is actually plain vanilla 

interest rate swaps that are undertaken by Fannie and Freddie to 

hedge the interest rate risk in their portfolio. 

It’s a matter of ongoing observation by us, as the regulator. We 

assure that each company has appropriate operating limits, with 

respect to the interest rate risk they take on. Those are both management limits and board limits we monitor that ensure the companies remain operating within those limits. 

And we think that—the only thing that we have been encouraging germaine to your question is working with both Fannie and 

Freddie and the Federal Home Loan Banks to look at what derivatives activity they are undertaking that can be effectively moved to 

central clearing, so as to improve the transparency and the risk 

management in their hedging activity. 

Mr. GARRETT. Wasn’t this— 

Mr. DEMARCO. So that’s an ongoing issue we have right now. 

Mr. GARRETT. Yes, wasn’t there some work on that already, and 

that that was going to be—so that’s not—is that done, as far as the 

transparency of—what’s the word I’m looking for? Yes, well, as far 

as the clearing of them? 

Mr. DEMARCO. They have not moved to central clearing, yes. 

Mr. GARRETT. Shadow clearing? 

Mr. DEMARCO. But it is being looked at. And this is a developing 

area right now that’s involving not just us, but the CFTC and the 

other banking regulators with regard to moving various derivative 

transactions to central clearing. 

Mr. GARRETT. Yes. Well, I understand that. So isn’t it just like— 

correct me if I’m wrong—is there only just like maybe just four or 

five partners on the other side that we’re really dealing with? 

38 

Mr. DEMARCO. There are a limited number of counterparties, as 

a general matter, which is part of the reason for wanting to see 

this moved to central clearing, to improve the counterparty risk 

management. 

Mr. GARRETT. Because we were just discussing this up here. 

You’re doing everything you can—I understand—that if interest 

rates tomorrow go like this, that you guys are all protected, and 

we don’t have to call you back in and say that you did everything 

good. 

Mr. DEMARCO. Yes, sir. 

Mr. GARRETT. But we were just saying do we have to have another hearing to bring in the four or five guys on the other side? 

Because now, because interest rates went through the roof and 

you have gotten rid of all your risk, but those three or four guys 

have to come in and say, ‘‘We picked up all that risk,’’ is that something that we have to worry about or no? 

Mr. DEMARCO. This gets into an area that is certainly beyond my 

expertise, but certainly—and this is being discussed a lot in the 

context of financial regulatory reform—is that derivatives can be a 

helpful thing for financial institutions to be managing risk. Derivatives themselves need to be properly overseen. We need to assure 

liquidity in the derivatives market. Derivatives activity is dominated by a relatively small number of large institutions. How they 

are laying off that risk or managing it on their end is something 

for their prudential regulators to be overseeing. 

And so, with the major U.S. banks that are key derivative 

counterparties of Fannie Mae and Freddie Mac, the Federal banking agencies are overseeing that as part of their prudential oversight of those companies. Moving to central clearing would provide 

a different mechanism, a broadened mechanism, for that kind of 

oversight and risk management. 

Chairman KANJORSKI. If I may just add on to that question, how 

is it that—take AIG Financial Products in London, why did it not 

come to anyone’s attention that they did not have anywhere near 

the amount of equity necessary to support their derivative activity? 

As a regulator, did you have an occasion to look at their capacity 

to be a counterparty or to take the risk on some of these transactions, or did anyone else in the field do that? 

They had, as I understand, $2.8 trillion in derivatives without 

any actual physical support of funds out of AIG itself, until far 

down the line, when the market started deteriorating. 

Why was this not examined, either by the regulators or by the 

parties involved? 

Mr. DEMARCO. I’m sorry, Mr. Chairman, but I just don’t feel that 

I’m expert enough to be able to respond to what is a very important 

question. 

My limited understanding here involves things that—for example, some of the derivative transactions that—for which AIG had 

great difficulty were certain credit default swaps and other things 

that are of different characteristics than what the Enterprises used 

to hedge their interest rate risk on their retained portfolios. 

But I would have to defer to the appropriate regulators for what 

was going on in the AIG case. That’s outside my area of expertise. 

39 

Chairman KANJORSKI. Thank you very much. The Chair notes 

that some members may have additional questions for this panel, 

for this witness, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for 

members to submit written questions to this witness, and to place 

his responses in the record. Without objection, it is so ordered. 

There are no statements to be submitted into the record. Therefore, the panel—or the witness—is dismissed, and this hearing is 

adjourned. 

[Whereupon, at 4:09 p.m., the hearing was adjourned.] 

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