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LEGISLATIVE HEARING ON IMMEDIATE STEPS 

TO PROTECT TAXPAYERS FROM THE ONGOING 

BAILOUT OF FANNIE MAE AND FREDDIE MAC 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MARCH 31, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–22 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 31, 2011 ................................................................................................. 1 

Appendix: 

March 31, 2011 ................................................................................................. 87 

WITNESSES 

THURSDAY, MARCH 31, 2011 

Dalton, Hon. John H., President, Housing Policy Council, The Financial Services Roundtable .................................................................................................... 47 

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

(FHFA) .................................................................................................................. 7 

Nielsen, Robert, Chairman of the Board, National Association of Home Builders (NAHB) ........................................................................................................... 51 

Papagianis, Christopher, Managing Director, Economics21 ................................ 48 

Phipps, Ronald, President, National Association of REALTORS® ..................... 53 

Pinto, Edward J., Resident Fellow, American Enterprise Institute .................... 49 

Wachter, Susan M., Professor, The Wharton School, University of Pennsylvania ...................................................................................................................... 54 

APPENDIX 

Prepared statements: 

Dalton, Hon. John H. ....................................................................................... 88 

DeMarco, Edward J. ......................................................................................... 97 

Nielsen, Robert ................................................................................................. 113 

Papagianis, Christopher ................................................................................... 128 

Phipps, Ronald .................................................................................................. 138 

Pinto, Edward J. ............................................................................................... 145 

Wachter, Susan M. ........................................................................................... 213 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written statement of the National Association of Federal Credit Unions 

(NAFCU) ........................................................................................................ 218 

Written statement of the Office of Inspector General, Federal Housing 

Finance Agency (FHFA) ............................................................................... 221 

Biggert, Hon. Judy: 

Washington Post article entitled, ‘‘Rush to foreclose by Fannie, Freddie 

helped feed problems with legal paperwork,’’ dated December 23, 2010 . 235 

Stivers, Hon. Steve: 

Additional information provided by the Honorable John H. Dalton, President, Housing Policy Council of the Financial Services Roundtable, 

in response to questions posed during the hearing .................................... 240 

(1) 

LEGISLATIVE HEARING ON IMMEDIATE 

STEPS TO PROTECT TAXPAYERS 

FROM THE ONGOING BAILOUT OF 

FANNIE MAE AND FREDDIE MAC 

Thursday, March 31, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Royce, 

Biggert, Hensarling, Neugebauer, McCotter, Pearce, Fitzpatrick, 

Hayworth, Hurt, Grimm, Stivers; Waters, Sherman, Lynch, Miller 

of North Carolina, Moore, Perlmutter, Donnelly, Carson, Himes, 

Peters, Green, and Ellison. 

Ex officio present: Representatives Bachus and Frank. 

Also present: Representatives Miller of California, Renacci; and 

Watt. 

Chairman GARRETT. Good morning. This hearing of the Subcommittee on Capital Markets and Government Sponsored Enterprises is hereby called to order. 

Without objection, all members’ opening statements will be made 

a part of the record. And at this point, I yield myself 1 minute for 

my opening statement. 

And now that we actually have a gavel, it is official. 

Today, we begin the process of considering specific legislation 

that will take immediate steps to protect taxpayers from the ongoing multi-billion dollar bailout of Fannie Mae and Freddie Mac. 

I know those on the other side of the aisle will be critical of this 

Congress about the pace in which this committee has formally considered legislation to address Fannie and Freddie. However, unlike 

the last Congress, this committee is actually going to hold hearings 

and allow members to study and examine legislative proposals to 

end the bailouts and not simply pass legislation that actually 

would do the opposite, encourage more of them. 

Last Congress, our friends across the aisle refused to have any 

real hearings on specific bills to address the largest bailouts of the 

financial crisis. And so with the complete disregard by our Democratic colleagues of this bailout, we were compelled then to offer a 

2 

bill absent any time, really, to fully debate and formally examine 

legislative proposals addressing the GSEs. 

It was literally the only opportunity that we have had to offer an 

alternative to respond to the complete absence by our Democratic 

counterparts to address the issues at all in the now sacrosanct 

Dodd-Frank Act. 

Today, we begin to do this process the right way, with our first 

hearing on specific legislative proposals regarding the GSEs. And 

we are going to have these hearings and go through regular order 

to consider a wide array of proposals that this committee didn’t 

have the opportunity to do last Congress. 

So I look forward to reviewing the eight proposals before us 

today, many of which I believe and hope the Obama Administration 

will support. And I thank you all and look forward to the witnesses’ 

testimony. 

And with that, I yield to the gentleman from Massachusetts. 

Mr. FRANK. Thank you. Let me just preliminarily, before I start, 

the ranking member of the subcommittee is on her way over from 

the Whip meeting, so she, Ms. Waters, will be here. 

I will now begin my statement. I am not surprised that the chairman of the subcommittee began not with any positive statement 

about what he is planning to do, but by a defense of what they are 

doing. The contrast between their rhetoric of last year and their reality this year is overwhelming. 

I am now hearing that the bill that they were very critical of us 

for not incorporating into legislation last year wasn’t really ready 

for primetime and that was the best they could do. They had all 

year. The gentleman from Texas, Mr. Hensarling, introduced it in 

March. It was in July when they asked us to act on it, and were 

very critical when we didn’t. 

I have seen the extraordinary spectacle this year of people on the 

Republican side, Senator Corker, for one, asking for adult supervision from Secretaries Geithner and Donovan, people here being 

critical because the Obama Administration hasn’t given them more 

guidance on what to do. 

And it reminds me of the kind of classic scene of the man in the 

bar who is all ready to fight a very big guy and is being held back 

by his friends and insists that his friends turn him loose, and then 

they turn him loose, and he is immediately looking for somebody 

else to hold him back. 

The Republicans spent all last year telling us that they were just 

ready to take on this tough issue of what to do about housing finance, after you get rid of Fannie Mae and Freddie Mac, and we 

said it is a very tough issue and we should get to it this year, and 

that was the way to deal with it, but they were raring to go, and 

they were very critical that we hadn’t moved. They filed a bill in 

March, a comprehensive bill, and were very critical of us in July 

for not acting on this bill. 

And the notion that because we didn’t let them perfect it, they 

couldn’t get it perfected, of course makes no sense. They could have 

talked to anyone they wanted to talk to. They could have had 

whatever conversations they wanted. 

What happened, of course, is it turns out it is a tougher issue 

than they were prepared to acknowledge. And so what happens is, 

3 

all last year, they were, ‘‘Let me at him, let me at him,’’ and they 

were being held back. They were being held back by their Minority 

status. 

And then they got Majority status. Going from Minority to Majority status was equivalent to having your friend let go of your 

coat, and now you have no excuse not to go fight the guy. And so, 

they have been looking very much for someone to be the substitute 

coat-holder, and they found it, the Obama Administration. 

It is extraordinary to me that my Republicans colleagues, who 

have been so disrespectful of virtually anything the Obama Administration has said, on this very difficult issue are trying to hide behind it and are trying to say that they can’t really deal with this 

until the Obama Administration tells them how to do it. 

There are some specific pieces today, many of which I can support, and one or two which, I think, need some further work. But 

it is a far cry from the comprehensive solution they had. I am, however, prepared to take ‘‘yes’’ for an answer. 

I will give myself—if I can take another minute out of our time, 

Mr. Chairman—I am prepared to take yes for an answer. 

Chairman GARRETT. The gentleman is recognized for one additional minute. 

Mr. FRANK. Thank you, Mr. Chairman. I have learned to take 

‘‘yes’’ for an answer. 

What the Majority is now saying is that it is not as urgent as 

they said. It is important, but the losses are not mounting. They 

appear, in fact, to be somewhat diminishing. Yes, we should deal 

with this. And much of what they are talking about now is relatively non-controversial. There are one or two controversial pieces, 

in the portfolio area mainly. 

But the key question of, what do you do to replace Fannie and 

Freddie, which will be abolished and should be abolished, remains 

untouched. And so that tough issue, which they were so eager to 

tackle last year, they are now acknowledging is harder than they 

were prepared to acknowledge last year, and they are counting on 

the Obama Administration to hold them back until they can get 

some more time to figure out what to do. 

We would reserve the balance of our time, Mr. Chairman, until 

the ranking member can get here. 

Chairman GARRETT. Thank you. And we so appreciate the gentleman from Massachusetts exchanging his experiences in saloons. 

And with that, I yield now to the gentleman from Alabama for 

1 minute. 

Chairman BACHUS. Thank you, Chairman Garrett. 

As recent statistics and reports show, our housing markets remain very fragile, and housing is an important part of our overall 

economy and of consumer spending. We are not going to be able to 

revive our economy until we fix the housing market. And that is 

why Congress must take some action to bring some certainty. 

But it has to be thoughtful and deliberative action. And we have 

started that with this process of introducing a number of measures 

to address the failures of Fannie and Freddie. 

The main thrust of this is the—Freddie and Fannie had tremendous advantages over the private market, and over a several-year 

period, it drove everything into Fannie and Freddie, which were 

4 

government-run funds. And, of course, what happened in 2008 and 

2009 only precipitated that. 

Going forward, what we need to do, bottom line, is diminish in 

a thoughtful way those advantages that Freddie and Fannie have 

and ultimately get the government out of the mortgage financing 

market and particularly the guarantee market. 

So I appreciate that. 

Chairman GARRETT. I thank the gentleman. 

The gentleman from Massachusetts for 2 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. I want to begin by thanking all the witnesses for coming before us here today and helping 

the committee with this work. 

I just want to remind everyone that, together, Fannie and 

Freddie now provide about 90 percent of the financing or guaranteeing of all residential mortgages in the country today. This is an 

enormous market share, up from about 40 percent in 2006. And 

without the financial support of the Department of the Treasury 

and American taxpayers in 2008, the residential mortgage market 

would be in even more desperate shape than it currently remains. 

I understand that my colleagues on the other side have introduced eight bills to eliminate the GSEs and wind down their prominence in the mortgage market. The question is, as my colleague 

from Massachusetts has asked, what will take their place? 

I hope together we can devise a replacement for the GSE system 

that allows the 30-year fixed-rate mortgage to remain available at 

reasonable rates for creditworthy borrowers in a way that does not 

continue to put the taxpayer at tremendous risk. 

I look forward to hearing from our witnesses on how we can 

move to the next generation of mortgage finance and wind down 

the taxpayers’ investments in these GSEs. 

Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. And I thank you. 

The gentleman from California, Mr. Royce, for 1 minute. 

Mr. ROYCE. Thank you, Mr. Chairman. I thank you, also, for 

your continued leadership on this issue. 

The level of government intervention which contributed to the 

housing boom is well documented. As a matter of fact, what is often 

swept under the rug is the level of government intervention in the 

junk loan market during the boom years. 

Over the years, the GSEs acquired more than $1 trillion worth 

of subprime and Alt-A loans, making them the largest buyer of 

junk loans. Much of it goes back to the 1992 GSE Act and the affordable housing goals, which for the first time mandated that the 

GSEs dedicate a sizable portion of their business to affordable 

housing. 

This mandate on government-backed private institutions was a 

recipe for disaster. As former Chairman of the Federal Reserve 

Alan Greenspan said, their failure, Fannie and Freddie, is because 

they paid whatever price was necessary to reach the goal. And 

clearly, this was a mistake inspired by Congress. 

That is why I introduced legislation to eliminate these goals and 

correct one of the many errors in the GSE charter. It should be 

made clear that the group of bills introduced this week is merely 

a first step. Over the coming months, it is my hope that we will 

5 

move additional legislation, and I think this is the only way to end 

what Jamie Dimon labeled the biggest disaster of all time. 

I yield back. 

Chairman GARRETT. Thank you. The gentleman yields back. 

The gentlelady from Illinois for 1 minute? 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

As one of these eight bills, I have introduced H.R. 31, the Fannie 

Mae and Freddie Mac Accountability and Transparency for Taxpayers Act. H.R. 31 establishes in statute an inspector general with 

FHFA, something that Congress failed to do originally, and this is 

one agency that needs an independent watchdog. 

It also gives this new IG authority—new authority to enforce the 

law and hire expert investigators that expose fraud and abuse 

within the GSEs and their regulator. 

Three, it requires that this information be provided to the public 

in regular reports that outline taxpayer liabilities, investment decisions, and management details of Fannie and Freddie. 

For example, one problem we found with Freddie and Fannie is 

that they maintain a short list of just a few law firms that are allowed to monopolize the foreclosure process by offering the 

quickest, cheapest, and probably the least reliable service. This has 

contributed to a broad array of problems, paperwork discrepancies 

and fraud. These issues have to be investigated and resolved for 

the sake of homeowners, for the sake of taxpayers, and for the sake 

of housing recovery. 

This bill would ensure that effective oversight tools are in place. 

And with this bill, waste, fraud and abuse will no longer fly under 

the radar. 

I yield back. 

Chairman GARRETT. And the gentlelady yields back. 

Mrs. BIGGERT. Mr. Chairman, if I may, could I ask unanimous 

consent to include a letter from the FHFA Inspector General on 

H.R. 31 in the record? 

Chairman GARRETT. Without objection, it is so ordered. 

And to the gentlelady from California for 3 minutes. Yes, 3 minutes. 

Ms. WATERS. Thank you, Mr. Chairman, for organizing this hearing. 

This is now our third hearing on GSE reform during the 112th 

Congress. As I have stated at those previous hearings, I am committed to working with my colleagues on a practical, comprehensive reform proposal to reshape our housing finance system. 

That comprehensive proposal will inevitably need to include 

shorter-term provisions to address how we transition from where 

we are to where we want to be. Those measures must both encourage the return of private capital to the market, while also ensuring 

that we do not disrupt our housing finance system and shake our 

nascent economic recovery. 

I think it is important to note that some shorter-term steps are 

already being addressed as the GSEs go into conservatorship. For 

example, the Federal Housing Finance Agency has raised guarantee fees, making GSE mortgages more expensive for borrowers, 

and more accurately pricing risk. FHFA has also prohibited the 

GSEs from launching new product lines. 

6 

The office of the FHFA Inspector General has been established, 

and the portfolios of Fannie Mae and Freddie Mac are being wound 

down. Many of the proposals that we will consider today are to a 

certain degree restatements of what is already occurring, and I am 

willing to work with my colleagues on some reasonable refinements 

of current practices. Some other aspects of the proposal accelerate 

what is already being done or include more prescriptive direction 

to regulators for how they should manage the conservatorships. 

I think these are important debates for us to have, but we must 

consider that if we move too precipitously, we run the risk of destabilizing our economy. Three million more foreclosures are expected 

in the next year, and home prices are 3 percent lower than they 

were last year. Like many observers, I believe that the housing crisis is far from over. 

I am also eager for the committee to consider whether adopting 

these shorter-term measures without considering comprehensive 

reform is the best strategy. I think that most stakeholders would 

like to know what is coming next before we start accelerating the 

wind-down of what we have now. We must also ensure that our 

regulators have the flexibility they need to respond to our still-volatile housing market conditions and that their hands are not tied by 

legislation that is too rigid. 

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

I look forward to learning more about these proposals. And, of 

course, I yield back the balance of my time. 

Chairman GARRETT. And I thank the gentlelady. 

The gentleman from Texas for 1 minute? 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

This is an important hearing. One of the things that was brought 

out is that 98 percent of the mortgages that are being originated 

in this country today have some form of government backing. And 

as my colleagues on the other side of the aisle said, we don’t have 

anything to replace it with. That is because these entities enjoy a 

subsidized monopoly. 

So what we need to do is to begin to provide space and opportunity for the private capital to come into the market, as long as 

we provide lower guarantee fees to sanitize these mortgages, and 

there is no incentive for private capital to come into these markets. 

Our goal here is two things: first, to make sure that we shore up 

and reduce any additional losses that Fannie and Freddie may 

have; and second, to also provide opportunity for private capital to 

come back in so that we will have robust housing finance markets 

in this country. 

But if we keep what we have been doing, we are going to keep 

getting what we have been getting. And I think the American people have spoken pretty loudly; they are tired of not only making 

their mortgage payment, but they don’t want to make their neighbor’s mortgage payment, as well, and basically if we continue down 

the road that we are on right now, that is the direction we are 

headed. 

So I think this is a very important hearing, Mr. Chairman. And 

I will look forward to hearing from our witnesses today. 

Chairman GARRETT. Thank you. 

Mr. Pearce for 1 minute? 

7 

Mr. PEARCE. Thank you, Mr. Chairman. I appreciate the hearing 

today. I am looking forward to it. 

And we have one of the pieces of legislation that simply says the 

debt has to be approved with each new issuance, and it is what 

used to be, and we are simply requesting that we go back to that 

kind of stable approach. But I am looking forward to the hearing 

today, and thank you very much. 

Chairman GARRETT. The gentleman yields back. 

Mr. Fitzpatrick, for 30 seconds. 

Mr. FITZPATRICK. Thank you, Mr. Chairman, for the hearing. 

Today marks an important first step toward a major correction in 

our housing market and in our financial system. Fannie Mae and 

Freddie Mac control about 95 percent of the secondary mortgage 

market, and its access to easy capital has helped spur an unprecedented run on mortgages that, once it caught up to us, nearly 

brought the economy to its knees, and as the house of cards began 

to fall and implied government backing became a real one, to the 

tune of $150 billion. 

So let’s discuss how to get private capital back into the system 

and immediately in the bailouts, while protecting current and future homeowners. 

Thank you, Mr. Chairman. 

Chairman GARRETT. And I thank you. 

And for the remainder of the time, which is, I think, 30 seconds, 

the gentleman from California, Mr. Miller? 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

I hope this can be a bipartisan issue, because it is definitely a 

national issue. We need to be very cautious in what we do. We 

need comprehensive reform. But we need to look and ask, ‘‘What 

did Freddie and Fannie do wrong? And how can we correct that?’’ 

Without a doubt, they are outperforming the non-agency loans. 

So irrespective of that, they are losing money, and we have to determine what they did wrong to correct the problem. 

But we need to be sensitive as this industry has been dramatically impacted in recent years. And what we do here is going to 

have an impact. My goal is to make sure it has a positive impact, 

rather than a negative impact. 

And so I hope we will look at this issue in a comprehensive way, 

understanding the complexity that we are facing, and the impact 

of the results of what we do. 

I yield back the balance of my time. 

Chairman GARRETT. Thank you. 

Mr. DeMarco, once again, we welcome you back to our committee. And as you know, your full statement will be made a part 

of the record. You are recognized for 5 minutes, and we welcome 

you to the committee. 

STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, 

FEDERAL HOUSING FINANCE AGENCY (FHFA) 

Mr. DEMARCO. Very good. Thank you. Thank you, Mr. Chairman. 

Chairman Garrett, Ranking Member Waters, and members of 

the subcommittee, thank you for inviting me here. My written 

statement covers the financial condition of Fannie Mae and Freddie 

Mac, how FHFA is carrying out its conservatorship responsibilities, 

8 

and FHFA’s views on certain proposals made this week by subcommittee members. I will touch on just the last two at this point. 

As conservator, FHFA has a statutory responsibility to preserve 

and conserve the Enterprises’ assets, which I would group into four 

broad categories: the legacy, pre-conservatorship book of business, 

including investments, mortgages owned and mortgages guaranteed; the post-conservatorship book of business; the business platforms, operations and processes of the two companies; and the people who work at the Enterprises, the human capital who run the 

business, manage the risk, and support the operations. 

Preserving and conserving Enterprise assets protects taxpayers 

from further losses, ensures market stability and liquidity, gives 

lawmakers options for the future, and protects the future value of 

the Enterprises’ intangible assets for future utilization and value 

recognition for the benefit of taxpayers and markets. 

As conservator, we oversee these assets so that value may be returned to taxpayers from them in a manner to be determined by 

financial market developments and the decisions of lawmakers. 

These responsibilities entail challenging risk management issues. 

For the legacy book of business, the key risk is further credit 

losses from delinquent mortgages. For the post-conservatorship 

book of business, the key risk management challenge is establishing appropriate underwriting standards and risk-based pricing. 

The Enterprises’ business platforms, operations and processes 

present multiple risk management challenges. We need to develop 

and maintain the infrastructure supporting ongoing business in 

order to preserve and conserve the value of the securities being 

issued today, which have 30-year maturities backed by the taxpayer. 

Finally, preserving and conserving assets includes maintaining 

each company’s human capital in the face of a very uncertain future. Protecting taxpayer interests in the Enterprises requires each 

company having experienced, qualified people managing the day-today business operations. 

I will now briefly summarize a few of my written comments on 

the bills introduced earlier this week. I will begin with risk retention. 

The proposed rule on risk retention issued by the agencies this 

week does not classify Enterprise loans as qualified residential 

mortgages. It stipulates that Enterprise single-family mortgage securities are structured with a 100 percent risk retention by the 

securitizer, that is, the Enterprise, obviously, the maximum possible and far beyond the 5 percent retention required by DoddFrank. 

If the Enterprises were subject to the risk retention requirements 

for non-QRM loans, they could be forced to hold on their balance 

sheet 5 percent of the securities they issue. To impose such a requirement would add nothing further to the Enterprises’ skin-inthe-game or credit risk exposure. They already have 100 percent of 

the credit exposure. However, such a requirement would require 

the Enterprises to increase their portfolios by financing 5 percent 

of their mortgage-backed securities themselves. 

Retained portfolios. We are on a path to reduce the retained portfolio of each Enterprise by at least 10 percent per year. The only 

9 

material additions to the retained portfolios today come from removing delinquent mortgages from the Enterprises’ mortgagebacked securities. While some faster reduction of the Enterprises’ 

retained portfolios may be possible, a congressional mandate for a 

significantly faster reduction could cost taxpayers unnecessarily. 

New activities. FHFA is not permitting the Enterprises to offer 

any new products or enter new lines of business. Their operations 

are focused on their existing core businesses and on loss mitigation. 

I support in principle a bill to codify this position of the agency. As 

the subcommittee deliberates such a mandate, it may wish to consider whether exceptions should be provided for products that advance other purposes of the transition. 

Compensation. Retaining human capital and setting a compensation strategy in an environment of uncertainty requires a delicate 

balancing act. I am concerned that overhauling the compensation 

programs in place today by applying the Federal pay system to 

non-Federal employees carries risk for the conservatorship and, 

hence, the taxpayer. In my view, such an approach would increase 

costs to the taxpayers and risk further disruption in housing markets. 

And finally, guarantee fees. Since the beginning of conservatorship, FHFA has been steadily—has been overseeing steady increases in guarantee fees for the Enterprises. FHFA expects to continue to evaluate further changes along these lines, and we look 

forward to working with Congress on legislative approaches for determining appropriate changes for the Enterprises’ strategy for setting guarantee fees. 

Thank you again for this invitation, and I look forward to our 

discussion. 

[The prepared statement of Acting Director DeMarco can be 

found on page 97 of the appendix.] 

Chairman GARRETT. I thank the gentleman for his testimony and 

his full testimony, which we have seen previously. And I would at 

this point yield myself 5 minutes. 

Let’s go to the first point and the legislation that I have dropped 

in, which deals with risk retention. This goes with Section 941, 

15(g)(e)(3)(B) of the act of the law, which specifically exempts all 

assets which are insured or guaranteed by the United States toward any agency of the United States, but then the rest of the section specifically says what? That Freddie and Fannie are not agencies of the United States, and you, of course, agree with that. 

So what is hard for me to see is that it is—Congress was explicit 

in what that they are saying, that these are not agencies of the 

United States, and therefore they should be under the same requirement as in the private sector. But you are claiming in your 

testimony here that you don’t have to worry about that. Why? Because of the, what, 100 percent guarantee functionality for this 

type of risk, right? 

Mr. DEMARCO. What I am stating, Mr. Chairman, is that what 

Section 941 is designed to do is to have securitizers—that is, 

issuers of an asset-backed security, including mortgage-backed securities, to retain a portion—some economic interest in the credit 

risk of the loans that are underlying that security. 

10 

The way Fannie Mae and Freddie Mac undertake their 

securitization, they are providing a 100 percent corporate guarantee of timely payment of principal and interest. That is retaining 

100 percent of the credit risk. It can’t retain more of the credit risk 

than that. 

Chairman GARRETT. Yes, I understand that. I appreciate that. So 

what happens, then, on the private-sector side is what? If they are 

issuing an QRM, there is no problem? If they are issuing a nonQRM, that is when the—under the rule, it comes out, what, they 

have to retain the additional 5 percent? 

Mr. DEMARCO. They have to retain 5 percent. 

Chairman GARRETT. Right. And if they do that, what happens 

then? They have to have additional capital with regard to that 5 

percent. What happens there? That means that there is an additional cost, right, to that transaction? 

Mr. DEMARCO. Right. 

Chairman GARRETT. Now, if the goal I think we have agreed on 

here, if the goal is to try to get them to be able to facilitate that 

marketplace and not simply have all the markets just continue to 

go over to the GSEs, we can’t have that cost higher, right, than 

what is over the GSEs. So that is why set—at least in my legislation—we would want to try to bring them on par. 

So if your position is such as it is, walk through it with me, what 

are some of the alternatives that we could do in order to make it 

on par? Could we, for example—what could we do? Could we raise 

the dividends that the GSEs are responsible paying back to the 

Treasury, for example, in which case there would be a higher cost 

here that would effectively go back and make these on a level playing field? There is other legislation with regard to G-fees, correct? 

Could we do something with G-fees, elevate them to an additional 

point, again, to make it on a level playing field? 

If my legislation as it is crafted right now doesn’t solve the problem on this area in risk retention, how can we do it, in your mind, 

that is equal—takes care of the problem? 

Mr. DEMARCO. Right. Three things, Mr. Chairman. I appreciate 

the question. And you have already started to outline the answer. 

Chairman GARRETT. Okay. 

Mr. DEMARCO. The first is, in fact, G-fees. I do believe guarantee 

fee pricing and continuing to make gradual adjustments there is an 

important step. The second thing has to do with, whatever path is 

taken to gradually recede back to the private market a portion of 

the universe of mortgages originated that is not eligible for Enterprise purchase. And the conforming loan limit is the obvious mechanism for doing that. 

So making adjustments with respect to the universe of mortgages 

originated that are eligible for Enterprise purchase would be the 

second way to gradually reintroduce a portion of the market that 

would have to be financed out of the private sector. 

And the third is fundamentally what you are trying to do at this 

hearing and what the subcommittee is aiming to do over the long 

term, which is comprehensive housing finance reform, so that for 

private capital to truly come back into the mortgage market, it is 

not just about removing Fannie and Freddie. Private capital is 

going to want to know what the rules of the game are going forVerDate Nov 24 2008 11:38 Sep 22, 2011 Jkt 068337 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\68337.TXT TERRIE
11 

ward—what is going to be the role of the government? What is 

going to be the kind of oversight and regulation requirements that 

are in place for private firms that want to enter into the secondary 

mortgage market? 

Now, the Dodd-Frank Act and the some of the provisions being 

implemented—not just risk retention, but others—are part of that 

step of providing clarity to private financial institutions that would 

be considering re-entry in the market. So those are the three 

things. 

Chairman GARRETT. And in just the last 10 seconds, outside of 

your field, what about the FHA, with the whole argument with regard to the exemption? Should we be doing actions over there so 

we don’t have everything simply flow over to the FHA? 

Mr. DEMARCO. I think that the role of the FHA is a very important aspect of what I would expect the subcommittee to be looking 

at in terms of housing finance reform. Whether risk retention is 

the way to get at articulating the role of the FHA, I would think 

maybe not. But I would really defer to the HUD Secretary on that. 

Chairman GARRETT. Great. Thank you for your answers. 

The gentlelady from California? 

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

Let me wade into an area that has emerged as rather controversial. Mr. Royce has the GSE Mission Improvement Act. The bill 

would immediately repeal the GSEs’ affordable housing goals. And 

you know what this is all about. In this whole discussion of the 

subprime meltdown, it has been said more than once, I suppose by 

Mr. Royce and others, that the GSEs’ affordable housing goals are 

responsible for the GSEs’ problems and its meltdown. 

I know that there are those who believe that somehow there 

were too many people who could not afford mortgages who were extended mortgage opportunities. I want to know, did the GSEs 

change its criteria—its underwriting criteria, I suppose you would 

call it—for buying up these mortgages from Countrywide and other 

places? Did they somehow do something that would cause these 

goals to be undermined? 

Mr. DEMARCO. Congresswoman Waters, I think it is pretty clear 

that Fannie Mae and Freddie Mac both took steps to reduce their 

underwriting standards, particularly in the 2005 to 2008 period. 

So, yes, they reduced their underwriting standards. They took on 

more risk. They did invest in mortgages of a quality that they, in 

earlier days, would not have. 

And I believe that their pursuit of some of these riskier mortgages was motivated by three things: a loss of market share; wanting to make money; and housing goals. 

Ms. WATERS. All right. If they had stayed with their criteria, 

would that have been a different story? Would the results have 

been different if they had maintained the criteria that had been established for purchasing these mortgages? 

Mr. DEMARCO. If they had not reduced their underwriting standards, I think that the housing crisis that we have had, the losses 

they have had would not have been as great. But they still were 

taking on a lot of credit risk, and a lot of the losses that they have 

absorbed have come from prime, traditional mortgages, because of 

just the tremendous decline in house prices, and the tremendous 

12 

and persistent unemployment that we have had, and because of the 

tremendous amount of leverage on the balance sheet of households— 

Ms. WATERS. Can you tell me what percentage of the loss can be 

directly traced to the change in the underwriting criteria or just 

the economy? Do you know the difference? 

Mr. DEMARCO. Sitting right here, Congresswoman Waters, I cannot tell you that breakdown. 

Ms. WATERS. All right. Are you familiar with any threats to the 

GSEs by Countrywide or any of the other big banks indicating that 

if they did not take everything that they were writing that they 

would pull back all of their business and this would make the 

GSEs less profitable, less competitive? Have you heard that? 

Mr. DEMARCO. I am not aware of such threats. 

Ms. WATERS. Are you aware of any conversation from Countrywide that was reported in the newspapers of that nature? 

Mr. DEMARCO. I am not recalling it. I am not saying it hasn’t 

been reported and that I haven’t even read about it. I am sorry, 

Congresswoman Waters. I am not recalling it just sitting here. 

Ms. WATERS. I know you may not be recalling it, but what I am 

trying to find out is, as this meltdown took place, there was a lot 

written about what was going on. One of the stories that 

emerged—a lot of stories emerged, for example, around Countrywide. And one of those stories had to do Countrywide, because of 

the volume that they had involved with the GSEs, that they were 

in a position to either work with the GSEs and allow them to purchase these mortgages, or to block them and to not work with 

them, and thus put the GSEs in a less competitive situation. Are 

you not aware of that—those reports in any shape, form or fashion? 

Mr. DEMARCO. I am aware that Countrywide was a major provider of mortgages to both Enterprises. I am aware that book of 

business has been particularly costly to both Enterprises. And I am 

aware that the Enterprises were concerned about the loss of market share as a result of mortgage originations by Countrywide and 

others being financed or securitized through mechanisms other 

than the two of them. 

Ms. WATERS. All right. Thank you. I yield back. 

Chairman GARRETT. Okay, thanks. 

To the gentleman from Alabama, the chairman of the full committee. 

Chairman BACHUS. Thank you. And I appreciate your appearance. 

Two days ago, James Pressley wrote an article in Bloomberg 

where he reviewed a book by four professors from the NYU Stern 

School of Business. The title of the article is, ‘‘Godzilla Hedge 

Funds Fannie Mae and Freddie Mac Were Guaranteed to Fail.’’ 

It is a fascinating article about how they went from 4 percent of 

the mortgage market to about 42 percent right before the meltdown 

in 2008. And now they are financing well above that, 80 percent 

or 90 percent. It is fascinating. 

And Pressley at the end asked two questions, which we have discussed for really 2 years. And one—and these are authors of the 

book, and I think most people on both sides of the aisle agree that 

we have to wind down Fannie and Freddie. 

13 

So my first question would be, how do you do that? Now, these 

professors—I don’t know if you have read their book— 

Mr. DEMARCO. I have not, Mr. Chairman. 

Chairman BACHUS. Yes, they propose a bad bank, a good bank 

and a bad bank. But the second thing they say—and it is a trickier 

question, maybe—is what to do about Fannie Mae and Freddie 

Mac’s second main function, to guarantee mortgages against default. So let’s focus on that, because I only have about 4 minutes. 

Mr. DEMARCO. Okay. So— 

Chairman BACHUS. Government continued to guarantee these 

mortgages, whether they are private or public. And let me say this, 

you disputed the view that explicit government guarantees of mortgages could rectify the problems created by the GSEs. In your testimony to the last Congress you said that the argument for creating 

an explicit guarantee was built on the presumption that the market either cannot evaluate and price the risk of mortgage default, 

at least not at an acceptable cost, or that the private market cannot manage that amount of risk on its own. 

And you added, ‘‘We might ask whether there is a reason to believe that the government will do better. If the government backstop is underpriced, taxpayers eventually may foot the bill again.’’ 

And, that is the main concern on this side of the aisle, that if it 

is not priced right, it won’t be the sellers or the buyers. It will be 

the taxpayers. 

Mr. DEMARCO. Right. So several things there. In terms of what 

we can be doing now, I think the steps that we are taking are, in 

fact, designed to assist the Congress in preparing for an ultimate 

transformation. 

And so that is why as conservator, we have taken the following 

steps, that we are restricting the Enterprises to their core business 

activities, we are gradually raising prices so as not to disrupt markets, but to move towards a more risk-based mechanism and a 

mechanism more reflective of what purely private firms would do. 

We are gradually shrinking the portfolio. As I said, the only thing 

that really is being added to the portfolio are delinquent mortgages 

being pulled from pools. 

In terms of next steps, what we need is a clearer path forward. 

The path that is available to me in the legislation, in the law that 

exists today, would require us ultimately to—we are really at a 

stalemate. The only alternative left is to put them in receivership, 

which creates a limited life entity—which is, in essence, the bad 

bank that you were referring to—but it requires the FHFA to then 

re-issue the two charters as they exist under current law. 

And, if I hear one consensus in the whole GSE realm, it was nobody wants that, and so we are awaiting Congress to give further 

direction in terms of what is the role of the government, including 

whether there is going to be a role for limited or maybe not even 

limited guarantee of mortgage credits in the United States, but to 

define that. Getting that definition clear is going to be one of the 

things that is going to allow private financial institutions to make 

a better business determination about where it is they can enter 

and actually apply their capital and make money in serving this 

sector. 

14 

So I think that while incremental steps are important and really 

can help move us, fundamentally the market is going to want to 

know what is the whole picture in order to know how they can deploy private capital to serve the mortgage market. 

And with respect to your—the quotes from my testimony last 

year on guarantees, it can very well be a legitimate conclusion of 

lawmakers for there to be some form government guarantee of 

some portion of the mortgage market. I was trying to raise that it 

is not without costs and without risk, and that is what everyone 

is looking to lawmakers to sort of make those judgments. 

Chairman BACHUS. And I guess what you have said is that the 

Congress needs to act or the Administration? 

Mr. DEMARCO. Yes, sir. 

Chairman BACHUS. Thank you. 

Chairman GARRETT. And I thank you. Thank you. 

The gentleman from Massachusetts? 

Mr. FRANK. Thank you. 

Mr. DeMarco, as I—and I appreciate your very specific testimony 

on the legislation. This is very helpful testimony. And I would say, 

there is a fairly—on the whole moderate package—and as been 

noted, a lot that the Administration agrees with—some of them are 

tying down what is already being done. 

So I am supportive of—the one question I had—first of all, let me 

say, on risk retention, the gentleman from New Jersey is quite correct. He read the article—he read the bill. We covered them under 

risk retention. And I am sometimes told, oh, well, but they really 

are. Don’t worry about it. And I go back to my fundamental principle of legislation: Prefer redundancy to ambiguity. If they really 

are, what is the problem with saying so? 

And as I listen to your testimony—the one problem appeared to 

be—and I hope this is the only one that you see—that it would 

complicate the portfolio situation, because you would have to 

hedge—you would have to hold against them. 

If we exempted—if we explicitly said—of this bill that you were 

covered by the risk retention 5 percent, and exempted anything 

held specifically for that from the portfolio, would that remove any 

objections you would have? 

Mr. DEMARCO. I would have to think about that, Congressman 

Frank. This is really not about whether they hold a piece of the 

MBS. I don’t think—as I understand, what is explicitly written in 

Dodd-Frank, the point of— 

Mr. FRANK. Mr. DeMarco, let me put it this way. Look, nobody 

ever likes to be told what to do. I understand that. But I am trying 

to figure out what harm can come. I have to say, I am— 

Mr. DEMARCO. There is no harm. 

Mr. FRANK. No harm? If we— 

Mr. DEMARCO. If the Congress of the United States is not concerned about them building or retaining a larger retained portfolio— 

Mr. FRANK. But, Mr. DeMarco, though, in other words, if we 

were to exempt or add to the retained portfolio allowance an 

amount specifically equivalent to that 5 percent, then you would 

have no—it would not cause you any problem? 

15 

Mr. DEMARCO. As I understand the question, yes, sir, that is 

right. 

Mr. FRANK. Okay. I thought the question was pretty clear. 

Mr. DEMARCO. Well— 

Mr. FRANK. Okay. The other issue, then, is on the retained portfolio. And I say that because I am struck by this notion—people are 

making this mistake that, oh, the downpayment percentage in the 

qualified residential mortgage is too high. The notion that people 

will not be able to make loans unless they can securitize without 

risk retention I think is a great mistake. 

Mr. DEMARCO. I agree. 

Mr. FRANK. Wells Fargo has said they will. Smaller banks—portfolio. We didn’t use to have securitization, so—but I appreciate 

that, that it is only the portfolio. 

The other impact in the portfolio—because the major difference 

between this set of bills and the Administration, as I read it in substance, is the rate at which the portfolios get reduced—now, your 

point is that a major—the offset to reducing the portfolios is the 

need to take some bad mortgages and put them in portfolio. And 

as I read your testimony, the problem is, you believe, if I am correct, that a requirement that you accelerate the sell-off will require 

you to sell prematurely some assets which you might be able to get 

more from if you held them. Is that accurate? 

Mr. DEMARCO. Yes, sir. 

Mr. FRANK. So if we were, again, in the portfolio limitation, in 

the portfolio reduction, to make some allowance, some distinction 

between sort of the good and the bad assets and gave you more 

time to sell off the bad assets so that the reduction would be unrestricted with regard to the good ones, but give you some discretion 

of the time you are selling the bad ones, again, that would meet 

your problem? 

Mr. DEMARCO. That would be much easier for us to implement. 

I think it would be better for taxpayers. 

Mr. FRANK. Okay, I appreciate that. Last point. I just want to 

talk appropriately in your testimony—this is not about the bill— 

about the legacy book of business and the post-conservatorship 

book of business, because this goes to the urgency of moving right 

away. And I believe that, since Congress gave the Bush Administration the power to establish the conservatorship—and that was 

done by Secretary Paulson in 2008—you are really talking about a 

very different set of GSEs. 

You say here, since conservatorship, underwriting standards 

have been strengthened and several price increases have been initiated to better align pricing with risk. I know we can’t be certain, 

but based on what has been done, is it reasonable to assume that 

you are not going to see future losses from the business now, anything like what we saw before the conservatorship? 

Mr. DEMARCO. That is certainly our anticipation. 

Mr. FRANK. You are not likely to see that? 

Mr. DEMARCO. Right. 

Mr. FRANK. Thank you. I yield back. 

Chairman GARRETT. And if the gentleman will yield just for— 

Mr. FRANK. Yes, I would yield to the chairman. 

16 

Chairman GARRETT. On your second point, with regard to putting some sort of language in there, with regard to saying they 

would have additional discretion for the bad book, for the bad 

loans, okay, I understand that. But is there something in the proposal now that would tie their hands in that regard? 

Mr. FRANK. As I understand it—and I will be— 

Chairman GARRETT. Yes, sure. 

Mr. FRANK. As I understand it, if you have a general reduction 

of the portfolio, it doesn’t differentiate. 

Chairman GARRETT. Right. 

Mr. FRANK. And that what they are saying is it—at the level at 

which the portfolio would be mandated by this bill—and I generally 

support portfolio reduction—that might force them to sell bad assets— 

Chairman GARRETT. In one year, and then something might go 

wrong— 

Mr. FRANK. Yes. 

Chairman GARRETT. Okay. 

Mr. FRANK. And so that they could have some discretion, maybe 

to make an exception with the bad assets. So, it doesn’t specifically 

say it, but by covering the whole portfolio, it doesn’t give them the 

ability to differentiate. 

Chairman GARRETT. I understand. Thanks. I appreciate it. 

And with that, I yield to the vice chair of the subcommittee, the 

gentleman from Arizona. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Mr. DeMarco—and, first off, thank you. You have always—you 

have been very kind to me and very forthcoming with many of the 

questions we keep throwing at you. In sort of rapid fire, just as it 

helps me understand some things, how many units, how many residential units do you believe the GSEs presently have the deed to? 

How many do you own? 

Mr. DEMARCO. A couple hundred thousand. 

Mr. SCHWEIKERT. Are we over 200,000 now? 

Mr. DEMARCO. Yes, indeed. You mean REO properties? 

Mr. SCHWEIKERT. Yes, REO properties. 

Mr. DEMARCO. A couple hundred thousand. 

Mr. SCHWEIKERT. What is the mechanics right now? How many 

units are you getting sold every month? Any idea? 

Mr. DEMARCO. The intake has slowed down a bit because of 

some of the foreclosure processing problems. And I know that they 

have been coming in at a faster rate than we have been able to get 

them back out. I could get you the exact number, Congressman. I 

don’t know it off the top of my head. 

Mr. SCHWEIKERT. Because even in my short time here, that number looks like it is already up—I have been here, what, about 84 

days, 85 days, and I think that is up about 20,000 from where we 

were at the beginning of this year. 

Mr. DEMARCO. That could well be. 

Mr. SCHWEIKERT. And do you think some of the growth in inventory is—you are processing foreclosures faster? Your short sales 

aren’t going as quickly? Or just the process has cleaned up and you 

are actually taking down the ones that had to be taken down? 

17 

Mr. DEMARCO. All of the above, plus the seasonality of the time 

of year we are in with respect to sales. 

Mr. SCHWEIKERT. Mr. Chairman, Mr. DeMarco, on the non-performing portfolio of loans, how big is that? What is your best 

guess? 

Mr. DEMARCO. About 5 percent of their book, 5 percent on 30 

million mortgages. 

Mr. SCHWEIKERT. And mechanically you hold those, and if you 

can’t mitigate something out, they go into the foreclosure queue? 

Mr. DEMARCO. That is correct. But, the real emphasis and priority is, when loans start to go delinquent, Fannie and Freddie 

want their mortgage servicers to be reaching out to delinquent borrowers immediately and beginning loss mitigation procedures. That 

is very, very important to us, and I think it is very important to 

the taxpayer that it be done. And there is a great of effort and energy on that effort. 

Mr. SCHWEIKERT. I am hopeful I get to a second round of questions, because I have a whole bunch of things on the servicer side 

that—I am wondering if there are some better mechanics out there 

we could help. 

On principal write-down, your opinion? And would you also—for 

many of us who have a great concern that—if that sort of becomes 

aggressive stated policy, the moral hazard of, do we also start to 

create an additional cascade of non-performing debt? 

Mr. DEMARCO. Sir, I think the question of principal reduction is 

one for, really, the investor in the mortgage. There are investors 

in private-label securities who, as I understand it, at least some of 

them have expressed a desire and an interest that there is a way 

of doing a principal write-down with an underwater mortgage, particularly if that mortgage can then be, through an FHA short refi 

program, that the borrower goes over to FHA for a new mortgage, 

is one example, that allows them to cut their losses, get their principal back, and take that remaining principal and invest it elsewhere. 

We have looked at that as conservator of Fannie and Freddie, 

and we have examined it relative to the loss mitigation tools that 

are available and their position in the marketplace as a more 

longer-term participant. And it has been our conclusion that it is 

not loss minimizing for Fannie and Freddie to be engaging in a 

general program of principal reductions. 

I would say a couple of things. Fannie and Freddie’s mortgage 

book—the portion of it that is underwater today is much less than 

the case in private-label securities. And the majority of it—the vast 

majority of it is still performing, so these are performing mortgages 

today, and we expect these households to continue to honor their 

financial commitment. And, frankly, I think the households themselves are anticipating and fully expect to fulfill their commitment. 

So the moral hazard question that you raise is one that if you 

create an incentive for someone to find a way to not continue to 

make a mortgage payment that they are capable of making, in the 

Fannie and Freddie context, that would be shifting that loss to the 

taxpayer, and that is something we are trying to avoid. 

In fact, what we are experiencing is that the loss mitigation programs through loan modifications are households that have income 

18 

and are committed to staying in their house can and should be a 

very useful way to adjust the mortgage payments so that they can 

retain homeownership and we can minimize losses. And, frankly, 

the performance rate on loan modifications does not seem to be 

variant to what the current loan-to-value of those mortgages are. 

The final point I would say about Fannie and Freddie, with respect to principal forgiveness, is that the way that book of business 

has been done by Fannie and Freddie, a lot of the underwater 

mortgages have mortgage insurance in front of them. So there is 

a loss mitigant there for taxpayers that I want to make sure that 

protection stays there, and principal forgiveness can complicate 

that, as can second liens. 

Mr. SCHWEIKERT. I thank you, Mr. Chairman. And for my next 

half-an-hour of questions—oops, out of time. 

Chairman GARRETT. Yes, okay. 

Oh, the gentleman from California? 

Mr. SHERMAN. Thank you, Mr. Chairman. 

I can see how, once this crisis is over, we can divide up on philosophical lines. I have read the complete works of Ayn Rand, or at 

least I will claim I have, because I can state with confidence that 

Ayn Rand says nothing positive about either Fannie Mae or 

Freddie Mac. And if we were not in a crisis, we could divide up on 

the role of government and overall philosophy. 

But we are in a crisis. The economy is fragile. And we need to 

be practical. 

A double-dip recession is a very real possibility, and the most 

likely way that will occur is another precipitous drop or long slide 

in home prices. And loose talk here in Washington can add to that 

crisis. 

There are those on another committee talking about ending the 

home mortgage deduction. That is a great philosophical debate for 

good times. But right now, what it means is, why should anybody 

in my district buy a home if a couple of years from now they are 

going to lose their home mortgage deduction, and 5 or 10 years 

after that, when they go to sell their home, it is going to sell 10 

percent, 20 percent, 30 percent less than what it would otherwise, 

some would see an even greater drop? 

If we were to end the system whereby a Federal agency guarantees qualifying conforming mortgage loans, we would see a dramatic increase in home mortgage costs, a dramatic decline in values. The dramatic decline in values would then lead to a dramatic 

increase in defaults, and we would have a double-dip recession. 

That is why I am a little concerned about the title of these hearings, which talk about protecting taxpayers from the ongoing bailout of Fannie Mae and Freddie Mac. That may be a noble goal, but 

we also have to protect taxpayers from the precipitous removal of 

Fannie Mae and Freddie Mac from the housing system in this 

country, and we have to protect taxpayers from a double-dip recession. A second dip could mean double-digit unemployment and 

could make our situation even worse than that which we have recently experienced. 

Now, Mr. DeMarco, one issue is the size of the portfolio held in 

the safes of Fannie Mae and Freddie Mac. How large is that portfolio, adding the two agencies together? 

19 

Mr. DEMARCO. $1.3 billion to $1.4 billion. 

Mr. SHERMAN. Now if all of that was dumped on the market— 

Mr. DEMARCO. Trillion. Sorry about that. 

Mr. SHERMAN. What? 

Mr. DEMARCO. Trillion dollars. 

Mr. SHERMAN. Yes, I—I knew you meant trillion even without 

the correction. If that was precipitously dropped on the market, 

would Fannie Mae and Freddie Mac secure full value for the assets 

they were selling? 

Mr. DEMARCO. No, sir, if you are talking about selling $1.3 trillion all at once, no. 

Mr. SHERMAN. In fact, if there was even a precipitous decline in 

the size of that portfolio within any particular month, wouldn’t that 

affect the market price of the assets being sold and cause Fannie 

and Freddie to not be able to secure full value? 

Mr. DEMARCO. It could. 

Mr. SHERMAN. I yield back. 

Chairman GARRETT. I thank the gentleman. 

The gentleman from Texas? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Welcome, Mr. DeMarco. Forgive me. I was at another meeting, 

missed part of your testimony, and came in on part of the questioning of the ranking member. So if we are covering a little bit of 

old ground, I apologize. 

Following up on the questioning of the gentleman from California 

dealing in the reduction of their portfolio holdings, the GSE report 

from the Obama Administration itself says the PFPAs required reduction in this risk-taking by winding down their investment portfolios and an annual pace of no less than 10 percent. So I suppose 

that would be a minimum of a 10-year plan. 

I think you mentioned in your written testimony—I didn’t hear 

your oral testimony—I believe it was in your written testimony 

that the GSEs are ‘‘on track to meet or exceed the 10 percent reduction.’’ 

Mr. DEMARCO. Yes. 

Mr. HENSARLING. I assume by definition, you do not define 10 

years as acting precipitously. Is that correct? 

Mr. DEMARCO. Ten years would not be precipitous, Congressman. 

Mr. HENSARLING. Okay. Let’s talk about 5 years, for example. 

One of the witnesses on the panel to follow you, Mr. Pinto, has said 

in his testimony, ‘‘The natural liquidation rate being experienced 

by these portfolios for 2010 had an annualized rate of 21 percent 

and continued at the same annualized rate in January of 2011.’’ I 

think you also noted in your written testimony, ‘‘Some faster reduction of the Enterprises’ retained portfolios may be possible.’’ 

So if I am—and I looked forward to questioning Mr. Pinto, when 

he—I see him sitting there now—on the second panel, but he seems 

to be under the impression that already these are being reduced on 

a 5-year timeframe, so was the 5-year timeframe too precipitous, 

yet 10 years is just right? 

Mr. DEMARCO. Congressman, that question is basically impossible to answer, because one doesn’t know what market conditions 

20 

are going to be, and I can’t tell you what is going to—or how much 

is going to be added to the portfolio— 

Mr. HENSARLING. Thank you. I thought that was the answer, so 

you clarified that for me. 

In the Administration’s proposal—I say proposal, their list of 

three options that I know you are very well familiar with—it seems 

that option two and option three clearly include some form or facet 

of Federal guarantee mechanism in the secondary market. 

About 6 months ago, I believe it was before the full committee 

in September, you seemed to question—call into question the government’s ability to accurately price these guarantees. Reading 

from your testimony, you said the presumption behind the need for 

an explicit Federal guarantee is that the market either cannot 

evaluate and price the tail risk of mortgage default, at least at any 

price that most would consider reasonable or cannot manage that 

amount of mortgage credit risk on its own. 

You went on to say, but we might ask whether there is a reason 

to believe that the government will do better. If the government 

backstop is underpriced, taxpayers eventually may foot the bill 

again. 

When I look at the record of the National Flood Insurance Program, which is $19 billion in debt, when I look at the Federal Crop 

Insurance Program, which has cost the Federal Government almost 

$40 billion over the past decade, when I look at the PBGC, which 

has a debt, I believe the last number I have is $23 billion and 

counting, with an exposure of over $190 billion, I would seem to 

agree that the track record of government for accurately pricing 

this risk is questionable at best. 

So my question to you is this. Have you changed your opinion in 

the last 6 months on whether or not there is a credible reason to 

believe that government could accurately price risk in the context 

of the Administration’s proposal number two and three? 

Mr. DEMARCO. Excuse me, Congressman. I have not changed my 

opinion in the context of what I stated in that testimony, that there 

would be risks and challenges for the government being able to do 

that. I have not changed that opinion. 

Mr. HENSARLING. Thank you, last question. I see my time is 

winding down. I have heard many on the other side of the aisle 

offer criticisms of those who are proposing reform plans, but isn’t 

it true that if we don’t have a reform plan, the conservatorship that 

Fannie and Freddie are presently in could not continue in perpetuity? Is there a termination date— 

Mr. DEMARCO. There is not a termination date set, no, sir. 

Mr. HENSARLING. Okay. So if we don’t bring forth a reform plan, 

we go to the status quo, and the status quo is conservatorship in 

perpetuity. And I think the last estimate from CBO is that, as opposed to $150 billion of taxpayer exposure, we would eventually 

end up at $400 billion. I see my time has expired. Thank you. 

Chairman GARRETT. And I thank the gentleman from Texas. 

The gentlelady from Wisconsin? 

Oh, I am sorry. The gentleman from Massachusetts? You were 

preempted before by the gentleman from California. 

Mr. LYNCH. No problem. Thank you, Mr. Chairman. 

21 

I want to thank Mr. DeMarco for your good work in helping the 

committee. 

One of the bills—one of the eight bills that has been proffered 

by my friends on the other side of the aisle includes a provision offered by Mr. Royce of California, my friend, that is called the GSE 

Mission Improvement Act. However, part of this bill would repeal 

the mission of the GSEs to serve the section 202 elderly market. 

These are folks who are 62 years of age and older. We have a huge 

demographic in this country of people 62 years and over. As baby 

boomers retire, this is going to be a very critical part of the population served by section 202 housing. 

As someone who grew up in the old colony housing projects in 

south Boston, and my involvement on the housing committee the 

last few years, this section 202 housing happens to be some of the 

most successful housing that we have in the country. It is the bestmanaged. It is the cleanest. It is the safest. It is the most desirable. 

And, again, with that demographic of folks coming into 62 years of 

age and older, it is desperately needed. 

In my district, I have half the City of Boston, I have the City of 

Brockton, and 19 towns in between. I am at my wit’s end trying 

to get more 202 housing in there. 

I am very concerned about what this bill would do by eliminating 

the mission of serving this market. And I am hoping that you 

might be able to shed some light on that, what the impact would 

be for that market and for those seniors who are served. What happens? What happens when we stop serving this market and this 

202 housing goes away? 

Mr. DEMARCO. Congressman, I am not—I could do some research 

and get back to you about the particulars of the current activity of 

Fannie and Freddie with respect to the 202 program. What I would 

say is that, as I understand Congressman Royce’s bill, this would 

be consistent with what the approach we are already taking in conservatorship, which is, if it is a line of business that Fannie and 

Freddie are not already in, that they would not start doing it. 

I presume from your question that this is something where they 

are already active. And so my view of this that Fannie and 

Freddie’s charter acts fundamentally require them to serve the full 

range of markets that is available to them, that is, for which they 

are eligible to participate, and I believe it would be our responsibility as both regulator and conservator to ensure that they remained active in serving all segments of the market that are available to them, that are part of their core business activities. 

So I would not expect a reduction or elimination in housing goals 

to necessarily alter what it is that they would be doing, because I 

think that they have an overriding charter responsibility to be 

served in the housing market. 

Mr. LYNCH. I appreciate that. I just hope that we don’t forget the 

history here. Section 202 housing was developed for seniors. You 

have to be 62 years of age or older. You can’t— 

Mr. DEMARCO. Yes, sir. 

Mr. LYNCH. There is no other way to get into that housing. And 

the reason that we had to come up with that model was because, 

in the general family housing and elderly handicapped housing 

model, because of the laws in this country, we had to include a lot 

22 

of people in the old handicap/elderly model that their needs were 

much different than elderly people. 

If they were drug-addicted, handicapped, we had some horrific 

experiences when we put seniors in the same housing with very 

young people who were handicapped because of addiction to heroin 

and whatnot. So we created this model to protect seniors and also 

to better serve those people who were in addiction, because they 

have a different set of needs. We bifurcated this. And so that is 

why have 202 housing. 

Mr. DEMARCO. Thank you, Congressman. That helps. And so, 

again, to reiterate, my understanding of Congressman Royce’s bill 

is it—the extent to which Fannie and Freddie are serving that 

market today, I do not understand that bill would preclude them 

from continuing to serve it, nor would I view it as responsible as 

either regulator or conservator for them to be walking away from 

a segment of the market just because the housing goals— 

Mr. LYNCH. The bill would eliminate the provisions of HERA, 

which established a duty of the GSE to serve the 202 elderly market. 

Mr. DEMARCO. And that is why— 

Mr. LYNCH. If they are not going to serve that market, I think 

it goes away. 

Mr. DEMARCO. So that is what I am trying to be— 

Mr. LYNCH. You are doing 90 percent of the mortgages through 

the GSEs right now, so— 

Chairman GARRETT. We will let the gentleman answer, and this 

will be the— 

Mr. DEMARCO. I am simply trying to express that—I am not personally aware of what portion of activity Fannie and Freddie have 

in a 202 market today. If they are not serving it already, we are 

not going to get them to start serving it. But if they are serving 

it, I don’t see how removing the duty to serve requirement would 

cause any change in their continued service to that segment of the 

market. 

Chairman GARRETT. Okay, thank you. 

Mr. DEMARCO. And that is being consistent in what we have set 

forth as conservator, that we are not getting them into new lines 

of business. 

Chairman GARRETT. I thank the gentleman. 

Mr. LYNCH. I have exhausted my time. Thank you, Mr. Chairman. 

Chairman GARRETT. Thanks a lot. I appreciate it. 

The gentlelady from Illinois? 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Mr. DeMarco, for a couple of years now, I think I have been asking this question. You probably know what it is. It is about Fannie 

and Freddie’s exclusive list of law firms that have handled the foreclosures. 

Reports have indicated that there are—that these few firms get 

paid by the foreclosure, and there has been a rush to process those 

foreclosures to increase earnings. And meanwhile, there are reports 

of fraudulent paperwork among other paperwork problems. And 

these have also been reported. 

23 

I would actually ask to submit for the record the Washington 

Post story dated December 23, 2010, ‘‘Rush to foreclose by Fannie, 

Freddie helped feed problems with legal paperwork.’’ 

Chairman GARRETT. I am sorry? 

Mrs. BIGGERT. I asked to submit— 

Chairman GARRETT. Without objection, it is so orderd. 

Mrs. BIGGERT. Thank you. Back to the question. 

What have you done to review the need for this exclusive list or 

whether it should exist? Have you initiated audits of these law 

firms? And how many? 

Mr. DEMARCO. We have been doing a lot, in terms of taking a 

close review of these law firms. Fannie and Freddie certainly have. 

I think it is well known that a couple of them have caused a great 

deal of difficulty and loss to the Enterprises. They have been taking steps to expand, and they have been expanding the range of 

firms that are participating. 

But, Congresswoman, to the core of your question, we are taking 

a fundamental look at the use of and reliance on these firms as 

part of the foreclosure process and process. 

Mrs. BIGGERT. Has there been any—not just a review, but are 

they being charged with anything? 

Mr. DEMARCO. There are several firms that have been dismissed, 

if you will, no further business is being done, and ongoing business 

has been transferred. And, yes, there has been a heightened scrutiny of those that are continuing. 

Mrs. BIGGERT. And did you do audits of these law firms? Is that 

proper to do? 

Mr. DEMARCO. We do audits of Freddie and Fannie in terms of 

how they manage counterparty risk. So as part of our examinations, we have been undertaking additional exam activities to look 

at how Fannie and Freddie are managing those counterparties. 

Fannie and Freddie in turn have been taking a closer look at the 

performance and controls of their law firm. 

Mrs. BIGGERT. Okay. And should the FHFA Inspector General 

have access to all of FHFA’s records, reports, audits, reviews, documents, papers, recommendations, or other material that is available to FHFA? 

Mr. DEMARCO. As any other inspector general, yes, ma’am, and 

they do. 

Mrs. BIGGERT. Okay. And that is provided in section 6(a)(1) of 

the Inspector General Act of 1978? 

Mr. DEMARCO. I believe that is right. Our Inspector General, 

with all reference to the authorities there in the Inspector General 

Act of 1978, as amended. 

Mrs. BIGGERT. Okay. Would this also include the books and 

records of the GSEs, which are available to FHFA? 

Mr. DEMARCO. The books and records of the GSEs are available 

to FHFA, as both the regulator and the conservator. The role of 

FHFA’s Inspector General is to oversee FHFA and how we are conducting and carrying out our responsibilities as both the regulator 

and now as the conservator. I think that our IG has been under 

way for 6 or 7 months, and has been very active. And I think we 

have been developing a good process for ensuring that the IG has 

24 

access to the information he needs to carry out his audits and evaluations of FHFA. 

Mrs. BIGGERT. But the answer would be ‘‘no?’’ 

Mr. DEMARCO. The books and records are available to FHFA, 

yes, not to the IG. 

Mrs. BIGGERT. Okay. Thank you. 

Mr. DEMARCO. I will say that there are certain exceptions. Questions like that are difficult because there are circumstances and 

particular activities, such as criminal investigations and so forth, 

for which different answers apply. 

Mrs. BIGGERT. So there would be some limitations? 

Mr. DEMARCO. Yes. 

Mrs. BIGGERT. Yes, okay. And then you have—in looking at the 

three options that the Treasury has proposed, has said there is a 

privatized system of housing finance, with the government insurance role limited to FHA, USDA, and Department of Veterans Affairs assistance. Could you provide us with some ideas as to how 

option one could work specifically for multi-family housing? 

Chairman GARRETT. And the gentleman’s answer is your final 

answer. 

Mr. DEMARCO. Honestly, Congresswoman, that is a challenging 

question. I would like a little more opportunity to think about that. 

Mrs. BIGGERT. Maybe you could put that into writing? 

Mr. DEMARCO. I would be happy to get back to you on that. 

Mrs. BIGGERT. Thank you. I yield back. 

Chairman GARRETT. I thank the gentlelady. 

The gentlelady now from Wisconsin is recognized. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

I actually would like to follow up on Mrs. Biggert’s questions. I 

have three specific questions. First, how does the absence of GSEs, 

what impact would that have on affordable housing? Isn’t it sort 

of oxymoronic to talk about producing affordable housing and yet 

having a private entity provide the securitization? 

Second, I wanted to ask you about the liquidity. On page four of 

your testimony, you talked about the importance of keeping the 

GSEs focused on their existing core business and generating earnings, therefore benefiting taxpayers. And you also say that, because 

the private mortgage securitization market is already banished by 

this time, there were no other effective secondary market mechanisms in place. So I would like your view on whether or not the 

private sector and privatization really can take the place of providing secondary mortgage markets. 

And on page six, you talk about how the Nation’s housing finance 

structure depends on institutions capable of absorbing the flows 

that a market of that magnitude generates. You talk about, for example, the single-family market being a $10 trillion market. So if 

we were to privatize the secondary securitization, would we not be, 

indeed, creating too-big-to-fail institutions? 

Mr. DEMARCO. Congresswoman, let me take the questions in 

order. With respect to affordable housing, as I understood it, you 

were asking whether I thought that the affordable housing segment 

of the mortgage market would be served or could be served if we 

were operating with secondary mortgage market entities that were 

fully private, that it did not operate with a government guarantee. 

25 

I think that the answer to that is ‘‘yes.’’ I don’t see why it wouldn’t, 

because that is a large market segment. It is one where profits can 

be made and where customers can be served. 

Ms. MOORE. Without a lot of fees? What would the fee structure 

be? 

Mr. DEMARCO. Congresswoman, I can’t answer that, except to 

say that I would assume that the fees would be risk-based. And, 

there is a lot that has changed in our mortgage market in terms 

of private institutions serving low- and moderate-income households and serving the rental market. 

This market has long had and continues to have today a great 

deal of government involvement, not just at the Federal level, but 

also at the State level. So in considering your question, assuming 

that there is still an array of Federal through FHA, State through 

State and local housing finance agencies, actors still involved, but 

I do think that in terms of thinking about the role that Fannie and 

Freddie have played in the conventional conforming mortgage market over the years, including serving low- and moderate-income 

households, I do think a portion of that can be served by private 

institutions. 

With respect to your second question about, can the private sector take the place of Fannie and Freddie in the secondary mortgage 

market? I think fundamentally that is really, in essence, the question the Administration— 

Ms. MOORE. Liquidity. 

Mr. DEMARCO. —its White Paper. 

Ms. MOORE. Would it wipe out the small banks, the community 

banks? How would they fare in this market with respect to liquidity? 

Mr. DEMARCO. With fully private, I think that the more competitive that market is, the better served small- and mid-sized lenders 

would be. And so I would commend to the subcommittee that, in 

thinking about each reform of the secondary mortgage market, that 

the more competitive this marketplace is, I think the better for borrowers and the better for small- and mid-sized loan originators. 

I think that this is really the core question. And I must say that, 

in terms of market participants that I talk to, I find an array of 

views about this, as to just how much of a $10 trillion or $11 trillion single-family mortgage market can be effectively financed by 

capital markets, whether domestic investors or foreign investors in 

U.S. mortgages, how much of that can be done without any connection or backstop or guarantee from the government? 

So if you view the range as being between zero on the one hand and we have about an $11 trillion single-family mortgage market 

on the other, somewhere in there is an answer or a range of answers of how much can be done effectively by fully private firms. 

And I think that is the core question that the Congress is going to 

have to grapple with in determining the future of the secondary 

mortgage market. 

Chairman GARRETT. I thank the gentlelady. 

The gentleman from California? 

Mr. ROYCE. Thank you, Mr. Chairman. 

I wanted to ask you, Mr. DeMarco, I want to thank you for your 

testimony, but briefly, on the affordable housing goals legislation, 

26 

you mentioned in your testimony that, ‘‘Similar to the housing 

goals, eliminating the duty to serve requirements could be consistent with the realities associated with the Enterprises operating 

in conservatorship.’’ 

Could you please elaborate on that point? Walk us through that. 

Mr. DEMARCO. Certainly. Congressman, the duty to serve requirement was new in the HERA legislation enacted in 2008. It 

does not set quantitative—Congress did not want FHFA to set 

quantitative goals, but instead identified three areas of the housing 

market where it identified Fannie and Freddie as having a duty to 

serve them, and the legislation was encouraging them to take innovative steps to develop more product and activity in that area. 

In conservatorship, we are restricting Fannie and Freddie to 

their existing core business activities. It is inconsistent with conservatorship, in my view, to engage in new lines of business where 

you have to develop new infrastructure, new risk controls, new underwriting, and so forth, and new technology to service. 

And so the approach we took in our proposed rule on duty to 

serve was to implement the duty to serve requirement in areas 

that Fannie and Freddie were already providing support and to 

those particular market segments, but not to require them to develop new products in order to satisfy duty to serve, because that 

was what was in an inherent conflict with the approach we are 

taking in conservatorship. 

Mr. ROYCE. And also, with the experiences in the past, let me 

ask you—and we touched a little on this issue—but last month, the 

president of the Richmond Federal Reserve, Jeff Lacker, criticized 

proposals similar to the ones that will be touted on the second 

panel. And what Richmond President Jeff Lacker said was that 

many proposals would make government guarantees on home mortgages explicit and priced. Such proposals differ mainly in the nature of the intermediaries through which such guarantees would be 

channeled, but perpetuating guarantees for housing-related debt 

will continue to artificially stimulate the risky leverage that critically fueled the disastrous housing boom we have just experienced. 

The devastating consequences of the housing bust suggest that 

government backstops for housing finance are not worth the price 

of overbuilt, overleveraged, and at times overheated housing markets, on top of the fiscal burden of large contingent liabilities. 

You have made comments raising concerns with simply making 

a government guarantee explicit, rather than implicit. I wonder if 

you would comment on some of the other aspects of Mr. Lacker’s 

statement there. I would like to get your thoughts on that. 

Mr. DEMARCO. Certainly. As an economist, I would share the 

general principles that Mr. Lacker has set forth. I would add to 

that—certainly economists recognize that where there are either 

market failures or where there are public policy objectives that are 

to be served, there can be a role for guarantees, subsidies, or other 

incentives provided by government to incentivize greater activity in 

an area relative to what purely private actors would create. And 

that is really a determination for lawmakers to make, not regulators. 

Mr. ROYCE. My time is up, but, Mr. DeMarco, thank you very 

much. 

27 

Thank you, Mr. Chairman. 

Chairman GARRETT. The gentleman has one more minute. Do 

you have another question? Okay. 

The gentleman from Colorado? 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

Mr. DeMarco, let me begin with a couple of comments you made. 

In the conservatorship, you are not taking on any new products, 

new approaches. It is just trying to keep things going, right? 

Mr. DEMARCO. We are trying to restrict the Enterprises to their 

existing core business activities, to remediate where they had 

weaknesses in those business activities, and to keep them from getting into new lines of business or new products, yes, sir. 

Mr. PERLMUTTER. Anecdotally, I hear out there, 5, 6, 7 years ago, 

that 2003 to 2007 timeframe, anybody could get a mortgage if they 

were breathing. Obviously in this conservatorship mode, Freddie 

Mac and Fannie Mae are much more restrictive in what they will 

buy. Is that a fair statement? 

Mr. DEMARCO. Their underwriting standards have been appropriately strengthened, yes, sir. 

Mr. PERLMUTTER. What I have heard is the pendulum was very 

easy back in that 2003 to 2007 timeframe, much more difficult 

now. 

Mr. DEMARCO. I would say that underwriting standards have 

strengthened and pricing has become more risk-based. And I would 

say, Congressman, that is probably where it is actually seen its effects, is we were under pricing credit risk, and now we are getting 

at least closer to having appropriate pricing of credit risk. 

Mr. PERLMUTTER. Okay, and I will take your answer as a ‘‘yes.’’ 

Mr. DEMARCO. Yes, sir. 

Mr. PERLMUTTER. I ask those questions because of some questions Mr. Hensarling posed to you, that there were some $150 billion in troubled loans that are part of the conservator’s package 

and responsibility, but have those developed during the term of the 

conservator? Or were those things that preceded the conservatorship? 

Mr. DEMARCO. Most of the troubled loans and delinquent mortgages we are dealing with, sir, were originated pre-conservatorship. 

Mr. PERLMUTTER. Okay. So at this point, based on the underwriting standards, you wouldn’t expect to have that level of troubled loans on a going-forward basis, would you? 

Mr. DEMARCO. That is correct. 

Mr. PERLMUTTER. Okay. There were a couple of areas where I did 

agree with Mr. Hensarling. Obviously, we have some financial 

issues we must confront in this country. He and I absolutely disagree as to how we got here. I believe when the Bush Administration took a voluntary pay cut, in effect, cut our taxes substantially 

in 2001, 2002, prosecuted a couple of wars to the tune of $1 trillion, 

and then we don’t have enough police on Wall Street in 2008 and 

that put this country behind the financial eight ball. 

But we are behind the financial eight ball, which brings me to 

a second question. Obviously, in this conservatorship, you are not 

taking on anything new, but there are places, I believe, and your 

counsel and I have talked about this in the past, which are called 

28 

real estate mortgage investment conduits. Are you familiar with 

that concept, sir? 

Mr. DEMARCO. With REMICs? Yes, sir. 

Mr. PERLMUTTER. Okay. And the reason I am asking it is, there 

are certain portfolios—there are certain bonds that you have sold, 

either Fannie Mae or Freddie Mac has sold, that had very substantial interest rates back in the 1980s and the 1990s, compared to 

the interest rates today. So there is an opportunity in those older 

bonds to call those bonds and make some money. Are you familiar 

with that? 

Mr. DEMARCO. I am familiar with this issue, yes, sir. 

Mr. PERLMUTTER. Okay, I just want to bring it to your attention, 

because at least a couple of the proposals that the Republicans 

have brought forward—particularly for me, Mr. Schweikert’s, and 

Mrs. Biggert’s, have real merit in kind of advancing and continuing 

to build Fannie Mae and Freddie Mac. But I probably will want to 

reiterate the fact that the American taxpayer could make some 

money if some of those loans that are at higher interest rates were 

called today. 

And so I will—don’t be surprised if you see an amendment that, 

instead of focusing on NPR or Planned Parenthood or things that, 

in my opinion, didn’t cause the debt this country faces, we actually 

do something where there is money on the table that would benefit 

the American taxpayer. 

So I thank you for your service in this difficult time. I really do. 

And I thank you for your testimony today. 

Mr. DEMARCO. Thank you. 

Chairman GARRETT. The gentleman yields back. And we look forward to working with the gentleman on a number of those bills. 

And with that, I yield to the gentleman from Texas. 

Mr. NEUGEBAUER. Yes, thank you, Mr. Chairman. Thank you, 

Mr. Demarco, for being here. 

A couple of thoughts here. One is, I appreciated your thoughts 

on raising the guarantee fee. You and I have had a number of conversations about that. And I guess the question is, is from a strategy standpoint, is the goal here to just keep raising the G-fee until 

you start to see some private activity foregoing sanitizing these 

mortgages through Freddie and Fannie and begin to see some private activity? Or what is going to be your criteria and your goal 

in your G-fee strategy? 

Mr. DEMARCO. The approach we have been taking is to ensure, 

first of all, we have been focused on enhancing the risk-based characteristics of pricing, so that riskier mortgages are, in fact, charged 

a higher price. In the pre-conservatorship world, there is a tremendous amount of cross-subsidization going on from low-risk borrowers to high-risk borrowers, and we are trying to gradually correct that by enhancing the risk-based characteristics of the pricing. 

And the other is that we are continuing to move in a direction 

of looking at the risk characteristics of a particular group of loans 

based on their characteristics, determine what is the appropriate 

amount of economic capital that would be required to back that, if 

these were operated as private entities, and then what the rate— 

at least getting to a rate of against that sort of imputed capital 

that would be needed to back that. So that is really the benchmark 

29 

that we are looking at as we take these gradual steps with price 

adjustments. 

Mr. NEUGEBAUER. I think you brought up something else that I 

agree with, and that is that, in order to continue to create some 

space for the private market, lowering the conforming loan limits 

has to be a part of that strategy, because basically what we have 

done is we have pushed the jumbo market way up there now with 

the current limits, and so basically all of the private activity that 

seems to be going on in the marketplace right now is at the jumbo 

level. 

So I guess if you bring the jumbo level down some, you begin to 

create some space for the—do you have the authority as the conservator to say to the entities, ‘‘I am establishing new conforming loan 

limits, and from this point forward, this will be your conforming 

loan limit?’’ 

Mr. DEMARCO. The conforming loan limit is driven by statutory 

direction and formula, and we simply implement that. 

Mr. NEUGEBAUER. I think the man behind you is going to disagree with you here. 

Mr. DEMARCO. Oh, okay, thank you. I am being advised that my 

answer is partially correct. It is established by formula, but apparently I have authority to go lower. 

Mr. NEUGEBAUER. Would you consider doing that? 

Mr. DEMARCO. Since I have just discovered that I have this authority, I would have to—I suppose I would consider it. What I 

would do with it, Congressman, I am not sure. 

This has traditionally been something that has been really directed by Congress. The adjustments have been directed by Congress. And for me to make a change in that, as a regulator, I really 

want to think hard about that. 

Mr. NEUGEBAUER. I would just say this to you, Mr. DeMarco, 

that you are a conservator for the taxpayers of the United States 

of America. And so if you feel like it is in the best interests of the 

American taxpayers to begin a process of lowering those conforming loan limits, we certainly would expect you to fill your fiduciary responsibility and consider that. 

I want to go to another area where we were talking about the 

portfolio. And I agree with a number of my colleagues. I think the 

sooner we reduce our portfolio, the better. And I think sometimes— 

and there is an old banking saying that your first loss is sometimes 

your cheapest loss. 

One of the things that I am concerned about is—and you and I 

have talked about this a little bit—that basically your portfolio reduction is actually being slowed down some by the fact that you are 

purchasing some of these troubled loans rather than paying the 

principal and the interest deficiency on those loans. And I guess 

you have been bringing them into your portfolio and trying to rework them. I think in some cases you are selling those properties 

and putting new borrowers in there. 

And so my feeling is that, as we are really bringing the troubled 

loans into the portfolio, we are probably selling the better quality 

loans, and so basically the quality of the portfolio is probably deteriorating. Would that be a correct assumption? 

30 

Mr. DEMARCO. Certainly, the liquidity of the assets are deteriorating, because just as you quite rightly point out, the shift in the 

share of the mortgages that are financed on balance sheets by 

Fannie and Freddie are modified loans or otherwise troubled loans. 

And so that makes them much more difficult to sell. 

Mr. NEUGEBAUER. Just one quick question. Have you considered 

looking at a liquidation of some of the portfolio loans without a 

Freddie or Fannie guarantee? 

Mr. DEMARCO. The idea— 

Mr. NEUGEBAUER. Kind of— 

Mr. DEMARCO. The idea, in terms of REO, most of that is sold— 

Mr. DEMARCO. You are talking about loans. The idea has occurred to us. And actually, in my written statement, my commentary about one of the bills, about no new products, was, in fact, 

making really by inference—that was one of the things I had in 

mind, Congressman—is that while I remain steadfast in my view 

that as conservator we should not have the Enterprises entering 

new businesses and new product lines, that at some point, we 

might want to revisit that question, if it is part of a considered 

transition mechanism, really worked out with the Congress, about 

moving from Fannie and Freddie as we have them today to greater 

private participation. 

That is one mechanism that could be considered. And that needs 

to be balanced against the fact that it would be considered a new 

product. 

Chairman GARRETT. I thank the gentleman. And perhaps just on 

that, if you have specific ideas in that area, the gentleman and the 

committee would probably like to hear as to what those specific 

areas would be needed in order to get into that transitional phase, 

that might want to be excluded from any area limited—with the 

limitation on new products. 

Mr. DEMARCO. Certainly. I would welcome that discussion with 

any members of the committee. It is not something where I have 

a plan today. I am simply anticipating where we might find ourselves. 

Chairman GARRETT. Okay. The gentleman from North Carolina 

is recognized. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

Mr. DeMarco, you and I agree that the principal consideration, 

perhaps the only consideration for FHFA as conservator of Fannie 

and Freddie should be reducing the losses of taxpayers, but it appears pretty clear that the cycle we have of foreclosures leading to 

declining home values, declining home values leading to more borrowers, more homeowners being underwater, leads to more foreclosures, and on and on, it clearly is in the interest of taxpayers 

for FHFA, as conservator of Fannie and Freddie, to minimize the 

continuing decline in home values. Isn’t that correct? 

Mr. DEMARCO. Yes, sir. 

Mr. MILLER OF NORTH CAROLINA. Okay. The power—and you 

and I have corresponded about this, and I appreciate your response 

to my earlier letter, that more than 50 other members signed. The 

GSEs, Fannie and Freddie, obviously have enormous market power 

in the mortgage market now. Not only are they 50 percent of legacy 

31 

loans, but they are in essence the entire market for new loans. 

There is no PLS market now. 

Mr. DEMARCO. Right. It is Fannie, Freddie, and the FHA, basically. 

Mr. MILLER OF NORTH CAROLINA. Okay. Why would it not be in 

the taxpayers’ interest for FHFA, as conservator of Fannie and 

Freddie, to use that market power to try to reform the market for 

servicers, servicers’ conduct, with respect to your own servicers, 

that they not do all of the things that we have heard complained 

about, the dual track, the lack of a single point of contact, the failure to terminate the contracts with those servicers who keep losing 

paper, for instance. 

Why is FHFA as conservator not using your market power to reform the servicing industry, which seems to be in dire need of reform? 

Mr. DEMARCO. Indeed, I agree with you. And I would say that 

we are working very hard on the very set of things you just described. I made a presentation in the Mortgage Bankers Association’s annual servicing conference last month, and I told them rather directly that we were working with Fannie and Freddie to revise 

and make consistent a whole set of practices, timelines, and penalties, with regard to mortgage servicing, so we wouldn’t have 

this—Fannie wants it this way, but Freddie wants it that way. No, 

we are not doing that. 

We are getting them consistent. We are going to be rigorous, and 

there are going to be penalties associated with failure to service 

properly based on this, and we are very much engaged in that activity. 

Mr. MILLER OF NORTH CAROLINA. And are you using—are you 

applying those expectations, those standards to the same servicers 

in how they handle PLS mortgages? 

Mr. DEMARCO. No, sir, I don’t have regulatory authority over 

what mortgage servicers are doing. 

Mr. MILLER OF NORTH CAROLINA. You have contractual authority. 

Mr. DEMARCO. Pardon? 

Mr. MILLER OF NORTH CAROLINA. Contractual authority. 

Mr. DEMARCO. My contractual authority is what we were trying 

to exercise, yes. 

Mr. MILLER OF NORTH CAROLINA. Your contract can say—why 

can’t it not say that, with respect to your servicing standards generally, with respect to all clients, you must do these things? 

Mr. DEMARCO. I will take that under consideration, check—and 

I will go back and see if that is feasible for us. 

Mr. MILLER OF NORTH CAROLINA. Okay. And you and I have corresponded about principal reductions and the value of that. It 

seems that every study that has looked at the success of modifications has found that modifications that reduce principal, particularly—especially for those underwater, are much more successful if 

they reduce principal. 

And you said that actually not that many of FHFA’s—of Fannie 

and Freddie, the Enterprises’ mortgages are underwater, and it 

certainly makes sense that your book of business would be substantially better than the PLS book of business. 

32 

But why are you not pushing them to reduce principal to the extent it is consistent with their contracts, PLS contracts? 

Mr. DEMARCO. First of all, Congressman, some of these studies 

that purport to show principal forgiveness as superior, as minimizing losses, are actually combining principal forgiveness and 

principal forbearance, which are different concepts and matter a lot 

to me as conservator. 

As conservator, some of the loan modifications that Fannie and 

Freddie are doing, in fact, include principal forbearance, which 

means that you are basically being charged a zero rate of interest 

on the principal, but we are retaining—the principal value is still 

owed. 

And what that does, essentially, is that over time it retains for 

the Enterprises an upside should markets continue to improve, 

that households be able to maintain a good, steady payment on the 

modified loan. It has the potential to improve the net realized 

value on that mortgage for the Enterprise, whereas principal forgiveness, once it is forgiven, then that is it. There is no upside potential. 

The other thing, in response to an earlier question, the vast majority of the Enterprises’ underwater mortgages are continuing to 

perform. They are paying timely, and we would like to continue 

that, and it is our expectation that those households will continue 

to honor their financial commitments. So we are using principal 

forbearance as a tool in the loan modification process as a way of 

getting an affordable payment for consumers. 

The other thing—the comment I had made earlier before you arrived, in response to another question, is that in our examination 

of data of households that have received loan modifications, the 

performance rate on those modified loans does not seem to vary 

much with what the actual current loan-to-value is. 

So we see that there is a value in getting the borrower that is 

committed to their home into a payment that they can afford, and 

they then succeed in paying that modified loan regardless of what 

their loan-to-value ratio is. 

So we have been trying very hard to take an empirical approach 

to looking at this—at this important question, because I agree with 

you. This is a very important question. And as I said in my correspondence to you, there may be well be other segments of the 

market, and particularly in the private-label realm, where principal forgiveness makes more sense. 

Mr. MILLER OF NORTH CAROLINA. And, Mr. Chairman, my time 

has expired, but— 

Chairman GARRETT. Your time is— 

Mr. MILLER OF NORTH CAROLINA. If I could have 30 seconds? 

Chairman GARRETT. You are a minute and 40 seconds over, so 

let me go to the gentleman from New Mexico, please. 

Mr. PEARCE. Thank you. Thank you, Mr. Chairman. 

Thank you, Mr. DeMarco. On page one, you refer to the business 

as doing much better, but you also refer to substantial credit 

losses. How much are those credit losses? 

Mr. DEMARCO. The credit losses have been—I am sorry, on the order of $180 billion, I think— 

Mr. PEARCE. —$180 billion, in this past year? 

33 

Mr. DEMARCO. No, sir. I am talking since—the losses against 

capital from 2008. 

Mr. PEARCE. I understand, but you say it is significantly better, 

but it still has credit losses during the current— 

Mr. DEMARCO. Oh, credit losses in 2010 were much smaller than 

in prior years. 

Mr. PEARCE. How much are those? 

Mr. DEMARCO. I am sorry, Congressman. I will get you the number. 

Mr. PEARCE. You have an approximate ballpark? 

Mr. DEMARCO. It is in the order of $20 billion to $30 billion. 

Mr. PEARCE. Okay, so on page three, you refer to $28 billion 

drawdown, right? 

Mr. DEMARCO. Yes, sir. 

Mr. PEARCE. Is that then the amount of the credit losses? 

Mr. DEMARCO. That is pretty close to it, sir, because some of the 

draws are due to having to make dividend payments— 

Mr. PEARCE. Okay, that is—that will— 

Mr. DEMARCO. —to make dividend payments. 

Mr. PEARCE. So let me try to get this business model in mind. 

You have 30 million loans, and 1.5 million are nonperforming, 

right? And those are creating losses of $28 billion, which you drew 

down from the Treasury. Is that more or less correct? I see somebody shaking their head. 

Mr. DEMARCO. We have been reserving for those losses as we go 

along, so they have built-up loan-loss reserves that have been reflected in part— 

Mr. PEARCE. Okay. So you have basically 28.5 million loans that 

are performing, right? 

Mr. DEMARCO. That would seem about right. 

Mr. PEARCE. Yes. And those loans have the value of about $5.5 

trillion. Is that right? That is on page four of your testimony. 

Mr. DEMARCO. Yes, sir. 

Mr. PEARCE. So how much do you make on the $5.5 trillion? 

What are your revenues off the $5.5 trillion? And where 90 percent, 

95 percent are performing, what are your revenues then? 

Mr. DEMARCO. The revenues that we are making on that are basically the guarantee fees that are being charged. 

Mr. PEARCE. No, how much? What quantity? 

Mr. DEMARCO. I am sorry, Congressman. I don’t keep these numbers straight in my head—quite available. 

Mr. PEARCE. Excuse me, sir. You are a conservator of $5.5 trillion, and you don’t know how much money you are making? Can 

any of the people behind you tell us how—because what I am getting at is that, if you make 10 percent—and 10 percent is a very 

low value for a business model—you are sitting at $550 billion and 

yet you are drawing down from the Treasury. And I think the 

American people have a right to know that. 

And for you to come to a meeting here on a business model 

where you are talking about conserving the value for the taxpayers, 

I think that is one of the most basic questions of a business model. 

You are in the business of business, and you don’t know how much 

money you made in the last 12 months. Do any of the four people 

behind you know that? 

34 

Mr. DEMARCO. Total credit-related expenses for Fannie Mae last 

year was about $27 billion. Total credit-related expenses for 

Freddie Mac in 2010 was $21 billion. The net income for Fannie 

Mae last year was negative $14 billion, and it was the same for 

Freddie, a negative $14 billion. 

Mr. PEARCE. Okay, let’s hold up right here then. So let me get 

this clear. You have 28.5 million performing loans, and you have 

1.5 million nonperforming loans, and your performing loans are 

outweighed so that you have $114 million net loss in revenue, net 

income. 

Mr. DEMARCO. $14 billion net loss for the year. 

Mr. PEARCE. $14 billion net loss. So you have 95 percent performing loans and 5 percent nonperforming loans. I think there are 

some serious flaws. If I have a business and I am performing at 

95 percent capacity, I can go to 0 percent on the others and they 

should never, never, never outweigh. 

So what you are asking me to believe is that the losses from 5 

percent of your loans, from 1.5 million loans, outweighs the revenues from 28.5 million loans? That seems to me to be preposterous. 

If you look at it in large terms, you have $5.5 trillion of performing 

loans minus 5 percent. When I do the math, they are worth about 

$200,000 apiece, and I assume that $200,000 per loan goes across 

to the other side. 

So you have 1.5 million nonperforming loans at $200,000 apiece, 

that is about $300 billion on our portfolio, thinking of $5.5 trillion? 

Something stretches—what is it that I am missing here? 

Mr. DEMARCO. Congressman, I think—so I would welcome the 

opportunity to sit down with you and walk through this. But the 

thing about it is, I can’t be making $200,000 on a loan when the 

average loan size is itself less than— 

Mr. PEARCE. No, I am not saying you are making it. I am saying 

the loan size itself. The loan size itself— 

Mr. DEMARCO. And so the earnings that the companies are making, they are securitizing these mortgages, and so they are making 

maybe—they are charging maybe 20 basis points, 15, 20, 25 basis 

points on a mortgage as the guarantee fee. And from the guarantee 

fee, they have to pay their operating expenses, cover their credit 

losses, and then the rest is their income. 

Mr. PEARCE. I welcome the opportunity to visit with you in the 

office to look at it, because I don’t see a market where you have 

1.5 percent nonperforming, 1.5 million, 5 percent nonperforming, 

sinking the 95 percent performing. 

Thank you, Mr. Chairman. 

Mr. DEMARCO. Congressman— 

Chairman GARRETT. And I thank you. 

The gentleman from Texas? 

Mr. GREEN. Thank you, Mr. Chairman. I thank the witnesses for 

appearing. And I think that we all agree that we have to do something with reference to Fannie and Freddie. The question becomes, 

what do we do? And also, when do we do it? 

Would it be prudent to simply eliminate Fannie and Freddie and 

not have some idea as to what the market structure will be upon 

elimination? 

35 

Mr. DEMARCO. No, Congressman, I think the better course would 

be to have some sense of what the legal framework and institutional arrangements would be for the country’s secondary mortgage 

market. 

Mr. GREEN. And can you give some indication as to what we 

might have to confront if we don’t give some prudent thought to 

this process, such that at the end of the day we have in place some 

structure that we can at least associate some degree of predictability with, in terms of how the market will react to it and how 

it will impact the market? What could be some of the consequences 

of simply repealing, capping, eliminating, without having some idea 

as to what the structure will be? 

Mr. DEMARCO. One would expect that the implications would be 

higher mortgage rates and less liquidity in the mortgage markets. 

Mr. GREEN. And what would these higher rates and the lack of 

liquidity or not as much as we might have, how would that impact 

an economy that is recovering? 

Mr. DEMARCO. All else being equal, obviously, those things 

would make the recovery more difficult. 

Mr. GREEN. I am asking you to give these kinds of answers, sir, 

because I think that while efforts to repeal, eliminate, and 

downsize are noble, I don’t question the motives. I do think that 

we need to have a comprehensive approach that addresses not only 

what we would like to do in terms of downsizing Fannie and 

Freddie, but also what the structure is going to be at the end of 

the day if that happens. 

Because my fear is that we may end up with a market that has 

much higher interest rates than we want. Many persons will not 

be able to afford a home, which will then impact other organizations. You have REALTORS® who do business and who depend on 

the opportunity to have interest rates that are reasonable, so that 

people can buy. And as a result, they have businesses that can continue to flourish. The domino impact of this can be huge. 

And I am concerned about how that domino impact can impact 

the market. Do you have any thoughts on the impact that—we will 

go beyond simply just eliminating Fannie and Freddie and move to 

the broader economy and the dominos and how they may start to 

fall and collide with each other? 

Mr. DEMARCO. Congressman, I actually have a great deal of— 

though I have been challenged the last few years—faith in the resiliency and robustness of private financial institutions and the financial system of this country. 

I think that a gradual program of moving away from the degree 

of government support for the mortgage market to one that involves greater reliance on private capital and private institutions 

is something that is achievable and it is something to—that I understand most to be wanting to work towards. 

Precipitous action in the economic state we are in could be problematic and could raise costs to taxpayers and could be further disruptive to the housing market. 

But I agree with you that working on a gradual transition and 

transformation, something that we are doing as conservator of 

Fannie and Freddie would be helpful to the housing market, but 

we can move over time— 

36 

Mr. GREEN. If I may, because my time is about to expire. Would 

you simply define a phrase that you utilized, ‘‘precipitous action?’’ 

Would you define that, please? 

Mr. DEMARCO. If I was told to shut things down tomorrow at 

Fannie and Freddie and they were no longer purchasing or 

securitizing mortgages, I would view that as a precipitous action. 

Mr. GREEN. That would be an extreme action, obviously. Can you 

give me something that would be not quite as extreme, but also 

precipitous? 

Mr. DEMARCO. Certainly, Congressman, there is a range of 

things. 

Mr. GREEN. If you would, just give me the range, and I will yield 

back the balance of my time after you have done so, time that I 

do not have, by the way. 

[laughter] 

Mr. DEMARCO. There is a range of things that are being done as 

part of the unwind, so if we wanted to unwind the portfolio in 6 

months, that would be precipitous. 

Chairman GARRETT. I appreciate the gentleman’s answer. 

The gentleman from Virginia is recognized for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

Mr. DeMarco, thank you for being here and helping us work 

through these eight bills, legislative proposals. I don’t want to cut 

too much into my time, but I was very intrigued by Mr. Pearce’s 

line of questioning. And it seems like you might have had an answer. 

I would like for the benefit of the committee to hear briefly your 

response to the numbers that he set forth, if you can. 

Mr. DEMARCO. What I was trying to explain, I think maybe I 

was just either misunderstanding the Congressman or—but in 

thinking about the revenue stream that Fannie and Freddie get on 

$5.5 trillion of mortgages, that revenue stream is measured in fractions of a percentage point that is in the guarantee fee that is 

earned. And it is from that guarantee fee that they pay, they cover 

their credit losses, and they cover their operational and administrative expenses. That is all I was trying to get to. And we can do a 

breakdown of how the economics of that business works. 

But the other point I was trying to make, so thank you for the 

opportunity, is that, prior to conservatorship, I think one of the 

things that has contributed to these dramatic losses is that the Enterprises substantially underprice credit risk that they were taking 

on. 

And so the revenue stream that should have been coming off of 

these mortgages that were originated in the period prior to conservatorship has been inadequate to the losses that have been realized, because they were underpricing risk and, furthermore, they 

were operating with substantially less capital than would have 

been appropriate, something that the predecessor agency to FHFA 

had testified to numerous times, but was unable to materially 

change because the capital requirements were set in statute. 

Mr. HURT. Do you think that what you have just set forth underscores the importance of trying to wind down Freddie Mac and 

Fannie Mae? 

37 

Mr. DEMARCO. I think it underscores the importance of what we 

are doing to try to adjust the pricing and the underwriting standards at the companies operating in conservatorship—that is being 

written now provides support to the country’s mortgage market, 

but does so without creating risk to the taxpayer. 

Mr. HURT. Obviously, we are here looking at eight legislative 

proposals that are being considered by this subcommittee. In the 

White Paper that the Administration and Treasury made public recently, there were identified four different things that could be 

done, it was stated, without legislative action, increasing the guarantee fees, which you have discussed, winding down the portfolios, 

which you have discussed. 

The two other things were reducing conforming loan limits, 

which you indicated that you all had not considered. I would like 

to know why you haven’t considered that. And then, finally, is increasing the downpayments. I would like to hear about that. 

And I would also like to just—if you could speak generally about 

the objectives of the conservator in attempting to take some of 

these actions proactively, knowing that is where this legislation 

seems to be headed, it seems to be what the Administration may 

or may not be aggressively pursuing, but it seems to me that getting the GSEs out of the marketplace—or reducing—certainly diminishing their role is important. 

So I would like to know what your objectives are as conservator 

in taking actions in advance of any legislation, because I think it 

would serve the marketplace generally, at least provide some of 

that—or reduce the precipitous action that you are talking about, 

helps us ease into it. 

Mr. DEMARCO. Right. So I believe, in fact, as conservator, FHFA 

has been marching down this path for quite some time prior to either these particular bills or the Administration’s White Paper. 

And some of the ways in which we have done that have been, in 

fact, through increasing G-fees, improving underwriting standards, 

and the reduction in the portfolio, and restricting the company’s 

core business. 

And you asked me about two other things, downpayments and— 

Mr. HURT. Conforming loan limits. 

Mr. DEMARCO. —conforming loan limits. So the question on conforming loan limit, this is—so whether FHFA has authority or 

not—and my staff is telling me we do—this has traditionally been 

something that the Congress and the United States has taken a 

very deep and specific interest in. And the practice for decades has 

been that the conforming loan limit has been something that has 

been stipulated by Congress and has simply been implemented by 

the regulator. 

And, in fact, in each of the last several years, Congress has enacted temporary provisions to state what it wants the conforming 

loan limit to be, based upon its judgment of the condition of the 

economy and housing markets, and it has allowed for a series of 

temporary increases in the conforming loan limit as part of Congress’ approach to providing support to the country’s economy and 

to its housing market. 

And that is why I think it is quite prudent for me to have a good 

bit of deference to Congress to determine what the conforming loan 

38 

limit ought to be. Where we are in current laws is the conforming 

loan limit will come down October 1st of this year, if there is no 

further action by Congress. 

I would be happy to provide you and all the members of the subcommittee—we put out a research note just this week describing 

the parts of the country that would be affected, if the—if Congress 

takes no further action with the conforming loan limits. So I have 

that research out already. 

I am happy to share with you so you can see where these 

changes would take place. There are about 250 counties in the 

United States that would experience a reduction in the loan limits. 

With respect to downpayments, we have, in fact, been taking— 

just like with pricing—gradual steps to increase downpayment requirements. I testified before the House Financial Services Committee last year about a particular program that I had made clear 

we were not going to continue with, and that was very low downpayment mortgages. Now that we have the Administration’s White 

Paper, we are examining what would be appropriate gradual steps 

with respect to further tightening with respect to minimum downpayment requirements. 

Chairman GARRETT. The gentleman’s time has expired. And I 

thank you for your answer. 

The gentleman is recognized for 5 minutes. 

Mr. ELLISON. Thank you, Mr. Chairman. 

Mr. DeMarco, we have had a lot of dialogue about whether 

Fannie and Freddie take up too much of the secondary mortgage 

market, and I think maybe there is a consensus that they do. 

But my question is, after reform, what would be the proper balance? What should a GSE share of the secondary market be in, 

say, 10 years, assuming we were to have responsive reform? 

Mr. DEMARCO. Congressman, I would like to, if I may, answer 

the question differently. The way I would approach the thought 

process is, what part of an $11 trillion single-family mortgage market should have the benefit of a government credit support? 

Mr. ELLISON. Yes, that seems a good way to put it. 

Mr. DEMARCO. And then that credit support can be provided 

through the existing government programs, the FHA, G.A., rural— 

VA, excuse me, rural housing, and Congress is free to look at making alterations to the scope or targeting of those particular programs, because here is where we want to have government credit 

support. 

With respect to what the GSEs do today, then the question on 

the table is, does the government want to—or feel it is appropriate 

and is in the best public interest to provide some portion of the rest 

of that universe with a government guarantee that would somehow 

wrap a private guarantee of the mortgages that are being written 

in that space? 

So whatever replaced Fannie and Freddie, whatever these private-sector securitizers are, presumably they would be in the first 

loss position with respect to mortgage credit. And the question is, 

can the capital market sufficiently and appropriately finance all of 

that without there being— 

39 

Mr. ELLISON. Mr. DeMarco, the analysis you are going through 

does make sense to me, but they only give us 5 minutes. So I 

guess— 

Mr. DEMARCO. Sorry, sir. 

Mr. ELLISON. I guess my question is, so it is clear to me, based 

on your answer to me, that you do see a role for a public-sector or 

quasi-public-sector institution in the mortgage market? 

Mr. DEMARCO. Yes, sir. I continue to see a role for the FHA, the 

VA, the rural housing, that can be defined up or down from where 

it exists today, but I envision that would continue. 

Mr. ELLISON. Let me ask you this. We have a lot of dialogue 

about the role Fannie and Freddie may or may not have played in 

the recent crisis, and the Financial Crisis Inquiry Commission said 

that GSEs played a contributing role, but certainly were not the 

primary cause. 

Let me ask you the question this way. Do you believe that there 

is a public interest in the United States Government, through its 

programs for housing, having homeownership as a laudable and 

meritorious goal? 

Mr. DEMARCO. Certainly, the evidence would suggest that the 

answer to that is yes, because there are numerous ways in which 

the Federal Government—and, frankly, State governments—provide subsidies, incentives, or otherwise support home ownership activity. 

Mr. ELLISON. Yes. And it sounds—and I was reading in the document where it states that—where basically, I am wondering whether—I wanted to get your answer on that, because I was not sure 

where the Administration was coming from on homeownership as 

a laudable goal of a government program. It sounds to me like you 

are saying it is an important goal, and you don’t plan on joining 

with any forces that want to eliminate it as something that we 

should pursue? 

Mr. DEMARCO. I can affirmatively say yes to that question. But 

my role as the regulator is to implement what is being told to me 

by— 

Mr. ELLISON. I know. I understand that. 

Mr. DEMARCO. I am not a policymaker, per se— 

Mr. ELLISON. Right. 

Mr. DEMARCO. —in terms of being an advocate for the degree or 

form of government support for housing. 

Mr. ELLISON. So you are saying that you don’t really have any 

position on whether or not we should—I am just trying to get an 

understanding. I am not trying to— 

Mr. DEMARCO. I understand. 

Mr. ELLISON. —trick you or anything. I just want to— 

Mr. DEMARCO. And I am not trying to be cagey. I am trying to 

respect that I am not a policymaker. I am a regulator. And I am 

trying to provide advice and perspective, where apt. 

But in terms of being able to say what I think is the right spot 

in that spectrum for the government support, I don’t feel comfortable answering that. 

Mr. ELLISON. All right. Fair enough. 

Chairman GARRETT. I think your time has expired, actually. 

Mr. ELLISON. That quickly? 

40 

Chairman GARRETT. It goes by quickly when you are asking good 

questions. 

Mr. ELLISON. I guess that is it. 

Chairman GARRETT. When you are on the point with the questions, it just flies by. 

The gentlelady from New York? 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

Mr. DeMarco, this is more of a comment, I guess, than a question. And it is about something rather different. Perhaps it will be 

refreshing. But there is a great program called—it goes by the acronym PACE, the Property Assessed Clean Energy program. And 

as you know, it allows property holders to make energy-saving improvements on their homes via loans that are financed through 

their local property taxes. And it actually is a program that was 

designed to allow these improvements to be made for the sake of 

our general good, if you will, without costing taxpayers money. 

I understand that there have been problems fitting PACE in with 

the GSE programs because that would be senior debt, but I know 

that there are efforts underway to see how we can fit PACE into 

the mortgage program for people who have Fannie Mae or Freddie 

Mac-related—GSE-related secondary mortgages. 

So is your staff willing to work with us in the legislature about 

trying to get PACE going for these folks so that we can really do 

some good? 

Mr. DEMARCO. Yes, we would be pleased to work with you and 

anyone on the Hill who would like to engage in this issue. And I 

appreciate the way you framed it, because I appreciate that in the 

way you framed it, you have recognized what our fundamental concern is. It is not that we are opposed to energy efficiency. It is that 

we are looking at mortgages that are done with a first lien, where 

it has been underwritten with the presumption that here is what 

the borrower’s capacity to pay is and here is what the security is 

on this loan. And by a PACE loan then coming in after that and 

having a senior position for the first lien, ups that whole thing and 

creates credit risk where—after the loan has been finalized. 

With that understanding, we would be very happy to try to work 

with—a way to make these energy efficiency loans more available 

to folks. 

Dr. HAYWORTH. Great. I think it would just be a terrific good for 

all of us. Our staff is working on trying to get that PACE legislation going, so perhaps we can coordinate with your staff. 

Mr. DEMARCO. We would be glad to meet with your team. 

Dr. HAYWORTH. I appreciate it. And I yield back the balance of 

my time, Mr. Chairman. I think Mr. Fitzpatrick graciously allowed 

me to take his place in the order, so I am happy to yield my time 

to him, with your permission. 

Chairman GARRETT. Since you were so gracious, then I will be, 

as well. 

Mr. Fitzpatrick? 

Mr. FITZPATRICK. Thank you. 

And I thank the Director for his testimony. 

Sir, you mentioned just a little while ago that revenue that 

Fannie Mae gets is measured in the G-fee. It was in response to 

questions from Mr. Hurt and Mr. Pearce. You say in your written 

41 

testimony that FHFA supports the principle advanced by both the 

Administration and Representative Neugebauer that guarantee 

fees should continue to be gradually increased. 

And so my question would be, what effect, if any, might an increase in the guarantee fee have on the market? 

Mr. DEMARCO. An increase in the G-fee is going to translate to 

some increase in mortgage rates. 

Mr. FITZPATRICK. But you recommend an increase in the G-fees, 

a gradual increase? 

Mr. DEMARCO. I think that putting us on a path so that G-fees 

and, hence, mortgage rates are such that they are appropriate to 

the cost of capital and to the credit risk involved is an appropriate 

place to be moving towards. And we are trying to do so incrementally in a way that is less disruptive to the market and it is appropriate to the risk. So in response to an earlier question, I noted 

that one of the key things we have been doing is trying to enhance 

the risk-based characteristics of pricing. 

Mr. FITZPATRICK. How and when is the Administration, FHFA 

going to require the Enterprises to revise their pricing so that the 

private market does not continue to be crowded out of the secondary market— 

Mr. DEMARCO. We are actively working on that. And, in fact, 

both Enterprises had a round of G-fee price increases that just 

have gone into effect this month or this past month. 

Mr. FITZPATRICK. Thank you. 

Chairman GARRETT. The gentleman yields back. 

The gentleman from Ohio, for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. 

I would like to thank Mr. DeMarco for being here today. And I 

want to thank you for what you are doing on G-fees, on portfolio 

reduction, and strengthening underwriting standards as conservator. I think we need to have a thoughtful approach that creates 

a legal framework for a post-Fannie and Freddie world, and I think 

that you bring—obviously, your key function is to protect the taxpayers, but the other advantage you bring to us is to help us with 

that transition, so I want to thank you for what you are doing 

there. 

Mr. DEMARCO. Thank you, sir. 

Mr. STIVERS. I have a couple of concerns about a couple of the 

proposals, similar to your concerns. And I want to focus on Mr. 

Schweikert’s—new activities for a second, because I am a little concerned that your portfolios are becoming a little more nonperforming and a little more illiquid. 

And my question to you is, do you have all the tools you need 

and the powers you need to deal with those loans and either get 

those loans in a position where they are performing or get them in 

productive hands again and, obviously, recapture whatever capital 

you can in that process? And does the Schweikert bill limit you in 

that ability? 

Mr. DEMARCO. Very good. Thank you, Congressman. I appreciate 

the question. And the answer is, I don’t believe it does. 

I do not view loss mitigation activities that we undertake to be 

either a product of the firm. 

Mr. STIVERS. Okay. 

42 

Mr. DEMARCO. That is not a line of business. It is not a product. 

It is loss mitigation. And so I don’t view that as being covered by— 

Mr. STIVERS. Perfect. That is good stuff. 

And the second thing that I think you can sort of help us with 

is, as we sort of move to a new framework, I think we are on the 

right track with G-fees. You are already on that track, as well. I 

think the chairman of the subcommittee, his goal on risk retention 

is at least to make sure we level the playing field. And maybe you 

can help us with that in other ways. 

I think the thing we need to try to do is to try to pave the way 

to a more private-sector market. And I guess my question for you 

is, do you see a role for Fannie and Freddie without a government 

guarantee as aggregators and securitizers in the marketplace potentially? 

Mr. DEMARCO. Not as we have known Fannie and Freddie in the 

past. I do see a role for firms that are operating and specializing 

in the process of securitizing mortgages, because, again, in an $11 

trillion market, that is not going to be financed on the balance 

sheets of depository institutions. We need to tap into capital markets, including global capital markets, and that requires 

securitization processes. It means you need entities that are engaged in the business of securitizing mortgages. 

Mr. STIVERS. And that may not be the Fannie and Freddie? Certainly not in their current form, but a lot of the expertise that 

Fannie and Freddie have, I guess my point is, can be transferred 

to these new private entities that don’t have a government— 

Mr. DEMARCO. Absolutely, Congressman. I think that is an important consideration here, is that the single biggest economic 

stakeholder now in Fannie and Freddie is the American taxpayer. 

As I said my written statement, the business processes and platforms and the human capital of these companies are intangible assets for the company and are available for disposition as Congress 

figures out what the ultimate resolution of Fannie and Freddie are, 

but they are platforms and expertise that can be put back out into 

the marketplace in some fashion and perhaps some value realized 

back for the taxpayer in that process. 

Mr. STIVERS. Great. And I think the conforming loan limits are 

an important part of that, so again, like a lot of other members, 

I would urge you to look at what your authority is and consider it. 

Obviously, we are going to consider that as policymakers here, 

but our number is the top number, and you can certainly go below 

that. I believe you have the authority to, so I hope you would consider that, as well. And I am not going to ask you a question about 

that, because I think you have already answered that it is new to 

you, and that is certainly okay, and I appreciate what you are 

doing to focus on protecting the taxpayers. 

The only other concern I guess I have is about the bill that forces 

Fannie and Freddie to be compensated as government employees. 

My goal is to have them move away from the government, not toward the government, and so I actually don’t think I am going to 

be able to support that bill. And I guess if you could give us your 

thoughts, I know you mentioned them briefly earlier. 

Mr. DEMARCO. I think to your point that if we are looking to put 

Fannie and Freddie and its employees in business platforms back 

43 

out into the private sector, that keeping a private-sector compensation program in place would certainly be consistent with that. And 

my more immediate concern is the disruptiveness of making a 

change like that. 

There is already tremendous uncertainty on the part of the 

12,000-plus employees of these companies about what does it mean 

and kind of repeatedly hears we are going to be wound down and 

we are getting rid of Fannie and Freddie. But, the government has 

an exposure here on $5 trillion worth of mortgage securities, and 

as conservator, I would like to make sure that we have qualified 

people continuing to service that book of business on behalf of the 

taxpayer. 

Mr. STIVERS. Thank you. 

Thank you, Mr. Chairman. I yield back my nonexistent time. 

Chairman GARRETT. The gentleman from New York? 

Mr. GRIMM. Thank you, Mr. Chairman. I appreciate that. 

Thank you, Mr. DeMarco, for coming today and for fielding these 

questions. They are extremely important to just about everyone I 

speak to within banking and mortgage business and my constituents back home in Staten Island and Brooklyn. They are concerned 

about the values of their homes and where we are going overall. 

Just to piggyback, Mr. Stivers mentioned something that I had 

a question about. Many of those in the industry have spoken about 

the meltdown and the housing bust. And they talk about how 

some—a big part of the problem is unrelated brokers dealing with 

unregulated aggregators, and 60 out of 100 loans being done without a bank. 

Specifically to the DUS program, how now is Fannie Mae being 

involved in aggregating and multi-family homes? What role is that 

playing? And is that not consistent with some of the problems we 

have seen? 

Mr. DEMARCO. So, actually, the Fannie Mae DUS program, 

which is a program for financing multi-family loans where the underwriting is delegated to the loan originator, has been a pretty 

successful model, and it is one, actually, that builds in some fashion on some of the provisions of the risk retention rules we were 

talking about earlier in Dodd-Frank, with respect to there being exposure by the originator, credit exposure by the originator, but I 

think that program is continuing to work successfully. Both firms 

are continuing to provide service to the multi-family market. 

And the other thing I would note about the multi-family—it 

hasn’t gotten much attention in this hearing—but virtually all of 

the multi-family business both companies are doing is, in fact, 

being securitized today. 

Mr. GRIMM. Just to switch back to maybe bring it back to the 

30,000-foot level. Can you talk a little bit about the impact that a 

narrow qualified residential mortgage definition could have on excluding first-time homebuyers from purchasing a home? 

Mr. DEMARCO. Congressman, the rule is out for comment. And 

as one of the agencies that has signed off on issuing this rule, I 

look forward to the public comments that are coming in. But the 

concept here, actually, is we understand what we were directed to 

do in Dodd-Frank was to establish an exemption through this 

qualified residential mortgage designation that was supposed to be 

44 

reflecting very low-risk characteristics on the mortgages. And we 

think we have done that. 

And, in fact, I think it helps first-time homebuyers that the QRM 

definition not be too liberal, because this—we fully expect there to 

be a robust market for mortgage lending that is not meeting the 

definition of QRM. And the richer that market is, the healthier it 

is, the better it is going—the more easily private firms are going 

to be able to make those loans and ultimately, when we resolve 

Fannie and Freddie, to be able for there to be a re-emergence of 

a private securitization market that securitized them. 

This is not a penalty or an expectation that we will not have 

loans that don’t have at least 20 percent down. Not at all. That is 

not the expectation, nor the intent. 

And so I think that the issue of first-time homebuyers can be one 

that policymakers want to take a careful look at in the context of 

looking at the U.S. housing finance system, and in terms of visiting 

questions about, as a matter of public policy, do we want to have 

support or incentives for that? 

But I don’t view the QRM rule as proposed as being one that is 

directed at creating harm for first-time homebuyers. I think it is 

meant—what it is really meant to do is to address the problems 

Congress saw with securitization and with securitization activity 

taking place, whereas where the securitizers did not have a risk exposure to the mortgages they were making. 

Mr. GRIMM. A little bit about your opinion regarding the impact 

of lowering the current loan limits on high-cost markets, such as 

California, New York, my district. Can you just elaborate a little 

bit on the impact this will have on housing affordability? 

Mr. DEMARCO. I would be happy to provide you the mortgage research note we just issued that goes through the counties in the 

United States that would see a decline in the conforming loan limit 

if Congress takes no further action this year. 

Frankly, for what Fannie and Freddie have been doing, they are 

not doing a whole lot of mortgages in that space. So I think that 

the—if you happen to be a buyer in that particular space, in that 

part of the country, you may feel like I have been affected here. 

But in terms of the overall—thinking about the country’s housing 

mortgage market, this is not a very big piece of it. 

Mr. GRIMM. My time— 

Chairman GARRETT. Your time has expired. Thank you. The gentleman from California? 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

It has been an interesting conversation today, especially the last 

comments on that if you got it out of the high-cost areas, it would 

not be significant, then why get out of them? Speaking from a highcost area, it would have a huge impact on the housing market in 

the areas that are high cost. If you are not there, nobody is there. 

When you are making 92 percent of the loans in those areas, it is 

dramatic. 

I would encourage you—just going back to risk-based loans, underwriting standards have increased. And I remember going back 

to the 1970s when I was introduced—I would go to get a construction loan from a lender, and they made sure I met conforming 

standards, design criteria, sales criteria, because if we didn’t do 

45 

that, there was not an assured takeout on the other end when the 

home was sold, because there was not the guaranteed liquidity in 

the marketplace to be able to make that loan. 

Now, if we are trying to stabilize Fannie and Freddie, I guess my 

main question to you is, under TARP, we charged banks 5 percent. 

Why are we charging Freddie and Fannie 10 percent interest on 

the money we lend them? Is that risk-based? 

Mr. DEMARCO. Congressman, that was a determination made by 

the Treasury Department— 

Mr. MILLER OF CALIFORNIA. Okay, thank you. I just wondered, 

because it seems like we are trying to doom them to failure. If you 

go back to 1970, 1980, 1990, prior to 2005, do you believe that the 

GSEs crowded the private sector out of the marketplace? 

Mr. DEMARCO. Over that time period, increasingly, sir. 

Mr. MILLER OF CALIFORNIA. What years? 

Mr. DEMARCO. I think that the Enterprises’ market share grows 

gradually over that time period, until we got to the mid 2000s, and 

the emergence of the private-label market and the rapid growth in 

subprime and non-traditional lending saw substantial decline in 

their market share. 

Mr. MILLER OF CALIFORNIA. Yes. And they made bad loans to 

pick their market share back up, which was a huge mistake on 

their part. 

Mr. DEMARCO. Yes, sir. 

Mr. MILLER OF CALIFORNIA. Where would the housing market 

have been in mid-2007 if the GSEs weren’t there? In a disastrous 

situation. And instead of lending the GSEs $120 billion, we might 

have lost $2 trillion in home equity, because you couldn’t have 

bought a home or sold a home because there was no money in the 

marketplace to make a loan for a home. Is that not correct? Today 

they are only making 8 percent of the loans, the private sector. And 

those are very difficult at that. And FHA, Freddie and Fannie are 

picking up 92 percent. 

But I am really gratified that you are using a risk-based loan criteria and you are assessing the risks you are lending on and you 

are using good underwriting standards, which should have been 

done all along. 

Mr. DEMARCO. Yes, sir. 

Mr. MILLER OF CALIFORNIA. It is inexcusable that an agency like 

that—understanding their purpose and their intent—would go out 

and make stupid loans just to pick up a larger percentage of the 

marketplace. But my concern is, if we say there is a private sector 

there to fulfill the void that the GSEs would create by backing out, 

I have never seen it. And if at any time in history, it would have 

been there, it would have been probably 2005, 2006, and 2007. 

The only alternative we had was Countrywide and other groups 

like that. And I remember going back to 2001, introducing amendments to bills, and I probably got it into four bills defining predatory versus subprime. Had we defined predatory versus subprime 

in 2001, 2003, or 2005, Countrywide would have not done what 

they did, nor would the other organizations have done what they 

did to pass off these junk mortgage-backed securities, trying to replicate what a GSE mortgage-backed security was, which was safe 

and sound. 

46 

And if you invested in them, you were guaranteed a greater return, to the point at where the GSEs—most of their losses are taking those bad loans, nonperforming out, and replacing them with 

performing loans, so you—I have demonstrated integrity that the 

private sector abused during those periods of time. 

And my concern is, if we look at what the purpose of GSEs has 

been to provide liquidity to the marketplace, they have done a pretty good job, but especially in recent years. And having been in the 

building industry since the 1970s, and looking at the criteria by 

most lenders that they placed on you to even get a loan, and the 

intent of that was that if, once your product was on the market, 

that there would be a secondary market to sell the loan off to, because the major market did not have the liquidity to make fixed 

30-year loans and sit on those loans, because that took their capital 

and put them in loans that were sitting there that they were virtually out of business for any new accounts, so they could close 

down and just wait for their loans to pay back on those loans. 

So when you say that they are in the 1970s, 1980s, and 1990s, 

that the GSEs played a more predominant role in the marketplace, 

I would say appropriately so, because there was no alternative to 

that. And if you had allowed the private market that went from 

about—4 lenders had 25 percent of the market to today those 4 

have 75 percent of the market, that is dangerous, having 4 lenders 

control 75 percent of the marketplace. 

And if it were not for the option of a GSE out there today, if 

something went wrong in those four, this country could be in serious, serious trouble. And— 

Chairman GARRETT. And with that, I thank the gentleman. 

Mr. MILLER OF CALIFORNIA. My time has expired? 

Chairman GARRETT. Some time ago, actually. 

Mr. MILLER OF CALIFORNIA. You are very generous. Thank you. 

Chairman GARRETT. But I understand the other side of the aisle 

was probably encouraged— 

Mr. MILLER OF CALIFORNIA. Can I have a point of order? I want 

to wish Mr. Frank a happy 71st birthday today. 

Chairman GARRETT. Happy birthday. 

[applause] 

And I yield to the gentleman for a retort. 

Mr. FRANK. I would simply say that, while the gentleman’s time 

has expired, I am pleased to say that at least I have not, as yet. 

[laughter] 

Chairman GARRETT. And so with that—Mr. DeMarco, again, I 

appreciate your coming to the hearing, and I appreciate your forthright answers and the detail that you provided for those answers, 

as well. 

Mr. DEMARCO. Thank you, Mr. Chairman. And I appreciate the 

opportunity. I look forward to continuing to work with all the members of the subcommittee. 

Mr. FRANK. Mr. Chairman, if you would yield briefly? 

Chairman GARRETT. I will yield, yes. 

Mr. FRANK. I would just like to add, Mr. DeMarco’s testimony 

was exactly what we need from witnesses. It was responsive, it was 

aimed at helping us legislate, and I not only want to express my 

appreciation, I hope other people will follow his example. 

47 

Chairman GARRETT. Thank you. I appreciate it. 

Mr. DEMARCO. Thank you, Congressman Frank. 

Chairman GARRETT. Thank you. 

This panel is dismissed and everyone with it. And we will at this 

point bring up the next panel. 

Okay. While you comport yourself there and get your papers in 

order, I welcome the second panel to this hearing. And I see we 

have six of you before us. So for the next half-hour, we will be listening eagerly to your testimony. 

And as always, without any objections, your written statements, 

of course, will be made a part of the record. You will be each recognized for 5 minutes. And I know many of you have been here before, so you follow the lights. 

Mr. Dalton, you are recognized for 5 minutes. And welcome to 

the panel. 

STATEMENT OF THE HONORABLE JOHN H. DALTON, PRESIDENT, HOUSING POLICY COUNCIL, THE FINANCIAL SERVICES ROUNDTABLE 

Mr. DALTON. Thank you very much, Mr. Chairman, Ranking 

Member Waters, and members of the subcommittee. Thank you for 

holding this important hearing, and thank you for the opportunity 

to participate. 

My name is John Dalton, and I am the president of the Housing 

Policy Council of the Financial Services Roundtable. Our 32 member originate, service, and insure mortgages, and we do business 

with Fannie Mae and Freddie Mac. 

Mr. Chairman, we see an emerging consensus that private capital needs to be the primary insurer of mortgage risk. The future 

system must have two goals: servicing homebuyers; and protecting 

taxpayers. 

Homeownership is a pillar of the U.S. economy and the American 

way of life. A new housing finance system built on private capital 

and clear rules would deliver sound financing and keep homeownership within the reach of most Americans. Without an approach 

like this, owning a home in America could become a luxury for the 

few. 

To make sure this does not happen, Congress needs to ensure reform enables the continuing availability of the 30-year fixed-rate 

mortgage, which has been the bedrock of our Nation’s housing finance system for more than half a century. The 30-year fixed-rate 

mortgage is as American as opening day in baseball. 

A fixed-rate mortgage provides peace of mind, because homeowners know that their biggest monthly bill is not going to change 

from month to month and year to year. Without this popular financing tool, many homeowners would experience in their mortgages the same wild swings they now feel at the gas pump. This 

is a rollercoaster ride most Americans would like to avoid. 

Today, approximately 90 percent of newly originated mortgages 

and 95 percent of refinances are fixed-rate loans. Homeowners are 

clearly voting with their checkbooks. The predictability of a fixedrate mortgage needs to be preserved for homebuyers, and peace of 

mind needs to be returned to the American taxpayer. 

48 

Several of the bills introduced this week by committee members 

would begin to limit the role of the current GSEs. This is part of 

a needed reform process toward a new stronger housing finance 

system. They are a good first step, but it must be accompanied by 

a comprehensive plan. 

Important issues are addressed in the bills introduced this week. 

The Housing Policy Council agrees that G-fees gradually need to be 

increased, portfolios need to be wound down, a strong regulator 

needs to be in place, and specific housing goals need to be eliminated. These bills are a start, but simply cannot be the end of GSE 

reform. 

The Housing Policy Council has laid out a comprehensive proposal to reform the secondary mortgage market, and we commend 

it to you. Our plan creates a new private-sector system that serves 

American homebuyers and it protects the American taxpayer. Our 

system ensures that multiple layers of private capital bear the risk 

of securing mortgages while setting clear rules for capital, licensing, and mortgage security investment. 

These multiple layers include the downpayments on mortgages, 

private mortgage insurance, the capital of the private guarantee 

companies, and a reserve fund paid into by these companies. The 

layers of private capital would protect taxpayers from risk and 

come before a Federal backstop or guarantee. 

Our full plan is in my written testimony. 

Mr. Chairman, I appreciate your leadership and each of you on 

the committee for tackling this difficult issue. It is complicated, and 

I support your efforts to return private capital to the housing market. In order to have a full economic recovery, it is very important 

for reform of the housing finance system to move forward comprehensively. 

There is much uncertainty in the housing market today, and a 

complete roadmap for GSE reform would go a long way to help 

lessen that uncertainty. The Housing Policy Council stands ready 

to work with this committee and other stakeholders to assist wherever we can. 

Thank you very much for the opportunity to testify, and I look 

forward to responding to your questions. 

[The prepared statement of Mr. Dalton can be found on page 88 

of the appendix.] 

Chairman GARRETT. I thank you for your testimony. 

The gentleman is recognized for 5 minutes. And I will let you introduce—say your name correctly for me. 

STATEMENT OF CHRISTOPHER PAPAGIANIS, MANAGING 

DIRECTOR, ECONOMICS21 

Mr. PAPAGIANIS. Sure. My name is pronounced ‘‘Papagianis,’’ 

Chris Papagianis. 

Chairman Garrett, Ranking Member Waters, and members of 

the subcommittee, thank you for the opportunity to testify today. 

I am the managing director of a nonprofit think tank, e21, Economic Policies for the 21st Century. 

Drawing on the expertise of practitioners and academics, our 

mission at Economics21 is to help foster a spirit of debate about 

the way forward on issues like housing finance. Previously, I was 

49 

Special Assistant for Domestic Policy to President George Bush. In 

this role, I helped guide the collaborative process within the Executive Branch to develop and implement policies, legislation, and regulations across numerous agencies, including Treasury and HUD. 

Fannie Mae and Freddie Mac have been in conservatorship now 

for the past 30 months. Over this period, numerous proposals have 

been offered for how to reform or re-envision the Government-Sponsored Enterprises. Given how dominant Fannie and Freddie are in 

terms of market share today, reform of these institutions will have 

a significant impact on the future of the $11 trillion mortgage market. 

In short, the stakes are quite high, and I agree with this committee’s approach in assessing long-term solutions while at the same 

time considering reforms that could be advanced in the short term 

to protect taxpayers. 

Importantly, some of the proposals before this committee, if enacted, would accomplish two distinct things. They would protect 

taxpayers in the near term, and the implementation experience 

would provide invaluable lessons and data that could inform the 

broader debate about the future of housing finance in this country. 

One of the big analytical challenges before this committee is that 

the most egregious excesses of the previous GSE model are not necessarily the primary sources of taxpayer losses thus far. From my 

vantage point, this means that there is still a lot of taxpayer risk 

in the GSE system and that near-term reform proposals can have 

a positive impact. 

It is for these reasons that I support near-term measures to try 

and hold the GSEs to the same standards as other private market 

participants, to improve the pricing practices for mortgage guarantees, to limit the types of mortgages that can be guaranteed or purchased, and to add new oversight measures that shed more light 

on how the GSEs issue debt to fund their activities. 

In the end, important decisions still need to be made about the 

future of the GSEs and the government generally in the housing 

market. It might take some time to come to an agreement on a 

wind-down strategy or a lasting structure for housing finance. 

Ahead of these decisions, however, it is still important to make 

practice in protecting taxpayers and reducing the risk presented by 

the GSEs, while at the same time ensuring that families have adequate access to mortgages. 

Thank you again for the opportunity to testify today. 

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

128 of the appendix.] 

Chairman GARRETT. I thank the gentleman very much. 

Mr. Pinto, for 5 minutes? 

STATEMENT OF EDWARD J. PINTO, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. PINTO. Chairman Garrett, Ranking Member Waters, thank 

you for the opportunity to testify. 

In its February 11th report to Congress, the Obama Administration asked Congress to work with it to fashion legislation to accomplish three broad goals: the winding down of Fannie Mae and 

Freddie Mac; the returning of FHA to its traditional role as a tarVerDate Nov 24 2008 11:38 Sep 22, 2011 Jkt 068337 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\68337.TXT TERRIE
50 

geted lender of affordable mortgages; and a largely privatized system of housing finance, with an open question as to the level of 

government involvement as to a particular guarantee. 

These three goals provide an opportunity for a bipartisan solution that truly reforms our housing finance market. Secretary 

Geithner, in testimony before the Financial Services Committee on 

March 1st, asked that these three goals be accomplished sooner 

rather than later during this Congress. 

I, along with my co-authors, Peter Wallison and Alex Pollock, released a White Paper last week detailing a comprehensive approach for reforming the housing finance market under the Administration’s option one. It builds on the foundation provided by the 

Administration and forcefully and directly addresses each perceived 

shortcoming. 

It meets the principles for restoring stability to the Nation’s 

housing finance system, as recently outlined by 16 industry groups. 

It demonstrates that a government guarantee is both unnecessary 

and undesirable. It provides a bipartisan solution that can and 

should be enacted by this Congress. It is the only plan that both 

creates a housing finance market we can be proud of and protects 

the taxpayers, and I commend it to your consideration. 

My written testimony covers each of the eight bills. I will limit 

my oral remarks to a few key points. 

First, increasing guarantee fees. Enactment of this bill is appropriate, as it would implement a key step recommended by the Administration to responsibly reduce the role of the GSEs in the 

mortgage marketplace and ultimately wind them down. It would 

eliminate the unfair capital advantages that the GSEs enjoy and 

reduce the gap between Fannie and Freddie subsidized pricing and 

private rates. 

This increase in capital requirements would require the GSEs to 

raise their guarantee fee by perhaps 15, 25 basis points, and would 

be phased in over 2 years. The bill wisely stipulates that guarantees be set uniformly among lenders. 

The Administration has also just suggested that the GSEs rely 

more on private capital. This subcommittee and the Administration 

should request that the FHFA Director explore various means of 

credit enhancement to reduce the liability of the GSEs for losses 

on mortgages, including the possibility of increased use of mortgage 

guarantee insurance. 

Chairman Garrett and Ranking Member Waters, I commend you 

and over 30 other members for the letter on this topic that you sent 

to Acting Director DeMarco last October. 

I am told—excuse me, subjecting GSEs to credit risk retention 

requirements in the Security Exchange Act of 1934. Enactment of 

a bill addressing this topic is essential, as it is needed to sort out 

the previously noted perpetuation of Fannie, Freddie, and FHA. 

This is an unfortunate consequence of the Dodd-Frank Act and is 

being reinforced by the proposed rulemaking that just came out 

this week. 

I would recommend that the qualified residential mortgage 

standards be set by legislation, rather than by administrative rule. 

In appendix one, we set forth a proposed definition. 

51 

I would also suggest that you limit collateral backing private 

MBS to loans that meet the definition, as we have suggested. This 

would obviate the need for any risk retention and its attendant 

complexity and potential gaming of the system. Taking this step 

would return capital to the housing finance system in both a prudent and speedy manner. 

Repeal of affordable housing goals clearly is appropriate, and I 

would also recommend you consider repealing affordable housing 

support fees enacted under HERA and currently suspended by 

FHFA. Compensation of certain Fannie-Freddie employees, I cover 

that in more detail in my testimony. But in light of the need to 

wind down Fannie and Freddie, I would suggest that you focus on 

how to incent employees over the long term to accomplish that 

goal. 

Prohibit the GSEs from engaging in new activities or offering 

new products. Given their wind-down status, this bill is appropriate. It particularly needs to focus on efforts that might be undertaken to force the GSEs to undertake potentially risky activities 

such as energy retrofit programs, manufactured housing programs, 

and other programs involving mortgage write-down. 

Finally, turning briefly to the recently introduced Hensarling 

bill, I would commend Representative Hensarling for his early and 

prescient attempts to wind down Fannie and Freddie. His bill provides the basis for undertaking a frank but crucial discussion between this subcommittee and the Administration. This discussion 

has been requested by Secretary Geithner and Representative 

Biggert. It is my hope it will lead to a privatized system of housing 

finance under option one. 

Thank you. 

[The prepared statement of Mr. Pinto can be found on page 145 

of the appendix.] 

Chairman GARRETT. Thank you. Mr. Nielsen, for 5 minutes. 

STATEMENT OF ROBERT NIELSEN, CHAIRMAN OF THE BOARD, 

NATIONAL ASSOCIATION OF HOME BUILDERS (NAHB) 

Mr. NIELSEN. Chairman Garrett, Ranking Member Waters, and 

members of the subcommittee, thank you for the opportunity to testify today. My name is Bob Nielsen. I am the 2011 National Association of Home Builders chairman of the board and a builder and 

a developer from Reno, Nevada. 

Credit is the lifeblood of the housing sector. A reliable and adequate flow of affordable funds is necessary in order to achieve the 

Nation’s housing and economic goals. Establishing a financing system that provides liquidity for the housing sector in all markets 

throughout the economic cycle is a prerequisite to achieving housing policy objectives. 

Furthermore, a stable, effective, and efficient housing finance 

system is critical to the housing industry’s important contribution 

to the Nation’s economic performance and to the achievement of 

America’s social goals. 

The housing finance system is currently under a cloud of uncertainty. The Federal Government, through FHA and the housing 

GSEs, is currently accounting for nearly all mortgage credit flowing 

to homebuyers and rental properties. Even with the current heavy 

52 

dose of Federal backing, fewer mortgage products are available, 

and loans are being underwritten on much more stringent terms. 

In addition, Congress and regulators are piling on layers of regulation in an attempt to plug gaps in a system of mortgage regulation and prevent a recurrence of the mortgage finance debacle that 

is still playing out. This is not an arrangement that can continue 

indefinitely, and there is no clear picture of the future shape of the 

conforming conventional mortgage market. 

One thing is clear. The status quo cannot be maintained. NAHB 

has been actively involved in discussions on changes to the financing framework for homebuyers and producers of housing. We presented our thoughts on the future of the housing finance system to 

this committee nearly one year ago today. And since then, Congress 

has passed the Dodd-Frank Act, and regulators are now busy implementing this massive law that has the potential to reduce the 

availability and increase the cost of housing and credit. 

The housing landscape has seen little change during this period, 

as the housing market remains extremely weak. In fact, while economic growth has been weak by historic standards for an economic 

recovery, housing’s performance has been even weaker. Unlike a 

typical recovery where housing grows at 28 percent in the first year 

after the end of a recession, housing’s growth has been a paltry 5 

percent in the first year of the current recovery. 

Adding to the current housing crisis, decisions about comprehensive structural reforms to the U.S. housing finance system are 

stuck in a quagmire, despite the Administration’s recent report outlining options for reforming the housing finance market. 

Recently, NAHB joined a coalition with 15 other organizations 

outlining principles for restoring stability to the Nation’s housing 

finance system. NAHB strongly supports these principles, which 

highlight the need for the continuing and predictable government 

role in housing finance to promote investor confidence and ensure 

liquidity and stability for homeownership and rental housing. 

NAHB strongly supports efforts to modernize the Nation’s housing finance system, including reforms to the Government-Sponsored Enterprises, Fannie Mae and Freddie Mac. Like the principles outlined earlier, NAHB believes strongly that a Federal 

backstop is needed to ensure the continued availability of affordable mortgage credit specifically to 30-year, long-term, fixed-rate 

mortgages. 

We cannot go back to the system that existed before this great 

recession, but it is critical that any reforms be well conceived, orderly, and phased in over time. Proposals offered by this subcommittee for short-term dissolution of Fannie Mae and Freddie 

Mac and the support they provide for the housing finance system 

represent a piecemeal approach to reform that would disrupt the 

housing market even further and could push the Nation back into 

a deep recession. 

These proposals, along with similar plans announced by the 

Obama Administration in February, show that many policymakers 

have clearly forgotten housing’s importance to the economy. 

America’s homebuilders urge policymakers in the Administration 

and Congress to consider the potential consequences of their proposal. The subcommittee should not move forward with policies 

53 

that would further destabilize a housing market that is already 

struggling. Housing can be a key engine of job growth that this 

country needs, but it cannot fill that vital role if Congress and the 

Administration make damaging, ill-advised changes to the housing 

system at such a critical time. 

Thank you for the opportunity to testify today. 

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

113 of the appendix.] 

Chairman GARRETT. I thank you for your testimony. 

Mr. Phipps please, for 5 minutes? 

STATEMENT OF RONALD PHIPPS, PRESIDENT, NATIONAL 

ASSOCIATION OF REALTORS® 

Mr. PHIPPS. Good afternoon. 

Chairman Garrett, Ranking Member Waters, and members of 

the subcommittee, thank you for inviting me to testify today regarding GSE reform. My name is Ron Phipps. I am the 2011 president of the National Association of REALTORS®. My family, now in Rhode Island, has been in the business of residential real estate for 4 generations. My passion is making the 

dream of homeownership a reality for American families. I am 

proud to testify on behalf of the more than 1.1 million REALTORS® who share that passion, as 75 million American families 

who own homes, and the 310 million Americans who require shelter. 

REALTORS® agree that the existing system failed and reforms 

are needed. However, we caution you to heed the words of Treasury 

Secretary Timothy Geithner and Senator Richard Shelby that, 

‘‘Housing finance must be addressed and reform passed. However, 

proper homework must be done before action is taken and Federal 

housing policies must be adequately assessed.’’ 

Today, we ask you to slow down the legislative process and begin 

a methodological, measured effort in order to yield a comprehensive 

solution that is in the best interests of all, most importantly, the 

taxpayers. Therefore, we oppose the GSE bills recently introduced 

to reform GSEs, because they represent a piecemeal approach to 

reforming the housing finance system and effectively work to make 

Fannie Mae and Freddie Mac not viable, without putting forth an 

adequate replacement secondary mortgage market mechanism. 

NAR is collaborating with the offices of Congressmen Gary Miller 

and Brad Sherman to develop an alternative comprehensive approach to reform the secondary market. This legislation will be introduced shortly. 

As you consider the future of Federal housing policies, we ask 

you to keep two things in mind: first, the immense value that sustainable homeownership provides for this country; and second, investors require certainty in order for markets to perform. 

The proposed legislation introduces uncertainty that will cause 

our fragile recovery to slow and possibly stop. Right now, the market is not working as many believe it should, and change is required. Additionally, REALTORS® believe that the pendulum on 

mortgage credit has swung too far in the wrong direction and is 

hurting consumers and the economy. Quick decisions aimed at punishing certain market players or fostering theoretical ideology will 

54 

only act to punish taxpayers by constraining their ability to access 

affordable mortgage financing and locking in current losses. 

Let me be clear. REALTORS® agree that reforms are required 

to prevent a recurrence of the housing meltdown, but unnecessary 

implementation of rules that curtail access to affordable credit, i.e. 

raising downpayments or other mortgage costs, will have stark 

ramifications for that overall economy. 

Let me speak specifically to a couple of proposed bills. The QRM 

is likely to shape housing finance for the foreseeable future. REALTORS® believe that Federal regulators and members of the House 

Financial Services Committee should honor the intentions of Senators Isakson and Landrieu by crafting qualified residential mortgage exemptions that accommodate a wide variety of staid, well-underwritten products such as 30-, 15-, and 10-year fixed-rate loans, 

7/1 and 5/1 ARMs, and loans with flexible downpayments that require mortgage insurance. 

A poor QRM policy that does not heed their intentions will displace a large portion of homeowners and could once again slow economic recovery and hamper job creation. As noted in American 

Banker yesterday, 69.5 percent of all loans originated in 2009 

would not qualify under the QRM standard. Furthermore, increased GSE fees could really cause additional problems with up to 

10 percent to 15 percent of other qualified buyers not being able 

to meet those stringent requirements. Approximately 500,000 sales 

would not happen. 

In World War II, President Franklin Delano Roosevelt said the 

nation of homeowners is unconquerable. In the 1980s, President 

Ronald Reagan said the need to preserve the mortgage interest deduction in order to promote the most important asset of the American dream, homeownership, should be protected. We REALTORS® 

agree. 

We ask you to be positive in your future. I thank you for this opportunity to present our thoughts on GSE reform. And as always, 

the National Association of REALTORS® is ready, willing, and 

able to work with you and our partners to make a bright future for 

America. 

Housing is not a partisan issue, nor is it simply in the common 

interest. It is the national interest. Thank you. 

[The prepared statement of Mr. Phipps can be found on page 138 

of the appendix.] 

Chairman GARRETT. Thank you. 

And we look now to the professor, Professor Wachter, for 5 minutes. 

STATEMENT OF SUSAN M. WACHTER, PROFESSOR, THE 

WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA 

Ms. WACHTER. Chairman Garrett, Ranking Member Waters, and 

other distinguished members of the subcommittee, thank you for 

the opportunity to testify at today’s hearing. I am honored to be 

here to discuss the proposed legislative initiatives and the broader 

need for a reinvented housing finance system. 

While comprehensive reform is necessary for a stable housing finance system, the transition must be accomplished while taking 

into consideration the current extraordinary fragility of housing 

55 

markets. With January prices in real dollars breaching the 2009 

bottom and still falling, there is a danger of a double dip. 

In the reformed system, private capital must be accountable and 

at-risk. However, today, in that part of the market in which Fannie 

and Freddie cannot operate, the jumbo market, there is still only 

a very limited supply of private capital. This points to the need for 

comprehensive reform to bring back private capital. 

There is a need for rules of the game, standards and transparency to counter the information failures that caused reckless 

mortgage products and underwriting practices to drive the system 

to failure. There is an important role for collective or government 

action to mandate transparency standards and information to allow 

for all market participants—borrowers, regulators, and investors— 

to prevent risks from becoming uncontrollable. Investors are asking 

for this before they enter the market. 

My written testimony addresses each of the legislative initiatives. I will limit my comments to two. First, the GSE Mission Improvement Act repeals affordable housing goals without suggesting 

what might replace them going forward. As we re-envision the 

housing finance system, there will be a need to address the goal 

of nondiscriminatory access to housing finance. In the academic literature, there is substantial evidence that the affordable housing 

goals were not the major factor responsible for the housing bubble 

and crash. 

Second, the Portfolio Risk Reduction Act caps the GSEs’ port- folios at $250 billion in 5 years. While it is ultimately both desirable and necessary to reduce the portfolio, constraining the path of 

reduction in this way is not, in fact, the way to optimize taxpayer 

returns. 

Policymakers and the Nation as a whole must make fundamental 

decisions about the shape of our Nation’s finance system going forward. The issues being considered today are of critical importance 

to the Nation’s future. 

I thank you for the opportunity to testify, and I welcome your 

questions. 

[The prepared statement of Professor Wachter can be found on 

page 213 of the appendix.] 

Chairman GARRETT. I thank the panel. 

So I will begin by yielding myself 5 minutes. And I guess I will 

just start with Mr. Dalton. 

One of your opening comments was to make a comparison to the 

first day of baseball, which is cute, but, of course, the Secretary— 

the Federal Government doesn’t subsidize the first day of baseball, 

at least I hope they are not. Maybe it will be something we will 

discover during the C.R. discussion. 

So can you run down and take a look at some of the things that 

we are doing right now? I am getting a little bit of a mixed message here. Some people on the panel are saying that we are moving 

too quickly, that we shouldn’t be acting now, that despite, of 

course, the fact that it has been 2 years and we have been asking 

for hearings on this, and we haven’t had anything. Now we are 

having hearings, and we are having the experts come up before us. 

So do you believe that the legislation that you are seeing before, 

as far as the IG, additional powers there, and the rest, as far as 

56 

the G-fees and the rest, will those things be moving too quickly if 

we begin to consider them and debate them and discuss them and 

move those along? 

Mr. DALTON. Mr. Chairman, I think that there are positive aspects to a number of these bills, but I think it is very important 

that we have a comprehensive program in place before we—for example, one of the bills has the GSEs going out of business in 5 

years. And I think to have that without having a new system in 

place— 

Chairman GARRETT. Actually, let me just correct you there. I 

think you are talking about the portfolio language, which winds 

that down. Is that what you are talking about? 

Mr. DALTON. That is right. 

Chairman GARRETT. Yes, that just deals with the portfolio, 

shrinking the portfolio over 5 years, right? So—yes. 

Mr. DALTON. I was referring to the Hensarling bill, that I believe 

does, in fact, within—at the end of a 5-year period, the GSEs— 

Chairman GARRETT. So you are not opposed to the idea of having 

an acceleration, for example, of the portfolio so that we can try to 

wind down that $1.5 trillion deficit hanging around our head? 

Mr. DALTON. No, sir. I think the winding down of the portfolio 

has merit. 

Chairman GARRETT. Okay. Since we only have so much time, Mr. 

Pinto, in your testimony, you describe the advantages that the big 

banks somehow have over the small banks, in terms of one of the 

other bills with regard to the issue of G-fees. Can you just elaborate on that and explain that to us? 

Mr. PINTO. Yes. Actually, in my testimony, I believe I quote Jay 

Brinkmann, the chief economist for the Mortgage Bankers Association, who about 2 weeks ago said that the history of the GSEs was 

to promote ever-larger consolidation among large financial institutions, controlling the housing finance market through their offering 

of discounts to the large financial institutions, Countrywide and 

the large banks. 

The community banks and the other community financial institutions were charged what you would consider in hotels being called 

a rack rate, 20, 25 basis points. Countrywide and the other larger 

originators were charged 10 basis points, 12 basis points. 

As I pointed out in my testimony, what you lose on each one, you 

cannot make up in volume. And I think Director DeMarco covered 

that when he said the G-fees were woefully inadequate. It was because they were discounting them for the big banks and trying to 

make it up with the little banks. 

Chairman GARRETT. Let me just jump over to Mr. Phipps. You 

were the one who suggested that we may be moving too quickly, 

we don’t want to move on a piecemeal approach. So let me just ask 

you, on some of the bills that are before us, for example, Mrs. 

Biggert’s bill, with regards to giving more authority in creation of 

the IG, how would that be bad if we did that today? Wouldn’t that 

have been good if we actually had that in place several years ago? 

Mr. PHIPPS. The short answer is, we really believe that the principles that we spent the last 2 years working on articulate a comprehensive plan. And we believe that the replacement, the successor for this, is critical and needs to be put in that context. 

57 

Chairman GARRETT. And I am right with you on that. We have 

to figure out what the replacement is. But until we get there—and 

you have to admit, it is going to be pretty hard to get consensus 

on what that replacement is—until we get there, aren’t there some 

other things we can do, as we lay out here today, that would be 

good? So you are supportive of the idea, right, that they should 

have—on the— 

Mr. PHIPPS. —should be reformed. 

Chairman GARRETT. And you are supportive of the idea with regard to Mrs. Biggert’s bill, as far as additional authority with regard to the IG. You can’t be opposed to the idea of—are you? Is 

anybody opposed to that idea, that they should have authority in 

that area? No? Is anybody opposed to the idea that— 

Ms. WACHTER. Yes, in my written testimony, I did oppose that. 

Chairman GARRETT. Okay. And if we had that—okay. 

Ms. WACHTER. The reason I opposed it is that reporting to Congress with 7 days advance notice may simply not be practical. 

Chairman GARRETT. Okay, just for the practicality. And just one 

last question, then. With regard to some of the other ideas, with 

regard to the Secretary signing off on the new debt issuance, is 

anyone opposed to that idea? 

Mr. PHIPPS. We are not taking— 

Chairman GARRETT. Besides this one. I know, besides Ms. 

Wachter, because you highlighted that. Okay. So there are some— 

and I suppose, Mr. Nielson, you want to— 

Mr. NIELSEN. No. I think that Treasury already has that ability 

to sign off on that debt. 

Chairman GARRETT. But this is a requirement that he would 

have to. 

Mr. NIELSEN. But they have the ability to do it now, correct? 

Don’t they have to sign off on— 

Chairman GARRETT. They do. 

Mr. NIELSEN. Okay. 

Chairman GARRETT. They are not doing it, and we would say 

that they—and so I will just close on this and yield to the ranking 

member that I guess there is a little bit of unanimity that there 

are at least some things that we can do now, even though we don’t 

have the final plan, which is going to take a little bit more time 

to accomplish. 

With that, I yield to the gentlelady from California. 

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

Let me thank all of our panelists who have come today to help 

us delve into this very, very difficult and complex problem of what 

to do about the GSEs. I think that it was said by one of you that 

this should not be a partisan issue, that this should be a bipartisan 

issue. And I agree with that. 

There are several things that have been said today that I absolutely agree with. Starting with you, Mr. Dalton, and your love for 

the 30-year mortgage, I love it, too. And I think we should do everything possible to ensure that is a product that is available. 

But let me delve a little bit into who you are and what you do. 

I see, Mr. Dalton, that you are the president of the Housing Policy 

Council of the Financial Services Roundtable. You are made up of 

individuals who are in this business of initiating loans, financing, 

58 

extending mortgages, however you want to describe it. These are 

people who know what is going on in this mortgage industry. Is 

that correct? 

Mr. DALTON. Yes, ma’am. That is accurate. 

Ms. WATERS. And having said that, some researchers—particularly those from the American Enterprise Institute, whom Mr. 

Pinto represents on the panel today, contend that the 30-year fixed 

mortgage either isn’t going for homeowners or could survive and 

could continue to be an affordable product for medium-income families without any government involvement in the housing finance 

system, but you were definite about 30-year mortgage. Do you want 

to say it again in a short sentence for us why you feel so strongly 

about the 30-year fixed mortgage? 

Mr. DALTON. Yes, ma’am. I think it has been the bedrock of the 

Nation’s housing finance system for more than a half a century. It 

is sustainable. It is safe. It delivers affordability, certainty, stability, and predictability. 

The fact is that for those Americans who live on a budget, they 

know every month, year—month in and month out, year in and 

year out, that mortgage payment is going to be the same. And I 

think that predictability is very important for those Americans who 

are living on a budget and— 

Ms. WATERS. You don’t have to go any further. I think you have 

really said it. But what is interesting for me is, I think your background is Republican and you are willing to stand up for this 30- 

year mortgage. Is that right? 

Mr. DALTON. My background happens to be Democrat, Madam 

Chairwoman. 

Ms. WATERS. Oh, is that right? Oh, that is better. 

[laughter] 

Mr. DALTON. But I have served in both Democrat and Republican 

Administrations. 

Ms. WATERS. Okay, thank you. 

Now, if our housing finance system were completely privatized, 

as the plan under Representative Hensarling’s comprehensive GSE 

reform bill, what would the implications be for small and community banks? Would they be able to compete with the large financial 

players? Would they easily be able to sell their homes on the secondary market? Would you tell me what you think about that plan? 

He wants to completely privatize. 

Mr. DALTON. I am sorry? 

Ms. WATERS. Under the Hensarling comprehensive GSE reform 

bill, he would like to completely privatize. And I want to know, if 

the system was completely privatized, what would the implications 

be for small and community banks? Would they be able to compete 

with the large financial players? Would they easily be able to sell 

their loans on the secondary market? What would this mean for 

the small banks? 

Mr. DALTON. I have reservations about a completely privatized 

system, Congresswoman Waters. I think that the—our proposal is 

one that includes the private sector. And we welcome that. 

But I think to go completely to the private sector, you wouldn’t 

have the government guarantee of the 30-year fixed-rate mortgage. 

I think the mortgage market would shrink. I think long-term fixedVerDate Nov 24 2008 11:38 Sep 22, 2011 Jkt 068337 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\68337.TXT TERRIE
59 

rate loans would be less available. And generally, I think it would 

be difficult for the institutions that you mentioned to be able to finance mortgages. 

Ms. WATERS. Thank you very much. 

I want to move quickly to Ms. Susan Wachter, professor, the 

Wharton School, University of Pennsylvania. One of the bills offered today by Representative Royce would eliminate the GSEs’ affordable housing goals. While I don’t believe that data suggests 

that those were major contributors to either the failure of Fannie 

and Freddie or the greater housing and economic crisis, I am open 

to perhaps restructuring how we support affordable housing in a 

future housing finance system. 

Would you reiterate what you know about this accusation that 

these affordable housing goals somehow caused the crisis? And do 

you have any ideas about how we could provide support for 

moderate- and low-income folks—how could we restructure this? 

Ms. WACHTER. Congresswoman Waters, may I take that question 

in reverse order? Support for working Americans is extremely important for the mortgage system. And for that, we do need a 30- 

year fixed-rate mortgage as a base because of its affordability 

through amortization. 

So for working Americans overall, the starting point is that we 

need comprehensive reform that will allow sustainability of the 30- 

year fixed-rate mortgage. 

Secondly, on the role of affordability, and housing goals in particular, it has been alleged that the Community Reinvestment Act 

and the GSEs’ housing goals were somehow the cause of the crisis. 

The timing is simply wrong, number one. The Community Reinvestment Act and the housing goals were in place far earlier. 

In addition, we had a commercial real estate bubble, as well. We 

had a boom and bust of equal dimensions. And when I say commercial, I am not simply talking about multi-family only. I am talking 

about office, industrial. That commercial real estate bubble certainly could not have been caused by the affordable housing goals 

or the CRE. 

Chairman GARRETT. I thank the ranking member. 

To the vice chair of the subcommittee, the gentleman from Arizona? 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. The joys of trying 

to do this in 5 minutes when you have dozens of different kinds of 

questions. 

And forgive me. This is going to be a little bit shotgun. I think 

it might have been Mr. Nielsen, who spoke to sort of the housing 

policy or housing goals for the country. In, like, 25 seconds, what 

is that? 

Mr. NIELSEN. In my mind, I think the housing goals should be 

that people who want to have a home should be able to find a mortgage, if they are creditworthy, to be able to buy a home. That 

seems to be the American dream, and we believe in that. And so 

we think that is extremely important. 

And all of these discussions have to do with costs. We can create 

a system that is so expensive that only a very few people can access themselves to single-family homes. That, we think, would be 

wrong. 

60 

Mr. SCHWEIKERT. Mr. Chairman, Mr. Nielsen, and this is one of 

the concerns, because you are my brothers and sisters. I come from 

your industry. But I am being told that as much as 13 percent of 

our housing stock in this country is now empty. And much of the 

pricing structure out there right now may be half replacement 

costs. So those on the homebuilding side have a devastating type 

of structural competition. 

You see the solution as what? 

Mr. NIELSEN. I can tell you that in some of the most devastated 

markets, number one being Las Vegas, which I just visited, there 

are still homes being built and sold. This hangover is not of newly 

built unoccupied homes, of older foreclosed homes. There are going 

to be 5,000 homes built and sold in the worst market, the white 

hot center of foreclosure in this country. And those homes being 

sold, each one of them will employ 3.5 people. 

Mr. SCHWEIKERT. Mr. Nielsen—having a little familiarity with 

some of the Vegas market, isn’t that because, also those lots, the 

land, the infrastructure, those things basically were almost given 

away for— 

Mr. NIELSEN. But, Congressman, still, those homes are being 

sold at way above the foreclosure prices. So people are willing to 

pay more for a home, a new home. It clearly is only 10 percent of 

where they were at one time, but the point is, there is still a market for new homes. And that exists across the country. 

Whether you are in Florida or anyplace else, there are niches 

where people are desirous of homes. 

Mr. SCHWEIKERT. But my great fear—and I am going to bounce 

along—is we are still sitting there with a massive number of vacant properties in many of my neighborhoods. And I know there is 

a hunger over here to build new products, but I still have this concern about what happens to my housing stock when I have 10 percent, 13 percent vacancies, up and down the country? And what 

does that mean? 

For Mr. Phillips, let’s—some of the financing side. What would 

make the REALTORS® happy? How about a system where much 

of the guarantee was actually coming through private mortgage insurance? Would that be helping us meet some of our mechanics 

and our goals? 

Mr. PHIPPS. Certainly any pieces that can be brought to the table 

to minimize the exposure would be great. But when you are looking 

at the raw scale, at the end of the day, we need the government 

guarantee. We just do. And the secondary market is critical for the 

whole market, because you are talking about the impact of all 75 

million— 

Mr. SCHWEIKERT. You are saying—okay, Mr. Phillips— 

Mr. PHIPPS. It is ‘‘Phipps.’’ 

Mr. SCHWEIKERT. Oh, excuse me, sir. 

Mr. PHIPPS. ‘‘Phipps.’’ 

Mr. SCHWEIKERT. Okay. Glad I was paying attention. Sorry about 

that. Mr. Phipps, you need the government guarantee because you 

are concerned about bondholders’ willingness to buy the bonds? 

Mr. PHIPPS. No, actually— 

Mr. SCHWEIKERT. The guarantee does what? In your eyes, it does 

what? 

61 

Mr. PHIPPS. The guarantee provides us with access to capital in 

a market where there are so few— 

Mr. SCHWEIKERT. I need you to get more technical with me, Mr. 

Phipps. Is it because people are willing to buy the bonds because 

there is a guarantee and that creates liquidity? 

Mr. PHIPPS. Essentially, yes. There is no confidence right now 

without the guarantee. 

Mr. SCHWEIKERT. So ultimately our solution is, what makes it so 

people are willing to buy the bonds? 

Mr. PHIPPS. The guarantee makes it possible that they are willing to invest. The certainty of the guarantee and the certainty of 

this government is what is facilitating it. It is a huge scale. Clearly, insurance will complement it. 

Mr. SCHWEIKERT. But ultimately, if we sold that liquidity issue, 

of saying, look, I have the MBS, I need someone willing to buy the 

bonds, right now we do it through a GSE or a full faith and credit 

right now guarantee, but if it was a combination of that or something else, as long as someone is buying these bonds and it pushes 

down the liquidity outside the securitization into my home mortgages, we are accomplishing the goal? 

Mr. PHIPPS. Provided the average consumer has access to competitive cost mortgage money, we get there. We don’t see any alternative right now. And the principles outlined in my written testimony, really tell you how we have to transition to it. 

The conversation is really problematic because the winding down 

causes uncertainty in the market, which causes the consumer to 

pause. That is a huge problem where the consumer doesn’t understand— 

Mr. SCHWEIKERT. That is at this end. I am trying to actually 

solve the problem on—if it is a liquidity issue. 

Mr. PHIPPS. Thank you. 

Mr. SCHWEIKERT. Sorry. I am now over my time. I look forward 

to another round. 

Chairman GARRETT. The gentleman from Massachusetts? 

Mr. FRANK. Thank you, Mr. Chairman. 

Let me begin with Mr. Phipps. I want to echo what my colleague, 

Mr. Sherman, said. Others may have, as well. I think it is very important when we are trying to keep confidence in the housing industry to make it very clear that the mortgage interest deduction 

is going nowhere. The sun will disappear before it goes away. 

Now, I will say this. If I were starting a new country, I would 

not have it. I don’t think it is ideal tax policy. But given the extent 

to which people’s legitimate vested interest, in the best sense, include that, trying to abolish it now, even if we were in a wonderful 

economy, would be unfair. You cannot do it without being disruptive to people. Houses are still a large part of the wealth for many 

people. 

And I have to say, I don’t think there are 50 votes to get rid of 

it. I understand people are afraid of it, but I think it would help 

us all if we could just make this clear that is staying around and 

then we can build on that. 

And, having that said, I do note that there is a dilemma, I 

think—and I sense this from Mr. Dalton’s testimony, whom I have 

enjoyed working with over the years. The specific bills that are proVerDate Nov 24 2008 11:38 Sep 22, 2011 Jkt 068337 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 K:\DOCS\68337.TXT TERRIE
62 

posed, in my judgment, are almost all reasonable. I do notice— 

frankly, if you don’t mind my phraseology—even Mr. Pinto balked 

at the compensation one. I say, ‘‘even Mr. Pinto,’’ because he has 

been most critical of the operations. 

And since everybody agrees they are not going anywhere and we 

have a whole lot of complex tasks to talk about, I don’t think a 

drastic reduction in everybody’s salary is a realistic proposal. We 

did, I would note, in 2009 put a bill through the House that would 

have covered them under the TARP executive restrictions. My colleagues at that point opposed it. Now they—I think they went from 

being too relaxed to too rigid. 

But it did seem to me—and I noticed one of my Republican colleagues had concerns about that. Others—I think Mr. DeMarco 

made a good point on the portfolio. I think we should make clear 

that securitization, risk retention applies to them, but I think you 

have to account for that in the portfolio. And making a distinction 

in the portfolio between bad assets and good ones, giving you the 

flexibility—we could work on those. 

But I think there would be a lot of agreement. I have some questions about some of the goals, but here is—what I am struck by is 

that three very responsible organizations representing major economic interests concerned with housing—the Financial Services 

Roundtable, which is itself an amalgam of a number of different financial entities, the REALTORS® and the homebuilders. 

And we have people who represent the financers, the people who 

build the house and people who sell them, all say the same thing. 

Yes, taken individually, these bills are reasonable, but to act on 

them now, in the absence of a broader approach, would be a problem. 

Would you elaborate on what you think the negative would be? 

And I know Mr. Dalton mentioned the Hensarling bill, which is in 

limbo somewhere, and I think you are not supposed to mention it 

in polite company. It was filed to satisfy some obligation. 

But what is the problem you see? I did sense agreement that the 

bills that were before us are mostly bills that—let’s put it this 

way—they are bills everybody would want to see included in an 

overall proposal. What do you think is the reason not to go forward 

with some of them now, given that there is still no agreement on 

what happens at the end? 

Let me start with you, Mr. Phipps. 

Mr. PHIPPS. I think the short answer, Congressman, is that we 

want to go through with a comprehensive approach, because consumers need to know that there is a reliable source of financing. 

And, frankly, when I started in the business 30 years ago, there 

were—the top 5 lenders represented 25 percent of the market. The 

top 5 lenders now represent almost 75 percent of the market. So 

there is a concentration that really makes it hard for competition 

that is pro-consumer, and we need a successor to this— 

Mr. FRANK. Can I say then—let me see if I can rephrase it— 

since confidence we all understand is an important part of this. We 

are asking people to make a huge decision. That is why I wanted 

to say that the MID isn’t going anywhere. 

63 

Is it your concern that if we appear to be doing this in a piecemeal way that people will be reinforced in the sense that this is 

an uncertain future for the whole operation? 

Mr. PHIPPS. Exactly. When you— 

Mr. FRANK. Okay, if I got it right, then I am going to go on to 

Mr. Nielsen. 

Mr. NIELSEN. I think you are exactly right. I think it is a comprehensive approach that needs to be taken so that there is consistency and people can see where we are going. I was listening to Mr. 

DeMarco very closely when he talked about the number of folks 

who worked for Fannie and Freddie and what they must be feeling 

today as they go forward. 

And we still have an ongoing company there that has a whole lot 

of— 

Mr. FRANK. I don’t want to go over, and I know Mr. Dalton has 

essentially said the same thing. And I just want to say, here is the 

dilemma that my colleagues have. I want to take ‘‘yes’’ for an answer. I think the problem is this: My colleagues got themselves, 

frankly, into a corner by insisting last year that they knew what 

the ultimate solution was, by bringing forward a bill that had a 

longer-range thing, the Hensarling bill, that is, as I said, now in 

limbo. They offered it. They said it was our fault we didn’t give a 

chance to have hearings to make it better. 

But I have never known them to have to wait for me to do what 

they thought was best. They could talk to other people. They don’t 

need my permission. And here is the problem. They are a little bit 

embarrassed, I think, that they were committed to something and 

haven’t got the final thing, so they are putting forward these proposals to show they are at least doing something. And while they 

are in themselves, I think, reasonable, taken together, trying to do 

it that way instead of going forward with the overall approach may 

do more harm than good, and I am struck that it appears to be the 

view of those industry organizations that have this responsibility. 

Thanks for the indulgence, Mr. Chairman. 

Chairman GARRETT. Thank you. I didn’t hear all of that; I just 

heard the part that they are reasonable. 

[laughter] 

I yield now to the gentleman from Ohio. 

Mr. STIVERS. Thank you, Mr. Chairman. 

And I would like to start with a question for Mr. Dalton. I think 

you and the ranking member of the subcommittee had a conversation about the 30-year fixed mortgage. I, too, like probably all the 

committee, support the 30-year fixed mortgage, and I am just curious if you can tell the committee whether the jumbo market that 

didn’t have GSEs involved had a 30-year fixed mortgage involved 

in it for the past 20 or 30 years. 

Mr. DALTON. Mr. Chairman—or, excuse me, Congressman—the 

concern I have about the— 

Mr. STIVERS. No, I am asking a question. Did they have—did the 

jumbo market have a 30-year fixed mortgage? This is a yes-or-no 

question. 

Mr. DALTON. Yes. 

Mr. STIVERS. Thank you. The second question I have for Mr. Dalton is about the Federal Home Loan Banks. We have kind of not 

64 

talked about them. And I think you and the ranking member of the 

subcommittee also had a conversation about community banks. 

Can you, in about 10 seconds, talk about the role of the Home Loan 

Banks with regard to community banks? Don’t they give community banks liquidity on mortgages and provide a similar role to 

what the GSE does? 

Mr. DALTON. The Federal Home Loan Banks did provide that 

role. Yes, sir— 

Mr. STIVERS. And don’t they help keep community banks competitive in the mortgage market, at least to the extent they can, 

without some huge—they don’t have the volume of a lot of your 

members. 

Mr. DALTON. Congressman, I would like to answer that for the 

record. I am not sure specifically— 

Mr. STIVERS. No, we can back off of that one. But, I just wanted 

to make sure that we put all this in context, because it is a puzzle. 

And the Home Loan Banks have an important piece of it. 

I do want to go to something Mr. Phipps said and talk quickly 

about the mortgage interest deduction and agree with the ranking 

member of the full committee that I think we all support mortgage 

interest deduction. I am for a flatter tax system, but I still believe 

that the mortgage interest deduction plays an important role here. 

And it is one way that we can support housing going forward. 

I do want to go through and ask a question sort of all the members. Is there anyone on the panel who believes that risk-based 

pricing of the guarantee fees, the G-fees, is a bad idea? 

Mr. NIELSEN. Let me respond to that. As I said before, you can 

create any kind of a cost structure that you want. All it does is 

take more and more people out of the mortgage market. So anytime 

you increase costs— 

Mr. STIVERS. Okay, I understand that. So what you are saying 

is, it is fair for my neighbor, if I am a bad credit risk, to pay the 

same amount I pay— 

Mr. NIELSEN. No, no. 

Mr. STIVERS. —but take some of my risk, because that is what 

happens when you don’t have a risk-based pricing system. Is that 

what you are for? 

Mr. NIELSEN. No, no. That is not what I am for. 

Mr. STIVERS. Okay. Then how do you reconcile that with the 

fact— 

Mr. NIELSEN. No, no— 

Mr. STIVERS. —increasing G-fees to a risk-based system? 

Mr. NIELSEN. I am going back to my original analogy. The concept is, if anyone can create risk-based fees to a point where you 

have no risk almost—there is always some risk—but at what cost? 

What— 

Mr. STIVERS. Okay— 

Mr. NIELSEN. To what portion of the American public are you 

going to say, ‘‘You don’t get to have a home?’’ ‘‘You don’t get to have 

a mortgage.’’ 

Mr. STIVERS. The point is, people need to do as good a job of pricing risk. And if we can identify risk, it needs to be priced. Is there 

anybody on the panel who disagrees with that? You disagree with 

that? 

65 

Ms. WACHTER. In a nuanced way, yes. 

Mr. STIVERS. Okay. 

Ms. WACHTER. The fact of the matter is, what is even more important is that the system itself delivers what the credit risk of the 

system will be. So your actions going forward will determine how 

risky the system is. 

Mr. STIVERS. That is fair. I think that is fair. And I don’t disagree with folks that we need to figure out where we are going, but 

I think the point of these proposals is you can create a foundation 

that you can move forward with. And while I don’t agree with all 

these, I agree with almost all of them. I think they create a foundation that allows us to move forward. 

Is there anybody who disagrees with an Inspector General for 

Fannie and Freddie, which is one of the other proposals? I didn’t 

think there would be. 

Ms. WACHTER. That is not my understanding. I thought—they do 

have an Inspector General. I thought you were talking about specific roles of an Inspector General. 

Mr. STIVERS. It is powers. It is powers for the Inspector General, 

but yes. 

Ms. WACHTER. —very narrow, specific proposals, including that 

are—the problem— 

Mr. STIVERS. So do you disagree with— 

Ms. WACHTER. Yes, I do, in the following way. 

Mr. STIVERS. Tell me. Okay. 

Ms. WACHTER. I think the problem is, these are—when you say 

Inspector General, that is, of course, extremely reasonable, sir. But 

all of these are very narrow, and the problem is that the American 

people could say, ‘‘Is this all Congress can do in setting up a new 

system?’’ I think it undermines confidence. 

Mr. STIVERS. I think what we are—the purpose is to set a foundation that everybody can agree on while we continue to move forward. And you will see more proposals coming forward, but I think 

most of these proposals are very reasonable. I support most of 

them, and I appreciate everybody’s time. It looks like my time has 

expired, but I appreciate the opportunity to have a conversation 

with all of you today. And we want you included in the discussions 

going forward. 

Thank you. 

Chairman GARRETT. Thank you. 

The gentleman from Colorado for 5 minutes. 

Mr. PERLMUTTER. I thank the chairman, and I thank the panel 

for their testimony today. What I am getting from most everybody’s 

testimony is that we have a fragile real estate market. It hasn’t 

begun to move in the way that any of us want it to move. We know 

that so many millions of people are employed in housing and in 

real estate, in finance. And, we have to get people back to work. 

And all of a sudden, we are starting to tinker with something 

that has been central to the real estate market since the 1930s, as 

if that is going to help stabilize and underscore strength in this 

market. 

So I think my friends on the Republican side are just wrong on 

this. And I feel like I have to be the historian in this committee, 

because— 

66 

Chairman GARRETT. Please do. 

Mr. PERLMUTTER. —I thought—I know the chairman always 

loves to hear me, because he and I really get going on this subject. 

But Fannie Mae and Freddie Mac in particular—Federal Home 

Loan Banks, I hope are not part of any of this GSE conversation. 

I don’t think they are. 

But as to Fannie Mae and Freddie Mac, we have had two trouble 

spots for Fannie Mae and Freddie Mac, once under Ronald Reagan 

and once under George Bush II. And I know, Mr. Phipps, you 

would like this to be a very bipartisan—and I appreciate that—but 

I see a pattern, quite frankly, where particularly 2003 to 2007, the 

Fannie Mae and Freddie Mac were used in a way—it was like just 

a cash register. 

Now that stronger and tougher underwriting standards are back 

in place, we don’t see the troubled loans. We didn’t see the troubled 

loans before that. So in working with these particular agencies, 

companies, and that is something we have to look at, whether it 

is the Federal Government or private or both, and that is a legitimate concern. But none of that is really addressed here. 

So, Mr. Nielsen, what I would like to—I did have one other historical nugget for you, Mr. Chairman, that I know you always like 

to hear. 

Chairman GARRETT. About the President or— 

Mr. PERLMUTTER. That is—no, this is about the former chairman, 

one of the former chairmen of this committee, Mr. Oxley, when in 

2005, there was an effort to put some limitations on Fannie Mae 

and Freddie Mac and exactly what was going on there. And he 

pointed the criticism at the White House. He said all the handwringing and bed-wetting is going on without remembering how 

the House stepped up on this to modify it. 

What did we get from the White House? We got a one-finger salute from the Bush— 

Mr. SHERMAN. Will the gentleman yield? Did the former chairman indicate with which finger he was saluted? 

Mr. PERLMUTTER. He did not, but I can picture it. And when the 

Democrats came in, in 2007, the very first thing we took on was 

Fannie Mae and Freddie Mac and the excesses— 

Chairman GARRETT. Would the gentleman—will the gentleman 

just yield on that? 

Mr. PERLMUTTER. I would yield to my friend from New Jersey. 

Chairman GARRETT. So were you here when all that was happening? 

Mr. PERLMUTTER. I was not. 

Chairman GARRETT. Oh, okay. 

Mr. PERLMUTTER. I am just reading what Mr. Oxley had to say. 

Chairman GARRETT. Do you remember—that bill moved along in 

the House, right? 

Mr. PERLMUTTER. It did move in the House. And it stalled in the 

Senate, apparently at the request of the White House, who I think 

was— 

Chairman GARRETT. It came out of Senate Banking, right? 

Mr. PERLMUTTER. —provided— 

Chairman GARRETT. It came out of the Senate Banking Committee? 

67 

Mr. PERLMUTTER. No, it did not, did not come out of the Senate. 

But taking back my time, Mr. Chairman— 

Chairman GARRETT. You may want to check your record on that. 

It came out of the Senate Banking Committee, and then it was 

stalled in the full Senate. 

Mr. PERLMUTTER. All I am doing is reading from Mr. Oxley, the 

former chairman of this committee. So— 

Mr. SHERMAN. If the gentleman would yield— 

Mr. PERLMUTTER. I yield to my friend from California. 

Mr. SHERMAN. I understand the chairman’s position is that 

blame lies before the full Senate and not the Senate Banking Committee, that the Senate Banking Committee was wise up to take 

up the legislation in the full Senate? 

Chairman GARRETT. Right. And it was the full Senate where we 

needed 60 votes in order to move the bill, and I guess we didn’t 

get support—I guess from your side of the aisle, actually, in order 

to move that. 

Mr. PERLMUTTER. I will take back my time, because I am just 

reading what Mr. Oxley had to say. 

Now, the point being that here we have a fragile recovery, and 

I would turn to you, Mr. Nielsen, for just this question. If we were 

to take up all of these different efforts right now, what would we 

do to the housing business, to those 5,000 homes that you are talking about being built in Nevada? 

Mr. NIELSEN. I guarantee it would be a miss. And to your earlier 

point, the secondary mortgage market that we have had in place 

since the 1930s is the envy of the world. 

Mr. PERLMUTTER. You bet it is. 

Mr. NIELSEN. Envy of the world. For us to look at two blips and 

say we should dump the whole thing, in my mind, seems inappropriate. And to that end, if you want to change the name or change 

little bits around the edge, that is fine. But please maintain that 

secondary mortgage market that has created a homeowner nation 

out of this country. 

Mr. PERLMUTTER. Thank you. And I yield back to the Chair. 

Chairman GARRETT. The gentleman from New York? 

Mr. GRIMM. Thank you, Mr. Chairman, I appreciate it. 

And I thank my colleague for the history lesson, I think. 

[laughter] 

It is amazing how so many different individuals can remember 

history differently. But I think what I am getting out of this—and, 

Ranking Member Frank, you mentioned how we could have had 

these hearings. I think the point is, we are having them now. 

I am proud to be a part of a committee that is having this dialogue. I come from Staten Island, Brooklyn, where the real estate 

market is imperative. It is crucial and vital for our job sector and 

for our economy overall. 

I am—I do have to admit—and maybe because it is his birthday—I agree with Ranking Member Frank, and that will be his 

birthday present, that the interest deduction should not go away. 

I also believe in the 30-year fixed, something my parents relied on 

when they bought their first and only house, the same house my 

mother still lives in. 

68 

That being said, this discussion is important, because I think we 

are all agreeing that we do need reforms. It is a matter of getting 

it right, though, and not—if I am understanding this panel—going 

so fast that we cut off our nose to spite our face and we make 

things worse, rather than better. 

Professor Wachter, you mentioned that we have to recognize the 

fragility of the market. And just if you could expand a little bit on 

bringing back private capital and how you would propose on bringing back the private capital. 

Ms. WACHTER. Thank you, Congressman. The market is at an extremely fragile point. And if we were to have a double dip, not 

down a few percentage but a serious double dip, a recurrence of 

what we had before, it would not only put people out of jobs, it has 

the potential to bankrupt our banking system again. So we are at 

a serious crossroads. 

And the confidence in the housing market depends on confidence 

in there being financing for the housing market. That said, private 

capital is not where it could be. Private capital has not come to the 

fore in the jumbo market where Fannie and Freddie are not operating. And the suppliers there are asking for rules of the game so 

that they can bring in more capital. 

In the short run, there is no alternative to a government guarantee, a catastrophic guarantee. Even if— 

Mr. GRIMM. Professor, could I just—on that, would you agree, 

though, that the first step has to be, at a minimum, to start to unwind where Fannie and Freddie never should have been— 

Ms. WACHTER. Absolutely, from the sense of— 

Mr. GRIMM. —out competing in the marketplace— 

Ms. WACHTER. Absolutely— 

Mr. GRIMM. —putting them back to a secondary market, which 

is their original mission? 

Ms. WACHTER. Absolutely. They should be—they should not have 

been part of the unwinding of credit standards, the reckless lending. They should not have been part of that. They didn’t start it. 

They were late to the game. But they certainly were part of it. 

And— 

Mr. GRIMM. So would you agree that in and of itself— 

Ms. WACHTER. And it has been stopped. 

Mr. GRIMM. —will be the beginning of starting to bring the private capital back? 

Ms. WACHTER. No. One solution is to have private capital which 

has a government-guaranteed backstop. And in fact, that is what 

we have with the banking system. It is not correct to say that we 

don’t have a government backstop. We have it implicitly in the 

banking system. 

The question is, a backstop that will, in fact, allow a flourishing 

market for 30-year fixed-rate mortgages. And that is why we need 

a system, a secondary market system. It doesn’t have to be exactly 

like Fannie and Freddie, and it certainly should not replicate the 

errors of Fannie and Freddie, but there is no secondary market system in the world—and we are the envy of the world—that doesn’t 

have some government role. 

Mr. GRIMM. I am almost out of time. Thank you. 

69 

Mr. Phipps, you mentioned the value of homeownership. And I 

don’t think anyone in this room would disagree with you. What are 

you proposing, though? In general broad terms, I am hearing just 

an overall plan. Is it that you want to make sure that we don’t 

move too quickly, that there is no secondary market at all and the 

bottom falls out because the private sector and the private money 

have not come to bear yet? 

Mr. PHIPPS. Essentially, yes. And the reason homeownership 

matters is that even after all the market corrections, the average 

family who owns their house is worth $188,000. The average family 

who rents a house is worth about $4,600. If we want self-reliant 

people, homeownership is the perfect opportunity for that. It has 

been a benefit and a priority of this country for almost 100 years. 

We would like to see that for our children and grandchildren. 

Mr. GRIMM. Thank you. 

Mr. Dalton, we have met before. I am out of time, so I will just 

ask you yes/no. Are you really a Democrat, Mr. Dalton? 

Mr. DALTON. I am a Democrat. 

Mr. GRIMM. Okay, that is fine. 

[laughter] 

My time has expired. 

Chairman GARRETT. And did you want to go down the rest of the 

row, too, with— 

[laughter] 

Just to be curious. And—anyway. And, of course, the professor’s 

comment—of course, Dodd-Frank was to make sure that we are 

taking away all those explicit and implicit guarantees to the banking system, because they are no longer too-big-to-fail, and that is 

what the whole benefit of Dodd-Frank is, that we don’t have that 

anymore. 

But to the gentleman from California, for 5 minutes. 

Mr. SHERMAN. I wish the gentleman from New Jersey was right 

and Dodd-Frank completely eliminated too-big-to-fail. As you know, 

we had a number of amendments to Dodd-Frank that might have 

allowed it to achieve that objective. 

Chairman GARRETT. Achieve that, yes. 

Mr. SHERMAN. I think Mr. Dalton is to be commended on his 

most recent answer— 

[laughter] 

And the wisdom that lies behind it. 

Professor Wachter, I think, is right in that the worst thing we 

could do to our economy is to see a slide or precipitous drop in 

home prices. And the biggest thing we can do to protect Fannie 

Mae and Freddie Mac is to make sure that they are not buying 

subprime loans and Alt-A loans and liar’s loans. And that we have 

already done. 

The barn is much better now that we have closed the door. I 

don’t know what changes we would have to make short term that 

exceed the importance of that. 

Mr. Phillips, I just want to re-emphasize what you just said. The 

average non-homeowning family in this country has an average net 

worth, value of everything they own in the world, of under $5,000. 

Mr. PHIPPS. Correct. 

70 

Mr. SHERMAN. That is a strong argument for promoting homeownership. I commend the gentleman from Staten Island on the 

importance—on his statement that we should keep the home mortgage deduction. 

What is most likely to happen in Congress is we will have a lot 

of talk about eliminating the home mortgage deduction, and then 

we won’t actually do anything. So whatever Federal revenues are 

available from not doing anything will be available. That is to say, 

zero. 

But what effect does it have on today’s home prices that people 

are reading that Congress might eliminate the home mortgage deduction, which means when you live in the home, you don’t get the 

home mortgage deduction, and when you sell the home, you sell it 

for an awful lot less? I would think from your position, as president 

of the National Association of REALTORS®, you could give me 

some insight as to what this talk is doing to home prices. 

Mr. PHIPPS. What all the conversations—and particularly the 

conversations on mortgage interest deduction and its elimination 

do—is cause people to pause. So when we have an overhang and 

an oversupply in the market, to discourage qualified, ready, willing, 

and able buyers from stepping into the market means that you 

have a further eroding of average price. 

It is particularly challenging—and the conversation I personally 

find frustrating, because it is something that my grandparents, my 

parents, and I benefited from, to pay down and pay off the 30-year 

mortgages. It feels like generation theft that my kids and 

grandkids cannot enjoy the benefits that we have had in place 

since 1913. 

Mr. SHERMAN. Fannie and Freddie hold portfolios of well over $1 

trillion collectively. Their plan is to sell those off to reduce that 

holding of mortgages by about 10 percent. Is that too precipitous, 

too fast, both to keep the housing market in good shape and keep 

the funds flowing in the housing market and to make sure that 

Fannie and Freddie get full value for the assets that they are selling? Is 10 percent a year faster than it ought to be? Or should I 

prefer to— 

Mr. PHIPPS. Actually, I would prefer you ask—I think the goal, 

frankly, is— 

Mr. SHERMAN. Let me ask the professor. 

Ms. WACHTER. I think that Director Ed DeMarco did actually respond to that in a way. He was asked whether 5 years is too precipitous, and he said there is no way that he can answer that question. 

Mr. SHERMAN. But you are smarter. 

Ms. WACHTER. —no, by no means—10 percent at this moment in 

time does not appear to be threatening the recovery. 

Mr. SHERMAN. So we should encourage the 10 percent, but 

maybe not mandate it in a way— 

Ms. WACHTER. Exactly, mandatory— 

Mr. SHERMAN. —that would lock it in. 

Ms. WACHTER. —is exactly where you do not want to be on this. 

Mr. SHERMAN. Mr. Phillips, I come from a high-cost area, Los 

Angeles. If the conforming loan limit drops, what does that do to 

home prices in the 10 largest cities? And then I will ask the proVerDate Nov 24 2008 11:38 Sep 22, 2011 Jkt 068337 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 K:\DOCS\68337.TXT TERRIE
71 

fessor whether that likely drop in home prices would adversely affect the economy, but first— 

Mr. PHIPPS. The answer is that it will actually force down prices. 

What is really interesting is it is portrayed as a coastal issue, 

when, in fact, we are looking at 29 States having high-cost areas, 

206 counties, and it impacts 51 million Americans. So it is a significant portion of this country that has broad demographics. 

Mr. SHERMAN. And if all of a sudden every home that used to be worth $800,000 in the L.A. area dropped to a value of $500,000, 

Professor, what would that mean for the national economy? 

Ms. WACHTER. That would certainly create regional recessions 

and beyond that, of course, if we have a price— 

Mr. SHERMAN. But only in our 10 biggest metropolitan markets. 

Ms. WACHTER. —if we have a price fall of that magnitude. 

Mr. SHERMAN. I yield back. 

Chairman GARRETT. Great. Thank you. 

The gentleman from Texas? 

Mr. SHERMAN. The record should show that when I say only the 

10 largest markets, that was facetious. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Mr. Pinto, I evoked your name in the earlier panel for some work 

that you did. Just to put it in the proper context, I believe you said 

that, under the normal rate at which Fannie and Freddie are dealing with their portfolio holdings, that is roughly 20 percent per 

year. 

I had authored some legislation that would have essentially 

shrinked their portfolios on a stair step basis 700, all the way down 

to 250, over a 5-year timeframe. So did I understand correctly—and 

I didn’t hear Mr. DeMarco necessarily disagree—that your data is 

accurate? 

I know that you have spent quite a part of your professional career studying the GSEs, and I certainly have spent some time 

poring over the paper that you did along with Mr. Wallison. 

So, can you give us a little bit more detail about your observation 

on reducing the portfolio of holdings? And is 5 years a reasonable 

time period? 

Mr. PINTO. Yes, thank you, Congressman. 

Fannie and Freddie report monthly. They have a monthly report. 

And in that, there is a section on their portfolio, and it shows what 

it consists of, what the additions are, what the subtractions are, 

and it has a liquidation rate. 

And the liquidation rate over the last year, 2010, it is known as 

an annualized liquidation rate. It varies a little bit month by 

month, so you annualize it. And so you are getting 21 percent is 

what it was last year. And if you look in January of this year, the 

first month that is reported, it has an annualize rate of 21 percent. 

So it is running in January the same. It could drop a bit. It could 

go up a bit. But that is roughly what it has been running. 

And when I put that against your stair step, as you described it, 

you started off a little more slowly and then accelerated, and so 

over time, over 5 years, it came out to be—I don’t remember the 

exact number—it was about a 15 percent reduction per year, 

annualized 15 percent. So it seemed that if the liquidations are 21 

percent today, if you assume it slows up a bit, that 15 percent 

72 

seemed to be in the ballpark and, therefore, shouldn’t be troublesome. 

I would add that I believe the reduction over the last year-anda-half has been slower than the liquidation. So in effect, they have 

been adding to the portfolio, not—if they were just sticking to the 

liquidation rate, it would be lower than where it is today. 

Mr. HENSARLING. Mr. Pinto, in the paper, the AEI paper that you 

presented back in January along with Mr. Pollock and Mr. 

Wallison, you stated that the alternative plans in Washington that 

still retained a government guarantee in the secondary mortgage 

market were flawed. I quote from the paper, ‘‘These plans are 

based on a fundamental error that the government can act like an 

insurance company and set a correct price for the risk it is taking.’’ 

So we know on the menu of options that the Administration has 

presented to us, certainly, option two and option three would still 

have the government setting a price for risk-taking. Can you tell 

me why you and the other AEI scholars have concluded that the 

government cannot correctly price for risk? 

Mr. PINTO. Yes, thank you. Basically—and it echoes what Director DeMarco said last September before the full committee—the 

government doesn’t have a means for figuring out how to price for 

risk. It doesn’t have a profit motive. It doesn’t have the ability to 

do that. 

And time and time again, it has been proven—and I think there 

were some comments by various members earlier, the number of 

cases that the government has had where it hasn’t properly figured 

out the pricing of risk. And so that is your first problem. 

The way the government doesn’t provide capital backing that for 

the most part, whereas the private sector does. So if the private 

sector actually has a thick cushion of capital at risk, it has to do 

a very good job of pricing for risk. And if it doesn’t, it loses that 

capital. 

In fact, we issued a final White Paper last week that outlined a 

completely private system, save for FHA, which we talked about 

earlier, that would rely totally on private capital, and it would put 

that capital at risk if it were not properly priced. 

And we priced that with experts in the industry, and we came 

up with pricing that is not that much higher than where we are 

today, and certainly within the confines of both what Secretary 

Geithner said on March 1st, a moderate increase in interest rates, 

and, secondly, the Center for American Progress proposal, which 

relies on a government guarantee, calls for a 40 basis point increase per year, and ours is less than that. 

Mr. HENSARLING. I see my time has expired. Thank you. 

Chairman GARRETT. And I thank the gentleman from Texas. 

The gentleman from Indiana is recognized for 5 minutes. 

Mr. DONNELLY. Thank you, Mr. Chairman. 

It seems to me that one of the key ingredients here, more than 

almost anything else, is common sense, that we have to have a 

glide path into a product that doesn’t disrupt and tear apart the 

housing market as we move forward, that we can’t one day be here 

and the next day be completely here and pray that everything 

turns out right in the process, because in the process of doing that, 

73 

Mr. Nielsen, for instance, how many people are involved in the 

home-building industry today? 

Mr. NIELSEN. We have 160,000 members that are involved in the 

home-building industry. They represent about 6 million total employees. And that is down dramatically from just a year or two ago. 

Mr. DONNELLY. And, Mr. Phipps, just a little background, the 

first house I bought was a 30-year fixed mortgage, 30-year fixedrate mortgage. And what we were able to do, it enabled us to get 

into the house. And then after some years, we were able to refinance into a 15-year mortgage, when we were able to handle a little bit more payment. 

But what it did was enable us to raise our family there, to be 

our greatest wealth instrument, and at the same time, the 30-year 

fixed got us into the opportunity to be part of this. 

What happens to the real estate market if what we do is not a 

smooth transition as we move away from the way Fannie and 

Freddie is? If we do not handle this properly, what will happen to 

the real estate market? 

Mr. PHIPPS. An unpredictable market and a market with uncertainty is a challenge, because prices go down. It is interesting. Our 

number-one priority as an organization is a reliable flow of capital, 

of mortgage capital, because at the end of the day, we live on the 

river on which capital creates, and it impacts all 75 million American families. 

If you take that away and it is not reliable, and it is not understood to be available, then it causes people to pause, prices go 

down, unemployment will increase. It is a challenge. 

And I would add one other interesting nuance. The pendulum 

has swung so far in terms of tight credit now that the average 

credit score that Fannie and Freddie are buying is 750, rather than 

700 to 720. So we need to get back toward medium, because there 

is about 15 percent of the market that should have access to credit, 

that if you look at their whole profile, certainly have the ability to 

pay it back. And they are being disenfranchised, and, frankly, that 

750,000 additional transactions this year could generate 350,000 to 

375,000 additional private-sector jobs. We are very much a jobs 

business. 

Mr. DONNELLY. Thank you. 

Mr. Secretary, first, thank you for your service, sir. And then I 

just have one question for you, and that is, what would happen to 

the real estate market if there wasn’t a 30-year fixed-rate product 

available? 

Mr. DALTON. Thank you for your nice compliment, Congressman 

Donnelly. With respect to what happens, I think you can see that 

the American people want 30-year fixed-rate mortgages, in that in 

the last quarter of 2010, 95 percent of the refinances went into a 

long-term fixed-rate mortgage. Whatever people had before, this is 

what they want. And so I think clearly we need to do that. 

In terms of what would happen without it, I think you would see 

homeownership less available to many Americans. I think they 

want predictability, and that is what the long-term fixed-rate mortgage gives them. I think without it, you would have uncertainty. 

And one of the things that we have learned is that nothing spooks 

the marketplace more than uncertainty. 

74 

Mr. DONNELLY. Thank you, Mr. Secretary. 

Mr. Chairman, I yield back my time. 

Chairman GARRETT. Thank you. 

Mr. DONNELLY. Thank you, sir. 

Chairman GARRETT. Thank you very much. 

The gentleman from Ohio? 

Oh, he is already gone. The gentleman from—unless the gentleman from California would like to yield to the gentleman from 

Ohio? 

Mr. MILLER OF CALIFORNIA. No, no, I didn’t. I was waiting for my 

time. You are wishing I would yield, but I won’t. 

Chairman GARRETT. Would you like to yield to anyone? 

Mr. MILLER OF CALIFORNIA. No, I would love to take my time. 

I am a history buff. I love history. If we go back to 490 B.C. and 

discuss Athenian democracy or we look at the issue of the GSEs— 

I enjoyed Mr. Dalton’s comments that everybody supports the fixed 

30-year loan. I do, too. I attended a major seminar by all the major 

lenders in 1982 when they said there would never be a fixed 30- 

year loan again. Remember that? Because of the bad times. And 

the GSEs got that moving, where the jumbo market came back in 

and participated in the fixed 30-year loan, so I totally agree with 

that. 

Now, Mr. Pinto, did you say that the GSEs or the government 

is not capable of pricing risk? Was that your comment? 

Mr. PINTO. The government is not capable of pricing risk. 

Mr. MILLER OF CALIFORNIA. The GSEs are not capable of— 

Mr. PINTO. I said the government is not— 

Mr. MILLER OF CALIFORNIA. Okay, good. I hope you said that, because if that were true, the private sector is doing horribly, because 

the GSEs are outperforming the non-agency market by far. Have 

they made mistakes? Yes. The default rates are lower. We can’t 

argue that. 

So they have made mistakes, without a doubt. And we tried in 

2005—and I would like to correct history—we sent a very good bill 

to the Senate. It required a strong regulator, good underwriting 

standards, a fair standard as applies to all lenders. It got out of 

committee, but the Senate Democrats filibustered it, but everything 

else was correct in the statement, except that last part. 

So perhaps if we had done that, we wouldn’t be where we are 

today. In 2001, I started introducing amendments that probably got 

the Senate 4 or 5 times defining subprime versus predatory. And 

if we had done that, we would not have seen a Countrywide and 

the predatory loans they made, and perhaps we wouldn’t have seen 

the debacle we have today. 

But if you look at the GSEs in history, if you go back from 1970 

to 2000, 1985, when Fannie lost some money that one year—they 

have always made money—in fact, they have always paid money 

into the Treasury. They have actually made money for the government. 

So instead of looking at the history of where they went wrong, 

what they did wrong, and what years they did it wrong in, and correcting that, we are looking at other things. 

And I think we need to say that, if they are outperforming the 

private sector—and this economic downturn in housing was global, 

75 

and yet not one of the other countries that suffered the downturn 

had the same form of lending practice that we have here, yet they 

suffered the same identical type of a downturn percentage-wise, we 

should say, what did they do wrong? How can we fix this? And how 

can we make the lending market solvent and strong for future generations? 

Now, what I have seen, based on the history of being a builder, 

is—and I think many REALTORS® and builders acknowledge 

that—when—lenders, if you couldn’t meet conforming standards, 

they didn’t want to deal with you, because they realize there wasn’t 

the liquidity in the private sector to make those fixed 30-year loans 

and hold those fixed 30-year loans because it ate up all their liquidity, in most cases. 

If we had an alternative to the GSEs, I would like to see it, because it wasn’t there at the height of the market, 2005, 2006, and 

2007, when you would have seen it. All you saw was Countrywide 

and the like issuing junk bonds out there to people and telling 

them they equaled mortgage-backed securities by the GSEs, which 

they didn’t. 

So if we didn’t have a GSE, I would like to hear from the builders and REALTORS®, what impact on the housing market do you 

think that would have today? 

Mr. NIELSEN. Probably the major problem would be, who is going 

to be there in another downturn? There is no question that private 

capital is private. And as a private capital, they get to go in or get 

out of any market they want to. 

So when the market is tough, they are not going to be there. 

What we have been able to count on in the past, is for the GSEs 

and FHA to take up that mantle when we had a problem. It concerns me greatly to think that the only folks we would have out 

there to help us out in a crisis is private capital. 

Mr. MILLER OF CALIFORNIA. And I am extremely pleased to hear 

that the GSEs are using risk-based loan standards and principles 

and strong underwriting standards. Had they done that in recent 

years, instead of acting like a company that is owned by stockholders trying to get a larger market share regardless of the cost 

or the risk, they wouldn’t be where they are at today. 

But today, the government owns them. Now, the government has 

an opportunity to make them solvent, to get paid back every dime 

we lent them, but charging them 10 percent interest doesn’t do 

that. So we have an opportunity to reform the GSEs, to put them 

back to their original intent, to provide liquidity to the marketplace, in times like today when we need them, and not put taxpayers at risk, as a matter of fact, make money for the taxpayers 

like they have done in all the years they have been in business 

until recent years. 

So if we are looking at what they have done, there is not a lender 

in the private sector historically that has performed as well as the 

GSEs, when they only lost money in one year. Find me one lender 

that has done that in history. There are none. 

So should we be fixing them? Yes. Should we be correcting the 

mistakes they made? Yes. But first, let’s find out what they did 

wrong and let’s fix it. I yield back the balance of my time. 

Chairman GARRETT. Thank you. 

76 

To the gentleman who is standing up from Texas, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I want to stand up for 

homeownership. 

Chairman GARRETT. There you go. 

Mr. GREEN. I want to stand up for builders who are trying to 

help us recover. 

Chairman GARRETT. And the taxpayers, too. 

Mr. GREEN. I want to stand up for all taxpayers, including you, 

Mr. Chairman. I stand for making sure that we have a 30-year affordable homeownership opportunity. And I am appreciative of 

what was said. Someone said that housing is not partisan. I made 

a note of it, and I had to step away. I believe it was the REALTOR® who said it. I concur. And I want to work across lines to 

make sure that we get this right. 

Ultimately, however, after—let me do this—I thank all of you for 

coming. I want to especially thank, however, the REALTORS®, the 

builders, and the Roundtable, simply because you are there where 

the rubber meets the road. And a lot of what you have presented 

is based upon your experiences, and your talking to people, and 

your actual knowledge of what is going on from the user’s perspective. 

And I don’t mean to in any way demean the academicians. I 

thank you for what you have done, as well. 

Ultimately, what we have to decide is, what will the role of the 

Federal Government be? That really is where the rubber meets the 

road right now. And until we do that, it is difficult to do all of these 

other things, because we could find ourselves moving in one direction, when, in fact, we have gone too far or we have done something that we will regret and we will have to try to unwind something that we placed in place. 

So I want to say to you—I believe it was Mr. Nielsen with the 

builders—you said that you think that there should be a Federal 

backstop. And, Mr. Pinto, I believe you are of the opinion—and if 

I am incorrect, I would like for you to correct me—there should be 

no Federal involvement at all, no Federal capital should be at risk 

in any way. 

Mr. PINTO. That is not correct. 

Mr. GREEN. Okay, thank you. Please correct me. And do it as 

quickly as you can, because I have a question. 

Mr. PINTO. FHA, VA, and the Department of Agriculture programs we believe are appropriate. 

Mr. GREEN. But as it relates to the GSEs, absolutely not? 

Mr. PINTO. We don’t— 

Mr. GREEN. Or anything similar? 

Mr. PINTO. We don’t believe there should be any GSEs. 

Mr. GREEN. Anything similar to that? Okay. So, now, the question becomes, in this new paradigm, however, I am sure you are 

aware that there is—we are thinking about a paradigm that will 

include FHA, VA, and some other things that may be unnamed at 

this time or some other paradigm, some system by which we will 

continue to have mortgages promulgated. 

And, of course, your answer would be, ‘‘Just let the private market take care of it.’’ Is that correct? 

77 

Mr. PINTO. Our answer is, we laid out a very comprehensive approach of how the private market— 

Mr. GREEN. Okay. But is it—in essence, when we get to the bottom line, it is the private market, is this correct? 

Mr. PINTO. A private market, yes. 

Mr. GREEN. And that would be it. Okay. Now, there are some 

other people who are similar to Mr. Nielsen, and they think that 

the Federal Government, while not the primary, maybe not the secondary, maybe not the tertiary, but possibly the quaternary, somewhere in there, there is a role for the Federal Government. And 

without saying where it is right now, those who think that there 

is a role for the Federal Government, we need to know who you are 

so that we can know what we are supposed to do, at least based 

upon your perspective. 

So let me just start with the lady. And it is interesting to note 

that one lady can counterbalance one, two, three, four, five men. 

[laughter] 

Ms. WACHTER. I don’t know— 

Mr. GREEN. And you have done well. So where do you stand on 

it? And I regret that I must ask that you say yes, some Federal 

role, or no, no Federal role— 

Ms. WACHTER. Yes, on the Federal role. 

Mr. GREEN. Yes. All right, that is a yes. 

Mr. PHIPPS. An enthusiastic yes. 

Mr. GREEN. That is another yes. That is two. Yes, sir? 

Mr. NIELSEN. Yes, sir. 

Mr. GREEN. That is three. 

Mr. PINTO. No for— 

Mr. GREEN. No, all right. 

Mr. PAPAGIANIS. Some Federal role. 

Mr. GREEN. All right. That is four, and— 

Mr. DALTON. Yes. Yes, sir, we do. 

Mr. GREEN. All right. So now we have—let the record reflect, 

please, let the record reflect that all persons, saving one, believe 

that there is some role for the Federal Government. And the record 

might also reflect that two of the academicians are having a gentle 

conversation about that. My suspicion is that there is— 

Mr. PAPAGIANIS. I think we agree. It is FHA. 

Mr. GREEN. Okay. Then let’s—extracting FHA, so we will get it 

right. I don’t want to trap you. I want to know what your thoughts 

are. Extracting FHA, removing VA, is there a role for the Federal 

Government? Now let’s do this again. Ma’am? 

Ms. WACHTER. Yes. 

Mr. GREEN. Sir? 

Mr. NIELSEN. Yes. 

Mr. GREEN. Sir? 

Mr. PINTO. No. 

Mr. GREEN. No. 

Mr. PAPAGIANIS. I say no, but we have a ton of subsidies in the— 

Mr. GREEN. Okay, you are a no. Okay. All right. 

Mr. DALTON. Yes. 

Mr. GREEN. Yes. So we have two of our academicians who think 

not, and those who, where the rubber meets the road, seem to 

think yes. Now, if we have this opportunity to have some role for 

78 

the Federal Government, isn’t it reasonable and prudent—my time 

is up, so I have to be quick here—isn’t it reasonable and prudent 

to have some idea as to where we are going with this, so that we 

can have a comprehensive approach to this, as opposed to deciding 

that maybe we ought to do a few things here and a few things 

there? 

I think what people are saying to us is, let’s get some certainty, 

and the way to get the certainty is to take this comprehensive approach and deal with it to make sure that we don’t make another 

big mistake. If I could just get people to say yes or no, I will be 

honored. 

Ms. WACHTER. Yes. 

Mr. PHIPPS. Yes. 

Mr. NIELSEN. Yes. 

Mr. GREEN. All right. You didn’t understand the question. That 

is all right. We will leave you out. You didn’t understand the question. Yes, sir? 

Mr. DALTON. Nor did I, sir. 

Mr. GREEN. Okay. 

Chairman GARRETT. Thank you for your questions. 

Mr. GREEN. Okay. 

Chairman GARRETT. Votes are going to be called shortly, but before the panel leaves, as they did with another hearing, we have 

a little bit of time left, so what we are going to do now is to go 

into what we call a lightning round, because votes are going to 

come very quickly, so we will just go for 2 minutes or so for each 

person, and then we will conclude. 

So, very quickly, following up on your last question, which members who had indicated yes to a government role or government 

guarantee or taxpayer-supported backstop have a financial interest 

in it if they were to have the taxpayers bail it out? Ms. Wachter? 

Ms. WACHTER. I do not. 

Chairman GARRETT. Would you— 

Mr. PHIPPS. Not personally, but— 

Chairman GARRETT. Not you, personally. I am asking on behalf 

of those you represent. 

Mr. PHIPPS. We certainly would benefit. 

Mr. NIELSEN. Yes. 

Chairman GARRETT. Yes? 

Mr. PINTO. No. 

Chairman GARRETT. You didn’t vote yes, so— 

Mr. DALTON. No, just the investor would have— 

Chairman GARRETT. Thank you. Excuse me? 

Mr. DALTON. I said just the investor, because of the government 

guarantee on the mortgage-backed securities. 

Chairman GARRETT. So a partial yes. Mr. Papagianis? There we 

go. Can you tell us, some of the proposals that were laid out before, 

some before us right now, would do what to the cost of mortgages? 

And then, secondly, depending upon your answer to what it will do 

to the cost of mortgages, what will it actually do at the end of the 

day with regard to the homeowner, prospective homeowner, as far 

as his ability to buy a house? 

Mr. PAPAGIANIS. Which proposal? You are talking about the bills 

before the committee? 

79 

Chairman GARRETT. Bills before the committee, yes. 

Mr. PAPAGIANIS. The bills before the committee are, in my opinion, as a package. And we can go through individual bills. But it 

would be a—it would send an important signal to the market to— 

so private capital could come back in. 

I think the most important one is actually on the G-fees. And I 

would go back to comments that Mr. DeMarco made, that even on 

the 2010 book of business—and, obviously, they are pulling forward 

losses from the past—but that the G-fee is still not appropriately 

calibrated. 

Chairman GARRETT. Right. And so that you may see costs go up, 

as far as the credit costs? 

Mr. PAPAGIANIS. I think so. I think that, I am sort of where the 

Treasury Department is, where—that any reasonable plan, pathway forward is going to include marginal price increases— 

Chairman GARRETT. What does that do to the price of the house? 

Mr. PAPAGIANIS. Price of the house? 

Chairman GARRETT. Yes. 

Mr. PAPAGIANIS. The price of the house would go down. 

Chairman GARRETT. What does that do to the homeowner, as far 

as buying a new house? 

Mr. PAPAGIANIS. It makes it more affordable. 

Chairman GARRETT. It makes it more affordable, so more—actually that—more sales and actually more construction and more 

building potential. 

Mr. PAPAGIANIS. That is right. 

Chairman GARRETT. Okay. And the last question is dealing with 

the 30-year fixed. Secretary, you said that people want a 30-year 

fixed mortgage. Isn’t it true that people actually want the cheapest 

mortgage that they can possibly get? For a long period of time, they 

actually wanted 1-year and 2-year and 3-year and 5-year and 7- 

year ARMs, because those were the cheapest things out there? 

Doesn’t the public really want whatever is most affordable to them, 

whether it is 30-year or anything else? 

Mr. DALTON. I think they want predictability, Mr. Chairman. 

And that is what the 30-year fixed-rate mortgage gives them. 

Chairman GARRETT. And even if it is more expensive, they will 

go with the 30-year fixed, if it is predictable, even if there are 

cheaper things on the market? 

Mr. DALTON. I think that is what they showed in the last quarter 

of 2010, yes, sir. 

Chairman GARRETT. Thank you. In the last quarter of 2010, because that is really all that was available? But prior to that, when 

there are other things available in the marketplace, won’t people 

go for what is cheapest available? Does anybody else have a comment as to whether people go for the higher-priced 30-year mortgage or the cheaper? 

Mr. NIELSEN. I think it is still predictability. I think if you go 

back and look at ARMs and what was happening, I think the 30- 

year fixed has always been the mortgage of choice. 

Mr. PHIPPS. And it was part of the problem that we had in the 

predatory lending period. People did exactly what you are saying. 

They went for the least expensive without realizing they were 

going to reset in 2 years. So there is a lesson that we learned as 

80 

a country that predictability and knowing what the payments are 

of a long term, it is something we really need to do for sustainable 

homeownership and literacy. 

Chairman GARRETT. Mr. Green? 

Mr. GREEN. Thank you, Mr. Chairman. 

I wanted to make that very comment, so I will continue with 

what you were saying. Also, if we examine the empirical evidence, 

we will find that many of the people who went for the teaser rate 

didn’t qualify for the adjusted rate. And I think we have to factor 

that into this equation. 

But people do seem to want to have certainty. Certainty means 

something not only to investors, but also to consumers. Everybody 

is looking for certainty. And I think that what we need to do, as 

has been indicated, is to move towards this comprehensive approach. 

Now, let’s talk about persons who have a vested interest. Is it not 

true that everybody has a vested interest in this? Because if we 

don’t— 

Mr. PHIPPS. Congressman, all 75 million American families who 

own homes have a vested interest in it. 

Mr. GREEN. Thank you. 

Mr. PHIPPS. It is their livelihood. 

Mr. GREEN. Exactly, because when they buy that home, they 

want to be able to pay for it, so it has to be affordable. And builders have an interest not only in what they sell, but also they have 

people who are employed by them. They have people who are going 

to—who are taxpayers and who benefit from this, as well. 

So the notion that because you happen to provide something that 

the American people need somehow skews your judgment, if we 

take that attitude, then we will never hear from anybody but academicians. And I would also point out that we get a lot of anecdotal 

evidence that we put a lot of credence in, and I don’t think that 

we ought to stop allowing anecdotal evidence to be presented. 

But also I think this evidence from people who are actually there 

on the ground makes a real difference. And I appreciate the testimony that you have presented. 

Let’s go back now to Mr. Dalton. Mr. Dalton, let me just ask you 

one final question before my time is up. You said you had 32 members? 

Mr. DALTON. Yes, sir. 

Mr. GREEN. And your 32 members, you have had an opportunity 

to poll them. And when you speak today, you are speaking for the 

32 members. Is this correct? 

Mr. DALTON. I am. Yes, sir. 

Mr. GREEN. Okay. And I assume that you are speaking for REALTORS® when you say that you are here today as a representative of REALTORS® — 

Mr. PHIPPS. The 1.1 million, but also on behalf of the 310 million 

Americans who need shelter and the 75 million Americans who 

own homes. 

Mr. GREEN. And let me just go to Mr. Nielsen. Are you speaking 

for builders across a—you can’t speak for every one of them, but 

across the length and breadth of the country, you are in communication with them? 

81 

Mr. NIELSEN. Correct. 

Mr. GREEN. And you are speaking for them, in terms of what we 

need to do as we move forward? 

Mr. NIELSEN. That is right. 

Mr. GREEN. Thank you. 

Chairman GARRETT. Thank you. 

The gentleman from Ohio? 

Mr. STIVERS. Thank you, Mr. Chairman. 

First, I would like to address Professor Wachter and let her—say 

I am glad to hear from the gentleman from Texas that the University of Pennsylvania is where the rubber meets the road, but I am 

sorry. I do find you an academician. He said you weren’t an academician, and I do think the University of Pennsylvania is a fine 

academic institution. And, I am just joking around there. 

But I do want to know how many of the folks at the table represent an organization that has a plan on GSEs? A lot of you do. 

Raise your hand if you do. Four—five of you have plans. Have any 

of you been involved in working together with the other groups to 

come together with one plan, for example? 

Because, for example, I know that the Financial Services Roundtable plan and the REALTORS®’ plan and the homebuilders’ plan 

have been different components. The two that are closest probably 

are the REALTORS® and the homebuilders. But have you guys 

worked together on a plan that you would—or talked at least about 

a plan? 

Mr. PHIPPS. We talk. 

Mr. STIVERS. Do you have one plan at this point? I know you 

have—I know there are five plans, but is there one plan that you 

have come together on? 

Mr. NIELSEN. No, I don’t think there is one plan. But, frankly, 

we haven’t been asked to coalesce in that way. We have gone out 

and developed these on our own— 

Mr. STIVERS. I will ask you to do it. 

Mr. NIELSEN. Okay. 

Mr. STIVERS. So, please, I would like—I would be curious to hear 

how you could come around on one plan. The other thing I want 

to address just quickly is, I do feel like that, on the 30-year mortgage, I support it, but it has to be an option in the marketplace. 

To Mr. Dalton, to me, it is about what is appropriate for each individual borrower. And that may include affordability. It may include 

predictability. It would probably include a range of factors for each 

individual borrower. 

This is not the Soviet Union, and I do not want to force any product down borrowers’ throats. So while I stand for the 30-year fixed 

mortgage, I stand for it as an option, and I believe that is the position of everybody at the table, although from hearing some of you, 

it sounded like that is not the case. 

Mr. DALTON. Congressman, my point is that we want to keep the 

30-year fixed-rate mortgage available. 

Mr. STIVERS. I agree. And that is exactly where I am. I just 

wanted to make sure we weren’t talking about having that as the 

only option, because, frankly, there are—and I will quickly ask the 

REALTORS®, because I think I am out of time—the average 

length somebody stays in their home is about— 

82 

Mr. PHIPPS. Seven to 8 years. 

Mr. STIVERS. That is what I thought. Okay. Thank you. And I 

support the 30-year fixed mortgage, but I want to recognize that 

it is not always the right option for each individual borrower. 

Thank you for your time, and thank you, Mr. Chairman, for including me. 

Mr. GREEN. Mr. Chairman, may I be recognized to ask a question, please? Would the Chair entertain a super-lightning round? 

[laughter] 

Chairman GARRETT. Sure. I yield to the—the gentleman is yielded 10 seconds. No, just kidding. 

Mr. GREEN. That would be faster than lightning, Mr. Chairman. 

Chairman GARRETT. Go ahead. 

Mr. GREEN. How much time? 

Chairman GARRETT. Do you have just a couple of questions? Another minute. 

Mr. GREEN. Okay, thank you. I want to follow up, because I concur with what my friend has said, that we are talking about options. And what we don’t want to do is rule out what appears to 

be a significant option. And if we are not careful in terms of how 

we structure this, we may find ourselves with a 30-year fixed-rate 

that is not affordable. It has to be affordable. It is just not enough 

to have a 30-year fixed-rate. It has to be affordable. 

That is what we have been trying to get to, affordability. And 

what do we have to do to make sure that we have affordability in 

this marketplace? Because builders can construct when they know 

how these are going to be sold. REALTORS® can sell houses when 

they know that the interest rate is going to be one that Americans 

can afford. And bankers can lend. And that is what affordability 

addresses. We have to make sure that all of these things are in this 

equation. 

And if we are not careful, we are going to find ourselves 

privatizing our way back to the way it was in the 1920s, when we 

had the private market and you had to put down 20 percent, 30 

percent, 40 percent, 50 percent, when you had balloons at the end 

of a very short period of time. Yes, there was a private market, but 

it was not an affordable market that gave every American the opportunity to fulfill the dream of homeownership. Not everybody can 

afford one, but those who can ought to be able to buy one. 

I yield back. 

Chairman GARRETT. All right. And I will yield myself a minute 

and then the gentleman from Ohio. 

For those of you who have looked and advocated for the 30-year 

mortgage, saying that we need to keep that, can you tell me in detail what you have looked at as opposed to the traditional government backing for this in order to guarantee that, as opposed to investor interest in this area as far as drilling down into the structures and making sure that there are some other mechanisms in 

place in order to provide the guarantee to them, whether you have 

a vertical—yes, Mr. Pinto? 

Mr. PINTO. Yes, we actually—in developing our approach, we 

went to the securitization market and had a 30-year fixed-rate— 

in this case, freely prepayable, because we wanted to compare it to 

today’s Fannie Mae loan. We had them run those numbers, and we 

83 

found that there was a very modest increase in interest rate. And 

if one takes into account what has been discussed here by both Director DeMarco and the committee members, increasing the G-fees 

some, the difference is quite modest. 

We do believe—and the important point is, you have to do this 

over time. It takes time to develop that transition, and we have 

proposed that, as I think most of the committee members do. And 

if you do that, you will have a robust market, including 30-year 

fixed-rate loans. 

Chairman GARRETT. My time is up. But who else did a comparable drilling down, as far as other approaches on this? 

Ms. WACHTER. I have. 

Chairman GARRETT. Okay. How about the other gentleman? 

Mr. PHIPPS. We have. 

Chairman GARRETT. And what is your analysis, that it will not 

work? 

Mr. PHIPPS. That it is not—it doesn’t have the capacity to absorb 

what we need to absorb right now, that is, the market— 

Chairman GARRETT. It doesn’t have the capacity? It has the capacity or the structure that you would analyze— 

Mr. PHIPPS. Both. 

Chairman GARRETT. Can you provide—since we don’t have much 

time—can you provide the analytical breakdown of the—and down 

to whether vertical, horizontal tranches that you would have on 

this to show us that this would not work, with regard to capacity 

or just as percentage of the marketplace? 

Mr. Nielsen, do you have— 

Mr. NIELSEN. I was just going to say, it is a cost issue, again. 

We could certainly provide you with those numbers. 

Chairman GARRETT. Okay. Anybody else? 

Mr. STIVERS. Thank you, Mr. Chairman. 

What we are talking about today is a way forward, and there are 

several legislative proposals in front of us which several of you opposed, but I guess I would ask you to work together and come to 

some consensus about what then you think the way forward is, because I think these are modest first steps that get us down the 

road to where we need to be. 

I guess something Mr. Pinto said just brought up a question. You 

talked about how we need to be thoughtful and it is going to take 

time for a robust marketplace to develop. What does that mean, in 

number of years or how long? 

Mr. PINTO. We have suggested 5 years, and we outlined a plan 

that would wind down Fannie and Freddie over 5 years, and then 

we demonstrate how the private sector will definitely fill in behind 

that and absorb that retreat by Fannie and Freddie and do it in 

a way that is cost-effective. 

Mr. STIVERS. Great. And I think we all agree with the gentleman 

from Texas that we want an affordable option in the 30-year fixed 

mortgage. It is not enough just to say we want a 30-year fixed-rate 

mortgage. Clearly, if it is not affordable, it is not a real option. 

So thank you for your time. I again would challenge you to work 

together to come to some kind of consensus that we can all work 

with you on, because we are committed on the way forward to makVerDate Nov 24 2008 11:38 Sep 22, 2011 Jkt 068337 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 K:\DOCS\68337.TXT TERRIE
84 

ing sure that we limit taxpayer exposure and find a robust marketplace so that we do have options. Thank you so much. 

Thank you, Mr. Chairman. 

Chairman GARRETT. And for the last word on this, 1 minute? 

Mr. SCHWEIKERT. Thank you, Mr. Chairman, as we do the lightning round. 

Mr. Pinto, earlier, I think, in some of the discussions, we were 

bouncing back and forth. The point I was trying to get to is, our 

great concern is liquidity, the ability to have money, the ability to 

finance these mortgages. I have a fixation of the number of vacant 

homes out there so we can start getting the velocity. 

Give me a vision that you have worked on that produces that liquidity so there is money out there for these deeds of trust and 

these home mortgages without a full faith and credit? 

Mr. PINTO. Great question. Thank you, Representative. 

The proposal that we have made, which relies on a combination 

of portfolio investment roughly at the levels they are at today, but 

expands the private mortgage-backed securities market substantially, and that market relies on mortgage insurance, a traditional 

approach, but with much more robust capital, which we outline, 

and securitization through the traditional tranches, but, again, 

only for prime loans. 

When you do that—and just take $10 billion, everyone talks 

about a $10 billion market. Let’s take today’s dollars, so we are not 

worrying about inflation or anything. So in 10 years, we want to 

handle a $10 trillion market. Let’s assume 20 percent of it is the 

Federal Government, FHA, VA, some non-prime loans. Let’s assume that is 20 percent. I think that is consistent with the Administration’s statements on the size of FHA, etc. 

You are now down to $8 trillion. Let’s assume that half of that 

is covered by mortgage-backed securities. Let’s assume a different 

half that also overlaps is also covered by mortgage insurance. So 

what you are looking for is two things. At the end of that 10 years, 

you want to have enough bond investors who will buy $5 trillion 

of mortgage bonds, private mortgage bonds, to support that market. 

When we talk to bond investors and we talk to, for example, one of the largest insurance companies in this country, with a $130 billion portfolio, they say we need private mortgage-backed securities 

for two reasons. There is only a $30 trillion investable private market in this country. That may sound like a lot, but they have investments to make of $30 trillion, and so there is a rough match. 

So there is $30 trillion in investable assets. 

The government has, in effect, taken $10 trillion off the table by 

nationalizing the housing finance system. And so you are left with 

$20 trillion. What that does is two things. One is, it doesn’t allow 

you to invest in the private securities, because there virtually 

aren’t any, but more importantly—or as important—it also concentrates your risk in the $20 trillion, so you now don’t have the 

diversification that you need, which is becoming a concern. So that 

is number one. 

Number two, on the private mortgage—excuse me, private mortgage guarantee side, let’s assume you had, again—you had $4 trillion of mortgage guarantee that you needed. They would cover a 25 

85 

percent exposure, which is what we suggested. That is $1 trillion. 

They would have, at the end of 10 years, about a 10 percent or 12 

percent capital. You would end up needing $80 billion to $100 billion of capital. That is very doable. We outline how that is done. 

By definition, that would probably involve 10 companies. None of 

them are too-big-to-fail. And each one has so much capital at risk 

that they have to be careful, but if they do fail, they fail on their 

own because of their own capital. 

Mr. SCHWEIKERT. Okay, Mr. Chairman—Mr. Pinto, so you think 

there is—sorry, I was going to tease you a bit about the ability— 

Mr. PINTO. It was a little bit— 

Mr. SCHWEIKERT. —very short answer on—last thing. Mr. Chairman, this one is sort of an open-ended and a little bit on the ethereal side. How important is it to having a healthy housing market 

if we had products that someone could buy a home with less than 

20 percent down, assuming we can make it quality paper, so, 

whether it be through a private PMI or some other mechanic? For 

those of us who have been—and I first became a member of—as a 

REALTOR® when I was 18 years old. I got my license when I was 

in high school, so it has been my whole life. 

And I will tell you, probably the majority of properties that I 

have sold over those years were 10 percent, 15 percent down. Do 

we need that to have—do we need to have something less than a 

20 percent down option out there? 

Ms. WACHTER. I believe we do. 

Mr. PHIPPS. Yes— 

Mr. PINTO. Absolutely. 

Mr. NIELSEN. Yes, particularly for home purchase. 

Mr. DALTON. Yes, sir, absolutely. 

Mr. PAPAGIANIS. Same, yes. 

Mr. SCHWEIKERT. So our mandate here is to find out if there is 

a way to make that quality enough paper that the bond markets 

are willing to securitize and the bond markets are willing to buy 

it? 

Okay. Thank you, Mr. Chairman. 

Chairman GARRETT. I thank you for that. And I thank the panel. 

As always, there may be more questions. And for that reason, without objection, the hearing record will remain open for 30 days for 

members to submit written questions to these witnesses and to 

place their responses in the record. 

Also without objection, I will be entering into the record the 

statement of the National Association of Credit Unions, dated 

March 30th, with regard to today. 

And with that, I thank the panel once again. And this hearing 

is adjourned. 

[Whereupon, at 2:30 p.m., the hearing was adjourned.] 

(87) 

A P P E N D I X 

March 31, 2011 

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