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HOUSING FINANCE—WHAT SHOULD THE NEW 

SYSTEM BE ABLE TO DO?: PART I— 

GOVERNMENT AND STAKEHOLDER PERSPECTIVES 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MARCH 23, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–115 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

March 23, 2010 ................................................................................................. 1 

Appendix: 

March 23, 2010 ................................................................................................. 73 

WITNESSES 

TUESDAY, MARCH 23, 2010 

Berman, Michael D., Chairman-Elect, the Mortgage Bankers Association 

(MBA) .................................................................................................................... 48 

Bowdler, Janis, Deputy Director, Wealth-Building Policy Project, the National 

Council of La Raza (NCLR) ................................................................................. 56 

Calabria, Mark A., Ph.D., Director, Financial Regulation Studies, the Cato 

Institute ................................................................................................................ 50 

DeWitt, Robert E., Vice Chairman, Chief Executive Officer, and President, 

GID Investment Advisers LLC, on behalf of the National Multi Housing 

Council and the National Apartment Association ............................................. 54 

Geithner, Hon. Timothy F., Secretary, U.S. Department of the Treasury ......... 7 

Malta, Vince, 2010 Vice President and Liaison to Government Affairs, the 

National Association of Realtors ......................................................................... 59 

O’Donnell, Vincent F., Vice President, Affordable Housing Preservation, Local 

Initiatives Support Corporation (LISC) .............................................................. 52 

Sanders, Anthony B., Distinguished Professor of Real Estate Finance, School 

of Management, George Mason University ........................................................ 58 

Wartell, Sarah Rosen, Executive Vice President, the Center for American 

Progress (CAP) ..................................................................................................... 47 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 74 

Berman, Michael D. ......................................................................................... 75 

Bowdler, Janis .................................................................................................. 94 

Calabria, Mark A. ............................................................................................. 103 

DeWitt, Robert E. ............................................................................................. 110 

Geithner, Hon. Timothy F. .............................................................................. 126 

Malta, Vince ...................................................................................................... 143 

O’Donnell, Vincent F. ....................................................................................... 159 

Sanders, Anthony B. ........................................................................................ 167 

Wartell, Sarah Rosen ....................................................................................... 178 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Written statement of the National Association of Federal Credit Unions .. 203 

Maloney, Hon. Carolyn: 

Written responses to questions submitted to Vincent O’Donnell ................. 204 

Royce, Hon. Ed: 

Written responses to questions submitted to Hon. Timothy F. Geithner .... 207 

(1) 

HOUSING FINANCE—WHAT SHOULD 

THE NEW SYSTEM BE ABLE TO DO?: 

PART I—GOVERNMENT AND 

STAKEHOLDER PERSPECTIVES 

Tuesday, March 23, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

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

Members present: Representatives Frank, Kanjorski, Waters, 

Maloney, Watt, Sherman, Capuano, Hinojosa, McCarthy of New 

York, Baca, Lynch, Miller of North Carolina, Green, Donnelly, 

Minnick, Peters, Maffei; Bachus, Castle, Royce, Paul, Manzullo, 

Biggert, Miller of California, Capito, Hensarling, Garrett, Neugebauer, Marchant, Posey, Jenkins, Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order. Let me make an 

announcement—I don’t know why I say, let me make an announcement—who’s stopping me? I am now making an announcement. 

The President is signing the health care bill today. That is why 

there are so few Democrats here and why there may soon be fewer 

Democrats here because the signing is now. Ordinarily, I would 

have considered postponing the hearing, but this hearing has already been postponed once. We’re about to go into recess. We have 

a crowded hearing schedule. We have hearings coming up on Lehman Brothers, on Greece, and on some other issues, therefore, I did 

not want to postpone this hearing, and so we’re going to go ahead. 

And what I will do is proceed. Members will get a chance to ask 

questions if and when they come, but that’s why we are somewhat 

thin, particularly on the Democratic side. 

I also want to announce that we are, I think, close to some agreement—the gentlewoman from West Virginia and the gentleman 

from California have been working on the FHA reforms. I know 

there has been a lot of Minority/Majority cooperation there. And we 

were on track to have a markup on Thursday. We will now almost 

certainly—well, we won’t be having a markup on Thursday, we 

have to give notice. We probably won’t be here. But we will schedule that markup as soon as we come back, and I think we will have 

an agreement on an FHA bill to come to the Floor. 

Finally, we are going to go ahead on Thursday with the hearing 

on the Federal Reserve’s need to deal with the liquidity that they 

have provided and what they will ultimately do. Mr. Watt wants 

2 

to go ahead with that, and I agree with him. Once again, we have 

had postponements because of the snow and other reasons. So that 

hearing, the hearing on the Federal Reserve, will go forward on 

Thursday. The markup obviously will not happen since we almost 

certainly won’t be here. 

And with that, I recognize for the first opening statement—we 

have 8 minutes of opening statements under our agreement on 

each side—the chairman of the Subcommittee on Capital Markets, 

which has jurisdiction under our rules over the GSEs, the gentleman from Pennsylvania, Mr. Kanjorski. 

Mr. KANJORSKI. Thank you very much, Mr. Chairman. Last 

June, the Capital Markets Subcommittee held the first hearing on 

housing finance in the 111th Congress to examine the present status and future structure of Fannie Mae and Freddie Mac. 

Today, we continue with what will undoubtedly be a long-term 

negotiation about the prospective configuration of our Nation’s 

housing finance system. As a result of considerable stress in our 

economy, and because of a need to maintain access to affordable 

mortgages, then-Secretary Paulson placed Fannie Mae and Freddie 

Mac under conservatorship in late 2008. Since then, the Treasury 

Department has committed to purchase more than $125 billion in 

preferred stock of the enterprises. Government agencies have also 

purchased in excess of $1.3 trillion in mortgage-backed securities. 

Together, these actions and others have helped to keep housing 

credit available for America’s middle class and prevented a complete collapse of our housing markets. 

Lawmakers also must now begin to grapple with what type of 

housing finance system we should construct for the future. In this 

regard, we have no shortage of ideas. While we must give a 

thoughtful consideration to each of these proposals, we must keep 

in mind the importance of why we created housing GovernmentSponsored Enterprises in the first place, to increase liquidity and 

to improve the distribution of capital available for home mortgages. 

My goals in this debate are: to establish a more stable, long-term 

funding source to help average Americans buy a home; to limit taxpayer risk through strong regulation; and to ensure that the housing finance system continues to support community bank and credit union lending. The task before us is not all that different from 

the one that engineers and policymakers faced in preparing for the 

‘‘Big Dig,’’ the enormous construction project that significantly 

structured how traffic flows through downtown Boston. 

We must figure out what pieces of the old housing finance system worked and keep them. We also need to determine what parts 

of the infrastructure we need to eliminate. In order to ensure access to affordable mortgages in the interim, we must additionally 

work to keep capital moving through the financial pipelines during 

our legislative debates. 

Finally, we must figure out how to pay for this enormous undertaking. As we kick off this year’s deliberations, the Treasury Secretary has joined us. In the near future, we will also hear from the 

Secretary of Housing and Urban Development. After the completion of these initial proceedings by the full committee, the Capital 

Markets Subcommittee will renew its examinations of these matters by exploring more detailed and technical questions related to 

3 

Government-Sponsored Enterprises and our Nation’s housing finance system. 

In sum, Mr. Chairman, I appreciate your efforts in convening 

this hearing as we receive testimony regarding what functions a 

new housing finance system should be able to perform. We also 

have to work to do no harm to those parts of the housing finance 

system that have worked well, and to protect taxpayers from future 

losses. I look forward to a fruitful set of discussions. 

The CHAIRMAN. The gentleman from Alabama—I am now reading from the Republican list—is recognized for 1 minute. 

Mr. BACHUS. Thank you, Chairman Frank, for holding this very 

important, and I think long overdue hearing. It’s unacceptable that 

more than 18 months after the GSEs were placed in conservatorship the Treasury Department still does not have a plan for Fannie 

and Freddie. Without reform, the bailouts will not stop, the housing market will not find its footing, and the American economy will 

not recover. But so far the response has been to pledge unlimited 

bailout aid and guarantee all the GSE debt, which has already cost 

the American taxpayers more than $127 billion. 

The question posed is, what should the new system be able to do? 

The answer is simple: Protect taxpayers from further losses and 

bailouts in order to build a stable housing finance system based on 

private capital. While the Administration and Congressional Democrats have remained silent, Republicans have introduced legislative 

measures to immediately address the failures—I yield myself an 

additional 20 seconds— 

The CHAIRMAN. The gentleman is recognized for 20 seconds, but 

it will all come out of the 8 minutes. 

Mr. BACHUS. —and to put forth real solutions. Mr. Chairman, I 

hope today is the beginning of open dialogue between Congress and 

the Administration and that you follow the leadership of House Republicans and phase out Federal credit privileges and taxpayer 

support and guarantee of Fannie and Freddie. Thank you. 

The CHAIRMAN. The gentleman has consumed 1 minute and 26 

seconds. We are going to hold ourselves to this. So, the gentleman 

from California is recognized for 11⁄2 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. We are all well aware of 

the damage caused by the mortgage giants Fannie Mae and 

Freddie Mac. Because they were perceived to be governmentbacked, they were isolated from market forces that would have otherwise prevented the excessive risk-taking. As a result, they wiped 

out any form of competition and formed a duopoly over the prime 

secondary mortgage market and dominated much of the junk loan 

market. 

As a matter of fact, between homeowners and flippers, 30 percent 

of the loans they held were flippers, you had over 10 million individual loans outstanding in 2008, held or guaranteed by Fannie 

and Freddie. Those junk loans accounted for 85 percent of their 

losses. They were at the heart of the housing bubble. The 1992 

GSE Act, which included the affordable housing mandates, played 

a significant role in the accumulation of those junk loans. Going 

forward, these requirements should be repealed, as should any 

other mandate on financial firms that puts at risk the safety and 

soundness of the institution for a broader goal. They were overVerDate Nov 24 2008 18:27 Aug 05, 2010 Jkt 056779 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\56779.TXT TERRIE
4 

leveraged 100 to 1. I carried legislation on the House Floor that 

would have allowed the deleveraging of the institutions, would 

allow the regulators to do that. Never in the future should we allow 

that kind of arbitrage and overleveraging of institutions like this, 

and that’s why I say the 1992 GSE Act with the affordable housing 

mandates frankly should be dropped. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from Illinois, for 1 minute. 

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

conservatorship in the fall of 2008, Fannie Mae and Freddie Mac 

have lost $174 billion, and billions more in losses are anticipated. 

Taxpayers have loaned the Enterprises over $127 billion and are 

liable for over $5 trillion in outstanding mortgage obligations. 

Edging out private sector mortgage market participants, Fannie 

Mae and Freddie Mac guaranteed or financed over three-fourths of 

new single family home mortgages in 2009. Taxpayers deserve to 

know where their dollars are going, what risks they are being exposed to, and how these institutions are being managed or mismanaged. Republicans have proposed reforms that will impose 

some commonsense accountability on these institutions and take 

immediate steps to wind down the immense risk they pose to the 

long-term stability of our housing market. 

GSE reform is critical. I yield back. 

The CHAIRMAN. The gentleman from California, Mr. Miller, for 1 

minute. 

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

know, the government currently owns 80 percent of Freddie and 

Fannie. We can all agree that the current scenario is not one that 

should last indefinitely, but I must disagree with anyone who suggests that Freddie and Fannie were the cause of the current housing crisis and must be abolished immediately. 

In California, Freddie and Fannie’s serious delinquency rates are 

dramatically lower than the jumbo market, evidence that while 

many of their loans were bad, they are outperforming the rest of 

the market. Currently, Freddie and Fannie and FHA make up 

roughly 90 percent of the loans made today. I have yet to see a viable alternative from this Administration or this Congress. We must 

find a path to effectively return Freddie and Fannie to profitability, 

allowing the government to recoup its investment in the secondary 

firms and ensure that there is a viable secondary mortgage market 

while removing the government from the home loan business. 

I look forward to hearing testimony from the witnesses today on 

how we should reform GSEs. Thank you. I yield back. 

The CHAIRMAN. I now recognize myself for the remaining 4 minutes and 40 seconds on our side. I very much agree that this is a 

subject that has to be addressed. That’s why I initiated the scheduling of this hearing. I regret the fact that constituency commitments of mine made us hold off a couple of weeks. We will have 

the Secretary of HUD coming forward. And I want to stress that 

I believe this should be seen as a hearing and as a legislative task, 

more importantly, not simply about Fannie Mae and Freddie Mac, 

but about housing finance. 

We have a very complex housing finance system that was allowed to grow in bits and pieces without any overall vision. There 

is the FHA and Ginnie Mae, two Federal agencies. There is Fannie 

5 

Mae and Freddie Mac, hybrids as they were, public shareholder 

corporations given by a variety of congressional and presidential 

mandates from both parties directions to do good, which came into 

conflict in some ways with their private mandate. 

There are the Federal Home Loan Banks, which should not be 

left out, which play a very important role in the housing finance. 

We will have two hearings here. We have a very large number of 

private sector witnesses, and I will say that many of them will be 

in agreement with what we just heard from the gentleman from 

California. We have two jobs here today. One is to figure out the 

best way to wind down Fannie Mae and Freddie Mac. But an 

equally important job is to decide what goes in their place. 

Now when I say decide, much of that will be purely private. It 

will not be government-mandated. But there will be some role for 

government agencies in figuring out the interaction of all of these, 

who provides liquidity to the secondary mortgage market? Is there 

a role for subsidy? My own view has always been that it’s a mistake for the government to heavily subsidize homeownership, and 

that we are much better off trying to subsidize rental housing because when you put people into decent rental housing, you do not 

confront the problems that we have seen from putting people inappropriately into homeownership. But there are some claims to be 

made for helping some working people get into homes after careful 

scrutiny. That may be partly the FHA, but it may be some other 

modes as well. 

So, yes, it is important to put into place a way to wind down 

Fannie Mae and Freddie Mac. I believe the overwhelming consensus from people concerned about the economy in general and 

the role of housing in the economy—Realtors, home builders, mortgage bankers, bankers, advocates for various groups, advocates for 

minority groups, and advocates for lower-income people—all agree 

that simply abolishing Fannie and Freddie, as well as we do that, 

would not be enough for this committee’s role. We also have to 

make decisions about what replaces it. 

Now again, many of those replacement entities will be purely private and may need no role for us. I notice there was a piece in the 

Republican bill that said, well, any State or Federal Government 

can charter a corporation to do this. Sure they can. They already 

can. And we would expect that. But I think those who are going 

to be doing the purely private aspect have a right to know, what 

is the role of Fannie Mae going to be? Where will the Federal 

Home Loan Banks be? 

So again I stress, and this is the beginning of this process, we 

will simultaneously, I hope, be figuring out how best to wind down 

Fannie Mae and Freddie Mac and make sure that before that is 

completed, we are ready to replace the functions they are now performing in the economy without leaving this great vacancy. It’s the 

old story that says you can’t really tear down the old jail until you 

build the new one. And that’s partly where we are with regard to 

this effort. 

We have a very important set of functions that are being performed, and it’s important for us to deal with the replacement of 

Fannie Mae and Freddie Mac knowing that there will be a new set 

of institutions that will deal with housing and that will also deal 

6 

with the economy. And as I said, that’s one of the things that we 

get from all of the participants in the economy who are coming forward. 

The goal of this committee will be to, I hope, come out with legislation that does both of those jobs: winds down Fannie Mae and 

Freddie Mac; and appropriately puts the government into places 

where it should be and leaves room for the private sector where the 

government shouldn’t be. 

The gentlewoman from West Virginia is recognized for 1 minute. 

Mrs. CAPITO. Thank you, Mr. Chairman, and I would like to 

thank you for this hearing today, something that needs immediate 

attention. Our Nation’s housing finance system is slowly recovering, but the system is being dominated by the GSEs, and we 

need to work together to restore a strong private market presence. 

As many of my colleagues know, the FHA is facing serious challenges with their capital reserve levels. I’m pleased that Secretary 

Donovan and Commissioner Stevens are taking a proactive approach in seeking a bipartisan consensus to resolve FHA’s challenges, and we’re still working through that process. 

Unfortunately, the same commitment to reaching a consensus 

could not be said for the Administration’s approach to the GSEs. 

Despite the complete collapse of Fannie and Freddie in 2008, and 

the massive taxpayer exposure, the Administration chose to barely 

mention the reform of these entities in their budget this year. 

The time for action is now. Republicans on this committee have 

put a statement of principles forward. The Federal Government 

should not be playing this large a role in the Nation’s housing finance system. We need to begin determining the roles of the GSEs 

and what the appropriate role for the government is in housing finance. 

I look forward to hearing the testimony of the witnesses. Thank 

you. 

The CHAIRMAN. Next, we have for 1 minute and 10 seconds, Mr. 

Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. Of all the dumb 

regulation and legislation that caused our economic crisis, none 

was dumber than that which created the GSE monopolies and gave 

them ever-increasing affordable housing missions. In other words, 

the Federal Government told them, we will let you monopolize a 

market as long as you securitize and insure mortgages for people 

who cannot afford to pay them. 

Regardless of many good motives and good people, ultimately the 

story of the GSEs is one of enriched executives, cooked books, political bullying, a massively inflated housing bubble, millions of home 

foreclosures, a shattered economy, and the mother of all taxpayer 

bailouts. The answer from the Administration to all of this, page 

352 of the budget, quote, ‘‘The Administration continues to monitor 

the situation.’’ It is unacceptable to protect the structural status 

quo to announce Christmas Eve multi-million-dollar bonuses for 

their executives and announce unlimited taxpayer exposure. 

Republicans are attempting to lead. I’m attempting to be one of 

them. That’s why I have introduced H.R. 4889, the GSE Bailout 

Elimination and Taxpayer Protection Act, that over a 5-year period 

would transition the GSEs to an innovative and competitive marVerDate Nov 24 2008 18:27 Aug 05, 2010 Jkt 056779 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\56779.TXT TERRIE
7 

ketplace without taxpayer bailouts. I encourage members to consider it, and I yield back. 

The CHAIRMAN. The gentleman from New Jersey, for 1 minute. 

Mr. GARRETT. Thank you, Mr. Secretary. It has been 3 months since the Obama Administration lifted the $400 billion cap on 

Fannie and Freddie and also allowed to be paid out literally millions of dollars to executives whom a lot of people are saying simply 

losing the taxpayers’ money. And today is simply our very first 

hearing on the topic, which I think is unbelievable. The ranking 

member and I sent a letter to the chairman immediately after that, 

saying we should have a hearing on this. It has been 3 months. We 

have had 20 hearings on other sundry issues, and it’s only now 

that we’re having this hearing today on one of the most important 

topics, over $400 billion in CBO estimates as far as the cost of it. 

For a lot of these people, it’s uncomfortable to discuss this issue 

because some of them played a supporting role in helping the demise of the GSEs, Fannie and Freddie. But, from your perspective, 

I know you said in the paper, AP has a story that says, if we rush, 

there’s risk if we do not achieve enough and not get consensus or 

something on this, through sweeping enough. Rush? It has been almost 18 months— 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. HENSARLING. —since we have had this collapse. I don’t think 

18 months— 

The CHAIRMAN. The gentleman’s time has expired. The Minority 

is entitled to divide its time as it wishes. I’m not the one who says 

people should get 1 minute, but if you have 1 minute, you get to 

talk for 1 minute. The Secretary of the Treasury is now recognized 

for his statement. 

STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Secretary GEITHNER. Chairman Frank, Ranking Member Bachus, 

and members of the committee, thanks for giving me the chance to 

come before you again. I want to compliment many of you for pointing out that the challenge of reform of the GSEs requires a broad 

look at the full range of government institutions that operate in the 

housing market. This is a complicated, difficult question, but I 

think we’re now at the point where we can begin a serious effort 

to build consensus on reform. 

Fannie Mae and Freddie Mac played a significant role in this financial crisis. Over the past decade, they were allowed to take on 

excessive risk and leverage with inadequate capital and inadequate 

oversight. And by the fall of 2008, their potential collapse posed a 

threat to the entire American financial system. Fannie and Freddie 

operated with a perception of government backing, which allowed 

them to take on significant leverage and build up a retained portfolio to a size the market never would have allowed for a fully private enterprise. 

Meanwhile, the government did not move quickly enough to put 

in place a set of restraints on their activities, restraints that would 

have protected the system from failure. This committee understands as well as anyone that these failures were not unique to 

Fannie and Freddie, which is why you moved late last year to pass 

8 

a comprehensive set of financial reforms for the rest of the American financial system. 

The failures of Fannie and Freddie were symptomatic of failures 

in the financial system as a whole, failures made by people over 

a long period of time. As the GSEs were growing, they retained 

portfolios and taking on tremendous amounts of risk, there was a 

damaging erosion in underwriting standards and a buildup in leverage across the rest of the financial system. 

Private companies, mortgage brokers, and large financial institutions with no government backstop and support were also becoming 

overleveraged. These institutions were offering credit that too 

many Americans could not afford and in many cases did not understand. And underlying all of this, of course, was the unrealistic assumption that housing prices would always go up. Together, these 

failures brought America to the edge of financial collapse. 

Over the past year, the Administration, Congress, and this committee have made important progress towards comprehensive financial reform, and today this hearing marks the beginning of the 

next stage in the process of reform, evaluating how to bring reform 

to the GSEs and the entire housing finance system. Over the coming months, we’re going to consult broadly across the public and 

private sector, across both sides of the aisle, working closely with 

this committee and your counterparts in the Senate to take a fresh, 

cold, hard look at the core problems in our system. We’re going to 

consider a full range of options, a full range of alternative models 

to determine what role the government, and what role the private 

sector should play in promoting a stable and efficient housing finance system. 

We believe any reform should meet the following broad objectives: to ensure broad and reliable access to mortgage credit; to provide financing for affordable rental housing and ownership for 

Americans; and to protect consumers and to safeguard the stability 

of our financial system. 

Effective reform has to end the system in which the benefits of 

government support were captured by shareholders rather than 

homeowners and where the taxpayers were left with very substantial losses. 

As we move forward, it’s critical we facilitate a smooth transition 

to any new system, and I want to be clear. Treasury remains committed to supporting the continued activities of the GSEs in conservatorship. We will continue to make sure they have sufficient 

capital, the capital necessary to perform under any guarantees 

issued now or in the future, and to meet their debt obligations. And 

we will be very careful not to pursue policies or reforms that would 

in any way threaten to disrupt the function or liquidity of the securities they have issued or the ability of Fannie and Freddie to 

honor their obligations. 

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

[The prepared statement of Secretary Geithner can be found on 

page 126 of the appendix.] 

The CHAIRMAN. I thank you, Mr. Secretary. And before I get to 

the questions, I do want to address some of the history. The gentleman from New Jersey raised some questions. First of all, he said 

that we have been waiting 3 months for the hearings. Well, as he 

9 

knows, 3 weeks of that came because I had it rescheduled on 

March 2nd, and had to postpone it, and this was the first day we 

could get. So I think the desire to make points here sometimes 

breaks out of the bounds of normal conversation. Yes, the hearing 

would have been 3 weeks ago, but I had a problem, and we do have 

other hearings that are scheduled. Many of those hearings, by the 

way, have been at the request of the Minority. 

But he also then said that it was uncomfortable for some of us 

to talk about this because of our role in helping Fannie and 

Freddie. The gentleman from California, Mr. Royce, also mentioned 

his efforts to try and rein things in. Well, it’s true. And again, the 

history gets forgotten here. The Republican Party controlled the 

House from 1995 through 2006. No legislation became law at that 

point. The House did pass a bill in 2005 under the chairmanship 

of Mr. Oxley to reform Fannie and Freddie. Most of the Republicans supported it. Some opposed it as too weak. It’s true, the gentleman from New Jersey thought that was not a good bill, but it 

was a Republican bill in a Republican House. 

So the notion that some of us on this side, I don’t know whether 

the assumption is that we inhabited Mr. Oxley’s body, that we 

somehow captured his mind, that we were working through Mr. 

DeLay, who was running the House at that point. I’m not sure 

what the—but it is true, the gentleman from New Jersey, Mr. Garrett, offered an amendment to strike the higher cost loan limits, 

and he did get some support. The gentleman from New Jersey 

mentions in 2005 under Republican control, he actually got 53 Republican votes. Of course, 168 Republicans voted against him. 

Those voting against him included my friend here, Mr. Bachus, 

Mrs. Biggert, the minority leader now, Mr. Boehner, Mr. Cantor. 

These are all apparently our tools. I have to tell you, you don’t 

know how good we are that I got all these people to vote to undermine poor Mr. Garrett’s valiant effort here. 

So then Mr. Royce had his bill. He did a little better than Mr. 

Garrett. He got 70 Republicans and only lost 153 of them. And 

again, the same people voted against him: Mr. Oxley; Mr. Boehner; 

Mrs. Biggert; and Mr. Bachus. So this notion that it was the Democrats who stopped him. By the way, Mr. Garrett had previously 

said, well— 

Mr. GARRETT. Would the gentleman yield on that? 

The CHAIRMAN. I’ll yield if I get unanimous consent for an additional 40 seconds, sure. 

Mr. GARRETT. I think my words actually were to the Secretary 

that some members of this committee were uncomfortable with discussing this issue, and looking at my notes, I never mentioned 

Democrats once at all, so I think the chairman doth protest too 

much. 

The CHAIRMAN. I don’t know what ‘‘doth protest too much’’ 

means when someone is correcting something. I thought he had 

said people on the other side. But if in fact he was referring to Mr. 

Bachus and Mrs. Biggert and Mr. Castle and Mr. Boehner and Mr. 

Cantor, I accept my correction, and I appreciate his making sure 

that people know that he was criticizing them, not just some of us. 

Mr. Royce got 70 Republican votes. The same group of people 

voted against it. By the way, the bill that the Republican House 

10 

passed was then denounced by the Republican President. Some will 

remember famously Mr. Oxley saying that he could have passed 

this legislation in 2005 if he hadn’t gotten the one finger salute 

from the White House. The Secretary of the Treasury at the time, 

Mr. Snow, was in favor of going forward. What happened then was 

the Republican Senate and the Republican House had a fight and 

no bill passed. 

Then comes 2006, and Mr. Paulson becomes Secretary of the 

Treasury, and as he reports in his book, he asked for permission 

to negotiate with the Congress. He got the President, whom he admires for doing this to let him do it, over the objection of many others in the White House. He then mentions in the book that he 

began negotiating with me and with the Democrats. In that next 

election, the Democrats got the Majority. He then points out in his 

book that we honored the agreements we had made and that in 

2007. When we took office, we passed a bill that he said was far 

from perfect, but was still better than the Republican bill in 2005. 

So I apologize to the gentleman from New Jersey. I thought he 

was saying that it was the Democrats who had done this. Instead, 

he was talking about Democrats and also the Republican leadership. I will say that previously the gentleman from New Jersey had 

said that, well, Republicans had tried—I do remember this; we can 

check the transcript—to fix the bill, but they were outvoted by the 

Democrats and some Republicans. In fact, in 2005, the records are 

all here, no amendment either in committee or on the Floor aimed 

at making the bill tougher on Fannie and Freddie that received a 

majority of Republican votes passed. In other words, the bill that 

passed committee and on the Floor was supported by a majority of 

Republicans in every single case. In no case did a majority of Republicans get overridden because a minority of Republicans voted 

with the Democrats. 

Now that is the history, and we do have to go forward. I believe 

with regard to the current situation there is agreement that we 

need to replace Fannie and Freddie. There may be disagreement 

about whether doing that is enough or whether or not we need to 

also figure out if we need to restructure the Federal Home Loan 

Banks and Ginnie Mae and the FHA, and if we need to provide any 

more authority in terms of the liquidity of the secondary mortgage 

market. All of those subjects are before us. In some ways they are 

harder intellectually, and that’s why we’re here to deal with them. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you. I guess there’s a question in there 

someplace for Mr. Geithner. 

The CHAIRMAN. No, no there wasn’t. 

[laughter] 

The CHAIRMAN. The rules say—I’m sorry, this won’t come out of 

the gentleman’s time. 

Mr. BACHUS. Oh, sure. 

The CHAIRMAN. The rules say each member has 5 minutes. 

Mr. BACHUS. Oh, you’re right. You’re absolutely right. 

The CHAIRMAN. Sing a song if you want to. 

[laughter] 

Mr. BACHUS. Secretary Geithner, how can you say that the regulatory reform bill in the Senate is comprehensive when it doesn’t 

11 

include the GSE’s reform? And as Chairman Frank has just said, 

we all realize now that that’s a critical part of financial reform. 

Secretary GEITHNER. The reform of the housing finance system 

is going to be a critical part of overall financial reform. But for reasons I think you understand, we decided to do this in two stages, 

and we’re now at the beginning of the next stage. This is going to 

be a very complicated consequential process, and we’re going to 

have to take a careful look across again the full range of institutions that operate in these markets. There are parts of the system 

that worked very well over a long period of time, but there are 

parts— 

Mr. BACHUS. Of course, Fannie and Freddie were not a part of 

the system that worked very well. 

Secretary GEITHNER. No, I think that—I agree with you about 

that. I think that you can’t—if you look over the past decade, a lot 

of things went wrong. The system did work relatively well for a 

long period of time, but things started to change at the beginning 

of this decade. At that point, you saw Fannie and Freddie start to 

build up these very large retained portfolios. There’s a huge 

amount of risk in those portfolios. They also started to provide 

guarantees that ultimately resulted in them taking on more credit 

risks than they were charging for. Both of those mistakes were central to the problem. 

Mr. BACHUS. All right. Mr. Secretary, I would have to disagree 

with you. In 1997, they started making loans without 

downpayments, and to people with questionable credit, so I think 

that it was a disaster waiting to happen. And I will say that several of us did speak on the House Floor at that time and resisted 

the Clinton Administration’s efforts to relax those standards. 

Secretary GEITHNER. Well, there was a—I was not a combatant 

in these debates in that period of time, but there was a long period 

of advocacy by people up here in the Congress on both sides of the 

aisle and in the Administration starting in the late 1990’s designed 

to try to bring stronger oversight, greater constraints in them. But 

of course, ultimately, as many of you have said, those efforts were 

not successful and that was a very consequential failure of policy. 

Mr. BACHUS. Right. And I think the time is now, not some second 

stage. Let me ask you this. Several alternatives have been suggested to reform them. One is to simply nationalize them and make 

the government guarantees explicit and permanent, and allow 

them to continue to have a line of credit with the Treasury and 

borrow from the Fed, and be exempted from State and local taxes. 

Another is to create more GSEs to compete against each other, 

and this is the government competing against itself, but still with 

the government subsidy and guarantees and privileges. Isn’t a better alternative to do what we Republicans are saying, at least long 

term, and let’s phase out the government’s subsidy and guarantee 

the duopoly over time, transition housing finance to a competitive 

market based environment and implement a withdrawal of all Federal Government support? 

Secretary GEITHNER. I agree with you Congressman, that I do 

not think either of the two options you began with look particularly 

appealing at this stage. I think the two options you laid out at the 

beginning, full nationalization or creating a whole new class of 

12 

GSEs to compete with each other with the same basic model, those 

do not look like appealing options to me. I have not had a chance 

to look in detail at your proposed alternative, but I will, and I am 

happy to spend time working closely with you on that. I think you 

ended by saying transition to a world in which you phase out all 

government support in any form. Is that what you said? 

Mr. BACHUS. Well, particularly the GSE that has a line of credit 

with the Treasury or ability to borrow from the Fed or exempt from 

State and local— 

Secretary GEITHNER. I personally think, as I said in my testimony, that we need to end a system in which you have this awkward combination of private shareholders with a broad sense of explicit implicit support. I think that system was a terrible mistake. 

Those mistakes were very consequential. And when—as we work 

together to create a new system to replace our current one, we can 

at least agree we should not recreate that fatal mix of public and 

private shareholders in the same institution. 

Mr. BACHUS. But I think as long as you have a government entity competing with the private market, if you subsidize them in any 

way, it’s unfair competition, and I think it crowds out the private 

market, and I think we have seen the result of that. 

Secretary GEITHNER. Well, I think, again, this—the heart of this 

debate will be to think about what is the appropriate role for the 

government in providing some form of guarantees to assure a more 

stable flow of housing finance, and what role should the private 

markets face. That’s the fundamental question we face, and we 

should take a fresh, cold look at that. And that’s going to be critical 

to reach consensus on before we figure out what the transition period should be—that transition pass should be to that new regime. 

The CHAIRMAN. The gentleman from Pennsylvania. 

Mr. KANJORSKI. Thank you very much. Welcome back, Mr. Secretary. It seems you have been remiss. You have not been here for 

at least a week. 

Secretary GEITHNER. I have had the privilege of being before this 

committee many times over the last year, and I look forward to 

many more times. 

Mr. KANJORSKI. Very good. And Mr. Secretary, it seemed we had 

some testimony the other day from Chairman Bernanke and former 

Chairman Volcker. And I thought part of Mr. Volcker’s testimony 

was particularly enlightening insofar as he was calling the committee’s attention to the difficulty of getting the regulators to regulate 

in accordance with their authority. To a large extent, I listened to 

the banter back and forth early. We are still, I guess, attacking 

each other as to who is at fault and why are they at fault. And I 

think you are taking the correct perspective there. That is history. 

Now we have to go forward and do something, and we have to 

address and answer some very serious questions. I happen to agree 

with you that with all the errors that may have occurred at some 

time with Fannie and Freddie, the reality is for a period of 20 or 

30 years, we had a relatively stable real estate market that functioned very well at poor times, so that we did not have stops and 

starts as we have had in prior decades. 

The question I guess that comes to my mind is, what are we 

going to be able to do about when this Congress passes authorizaVerDate Nov 24 2008 18:27 Aug 05, 2010 Jkt 056779 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\56779.TXT TERRIE
13 

tion for someone like the Federal Reserve to create and control 

mortgages and how they are made, and who is allowed to get them, 

and they do not exercise that influence? And regardless of whether 

the Republicans were in power for the 10 years in which that failure occurred, or whether the Democrats were in power, we can see 

that sometime in the future, one party or the other will be in 

power, and we are not quite getting the anticipated results from 

regulators that at least in policy we pass here as a matter of law. 

Should we start with that proposition and see—because it really 

does not matter what we do here if it is not implemented. What 

plans can you make, or are you intending to make, for better implementation of public policy as set by the Congress? 

Secretary GEITHNER. I think you have to start by making sure 

that the entity that is responsible for constraining risk-taking over 

these institutions, for example, has the authority and the ability to 

put in place those constraints. And among the many failures of policy in this area was we did not give the responsible body, which 

used to be called OFHEO, the authority to constrain risk-taking, 

set capital requirements high enough, and protect the taxpayer 

from loss in those entities. I think that’s the most important thing. 

If you don’t have that, nothing’s possible. 

Of course, that may not be sufficient. You still need to make sure 

that Congress is holding those supervisors, those oversight bodies, 

accountable for performance over time. But I think you have to 

start again by making sure there is clear authority and accountability for constraining risks that can pose systemic damage to the 

financial system as a whole. 

Mr. KANJORSKI. Are the independent regulators too independent 

in terms of when they seem to be going astray in what they are 

doing? 

Secretary GEITHNER. Well, I— 

Mr. KANJORSKI. Neither the Executive Branch nor the Congress 

can do much about it. They are independent, and— 

Secretary GEITHNER. I think that we created a system that put 

a lot of challenge on the regulators for the following simple reason: 

Parts of the system were held to quite high standards for capital 

consumer protection underwriting standards. But there were vast 

parts of the system that were not held to similar standards and 

had no oversight or effective enforcement in place. And when you 

do that, what happens is risk tends to migrate from where it’s constrained to where it is unconstrained. Risk tends to move to where 

regulations are weaker and the supervisor is more compliant or 

less experienced. 

So a central feature to the bill this body passed and a central 

part of reforms moving through the Senate are to make sure you 

have a level playing field across the system with clear standards 

enforced evenly across institutions doing similar activities. If you 

do that, you make the job of the supervisor much easier. If you 

make it easy for firms to evade those protections, you make their 

job much more difficult. And if you look back over the history of 

Fannie and Freddie’s role in the mortgage market where you saw— 

like you saw across the system as a whole, you saw mortgage underwriting business migrate from those institutions to parts of the 

system that were engaged in a competitive race to the bottom in 

14 

underwriting standards in consumer protection. And the most important thing we have to do in financial reform, and this will be 

true as we move to housing finance too, is to make sure there are 

clear standards set across the marketplace with clear accountability for enforcing those standards. 

Mr. KANJORSKI. Thank you, Mr. Secretary. My time has expired, 

Mr. Chairman. 

The CHAIRMAN. The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. Mr. Secretary, I have 

about three questions here. I’m going to try to put them all together, so this might get a little complicated, but last month I 

asked Federal Reserve Chairman Bernanke whether Fannie Mae 

and Freddie Mac served their purpose and whether we should be 

looking at some different way to finance mortgages since the problems we had, the expense of them at this point. And he responded 

that the Fed has been very vocal on this issue for years. He said 

we need to very cautious about returning to the existing structure 

with potential conflicts between private shareholders and public objectives, and suggested either privatization with government guarantees or a public utility approach. My first question is, would you 

agree, or could you comment on that assessment? 

My second question is, using the Federal Home Loan Bank 

model, is that something you could actually substitute for all this 

in terms of what we’re doing or not doing as far as the future is 

concerned? They don’t seem to have had the problems that the 

other GSEs have had. 

And then my last question is, what about just eliminating all 

these support systems, just a system whereby institutions which 

are making loans have to stand on their own in terms of what they 

are doing? I’m not necessarily saying I advocate that or you do, I 

just would be curious about your comments on it. 

Secretary GEITHNER. I agree with the quote you attributed to 

Paul Volcker about his diagnosis of what happened, what caused 

the problem in this context. He’s absolutely right. And I think the 

two options you summarized there should be among the options we 

take a careful look at. I think the Federal Home Loan Bank System is not without challenge today. And I think as the chairman 

said at the beginning, when you look at the housing finance markets and reform of the GSEs, you have to look at the FHLB structure as well to make sure that it can play the role it’s designed to 

play, again without leaving us with too much risk in the future 

that the government is going to have to come in, to step in to underwrite those losses. 

You ended by asking, is it possible to advocate a system in which 

the government plays no role in providing support for mortgage finance market through explicit guarantees, subsidies, support for liquidity? And I think there is certainly a pure theoretical option in 

which that may make sense. But my own view is there’s probably 

going to be a good economic case, good public policy case, for some 

continued provision of a carefully designed guarantee by the public 

sector going forward, because housing markets are so critical to 

overall economic activity. They play such a large role in people’s 

wealth, the perception of wealth. They are very vulnerable to volaVerDate Nov 24 2008 18:27 Aug 05, 2010 Jkt 056779 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\56779.TXT TERRIE
15 

tility when you see—when you experience broader financial markets’ shocks to the financial system. 

And because of that unique role housing markets play, I think 

there’s likely to be a good public policy case, good economic case, 

likely that both conservatives and liberals could agree on, for the 

design of a carefully calibrated guarantee, appropriately priced, 

that would continue in some form. 

Mr. CASTLE. What do you think the timetable on all this is? We 

have had a lot of discussion, some hearings now and that kind of 

thing. Is this something that you feel needs to be addressed in the 

next 2 or 3 months, or within a year, or do you have any thoughts 

about the timetable of how quickly Congress and the Administration should move on these issues? 

Secretary GEITHNER. I think realistically it’s going to take several months to do a careful exploration of the problems, solutions, 

alternative models, and to try to shape legislation that could command consensus. And again, I think we’re at the point now where 

we can start that process in earnest, and I think we should try and 

get it right. But I don’t see why this should take years. I think 

really at the moment now where there is a huge, compelling need 

to make sure we design the successor system, and it’s very hard, 

I think, for anybody to argue that we can live with the system as 

it now is indefinitely in the future. 

I know people are worried that we’re not going to take advantage 

of this moment together and put in place reforms, because many 

people tried in the past and failed to get consensus. But I don’t 

think we face that risk now, frankly, because I think no one can 

look at the model we have today and say we can afford to live with 

that model going forward. So I suspect you’re going to find very 

broad support for reform. The challenge is going to be just to design something that we think is going to work better in the future. 

Mr. CASTLE. I would agree with you that it’s going to take time 

to put it together, but I would hope that we could work on it together as rapidly as possible. There are a lot of dollars out there 

and a lot of correction which is needed. Thank you, Mr. Secretary. 

I yield back, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from California. 

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

for being here to discuss Fannie and Freddie, the GSEs that we depended on for many years to provide mortgage support, and mortgage financing for lower- and moderate-income homes. With the 

missteps of Fannie Mae and Freddie Mac into the subprime mortgage market during the past several years and the resulting 

conservatorships, they were given little credit for their decades of 

support for mortgage finance. They developed the fixed-rate, 30- 

year mortgage and consistent underwriting standards that made 

mortgage credit and homeownership available to millions of American families. These were the good aspects, and I won’t run away 

from that. I know that since they have been in trouble and some 

of us have been accused of having given them so much support that 

people are sometimes hesitant to say that. I believe that they dove 

into the uncharted waters when they followed private firms into 

the subprime market in an effort to increase market share and 

earnings of as publicly held companies. This effort to meet earnings 

16 

targets may have been the fatal flaw in their structure. If they had 

not been so focused on quarterly earning reports, they may have 

weathered that storm. 

Now having said that, we continue to have a great need for our 

low- and moderate-income housing in this country. This committee, 

led by our chairman and strongly supported by members of this 

committee, particularly on this side of the aisle, are supporting a 

$1 billion housing trust fund, national housing trust fund. That’s 

important to us right now. And we thought we were going to get 

the resources from Fannie, Freddie, their profits, what have you. 

That’s not possible at this time. Do you have any ideas about how 

we can support this housing trust fund? I would like to hear from 

you on that. 

Secretary GEITHNER. Congresswoman, let me just start by saying 

I think what you said at the beginning is very important for people 

to understand. Our system, our housing finance system, did work 

remarkably well over a period of many, many decades. It was in 

many ways the envy of the world. Things started to change, 

though, in the late 1990’s, and in the last decade you saw a dramatic increase in risk on their balance sheets, and a substantial 

erosion in underwriting standards more broadly. And as we know 

now, those mistakes caused a huge amount of damage. But I agree 

with you that it’s important as we think about the future, to make 

sure we retain what was good in this system. I don’t think, though, 

it’s going to be tenable to try to recreate the system as it exists 

today in the future. I think we’re going to have to do things. We’re 

going to have to do a fundamental change if we’re going to achieve 

the objective you laid out at the beginning. 

We are, of course, prepared to work with you and your colleagues 

on the committee to find ways to provide continued support for the 

housing trust fund. I’m not in a position today to describe in precise detail how we can do that, but we’re prepared to work with 

you on that, and we do have some suggestions. 

Ms. WATERS. I appreciate that very much, and we look forward 

to working with you on that. As I wrap this up, I would just like 

to be clear about whether or not we’re talking about Fannie and 

Freddie formulated perhaps in different ways to continue the mission without the risk, or are we talking about getting rid of them 

altogether? What are we talking about here? 

Secretary GEITHNER. As many of your colleagues have already 

said, I don’t think there is a credible argument that we can abolish, 

put out of existence these institutions today. That would not be responsible. One could not defend that. But I think we need to be 

very careful as we work together to design the future of the American housing finance system, that we preserve what was good, but 

we end what was too risky. 

Ms. WATERS. That makes good sense. And in the interim, I appreciate your representation that you will help us to do what we 

can to fund this housing trust fund. We need something while 

we’re trying to reorganize those GSEs. Thank you. 

The CHAIRMAN. Will the gentlewoman yield? 

Ms. WATERS. Yes. 

The CHAIRMAN. You have 30 seconds left. I just want to stress 

again the Administration has committed to work with us on this. 

17 

We are talking primarily here about rental housing. I want to 

make that point clear. We’re not ruling out homeownership, but 

many of us believe that we did too little in terms of rental housing, 

and the right rental housing financing avoids a lot of the problems 

we have gotten into in the past. 

The gentleman from California, Mr. Royce. 

Mr. ROYCE. Yes. Mr. Geithner, I want to thank you, and I also 

want to thank you for the period of time when you were at the Fed. 

I went back through my notes. I counted 15 times when the Fed 

came before Congress and warned us about the moral hazard with 

respect to the GSEs. And I admit we were in the minority, those 

of us—I think there were about 70 of us who listened to the Fed 

about this argument, about the overleveraging. But my amendment 

on the House Floor was not actually written by me. It was actually 

written by the Fed, just as over on the Senate side, Chuck Hagel’s 

amendment which was brought forward, was at the behest of the 

Fed to allow them to deleverage the arbitrage that was going on 

at Fannie and Freddie. And it was Chairman Dodd who blocked 

that amendment of Hagel’s or that bill that came out on the Floor. 

The CHAIRMAN. Would the gentleman yield? 

Mr. ROYCE. I will yield if you will yield me additional— 

The CHAIRMAN. Yes. I would point out that at that time, Chris 

Dodd was not even the ranking Democrat. The Republicans were 

in control in the Senate at that time in 2005. 

Mr. ROYCE. Right. 

The CHAIRMAN. Paul Sarbanes was the ranking Democrat, so 

Chris Dodd was the second ranking Democrat in the Minority. 

Mr. ROYCE. Yes. Right. And he objected on the House Floor to 

the bill going forward. But the point I’m making is that the Fed 

recognized the problem created in the housing market, but there’s 

another aspect of this that economists have talked to me about. 

And we have also seen over the last 10 or 15 years the huge increase in the derivatives market, and this is where I’m going with 

this, with respect to the GSEs. How much of that was tied to the 

GSEs, especially since they trade in the derivatives market the 

same way they did in the housing market? 

And I was going to ask you, Mr. Secretary, have you looked at 

this issue where GSEs were a large driver in the growth of the derivatives market and in the non-risk adjusted trading that went on 

in that market? In other words, the point I’m trying to make is 

that these entities, because of the presumption, because of the 

moral hazard, the same argument you were making to us, just like 

investors in their debt believed they were triple A, the counterparties here believed they were triple A. But here, it had additional 

significance. And so they played a big role, I think, in the growth 

of the derivatives market on Wall Street. How do we mitigate that 

going forward in the context of GSE reform? Thank you, Mr. Secretary. 

Secretary GEITHNER. GSEs take on two types of risk: credit risk, 

the risk the homeowner defaults; and interest rate risk, because a 

lot of the mortgages are guaranteeing their 30-year, fixed-rate 

mortgages. They need the capacity to hedge those risks. They need 

to use derivatives markets to hedge the interest rate risk on their 

books. So I think what they did there was necessary. Again, the 

18 

central failure of oversight of the GSEs was not to force them to 

hold enough capital to back their commitments. They took on more 

risk than they had capital to support. 

This committee has passed a sweeping set of reforms to establish 

oversight over the derivatives markets, and those reforms would 

make sure that you can force institutions that operate in those 

markets to hold capital against the commitments they write, would 

force standardized derivatives on to central clearinghouses where 

you can regulate and supervise margin, would give the SEC and 

CFTC the authority to police fraud and manipulation in those markets, and would bring broad transparency and disclosure to trading 

in those important markets. We think those reforms are central to 

reduce the substantial systemic risk that comes from the growth in 

those basic markets. And I think if we put those reforms in place, 

we will be doing a very important set of changes in building a more 

stable system. 

Mr. ROYCE. I understand that argument, but there are two 

points: one, you still have the moral hazard problem because of the 

presumption of the government-backed guarantee; and two, they 

were the 800-pound gorilla. So when you, in the Fed then and 

Treasury now, come forward and say, ‘‘Well, we have to make sure 

they don’t overleverage,’’ they were overleveraged at a hundred to 

one. They were involved in arbitrage big time. And all the Fed was 

asking was for the ability to deleverage this portfolio, arguing that 

if we slowly did that, we would avoid the bust in the market, we 

would avoid the systemic risk that would otherwise hit us. And 

that systemic risk did hit us and the Fed turned out to be absolutely right about this. 

But how do we overcome the fact that when you create a Government-Sponsored Enterprise, it becomes so powerful that it leans on 

the very institution that’s supposed to regulate it? 

Secretary GEITHNER. I would just say again, even without the 

many failures around the GSEs, what happened in derivatives 

markets posed systemic risk to the American financial system. And 

so even again without the challenges we face in the GSEs, we 

would have to bring about broad reforms, establish oversight over 

the derivatives market themselves. And you’re of course right to 

emphasize again the heart of all financial crisis is when you have 

too much leverage, not enough capital to back commitments. That 

simple failure was pervasive across the financial system, not just 

in the GSEs. 

Mr. ROYCE. Mr. Geithner, I have a few other questions for the 

record, and if you wouldn’t mind getting back to me in writing, I 

would appreciate it. Thank you very much. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, gentlemen. I thank them for having 

yielded, and I recognize the gentlewoman from New York, but I ask 

for 20 seconds, if you would yield to me? 

Mrs. MALONEY. Absolutely. 

The CHAIRMAN. Just to say that, yes, the Fed was complaining 

about Fannie and Freddie buying up mortgages. But the Fed was 

also at the time refusing to use authority that Congress had given 

it in 1994 to stop the bad mortgages from being made in the first 

place. So they were worried about the secondary market when they 

19 

were neglecting their opportunity to correct the primary market. If 

the Fed had used the authority that Congress granted them that 

Mr. Greenspan now acknowledges he could have used, you wouldn’t 

have had those bad loans made in the first place for Fannie and 

Freddie to buy up. 

The gentlewoman from New York. 

Mrs. MALONEY. Thank you. Welcome, Mr. Secretary. In 2007, 

both Fannie and Freddie invested in a very successful affordable 

housing project in the district I’m honored to represent called 

Stuyvesant Town and Peter Cooper. Over 25,000 constituents live 

in this affordable, rent-stabilized rental housing. Fannie and 

Freddie were the senior debt holders in a $22 billion commercial 

mortgage-backed securities deal that included the Stuyvesant 

Town/Peter Cooper debt. It was well known in the press and by 

economists and people looking at the deal. They knew at the time 

that the rental income on the Stuy Town property would not be 

sufficient to meet the owner’s debt service obligations. The owners 

knew that they would have to turn over or convert affordable housing to market rate units in order to increase the rental income and 

accelerate the rate of turnover. Hundreds and hundreds of my constituents, the tenants, were dragged into court to defend their 

homes on very frivolous lawsuits. Knowing this, Fannie and 

Freddie still invested in the debt. 

And I would like to ask you, Secretary Geithner, what can be 

done to prevent GSEs from investing in properties that can only be 

profitable if you convert affordable housing to market rate by forcing out certain tenants? That certainly works against the mission 

of Fannie and Freddie to build or provide a base for affordable 

housing. I am working on legislation with the chairman and others 

to ensure that Enterprises cannot receive affordable housing goals 

credits for investments like the one they made in the Stuy Town 

debt. Do you believe they should receive housing goals credit for 

this type of investment where they know cannot continue to provide affordable housing? 

Secretary GEITHNER. Congresswoman, I don’t know, but I would 

be happy to spend some time talking to you and your staff about 

that particular problem and how we can prevent this kind of thing 

from happening again. I can’t tell you now what is possible in that 

area. But I understand your concerns and I’m happy to work with 

you on it. 

Mrs. MALONEY. Thank you. In this vein, New York City has a 

growing problem of overleveraged multifamily properties, including 

the Stuy Town project. What incentives can we put in place to encourage GSEs and community banks to work with local housing authorities to ensure troubled affordable multifamily buildings are 

sold to buyers who are in the business of preserving affordable 

housing? We’re working so hard to build affordable housing and yet 

when it’s sold, it is sold under an umbrella that absolutely makes 

it impossible to continue as affordable housing. 

Secretary GEITHNER. Congresswoman, Secretary Donovan and 

my colleagues at Treasury have spent a lot of time looking just at 

exactly those issues, and again, I would be happy to have them 

come to you and talk through the range of options we think would 

be most productive in meeting that objective. 

20 

Mrs. MALONEY. And how do these securitized loans get detangled 

in a timely manner in order to protect tenants from a tumultuous 

foreclosure process, which is what we are now confronting with 

Stuyvesant Town and Peter Cooper? We can’t even figure out who 

owns it now. So what are your ideas in that area? 

Secretary GEITHNER. Again, I am happy to come spend some 

time talking to you about that. In the market we created for housing and finance, we have made it much more complicated in many 

ways, to work out economically sensible restructuring of loans 

backed by real estate than may have been possible in a more simple system in the past. You’re citing just one example of that. 

There are thousands of examples across the country of that. And 

I think the reforms that this committee has put forward to try and 

improve the way the securitization markets work would be helpful 

in that area. But they will take some time coming, and they’re not 

going to provide immediate relief to the problems you’re facing, but 

we would be happy to spend some time talking with you about how 

to address the specific problems you refer to in New York. 

Mrs. MALONEY. Thank you, and my time has expired. 

The CHAIRMAN. The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Mr. Secretary, it seems like the GSEs have exposed the fallacy 

of bifurcating the mission or consumer protection regulation from 

the safety and soundness oversight. When HUD oversaw Fannie 

and Freddie’s affordable housing mission and OFHEO served as its 

safety and soundness regulator, I think the result was a $227 billion bill for the American people. 

Do you think the Administration is posed right now to make the 

same mistake by creating a consumer financial protection agency 

even if it’s in the Federal Reserve or whether it’s been some places 

have talked about it being a separate agency? Can you explain how 

the financial institution supervision would be? Or do you think it 

would be more effective if there’s the one regulator to focus on both 

consumer protection and the safety and soundness? 

Secretary GEITHNER. Congresswoman, that is a very important 

question, and I’m glad you raised it. We are now living with the 

consequences of a system which for many, many decades gave bank 

supervisors the responsibility to write and enforce rules for consumer protection, and that system did a terrible job for the country. It did a terrible job of protecting consumers, and it did not do 

an adequate job of protecting the safety and soundness of the 

banks in our country. 

There were failures in both those two areas, and our judgment 

is you’re going to get better outcomes in consumer protection and 

better outcomes in safety and soundness if you separate those functions. We propose that. I don’t know if this helps the argument, but 

Secretary Paulson in 2006 in his Financial Blueprint—2008, 

maybe—proposed exactly the same, basic model, which is to separate consumer protection from safety and soundness supervision 

with the basic judgment that that would produce better safety and 

soundness regulation and better consumer protection. 

Mrs. BIGGERT. So you would really advocate for separating them? 

Secretary GEITHNER. Oh, absolutely, and, again, I do not believe. 

I have heard this argument a lot from bankers and supervisors, 

21 

and I do not believe it is a strong argument. Again, look at what 

that system produced—a colossal devastating failure. Let me try 

one simple example. Why should there be any conflict between 

rules designed to give consumers adequate disclosures so they can 

make choices of what type of mortgage product to take and rules 

designed to enforce sound underwriting standards for consumers? 

I do not see the basis for conflict. Now, in the bill this committee 

passed in recognition of that concern, there are a careful set of 

checks and balances against the risks that the consumer agency 

would somehow write rules that could imperil the stability of the 

financial system. But I think those jobs are better separated. President Bush and Secretary Paulson had the same view in their proposal, and I think the record of the current system supports that 

judgment. 

Mrs. BIGGERT. Well, wasn’t it that the Federal Reserve was really responsible for writing the rules and regulation, the financial 

regulators? 

Secretary GEITHNER. I think that’s the point. Again, I think that 

you want bank supervisors worrying about risk management, about 

capital, about liquidity. You want them focused on those core 

things. You don’t want them having to spend a bunch of time also 

having to worry about consumer protection if that job can be better 

done by an independent agency. 

Mrs. BIGGERT. I guess I see it differently as with the GSEs and 

the banking industry, the consumer regulations, and the other regulators was separated and it didn’t work. 

Secretary GEITHNER. Again, I respect that view, but in fact, the 

GSEs played a generally quite responsible role in what they did in 

establishing standardized mortgage products; and, generally, they 

held to better underwriting standards than was true of the private 

market. So I don’t see the failures and successes of the GSEs as 

undermining the argument for separating consumer protection 

from safety and soundness supervision and banks. 

Mrs. BIGGERT. Does it create a duplication? What if the consumer protections with GSEs or with the banking industry that it’s 

something that one way they propose that this will protect the consumers, and then the regulator with the safety and soundness, and 

they’re in conflict? 

Secretary GEITHNER. Well, again, if there’s any risk of conflict, 

you can deal with that risk by making sure that you have a body 

that looks at conflict and can pass judgment on conflict. But I think 

it’s very unlikely there would be any conflict. 

The CHAIRMAN. The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you, Mr. Secretary. 

Our housing market is to some extent broken. Thank God, the 

GSEs and FHA are really providing all the financing outside of 

Beverly Hills. The definition of median home price is distorted, because you may have a few arms-length sales, willing buyer, willing 

seller, home in good condition, and then you have tens and hundreds of thousands of foreclosure sales of homes in terrible repair, 

deeds in lieu. 

Now, focusing on high-cost areas, including Los Angeles and the 

10 largest or most expensive metropolitan areas, what would happen if at the end of the year, the maximum home limits for Fannie 

22 

Mae and Freddie Mac not only decline from $729,750, but not just 

to $625,000, but the government resets the loan to the current median price? I’m told in Los Angeles this means that the FHA limit 

drops from $729,000 to $376,000. The GSE limit, Fannie and 

Freddie, dropped from that $729,000 to $417,000. I don’t expect 

that by the end of this year, we’re going to have a robust, middleclass home finance market independent of the GSEs. What happens if you have that sudden inability to buy and sell a home anywhere in some of our country’s remote, largest areas? What happens to the national economy? Could it cause a second dip in this 

recession? 

Secretary GEITHNER. Congressman, that’s a very important question. I don’t have a judgment now about what Congress should do 

with those temporary increases and the conforming limits. I think 

it was very appropriate that Congress extended them. I fully supported that. I don’t have a judgment yet. I would say the following, 

though. I think it was very important for people to understand that 

the basic mistakes most governments make in dealing with financial crises, real estate crises, is they tend to prematurely declare 

victory, say that the great risks are behind us, and they tend to 

walk-back support too quickly—not too slowly. And I think it’s important to recognize that this housing crisis, the financial crisis has 

caused a huge amount of damage and it is going to take quite a 

long time for us to heal and repair that damage. I don’t know how 

long it’s going to take, but it’s going to take some time still. 

Mr. SHERMAN. Do you think we’re ready by the end of this year 

to see the GSE limit drop in half in America’s most important and 

largest cities without damaging the economy of the country? 

Secretary GEITHNER. As I said, Congressman, I’m not in the position yet to make that judgment. We don’t need to make that judgment yet. We’ll have to make that judgment at some point this 

year, but not quite yet. But, again, I want to underscore I think 

your basic point is we have to be very careful that we are doing 

carefully designed, sensible things to help facilitate this process of 

repair and recovery. 

Mr. SHERMAN. Let me move on to the next question. This one is 

just for the record, because I don’t want to get you in trouble with 

the Senate. But a year ago today, the President nominated an 

Under Secretary for International Affairs, which is still on hold in 

the Senate after a year, as well as other major positions—the 

Under Secretary for Domestic Finance and the Assistant Secretary 

for Tax Policy. And so the question for the record is, do holds, filibusters, and the Senate practice of not allowing a nominee to work 

as an acting on a temporary basis until the confirmation, do those 

Senate practices lead to higher unemployment to companies not 

being able to find out what the tax regulations are because you 

don’t have an Assistant Secretary for Tax Policy? And are there 

hundreds of thousands or tens of thousands of Americans unemployed today because of the perks and prerogatives of the other 

body? Don’t answer that one for the record. Let me guess. 

Secretary GEITHNER. Say. Can I just thank you for raising that 

concern and for pointing out that these three senior positions in the 

Treasury remain unoccupied today. It has now been 15 months 

since the President took office. And we have an amazingly talented, 

23 

dedicated, hard-working group of people at the Treasury doing a lot 

of important things for the country, but we need to get those people 

in place. 

Mr. SHERMAN. Finally, we have disagreed on whether the Executive Branch should have permanent, unlimited bailout authority to 

make sure that the creditors and counterparties of major institutions on Wall Street can get bailed out only by the Executive 

Branch. Congratulations on convincing the Senate, at least this far, 

to give you that permanent, unlimited buy authority. 

Secretary GEITHNER. Can I respond to that, Mr. Chairman? Actually, we agree on more than you think. As I said in the past in this 

hearing room, I would not support that, and neither your bill nor 

the Senate bill gives the Executive Branch the authority you describe. What it does do is make it clear that a large institution in 

the United States, if that institution in the future manages itself 

to the point where it gets to the edge of the abyss can no longer 

survive, then the government should have no option at that point 

except to put that institution into a form of receivership so it can 

be dismembered over time. 

The CHAIRMAN. Mr. Secretary, at this moment of agreement 

among you, Mr. Sherman, and the Senate, we are going to move 

on. The gentleman from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Mr. Secretary, it 

is good to see you again. Given the unprecedented support that the 

Federal Government, both at the Federal Reserve and the Treasury 

has propped up, the securitization market for housing in this country, one of the things that concerns me is that the longer we keep 

this government presence, I think the longer that the private sector 

and private securitization sits on the sidelines. Because quite honestly, now, we do know that there is some activity pending out 

there, and there could be, but not to the level that we have had 

in the past, so what do we do? 

And, you say—here you are saying—Congressman, I’m not really 

ready to do anything right now, but I am very concerned. It’s kind 

of like a muscle. Like the doctors tell you the longer that you don’t 

use a muscle and you keep your arm in the sling, which is where 

we have the housing finance market today—we have it in a sling— 

the harder it is to rehabilitate that arm once you take it out of the 

sling. How are we going to do that and what is your Blueprint to 

do that? 

Secretary GEITHNER. Congressman, I worry a lot about that risk, 

and you are right to highlight it. But I think the main risk we face 

today is we still have an economy that has only now been growing 

now for three quarters. We have unemployment at around 10 percent, much higher in many parts of the country, a housing market 

still overwhelmingly dependent on the government, because there 

is no private will to provide financing for residential real estate, 

and it is going to take us a while to get through this and be confident that we have a recovery in place led by the private sector 

that could be self-sustaining over time. 

The main risk we face today, still, is that there is still enormous 

damage caused by this crisis. You see it conspicuously in housing 

across the country. If you look at what we have done in the rest 

of the financial system, you can see we have been very, very careful 

24 

to unwind, to walk back to terminate and end the emergency programs that we no longer need to put in to keep in place, so we have 

ended the money market guarantee fund. The FDIC is no longer 

providing guarantees for the debt of bank holding companies. 

We have replaced the overwhelming majority of public investments in our banking system with private capital. We are 

unwinding and trimming as the Fed is doing all those emergency 

programs, exactly for the risk you pointed out. We do not want 

these markets excessively dependent on government support in the 

future, and we want to see those private markets come back as 

quickly as we can. 

Housing still has been so damaged. That process and repair is 

going to take a long time. But if you look at what we have done 

in those other areas, you can see we have been willing and careful 

and effective and walking back and unwinding the things that no 

longer play a useful, essential role in supporting recovery. 

Mr. NEUGEBAUER. I hear what you are saying, and I agree with 

some of that as well. But one of the big problems here is that we 

really don’t incentivize people to get into the securitization on the 

private side because of the interest rate levels that make borrowing 

very, very inexpensive. And so they can borrow very inexpensively. 

They can go out and buy the Freddie and Fannie products and the 

Ginnie Mae products, and so there’s not a lot of incentive to go out 

and look for private demand in those markets. 

Secretary GEITHNER. Again, I agree with that risk. I think if you 

look, you’ll have a chance to talk to Secretary Donovan about this, 

but if you talk to him, or you talk to Ed DeMarco who runs the 

FHFA, you’ll see that they have put in place a variety of changes 

already in underwriting standards and how they price their guarantees. It is designed to help promote the private sector coming 

back and replacing them as things start to heal, but that process 

is going to take some time. I think you’re right to underscore its 

importance, and I will be fully supportive of that effort as we move 

to a transition where the private sector can play a larger role. 

Mr. NEUGEBAUER. And one of the things I have heard also is, for 

example, PMI was an important part of the private securitization 

market. But what the PMI companies tell me is that they can’t 

compete with the Federal rates, and so sometimes we have to bring 

a level playing field here so that there is a yield difference there 

that people are willing to say, I would rather have the higher yield 

here, and so I will move outside of the current parameters and 

move into the private securitization. 

Secretary GEITHNER. Again, I agree with you about the objective. 

It’s the question about how we do it; and, again, I just want to underscore that even though the economy is growing now and we 

have brought a measure of substantial stability back to the overall 

financial system and interest rates are much lower today than they 

were, there’s a lot of challenge ahead still in the housing market 

and housing finance market. And we need to be very careful that 

we’re still helping to facilitate this process of recovery as we transition to a new, better system. 

Mr. NEUGEBAUER. One final, quick question: As Chairman 

Bernanke is wrapping up his purchase program of mortgages, what 

do you think that does to the market? 

25 

Secretary GEITHNER. I would leave that to the Chairman to describe, but again as the Fed does the careful responsible thing of 

winding down its emergency actions, we want to make sure again 

that the full complement of government policies in this area is 

helping facilitate this process of repair and recovery. And, it is getting better. We are making some progress in that area, but there 

is a lot of damage still out there. 

The CHAIRMAN. Before getting to Mr. Capuano, I ask unanimous 

consent that a letter from the National Association of Federal 

Credit Unions be put into the record. Just, ‘‘GSEs allow credit 

unions to obtain the necessary liquidity to create new mortgages, 

despite their conservatorship, Fannie Mae and Freddie Mac have 

made it an important tool for credit unions to help free them up 

to make more loans; and they’re a valuable resource for low-and 

moderate-income members. As Congress considers ways of reforming the current system, we believe it is important that safeguards 

are in place to make a very smooth transition, and the important 

roles that Fannie Mae and Freddie Mac play for credit unions not 

be capitalized.’’ 

That’s from the National Association of Federal Credit Unions. 

The gentleman from Massachusetts is recognized for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. Thank you, Mr. Secretary. 

Mr. Secretary, there have beeen a lot of big things talked about 

today, but I look at Fannie and Freddie maybe too simplistically, 

and I’m just curious. I’m not sure I know the exact number. Do you 

know the number of the general percentage of homeownership in 

this country prior to the existence of Fannie and Freddie? Am I 

right to think it was in the 30 to 40 percent range? 

Secretary GEITHNER. You mean going back to the 1930’s? 

Mr. CAPUANO. Yes. 

Secretary GEITHNER. I don’t know, but a small fraction of where 

it is today. I agree with that. 

Mr. CAPUANO. And today, it’s around 70 percent, give or take? 

Secretary GEITHNER. Today, it’s about two-thirds. 

Mr. CAPUANO. And I look at homeownership. Maybe I’m wrong, 

but I think it’s probably the main financial aspect of this country 

that helped create and maintain the middle class. I come from a 

neighborhood where everybody I know, their way into the middle 

class was the purchase of a simple home, oftentimes a multifamily 

home. And I look at Fannie and Freddie as symbolic if not in fact 

responsible for that. Prior to Fannie and Freddie, how did people 

get mortgages? The private market alone? There was no government involvement. 

Secretary GEITHNER. That’s right. 

Mr. CAPUANO. And for me, that’s what this is all about. I guess 

I understand that Fannie and Freddie like everything else needs 

to be retooled. I have no problem with that, but as far as the current economic crisis, did Fannie and Freddie create the derivatives 

market? 

Secretary GEITHNER. No. 

Mr. CAPUANO. Did they participate in it any worse or any differently than a million other private entities? 

Secretary GEITHNER. Differently, but I wouldn’t say worse. 

26 

Mr. CAPUANO. And so they did some bad things, but no worse 

than many private entities of this country around the world. 

Secretary GEITHNER. Well, I would say they were better than 

most private entities in these markets. 

Mr. CAPUANO. And that is my problem. I’m not going to suggest 

that they don’t need to be retooled. I’m not going to suggest that 

we don’t need to revisit them. I’m certainly not going to suggest in 

any way that they don’t need to be overseen or even destroyed and 

recreated in a different fashion. None of that bothers me, and 

that’s why I haven’t yet made up my mind exactly how I would like 

to approach this or like to seen it approach. 

That’s why I came today to listen to different ideas, but I will 

tell you that for me, subjecting homeowners or potential homeowners to nothing but the private market has been tried in this 

country for 150 years and failed to create a middle class. Since government got involved indirectly through Fannie and Freddie, we 

created the middle class, and we sustained the middle class. And 

when we are done with this, for me, that is the goal, the only goal. 

As a matter of fact, anything short of that, my emotions might 

overcome me, and I might be tempted to scream out that someone 

or something or some group of people might be a homeownership 

killer, if they got rid of Fannie and Freddie, and I hope that doesn’t 

happen. Thank you, Mr. Secretary. 

The CHAIRMAN. The gentleman from Texas. 

Let me just, before Mr. Hensarling, the Secretary has asked, and 

I think reasonably, to leave at 12:30. I would note all the members 

now here will be able to question him. Other members, if you plan 

to come over here about 12:15 to question the Secretary, have 

lunch instead and then come over and talk to the second panel. 

The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. Welcome again, Mr. 

Secretary. 

I note that it was about 18 months ago that the President was 

elected. I think it was 13 months ago that the Administration decided to double taxpayer liability for the GSEs; 9 months ago that 

the Administration asked— 

Secretary GEITHNER. Not to double the liability under the original preferred stock agreements. 

Mr. HENSARLING. $100 billion per to $200 billion per? 

Secretary GEITHNER. Under the law the Congress passed, you 

gave my predecessor unlimited authority to make sure Fannie and 

Freddie could meet their obligations. At that point, in effect, the 

government committed to make sure they had whatever capital 

was necessary to meet those obligations. All I have done is carried 

out that basic commitment using the authority that Congress gave 

my predecessor. 

Mr. HENSARLING. Okay. Well, exercising that authority. 

Secretary GEITHNER. It didn’t change our liability. 

Mr. HENSARLING. Mr. Secretary, please, I control the time here. 

It was 9 months ago that in the Administration’s White Paper, we 

were told to expect some type of plan or option in the budget. We 

know what that plan was and that is you continue to monitor the 

situation. Three months ago, the Administration announced unlimited taxpayer exposure for Fannie and Freddie. 

27 

I just note, Mr. Secretary, in 18 months, the Administration has 

clearly found the time to put forth a plan that would provide substantial regulation for one-sixth of our economy of healthcare, extend more control over broker-dealers, investment banks, credit 

card companies, community banks, hedge funds, finance companies, 

payday lenders, pawn shops, and auto companies, but still no plan 

for the GSEs except seemingly unlimited taxpayer exposure. 

So one Member’s opinion, Mr. Secretary, with respect to the timing, I just thing the timing is unacceptable. But let’s talk about the 

taxpayer exposure. Clearly, you’re familiar with the numbers. CBO 

estimates over the next 10 years, $376 billion. We know that 

there’s trillions more of exposure there; and, so, on the one hand, 

I see that Treasury continues to monitor the situation. I guess my 

greater concern is, is there in fact a de facto plan, perhaps not by 

design but perhaps by accident. 

I note that the chairman of our committee in January stated that 

Fannie Mae and Freddie Mac are now ‘‘basically public policy instruments of the government.’’ Charles Haldeman, Freddie Mac’s 

chief executive has stated, ‘‘We’re making decisions on loan modifications and other issues without being guided solely by profitability.’’ Daniel Mudd, who is Fannie Mae’s former CEO said, ‘‘The 

government is running Fannie and Freddie as an instrument of national economic policy, not as a business.’’ 

It appears to many of us, and I’ll give you an opportunity to disabuse me of the notion or to accept the premise that what we now 

have is the GSE’s or essentially an instrumentality of the Administration to fund taxpayer funds and to frankly fail foreclosures mitigation plan with nothing else in sight. So I’ll yield to you, Mr. Secretary. 

Secretary GEITHNER. Thank you, Congressman. Let me tell you 

what our strategy and our plan is. Our strategy is to fix this damaged housing finance market to make sure this economy recovers 

from the trauma caused by the recession. We’re going to do that 

as carefully and quickly as we can. 

As part of that process, we will be working with this committee 

to lay out a comprehensive set of reforms to the housing finance 

system, including the GSEs. But our obligation now and our priority now is to try to make sure that we heal what is broken in 

this housing finance system, and we help this economy dig out of 

this terrible mess. 

Mr. HENSARLING. I understand that, Mr. Secretary, but there’s 

still no timetable for that. Is that correct? As of today, there is still 

no timetable for a plan dealing with the GSEs? 

Secretary GEITHNER. Again, we’re looking forward to having this 

debate about reform. You are not going to care more about this 

than I am. I’m the one who has to preside over a set of broad commitments that I inherited from my predecessor, and we are going 

to do a careful, competent job. 

Mr. HENSARLING. Mr. Secretary, it’s just a simple question. Is 

there a timetable or is there not a timetable? 

Secretary GEITHNER. We are going to do a careful competent 

job— 

The CHAIRMAN. It is The gentleman from Texas’ time. 

28 

Secretary GEITHNER. —of digging out of that mess and making 

sure that we work with you to put in place a set of reforms that 

will leave our country in a better position. 

Mr. HENSARLING. Well in the little bit of time I have left, Mr. 

Secretary, in your mind, in the Administration’s mind, is there any 

reason that inherently we must have a Government-Sponsored Entity to securitize mortgages in order to have stable homeownership 

in America, because I note many other nations do not have GSEs. 

Secretary GEITHNER. This is the central existential question as 

you contemplate reform; and, as I said earlier in response to one 

of your colleagues, I think there is a quite strong economic case, 

quite strong public policy case for preserving designing some form 

of guarantee by the government to help facilitate a stable housing 

financing market. But it can’t be the one we have today. 

It can’t be the one we have lived with over the last decade. It’s 

going to be significantly different, but we will likely conclude as our 

predecessors have that there will be some rule for a guarantee of 

some sort. 

The CHAIRMAN. Thank you, Mr. Secretary. 

The gentleman from Texas, Mr. Hinojosa. 

Mr. HINOJOSA. Thank you, Mr. Chairman. I want to also say welcome to our Secretary. 

As you know, most of us and most of my colleagues are aware 

that April is National Financial Literacy Month. Throughout that 

month, special attention will be focused on efforts to increase the 

awareness of financial education and the importance of managing 

personal finances, increasing personal savings, and hopefully reducing personal debt in the United States. 

I look forward to working on financial literacy education and capabilities issues with you, Mr. Secretary, as well as with Michelle 

Greene, your Deputy Assistant Secretary for Financial Education 

and Financial Access. I have listened very carefully to many of 

your responses, and I agree with you that the system for protecting 

consumers in the mortgage market was and remains fundamentally flawed, and consumers should have the information they need 

about the cost, terms, and conditions of their mortgages, which 

would be incorporated into legislation reforming the House Finance 

System. 

I am sick and tired of listening to some of the folks who signed 

contracts and showing me the 20 or 25 items that were listed on 

fees, something very different than what it was years ago. I am 

pleased that the truth in lending and real estate settlement procedures will be placed under one roof in the Wall Street Reform and 

Consumer Protection Act. We should address my many concerns regarding the implementation of both of these acts. 

Mr. Secretary, do you intend to provide housing counseling in 

languages other than English? 

Secretary GEITHNER. Did you say ‘‘counseling?’’ 

Mr. HINOJOSA. Yes. 

Secretary GEITHNER. I believe that it is true today that the substantial support Congress has authorized to give in support of 

counseling agencies across the country now includes many nonprofits which provide those services in languages other than 

English, but I’ll check that for the record. 

29 

Mr. HINOJOSA. I was pleased when I visited the Federal Reserve 

Branch in Dallas that they are very strongly supporting these financial literacy programs and have it in eight languages. In Texas, 

it’s not uncommon to have school districts that have 40 or 50 languages spoken by some of the limited English-proficient students. 

So this is something that is very important, and I know some of 

my colleagues here in Congress don’t want anything but English in 

materials that are used by some of our Federal agencies, and so I 

disagree with that. 

I think that this is such a big investment that it’s important to 

me that this concern be addressed. Fannie Mae and Freddie Mac 

as Government-Sponsored Enterprises are responsible for helping 

many middle-class families in my district in buying a home. So it’s 

important to me that they survive through these difficult times. 

What actions will Treasury take to ensure that they survive? 

Secretary GEITHNER. Oh, Congressman, as I said, we are going 

to do everything necessary to make sure they can not just meet 

their obligations, but they can continue to play an important role 

in supporting housing finance markets as we work on the design 

of a better, stronger, more effective housing finance system in the 

future. 

We are completely committed to that and we will do everything 

necessary to make sure we allow them to continue to play the very 

important role they now play in providing a stable source of housing finance for this country as we try to dig out or repair what’s 

broken in our financial system. 

Mr. HINOJOSA. As you may well know, I have been a very strong 

proponent of community banks, because my district is one that has 

a very, very large number of community banks and that is one of 

the sources of borrowing. Some of them bought stock from Fannie 

Mae and Freddie Mac and took a huge loss. Is anything being considered to help them so that their balance sheets can look a little 

bit better because of the losses they took? 

Secretary GEITHNER. Congressman, we have proposed legislation 

to the Congress that would establish what we call a Small Business 

Lending Facility. And this facility would make capital available to 

small community banks so that they have more financial resources 

to support lending to their customers as we come out of this recession. And this legislation would establish a $30 billion lending facility. It involves very, very modest costs and we think this is one 

of the most important things we can do to help small community 

banks continue to get through the very challenging period we still 

have— 

Mr. HINOJOSA. What is the timetable to make that happen? 

Secretary GEITHNER. The leadership of both bodies are considering taking up a small business bill which includes a set of tax 

provisions and financial credit support mechanisms like the one I 

described. 

Mr. HINOJOSA. Thank you. 

The CHAIRMAN. The gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. Thank you, Mr. Chairman. Thank you, Mr. Secretary. In your testimony, you briefly talked about an alternative 

to securitization and that is covered bonds. Paul Kanjorski is not 

30 

here right now, but he and I dropped in a bill this past week, H.R. 

4884. I wonder whether you have looked at that? 

Secretary GEITHNER. I haven’t yet looked at it, but I will. And 

I would say that I understand. I know that you have been a long 

proponent of this issue of covered bonds. We do have a covered 

bond system in the FHLB today. 

Mr. GARRETT. Right, but this is structured statutorily, so— 

Secretary GEITHNER. Yes, it is. I would be happy to work with 

you on that, and I think looking at the covered bond model will be 

an important part of looking at the reform agenda. 

Mr. GARRETT. And would that be something we would help if we 

can get that done sooner this year rather than later? 

Secretary GEITHNER. It’s possible. I don’t know. Again, my basic 

feeling, like many argued when we were looking at financial reform 

of the private financial system in the United States, you want to 

look at comprehensively at the full complement of institutions, policy issues involved in this area. But again, I am happy to work 

with you on that part of reform. 

Mr. GARRETT. Great. A couple of weeks ago, we—I’m back now 

to the GSEs, like everyone’s talking about. We had the hearing 

here at the Budget Views and Estimates. I introduced an amendment that went down along party lines, which would basically put 

the GSEs on budget and applied $1.6 trillion of GSE debt, should 

be subject to the debt limit. 

Secretary GEITHNER. Okay. 

Mr. GARRETT. Back then, when Chairman Bernanke was here, I 

asked him his opinion of this, and I also asked him another question, and I’ll ask you the same question, is the debt of the GSEs 

sovereign debt? 

Secretary GEITHNER. Congressman, this is a very technical question, the appropriate accounting treatment of Fannie and Freddie 

and their obligations, so let me just give you two responses on this. 

Mr. GARRETT. Yes and no? 

Secretary GEITHNER. Determining the appropriate accounting 

treatment of these obligations, we have followed the advice of accountants. GAO agrees with the judgment we have made, and does 

not think it’s appropriate for us to consolidate. We followed that 

basic model. 

On your second question, let me repeat again what I said in both 

my written statement and my oral statement. We will do everything necessary to make sure these institutions have the capital 

they need to meet their commitments. 

Mr. GARRETT. And I understand that from reading your statement. But it’s really a basic question, and I’m not a Treasury Secretary or the Chairman of the Fed. And even Chairman Frank, not 

even, but the chairman also recognizes and he understands the difference because in his statement he says, ‘‘I—meaning the chairman—have noted that Fannie and Freddie debt did not have the 

legal standing as Treasury debt.’’ So, he recognizes that there is a 

distinction between sovereign debt and GSE’s debt. 

Secretary GEITHNER. Absolutely, they are different, but again, I 

want to emphasize again in saying they are different that I want 

to make sure that you understand, again I say this as clearly as 

31 

possible, we will make sure that they have the financial resources 

necessary to meet their obligations. 

Mr. GARRETT. Okay. I understand that. And the chairman says 

the same thing that he and many others want to make sure that 

is being done. Although, the chairman did say, I believe, throughout the debate, we will make sure that there are no implicit guarantees, hints, suggestions, or winks or nods, we will be explicit as 

to what is and what is not an obligation of the Federal Government. So, with the debt that we’re incurring since this has all happened going forward, is that on the same standing as the existing 

debt that is out there? In other words,— 

Secretary GEITHNER. That issue by the GSEs? 

Mr. GARRETT. Yes. 

Secretary GEITHNER. Yes. 

Mr. GARRETT. It is? So, when he says that we should have no implicit guarantees, hints, suggestions, winks or nods, we are nodding 

and winking and guaranteeing about that, as well? 

Secretary GEITHNER. No, no. We’re not doing nodding and winking, we’re saying very clearly, and I’ll say it over and over again, 

we will make sure, using the authority Congress gave us that these 

institutions have the ability to meet their obligations present and 

future. 

Mr. GARRETT. So, the chairman is incorrect when he states that 

there is a distinction between the debt that these have and sovereign debt? 

Secretary GEITHNER. No, I don’t think so. No, as I said, and of 

course, you know the answer to this question, they are different 

types of obligations. But again, I want to make it clear you understand that we will use the authority Congress gave us to make 

sure they can meet their commitments. 

Mr. GARRETT. I do, and okay, so what I’m hearing is, it is not 

sovereign debt, but it is debt that we will stand behind. 

Secretary GEITHNER. Well, I’ll repeat it. I’ll try and say it the 

same way every time I said it. 

Mr. GARRETT. Is it sovereign debt? 

Secretary GEITHNER. No, as I said, it’s not sovereign debt in 

that— 

Mr. GARRETT. Okay, that’s good, that’s really all I needed to 

know. It’s not sovereign debt, but it’s debt we’re going to stand behind. 

Secretary GEITHNER. I want to make sure—this is a very extensive issue. We’re going to make sure that these institutions have 

the resources they need to meet their commitments, past and future. 

Mr. GARRETT. Right. So, as I have heard it, and I understand it, 

it is not sovereign debt, but it is debt that we are going to stand 

behind, and because Congress has given you that authority to 

stand behind that— 

Secretary GEITHNER. For very good reasons, yes. 

Mr. GARRETT. Okay. And I still have 30 seconds left. 

The CHAIRMAN. You had 3 seconds. 

Mr. GARRETT. Excuse me? 

The CHAIRMAN. You had 3 seconds left when you said that. We 

will make it 10 seconds more now. 

32 

Mr. GARRETT. Do you have any comment on the fact that 

Bloomberg is reporting that the bond market is saying that it’s 

safer to lend to Warren Buffet than to this Administration right 

now because of the spreads? 

Secretary GEITHNER. I don’t agree with that comment. And I 

would say the following, which is that it is very important that the 

Congress work together to make sure we put in place over time a 

set of policies that will bring down our fiscal deficits to a more sustainable level. That’s very important to the strength of this recovery. It’s going to be very important to future growth of the American economy and we look forward to working with Members on 

both sides of the aisle to develop a political consensus to bring 

those deficits down to a sustainable level. 

Mr. GARRETT. Thank you. 

The CHAIRMAN. The gentleman’s time has expired. The gentlewoman from New York. 

Mrs. MCCARTHY OF NEW YORK. Thank you, and welcome again, 

Mr. Secretary. Watching, listening to the debate, I can’t help wondering—many, many years ago, a lot of years ago, I bought my first 

home and I, a single woman starting out in nursing, which by the 

way, back then nurses didn’t make much money, so every door was 

closed to me as far as buying a home. And it was my parents’ 

home. I was a good risk. But, it was through the GSEs that actually I was able to get a loan. I never missed a payment, and I paid 

it off. So, there are a lot of us out there who certainly took advantage of it. 

And from my understanding from a lot of these statistics, the 

majority of middle-income families will do everything they possibly 

can to make sure that they always pay their mortgage so they have 

a roof over their head. That’s their dream. That was my dream. So, 

I was just curious, when we started going into this spiral downfall 

with the GSEs and also with the subprime lending crisis that we 

saw, who actually had the worst record? I know in New York City, 

we had a—I was reading somebody’s testimony that 13,000 out of 

20,000 loans defaulted. And that came through a housing agency. 

So, we need to look at things, how to change things, but I agree 

with my colleague that financial literacy is going to be an important part. 

But, I just want to know now, what are we doing as far as the 

government to encourage more lenders to work towards loan modifications before people go into foreclosures? 

Secretary GEITHNER. That is a very good question. The program 

that we put in place to make it possible for homeowners to restructure, modify their loans is now reaching more than one million 

Americans. And what this means is for those families, those one 

million Americans, they now have substantially lower monthly payments, which on average is putting $500 to $600 more in the pockets of those families than they had before the modifications. We’re 

trying to make sure that as many of those as possible are translated into permanent modifications. And we’re going to keep working to make sure this program reaches as many people as we can 

to make sure people who do not need to lose their homes can stay 

in their homes. 

33 

Mrs. MCCARTHY OF NEW YORK. Just one other question, too. 

With—obviously with the GSEs, and they have the backing of the 

Federal Government, on that, there are going to be a lot of homes 

that probably will not be, they’re foreclosed now, they’re sitting 

there. What are the chances of turning some of those homes over 

into rental properties where people are getting back on their feet 

again? 

Secretary GEITHNER. Well, again, I think there are substantial 

opportunities for doing that. A lot of that is happening. And again, 

I would be happy to ask my colleagues, or my colleagues at HUD, 

or FHFA, to come brief you in more detail on what they can do in 

those areas. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

The CHAIRMAN. The gentlelady from West Virginia. 

Mrs. CAPITO. Thank you. Thank you, Mr. Secretary. I would like 

to talk about this maybe a little more simplistically and a little 

more globally. I just got the report this morning that existing home 

sales are down again for the third straight month. Unemployment, 

as you mentioned in your opening statement, remains too high. We 

have witness after witness, particularly from the financial institutions, asking why they’re not lending or why people aren’t borrowing, lack of confidence, uncertainty. 

My question is, is the lack of a certain plan forward with Fannie 

and Freddie leading to the uncertainty, as well? I’ll just give you 

an example. Speaking with a community banker several weeks ago, 

asking him, why are you not getting into the mortgage market because the FHA has taken up so much more of the mortgage area? 

And he said, well, maybe if you would give me a loan guarantee, 

maybe I would get into that a little bit more. 

Are we—because of this, all of the government involvement with 

Fannie and Freddie and dollars and just what you said, that we 

will back the debt of Fannie and Freddie, could that be part of— 

I know we need to do it slowly—but could it be part of the, maybe 

putting it in some mud and making it going slower, so that the confidence is not rebounding the way that we need it to in order to 

get out of this slump that we’re in? 

Secretary GEITHNER. I don’t think so, but I’ll give you my sense 

of this. I think if you talk to, as you do, and as we all do, community bankers across the country and you ask them what’s happening on the lending side, generally what they say is the following: They say, loan demand is still very low; they say, the supervisors are being very tough on us; and to some extent, they say, 

they would like to know what the rules of the game are going to 

be in terms of broader financial reform. 

So, for example, the bill that passed the House last December 

and the bill now moving its way through the Senate, they would 

like to know a little more certainty about what the rules of the 

game are going to be on capital, things like that, going forward. 

I think those are the principal factors still affecting the lending 

conditions for small community banks and I think we can do something about those things. Again, we can, as the Chairman of the 

Fed, and the Chairman of the FDIC are doing, try to make sure 

that their examiners across the country are not overdoing it. We 

can make sure, as I said, to your colleague, that we provide capital 

34 

to small community banks so they can have a little bit of assistance 

to get through this that will help support lending. And if we pass 

financial reform, that will bring some clarity to the rules of the 

game, that would be helpful. 

But I do not believe that what Fannie and Freddie and the FHA 

are doing now is overwhelmingly constructive to the process of repair of housing finance. 

Mrs. CAPITO. But, at the base of a recovery, a good, solid recovery, is going to be this bouncing back of the housing market at the 

most fundamental part. Would you agree with that? 

Secretary GEITHNER. It will, again, it’s hard to tell the timing 

now, but part of recovery will be more durable stability in housing 

prices. 

Mrs. CAPITO. Right. 

Secretary GEITHNER. And as that happens, you’re going to see 

the private market come back and take back some of the business 

of housing finance that is now dominated by Fannie and Freddie 

and the FHA. 

Mrs. CAPITO. Okay, on a totally different topic, and we have 

talked about this a little bit, the Administration’s Making Home 

Affordable modifications and refinancings, is that where we have 

done the $1 million dollar modification, is this affecting the bottom 

line of Fannie and Freddie at all? And are you concerned about the 

re-default rates on some of these re-modifications in terms of the 

ones that are held by Fannie and Freddie? 

Secretary GEITHNER. No, it’s not hurting the bottom line of 

Fannie and Freddie at all. The way this program works for both 

a private lender and for Fannie and Freddie is that they do the 

modifications if the economic value of the mortgage is better after 

being modified than it would be in foreclosure. So, because of that, 

that’s what these modifications do. They put Fannie and Freddie 

in a better position, not a worse position than if no modifications 

were happening. 

Mrs. CAPITO. But, we’re still having re-default rates in those? 

Secretary GEITHNER. Yes, absolutely. Again, given, as you said, 

how high unemployment is across the country still, you’re going to 

still see re-default rates happen; it’s just inevitable. We want to 

make sure we’re doing as much as we can to help people who lose 

their jobs and face the risk of losing their homes, but you’re going 

to see some risk of re-default rates across Fannie and Freddie and 

the banks who hold mortgages. 

Mrs. CAPITO. All right. Thank you, Mr. Secretary. 

The CHAIRMAN. Thank you very much. Now, we will hear from 

Mr. Lynch of Massachusetts. 

Mr. LYNCH. Thank you, Mr. Chairman. Welcome, Mr. Secretary. 

I think one of the major weaknesses in our housing finance system 

is the securitization process, and I was happy to see that you called 

that out on page 5 of your testimony and devoted a really substantial section to that. 

There was an article, I’m not sure if you saw it, in this past Sunday’s New York Times by Gretchen Morgenson where she astutely 

points out that much of the difficulty with the mortgage-backed securities part of our crisis was rooted in the opacity of these products. And part of the problem, obviously, was that the ratings and 

35 

valuations that were assigned to these mortgage-backed securities 

were completely wrong. But, because of the complexity and the 

opacity, folks were induced to rely on just the rating. And that was 

a real problem. 

As Ms. Morgenson points out, the Bank of England has just 

issued sort of an advisory, I think they call it a consultive report, 

and their Bank of England risk management division has recommended that—and they face the same problem, because in England, the collateral is being posted using these mortgage-backed securities and so, and at their discount window facilities, similar to 

what we’re doing here. What they’re recommending is that there be 

more useful information, additional information, supplied by those 

who, the issuers, the people who are creating these mortgagebacked securities, so that individual parties, the market, the banks, 

will be able to look through and actually vet them themselves rather than relying on Triple A and I think in our own situation with 

the Fed doing what they’re doing, I think especially, they’re posting 

collateral in much the same way. Is this something that, this is so 

important, this is such a critical part of credit formation here in 

this country, it’s a great thing, the securitization, if it’s properly 

used with proper standards. 

Is this something that we need to look at, as well, in terms of 

getting more information to the markets so they can discern the 

proper valuation on a rolling basis, not just a static number or rating when the issue comes out, but ongoing. 

Secretary GEITHNER. I completely agree with you. I think you 

said it very well, bringing more transparency to those structures so 

the investors can look through them, and understand the true risks 

in them is very important. It’s also very important, as many of 

your colleagues know, to bring more transparency to the rating 

processes themselves, and we would like to see the rating agencies 

be compelled to disclose much more about the models used to underpin those ratings. We want to make sure that in the regulatory 

system that supervisors preside over, they’re not creating incentives that encourage overreliance on ratings. 

That set of changes, including most importantly, the one you 

began with, we think would make a big difference. 

Mr. LYNCH. Let me ask you about that. In your report, it’s a little 

bit vague about the reform of the rating agencies. You do mention 

it, but can you drill down on that a little bit? 

Secretary GEITHNER. The reforms that this committee has embraced and which were the center of our proposals really had two 

pieces. One is to give the SEC the authority to police conflicts of 

interest because you don’t want the judgment skewed by the model 

these firms have been operating with and in the future. You don’t 

want their economic interests— 

Mr. LYNCH. Right. 

Secretary GEITHNER. —in the issuer altering their judgment, assigning excessively favorable ratings. That’s very important. 

Two, again, is to bring much more transparency to the rating 

process, make sure they have to disclose much more information 

about the inputs into their models into the rating and that way investors can bring an independent assessment about whether the 

ratings make any sense. 

36 

Again, the big mistake that underpinned almost everything that 

happened in our housing markets was that everyone made a judgment, almost everyone made a judgment that house prices would 

not fall in the future. 

Mr. LYNCH. Yes. 

Secretary GEITHNER. And the ratings were too favorable. Because 

of that, there was too much leverage, because of that, there was too 

little capital, because of that, it was a systematic failure across the 

GSEs and across private lenders. Transparency will help in that 

area but we also have to make sure we put in place stronger capital requirements, other things, so that we’re aren’t vulnerable to 

those kind of mistakes in the future. 

Mr. LYNCH. Right. Thank you, Mr. Secretary. I yield back, Mr. 

Chairman. 

The CHAIRMAN. Thank you, Mr. Lynch. Now, we’ll hear from Mr. 

Marchant of Texas. 

Mr. MARCHANT. Thank you, Mr. Chairman. My questions have to 

do with the projected losses, or the existing losses that are in 

Fannie Mae and Freddie Mac. Are you fairly confident, do you have 

any confidence that the loans that are being originated today and 

have been originated in the last year are high-quality loans and are 

not of the same quality as the loans that were originated in the 

previous 3 years? 

Secretary GEITHNER. Congressman, my sense is that the underwriting standards today are much stronger than they were. And I 

think the people who have looked at this question carefully say if 

you look at what these institutions are doing today enters a new 

guarantees and how they’re pricing them for those guarantees, 

means that the business is on a more stable footing, stand up footing today than it was. 

Mr. MARCHANT. With respect to the ability in the long term of 

having Fannie or Freddie or a successor agency repaying or earning back the losses over a long-term horizon, do you see that as a 

possibility? 

Secretary GEITHNER. I do not believe, Congressman, well, let me 

say it the other way around. I think the Government of the United 

States is likely to face substantial losses on the inherited commitments of these two institutions. It is very hard to judge what those 

scale of losses are, both the OMB and the CBO, as well as the FHA 

do a rolling assessment of those estimates. They’re going to move 

around a bit, but they’re going to be very substantial. 

Mr. MARCHANT. I would like to explore the bridge, I call it a 

bridge loan, it’s the loan that you’re making from the Treasury to 

Fannie and Freddie every month to meet their obligations. And I 

would like to explore if in fact, the government or the Treasury, at 

some point, is going to have to take some kind of a loss on, eventually, some kind of a loss on these funds? Why would we, what went 

into the judgment call of charging Fannie and Freddie such a high 

rate on the loan that it’s making to Fannie and Freddie, if in fact, 

that only adds to that long-term debt and in fact, may exacerbate 

that long-term debt? Why are we not dealing with a lower-cost facility? Because the cost of funds is—or is this money coming out 

of TARP? How is this income being booked? Those are— 

37 

Secretary GEITHNER. Those are very good questions. And this is 

under the authority we call the MAHRA authority, not under the 

TARP. And this was authority that again, President Bush asked 

for and received from the Congress. I have been carrying out the 

responsibilities that I inherited in that context. 

What we’re doing, Congressman, again, we’re trying to make a 

careful judgment of how best to minimize the extent of losses the 

taxpayer ultimate bears, maximize the chance we carefully manage 

these institutions as we promote a recovery in the housing markets. We’re trying to balance those objectives and we’re going to do 

the best job we can. Again, I’m trying to make sure that we reduce 

the risk of future loss from these institutions and we’ll look at the 

broader terms of our engagement through that basic objective. 

Mr. MARCHANT. But, you see where a person— 

Secretary GEITHNER. I do understand your point. It wouldn’t 

make sense to charge a punitive rate if we’re only charging ourselves for that, so you’re making the right point. 

Mr. MARCHANT. You go into a small bank and make a $10,000 

car loan, and then each month, they loan you the money to make 

the car loan, then at the end of 3 years, you could have a $14,000 

car loan, and I don’t know what would have been accomplished in 

that, exactly. 

Secretary GEITHNER. I understand the point you’re making. We 

did take some actions at the end of last year to restructure those 

commitments in some ways, partly in response to that concern. But 

again, we’re going to do what makes overall sense for the taxpayer, 

economically, in terms of reducing the risk of ultimate loss. 

Mr. MARCHANT. Thank you. 

The CHAIRMAN. The gentleman from Indiana, Mr. Donnelly. 

Mr. DONNELLY. Thank you, Mr. Chairman. Thank you, Mr. Secretary for being here. I think one of the things that has caused continued housing problems is obviously the unemployment rate, that 

people can’t afford to move into homes, to purchase homes. And a 

huge portion of the unemployment difficulties, at least in my area 

of the country, has been credit availability, and continues to be so. 

I have business after business after business who, in trying to— 

they have had their lines of credit cut, lines of credit cut not because they have missed a payment, but because a covenant was 

missed because maybe their sales were down for a quarter during 

that time. And they have spent the last year in order to get down 

to that lower number of the line of credit, selling equipment, laying 

off employees, and telling me they could be adding employees if 

they weren’t in this situation. We have jobs bill after jobs bill 

across the street. The real jobs bill, the folks in the shops tell me, 

is having a normal credit situation. 

So, what can you tell me where we’re going to be as we move forward on this? 

Secretary GEITHNER. You’re absolutely right. Many businesses 

across the country still are suffering from a very, very tight credit 

environment, even ones that have quite good businesses and have 

very good payment history. You’re absolutely right. The bill I referred to a few minutes ago, which is a small business package of 

incentives and assistance, has three important components. 

38 

One is, as a series of tax measures for small businesses, zero capital gains rate on investment of small businesses, more favorable 

expensing depreciation, range of tax provisions which we think 

would be very helpful. 

The second is, it includes expanded authority for the SBA to provide guarantees, both the size of guarantees and the economics of 

the guarantee. We think it would be very helpful. And this is the critical thing, we propose a $30 billion small business lending facility that would make capital available to small 

banks so they can do a better job of meeting the loan demand of 

their customers. 

We think giving capital to small banks is one of the most effective things we can do. It can happen very, very quickly if Congress 

gives us the authority. And that will help make sure a dollar of 

capital to a small bank means $8 to $10 in lending capacity. Without that capital, it’s hard for many of them to raise capital in the 

private market, so they’re going to have to reduce lending to their 

customers. 

We think that mix of tax incentives, SBA support, and a small 

business lending facility would make a big difference. 

Mr. DONNELLY. Here is the other conundrum, so to speak. I get 

emails from the businesses, from my friends who run businesses, 

and they say, the banks won’t lend us anything. And the banks 

come in to the office and they say, we have money to lend and 

we’re looking to make good loans. 

So, how can we put these two sides together? 

Secretary GEITHNER. I think what typically happens is, you have 

a bank that may have been a well-run bank, may have made a lot 

of good decisions over time but also may have gotten itself very exposed to commercial real estate. It has customers they have been 

working with for 30 years. They find themselves, because of a 

bunch of judgments in commercial real estate, having to reduce exposure to their customers and they, in explaining that to their customer, they frankly often say, it wasn’t us, it’s the supervisors who 

won’t let us lend, forcing us to raise capital requirements. 

As I said earlier, part of what’s happening is supervisors are 

being tougher than they were. And that is making these problems 

worse. I think part of the solution is to try to make sure that 

Chairman Bair and Chairman Bernanke and Comptroller Dugan 

and their colleagues as supervisors are sending a more balanced 

message to their examiners across the country. 

Mr. DONNELLY. And that is the message I would like to leave 

with you and those folks is, we want to make good loans. We don’t 

want to make bad loans. 

Secretary GEITHNER. Exactly. 

Mr. DONNELLY. But at the same time, we want to have supervisors who are understanding the entire economic picture here that 

there are good loans that don’t have to be extraordinary loans. And 

it is really choking the lifeblood out of a number of jobs that are 

available. 

And when we get these jobs back, people will be buying homes 

again. 

Secretary GEITHNER. I agree. I think there are businesses who 

see growing demand for their products now across the country. As 

39 

you start to see growth spread across the country, and they say 

they can’t meet that demand because they can’t get credit to add 

more equipment, add back payroll. So, you’re absolutely right. It is 

a critical problem, but Congress has a chance to do something 

about it now and that would help alongside what the supervisors 

are trying to do, to send a more balanced message to their examiners. 

Mr. DONNELLY. And I would suggest that the message is really, 

that’s the best jobs program of all, because those are the jobs that 

were there before, that can come back, but they can’t do it without 

the capital to run the business. 

Secretary GEITHNER. And it’s not expensive. 

Mr. DONNELLY. No. 

Secretary GEITHNER. It’s the highest return on a dollar of taxpayer’s money of, I think, any of the programs we have put in place 

over the last 15 months. 

Mr. DONNELLY. And that’s our small business guys making it 

happen instead of it having to happen out here. 

Secretary GEITHNER. I agree. 

Mr. DONNELLY. Thank you, Mr. Chairman. 

Mr. KANJORSKI. [presiding] Thank you very much, Mr. Donnelly. 

We will now hear from the gentleman from California, Mr. Miller. 

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

Geithner, it’s good to have you here again today. A lot of people in 

this country don’t realize that Fannie and Freddie even hold their 

loan, which is interesting. And I come from a history in the real 

estate industry, being a builder and a Realtor myself, and 92 percent of the loans in this country are made by Freddie, Fannie, and 

FHA today. I’m looking at what would occur in this country in the 

housing market if they were not there. 

I’m not here to defend them, but I’m looking at reality. Fannie 

and Freddie have made some tremendous mistakes, there’s no 

doubt about it. But I’m looking at the serious delinquency rates in 

this country: Fannie has about 5.38 percent; Freddie has about 

3.87 percent, but the private sector jumbo has about 9.6 percent. 

Fannie and Freddie are performing much better than the private 

sector in my district, the 42nd Congressional District. In LA County, Fannie and Freddie’s delinquency rate is 3.9 percent; the jumbo 

market is 10.1 percent; and FHA and VA are 2.6 percent. In Orange County, Fannie and Freddie are 2.1 percent delinquent; 

jumbo is 8.9 percent; and FHA and VA are 1.4 percent. In San 

Bernardino County, Fannie and Freddie are up to 7.8 and that’s 

alarming, but the jumbo market is 18.4 percent. 

And I guess my question is, I have had arguments presented to 

me that we need to allow the private sector to completely control 

the secondary marketplace and get Fannie and Freddie out of it. 

But I’m concerned if there was a viable alternative to a GSE, 

where was it at in 2005, 2006, 2007? It wasn’t there. At the same 

time the mortgage-backed security markets were blooming at that 

point in time, but the blooming part of the mortgage-backed security market was a group that sold terrible, terrible bundles to the 

private sector. 

Many of Fannie and Freddie’s losses today, in fact a majority of 

them, are because when they sell mortgage-backed securities, if 

40 

you have a nonperforming one, they take that nonperforming loan 

out and eat it themselves and replace it with a performing loan. 

Nothing Countrywide or anybody else ever did matches that because the way they bundle their securities, when investors bought 

them in good faith—these are not just rich people, these are people 

who have a moderate income, but they invested in the market— 

they bought absolutely worthless mortgage-backed securities. 

So my concern is, if we’re looking for a private sector alternative, 

might we be where we were with the mortgage-backed securities? 

I would appreciate an answer to that. 

Secretary GEITHNER. I think you’re exactly right. If you look at 

the record of what happened, the most appalling damaging erosion 

underwriting standards happened outside Fannie and Freddie, 

happened outside banks, happened in thrifts, mortgage finance 

companies, specialized finance companies. Fannie and Freddie’s 

prime portfolio has better quality today than the average across the 

market, as you said, your statistics are absolutely right. 

So I think you’re right in the basic emphasis, and right now 

you’re right to emphasize that the only games in town are Fannie 

and Freddie and the FHA. And it is very important again that they 

in this transition period, and it’s not going to go on indefinitely, but 

for a period of time, they need to be able to continue to provide 

mortgage finance if we’re going to heal what’s still very damaged 

across the country, including in California. 

Now I have not seen a ideal model yet for what to replace this 

current system, but as I said earlier, I think there’s going to be— 

we’re going to have to take a careful look at how to design a better 

form of guarantee and support than take the same risk— 

Mr. MILLER OF CALIFORNIA. And I’m open to that. I’m not—say 

we have to have Fannie and Freddie. I want to know what we do 

if we don’t have them. In fact, 9 years ago, the argument about 

conforming loan limits in high-cost areas has risen, and we talked 

about some oppose that. I started fighting for that 9 years ago, and 

I’m the one who always had the amendments out there that said 

we need to raise conforming in high-cost areas, and a few of my 

colleagues, including Mr. Hensarling, disagreed with me. But as I 

understand it, FHA and Fannie and Freddie, the best performing 

loans they’re making today are in high-cost areas. Is that not true? 

Secretary GEITHNER. I don’t know if that’s true, but I would be 

happy to check on that. 

Mr. MILLER OF CALIFORNIA. The FHA told me it was true that 

they are best for loans. I guess I’m too—the question of what are 

the key structural improvements Treasury thinks are necessary to 

prevent government from distorting, and I’m saying distorting the 

marketplace because some have said that they’re distorting the secondary marketplace as Fannie and Freddie have done. What can— 

do you think there’s a distortion because of them? And if there is, 

what can we do to resolve that? 

Secretary GEITHNER. Well, again, this is an unfair—this is a 

much more complicated problem than my answer will suggest, but 

there are two things that happen that we can prevent in the future, and we should prevent. One is, we should not allow institutions that operate with the expectation of government support to 

build up a huge retained portfolio. 

41 

Mr. MILLER OF CALIFORNIA. And I agree. 

Secretary GEITHNER. With a lot of risk in it with no capital to 

support it. 

Mr. MILLER OF CALIFORNIA. I agree. 

Secretary GEITHNER. It’s also true that I think, although economists disagree on the extent of this mistake, that Fannie and 

Freddie over time did provide guarantees for lower-quality mortgages without charging appropriately for that guarantee fee. Both 

those mistakes were consequential. The first, I think, was a much 

greater mistake. But whatever we do in redesigning the system, we 

need to avoid those two errors. 

Mr. MILLER OF CALIFORNIA. And in closing, Mr. Chairman, I 

want to point out the fact that the only time Fannie and Freddie 

ever lost money other than this round was the year of 1985. Other 

than that, they were profitable, and maybe Congress did things to 

distort their mission and get them headed in different directions 

and we may need to go back to a time when that mission wasn’t 

distorted, where they were making true conforming loans that met 

the criteria that they specified. I thank you for your patience, Mr. 

Chairman, and I yield back the balance of my time. 

Mr. KANJORSKI. Thank you very much, Mr. Miller. And we will 

now hear from Mr. Posey of Florida. 

Mr. POSEY. Thank you very much, Mr. Chairman. Mr. Secretary, 

during, I believe it was this committee’s last meeting, we heard 

breaking news that said Fannie and Freddie executives received 

millions of dollars in bonuses all the while this meltdown was continuing. And I just wondered if you had any part in signing off on 

those bonuses when the FHFA met on December 24, 2009? 

Secretary GEITHNER. The FHFA, as you said appropriately, is responsible as conservatorship for approving the compensation packages of these executives. They reached that decision in consultation 

with Ken Feinberg, whom I appointed to help establish stronger 

compensation standards across other institutions that were beneficiaries of the TARP. 

Mr. POSEY. Is that a yes or a no? 

Secretary GEITHNER. That gesture was made by the— 

Mr. POSEY. Is that a yes or a no? Did you have any hand in that? 

Secretary GEITHNER. I was not involved. It was— 

Mr. POSEY. That’s all I need. I don’t have much time, so I’m 

going to ask my questions, and if you don’t have time to answer 

them, I’m going to ask with the chairman’s permission that you respond in writing. It seems like every time I ask somebody a question here, if I ask them what time it is, they start describing a 

clock, and we never get an answer. 

I’m wondering why we’re never able to get an answer from you 

on a comprehensive recovery plan. We have testimony. We hear the 

same old rehashing of what went wrong. 

Secretary GEITHNER. For the GSEs? 

Mr. POSEY. But we never have any real plan, comprehensive plan 

for recovery. I wonder how much longer we’re going to have to wait 

for a plan, what information anybody could possibly still be waiting 

for to come forth with a plan. Clearly, the Administration has some 

serious credibility problems. They broke promises on space, they 

broke promises not to raise taxes, not to take over personal sovVerDate Nov 24 2008 18:27 Aug 05, 2010 Jkt 056779 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\56779.TXT TERRIE
42 

ereignty. The stimulus has failed to do what you said it would do. 

You said— 

Secretary GEITHNER. I don’t agree with that. 

Mr. POSEY. —if the stimulus is passed, your words, it would not 

exceed 8 percent unemployment— 

Secretary GEITHNER. That’s not true. 

Mr. POSEY. It’s now over 10 percent. 

Secretary GEITHNER. That’s not true, Congressman. 

Mr. POSEY. It’s your chart, not mine. There are so many fair and 

legitimate questions that we just can’t get answered, for example, 

when will Freddie and Fannie Mae’s conservatorship end? I think 

there ought to be a legitimate estimate on that. I think a professional ought to say, with your experience and guidance, I think— 

this is today. This ought to be the target, and this is how we’re 

going to go there. I don’t think those are out of bounds at all. And 

I’m curious about to what extent our creditors—China—are worried 

about the failures of Fannie and Freddie. And of course I think it 

has been asked before, how do we prevent ‘‘too-big-to-fail’’ Freddie 

and Fannie, going forward? These are questions Congress has to 

know, and we can’t wait forever to find out. 

Secretary GEITHNER. You won’t have to wait forever. And again, 

we’re starting today the necessary process of figuring out what 

Congress and the Executive Branch would like to do to reform the 

housing finance system. But as you know, this is an enormously 

complicated question. We need to do it carefully, but we’re beginning that process now and we look forward to working with you on 

how to fix what’s broken in the system. 

Mr. POSEY. What about the last year; what did they do? 

Secretary GEITHNER. What did who do? 

Mr. POSEY. Well, we have had a year to come up with a plan. 

Secretary GEITHNER. Well, we—if you worry we have been idle, 

I would just point out that we inherited the worst financial crisis 

in 75 years since the Great Depression. We have been working— 

Mr. POSEY. Who inherited it? 

Secretary GEITHNER. This Administration did and this Congress 

did. 

Mr. POSEY. This Congress has been run by the same Majority for 

3 years. I’m sick and tired of hearing that we inherited it. 

Secretary GEITHNER. Let’s look forward. We are looking to move 

forward. 

Mr. POSEY. We’re looking to you for answers. 

Secretary GEITHNER. I’m happy to move forward. We will work 

with you on how to reform the GSEs and our very damaged housing market, and I look forward to doing it. 

Mr. POSEY. But no answers. 

Secretary GEITHNER. Congressman, again, we have laid out a 

comprehensive, detailed set of objectives and principles. We laid 

out a comprehensive diagnosis of what was broken and what 

caused this housing crisis, and that is a good foundation on which 

to build and thinking about reforms. If we don’t agree on what was 

broken, we can’t begin the process, and we’re going to go through 

a process with this committee to consult with people in the private 

sector, in the academic community, among Republicans and DemoVerDate Nov 24 2008 18:27 Aug 05, 2010 Jkt 056779 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\56779.TXT TERRIE
43 

crats. We’ll look at alternative models, and we’ll figure out the best 

way forward. 

Mr. POSEY. So the reality is, we still don’t have a plan. 

Secretary GEITHNER. Congressman, again, you’re asking us to design in the midst of again the worst financial crisis in generations. 

Mr. POSEY. Listen, every business— 

Secretary GEITHNER. Comprehensive reform. 

Mr. POSEY. Every business in this country is suffering right now, 

and they’re working on some kind of a plan for recovery. They’re 

not doing it on a crisis— 

Secretary GEITHNER. And we’re working hard too, Congressman. 

We have been working hard too and we have done extraordinary 

things, and this economy is growing, and if you just want to go 

back, you say you don’t want to go back to history, but when we 

came into office, when this Congress came into office, the economy 

was shrinking at a rate of 6 percent a year and three-quarters of— 

were losing their jobs every month. And today, because we actually 

acted as a country, the economy is now growing. 

Things are dramatically better today than when we took office 15 

months ago because of the actions we took and this House of Representatives has passed the most sweeping set of financial reforms 

contemplated since the Great Depression. We’re on the verge of enacting those kind of reforms, and today, fortunately, we have a 

chance to begin the conversation about how we’re going to reform 

the GSEs. And again, we look forward to working with you, and 

look forward to seeing your ideas. I expect you guys will have some 

ideas on your side of the aisle, and we’ll take the best ideas on both 

sides and we’ll propose something that we think will meet the test 

of reform. 

Mr. KANJORSKI. The gentleman from Texas, Dr. Paul. 

Dr. PAUL. I thank the chairman. Today, we’re talking about reforms in the housing financial markets, which I think is crucial 

and very, very important. My concern is that there hasn’t been a 

full explanation or an understanding of how we got into this mess. 

And from what I hear, the little bit we do hear, is that we will deal 

with the problems with more technical solutions and more regulatory solutions rather than looking at the fundamental causes. 

To me, the fundamental causes are well understood by the Austrian free market economists because they predicted early on exactly what was going to happen, and it did. And they put the blame 

on three things. Fixing interests rates, price fixing, interest rates 

too low for too long, and also the line of credit that was—with the 

Federal Reserve, which was something the Congress did, even 

though it was $2 billion, it created a lot of moral hazard because 

even Mr. Greenspan admitted that there was probably about a $14 

billion indirect subsidy to Fannie and Freddie which also encouraged the distortion. And on the books, it was legal for the Federal 

Reserve to buy mortgage debt. And, of course, there were no restrictions at all because it was done in secret about exactly how 

much credit will be created. 

Because of my concerns and understanding of what was happening, in July of 2002, I was convinced that we were working on 

a financial bubble, and I introduced legislation that would have removed the line of credit from the Treasury as well as prohibited 

44 

the Fed from buying mortgage debt, which most people would object to: ‘‘No, we need them for the emergency.’’ But that’s what 

caused all the moral hazard. And I think it also existed for the benefit of us selling debt overseas. This encouraged foreigners to buy 

it, knowing the Treasury stands behind this, and the Federal Reserve stands behind this, and the whole cycle continues. 

But when I introduced that legislation back in 2002, I said by 

transferring the risk of widespread mortgage default, the government increases the likelihood of a painful crash in the housing 

market. And the system could stave off the day of reckoning by 

purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing 

market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable. 

Now that’s not so much my statement coming about that on my 

own but because I endorse free markets, I endorse Austrian economics, and I don’t see any understanding of that coming from our 

leadership in the Congress or the Fed or the Treasury, and I think 

it is so crucial that there is this understanding. So my question is, 

are you familiar with the explanation of the Austrian economist of 

the business cycle, how bubbles are formed and what we should do? 

And you shake your head, yes. If so, if you do understand that, 

which part of it don’t you like, and why don’t we look more carefully at those economists? They were right 10 years ago. I believe 

they’re right now. Why aren’t they consulted? 

Secretary GEITHNER. Congressman, I agree with much of what 

you said. And as you and I have talked about in this hearing room 

before, I think you’re right to point out that a long period of low 

real interest rates around the world played a major role in contributing to this financial crisis, this real estate boom, this credit 

boom. You’re also right that moral hazard played a very important 

role, most dangerously in Fannie and Freddie. And those institutions were allowed to grow to enormous size, take on enormous 

risk, without capital to support those commitments, because of the 

expectation that the government would come in and protect them 

from the failures. I completely agree with you. 

Dr. PAUL. Since my time is running out, I want to see if I can 

get one answer. My bill that was suggested years ago, would that 

be a proper thing to do now, to make sure that line of credit and 

this inevitable purchase of this kind of debt from the Fed, we 

should restrict that or remove it? Would you agree that was a good 

suggestion back then? 

Secretary GEITHNER. I would have to go back and look at your 

bill, but as I said in my statement, I think when you think about 

what system should replace our current system, a critical part of 

that is to make sure you don’t have institutions with private shareholders taking advantage of a subsidy from the government that 

leaves the taxpayer exposed to the risk of substantial losses. 

So I agree that a centerpiece of future reform will be dealing 

with the moral hazard in the current framework. 

Dr. PAUL. But doesn’t the monetary system breed into the system 

the moral hazard? The Fed is designed to be the lender of last resort. 

Secretary GEITHNER. No. I don’t think that was— 

45 

Dr. PAUL. That’s what it says. They are to be there to pick up 

the pieces. 

Secretary GEITHNER. Not—GSEs were different, as you said, because there was a credit line and because this expectation built 

over time that the government would be there. That had nothing 

to do with the Fed. In fact, the Fed is— 

Dr. PAUL. Our concerns bore out because that’s what exactly happened. The government did pick up the pieces, and now we’re in 

a bigger mess. 

Mr. KANJORSKI. The gentleman from Illinois, Mr. Manzullo. 

Mr. MANZULLO. Thank you, Mr. Chairman. Mr. Secretary, Hank 

Paulson, the former Treasury Secretary wrote in his book, ‘‘On the 

Brink,’’ that in September of 2008, the Treasury issued, as you referred to on page 10 of your testimony, the preferred stock purchase agreements, encouraging banks to purchase these. And that 

this was done at the same time to help satisfy the Chinese government, which owned billions of dollars in Fannie and Freddie bonds, 

which were paid off in their entirety. And so now we have these 

banks that were intentionally misled, intentionally deceived to buy 

Fannie and Freddie preferred holdings, and then after the government said buy these, it’s going to help out, the government just defaulted and stuck all those banks, big time. 

At the same time, you mentioned there’s a new $30 billion capital program being considered for community banks, and my question to you is, when I look at the objectives of reform, and this is 

a guideline, I don’t see anything in there that addresses whether 

or not these community banks should be treated the same as the 

Chinese and be made whole when they were intentionally misled 

by the U.S. Government to buy these bonds that turned out to be 

worthless. 

Secretary GEITHNER. Congressman, I cannot speak adequately to 

the judgments my predecessor made at that time—I cannot. 

Mr. MANZULLO. I understand. I’m asking you, do you have a solution for these banks that got stuck? 

Secretary GEITHNER. Well, again, I think that one of the most 

powerful things we could do to help community banks get through 

the challenges still ahead is to put in place a capital facility that 

gives them the ability to come to the Treasury and apply for capital 

support, small business lending. I believe that would help make a 

big difference. 

Mr. MANZULLO. I understand that. But if they’re made whole on 

their bonds, they’re just getting back—if they’re made whole in 

their preferred stock purchases, then they’re simply getting back 

the money they paid in the first place and don’t have to worry 

about another exotic program coming from the Federal Government. 

Secretary GEITHNER. Again, I understand those concerns, but 

small banks across the country face a lot of challenges, not just 

those who held Fannie and Freddie preferred stock. And that’s one 

of the reasons why small businesses across the country are still 

having a hard time getting credit, and I think it is a— 

Mr. MANZULLO. Well, that, and the fact that the regulators have 

really tightened up the screws, even though the regulators say they 

46 

have not, and I believe them, but the people in the field have done 

that, to make what credit is available even tighter. 

Secretary GEITHNER. You’re right. I think— 

Mr. MANZULLO. Here we have a situation where my question is, 

is the Treasury as part of its reform program interested or willing 

to treat the community banks in the same manner in which it 

treated the Chinese by making sure that they were indemnified on 

their bonds? 

Secretary GEITHNER. Well, again, I would be happy to spend time 

with you, Congressman, in looking in more detail at that particular— 

Mr. MANZULLO. Can you give me at least the basis of an answer 

on that? 

Secretary GEITHNER. Congressman, we have put forward a very 

detailed— 

Mr. MANZULLO. If you don’t know, I would accept that. 

Secretary GEITHNER. No. As I said, we think the most effective 

thing Congress could do to help small community banks now— 

Mr. MANZULLO. I understand that. I’m asking, what can you do? 

Secretary GEITHNER. What I can do is administer a program like 

that with authorization from the Congress, but I need authorization from the Congress for it to work. 

Mr. MANZULLO. You need authorization—would you need authorization in order to honor those preferred stock purchases? 

Secretary GEITHNER. I— 

Mr. MANZULLO. That were issued in September of 2008? 

Secretary GEITHNER. I would have to think about that and get 

back to you. 

Mr. MANZULLO. Okay. That’s fair enough. Thank you. 

The CHAIRMAN. The Secretary is now dismissed. Well, ‘‘excused,’’ 

I guess, is better than ‘‘dismissed.’’ 

[laughter] 

The CHAIRMAN. With our thanks. The hearing has been useful. 

I thank the members. I think we had a very serious set of questions asked in a perfectly reasonable way, and we will now call the 

second panel. 

People leaving, please leave. The panel will sit down. What are 

you running around the table for? There’s no music. The hearing 

will begin. This is obviously a continuation of the hearing on the 

future of housing finance, and I’m going to be very clear. We are 

not talking only about the GSEs. 

This is now the first of two hearings we’ll be having because Secretary Donovan will be testifying, and I should note that there are 

some organizations and others, and groups and individuals who 

have a lot of relevant things to say. They will be in the next panel. 

I will just say that I think this is one of the most interesting intellectual issues that we have before us, and it obviously has a lot of 

policy implications. Some of those are more easily done than others. But getting right what the successor set of institutions should 

be in housing finance is very important. 

We will begin with Sarah Rosen Wartell, who is the executive 

vice president of the Center for American Progress. I would just 

make one point. Please do not lean into the microphones. Move the 

microphone closer to you. 

47 

STATEMENT OF SARAH ROSEN WARTELL, EXECUTIVE VICE 

PRESIDENT, THE CENTER FOR AMERICAN PROGRESS (CAP) 

Ms. WARTELL. Thank you, Mr. Chairman, and Representative 

Capito. I applaud you, and I appreciate the way you framed the 

purpose of this hearing for beginning this conversation. I should 

say my testimony benefits from 18 months of conversation with the 

Mortgage Finance Working Group, which is a group of affordable 

housing finance experts sponsored by CAP, although my remarks 

are mine alone. 

I ask the Chair if my full statement and a statement of principles and a draft whitepaper that the working group has prepared 

could be included in the full record. 

Let me leave you with just six points. First, the new system’s 

goals should include liquidity, stability, and affordability. These objectives have served us well since the 1930’s. The mistakes that led 

to the current crisis represent not the failure of this vision, but the 

failure to keep those objectives paramount. 

The system also must better balance rental and homeownership, 

offering appropriate options for all kinds of families. Unfortunately, 

history suggests that the private market alone will not meet these 

objectives. 

Second, the crisis stemmed from the unchecked growth of a shadow banking system of unregulated and irrationally priced private 

label MBS or private label securities. As investor demand for PLS 

grew, issuers demanded more subprime loans, and good lending 

practices would yield, driving down standards and distorting markets. The only cops on the street were the rating agencies, and they 

had an incentive to keep the party going. 

An analogy may be helpful here. Imagine that there was suddenly great demand for hamburgers in the United States. Facing 

a shortage of Grade A meat, USDA inspectors would face pressure 

to let older, less healthy cows receive that Grade A designation. If 

we had a system in which they were paid by those whose meat 

they graded and there was no transparency on the standards, we 

might find ourselves waking up one day realizing that what we 

were eating in our hamburgers had changed. That’s basically what 

had happened with the PLS market. Our investors were eating the 

equivalent of horse meat. 

Figure 1 in the package of charts—there’s a package of charts 

that I believe is on your table with the CAP logo—shows how dramatically credit quality declined with early delinquencies, growing 

from 5 to 25 percent in only 4 years. Going forward, we must not 

reproduce a bifurcated system, as the Secretary mentioned earlier, 

in which unregulated capital in one part of the market drives a 

race to the bottom. Our working graph proposal argues that the 

same system of rules must apply to both whatever receives government backing and the private market. 

Third, we look at the GSE’s role in the crisis. They were followers, not leaders. They made poor decisions with costly consequences for taxpayers. They came to the party late, were drawn 

in to the subprime market to regain lost market share, and chased 

what seemed like higher returns. And Figure 2 in that set of charts 

shows how their market share dropped as the private label securities share grew. 

48 

As others left that market, the GSEs stayed, and inexplicably 

doubled down while credit quality collapsed. The regulators also 

made significant errors in risk oversight and in awarding goals 

credit for unsustainable subprime purchases. While both the GSEs 

and the regulators made the problems worse, neither was the primary cause of the junk mortgages or the larger global financial 

meltdown. 

Fourth, lending to low- and moderate-income and minority borrowers didn’t cause this crisis, nor was it the result of longstanding 

policies like CRA and the housing goals that encouraged serving 

creditworthy borrowers. Figure 3 in your package shows how the 

MBS market followed the same bubble burst pattern as other 

asset-backed securities markets that had no affordable housing 

goals. If the GSE goals drove the subprime business, these patterns 

would diverge. 

Fifth, while recent subprime lending was more detriment than 

benefit, we do know how to do affordable homeownership right. 

With sound lending practices, research shows, comparable borrowers are 3 to 4 times more likely to sustain homeownership as 

the fourth figure in the package shows. Communities have been 

stripped of equity by this foreclosure epidemic. It would be obscene 

if we first failed to prevent harmful subprime lending and then we 

let the hardest-hit communities be denied the fair and sustainable 

lending needing to recover. That must be a priority in reform. 

Sixth, while we should not preserve the government’s greatly expanded role any longer than necessary, policymakers must move 

cautiously. Even simple statements about the future might move 

markets, affect home values, and make domestic and overseas investors wary of agency securities, representing trillions of investment in the U.S. economy. And housing market deterioration could 

increase the taxpayer exposure from its existing obligations. 

Over time, we must reduce the Federal role to one focused on 

serving the historical goals of liquidity, stability, and affordability, 

and creating the conditions in which private capital can better 

serve the market. The Federal backstop should be more target than 

it is today. Private and public capital under explicit rules and rigorous oversight can be paired to ensure that all appropriate Americans have access to long-term, fixed-rate homeownership opportunities and affordable rental housing. 

Thank you. 

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

178 of the appendix.] 

The CHAIRMAN. Thank you, Ms. Wartell. 

Next, Mr. Michael Berman, who is the chairman-elect of the 

Mortgage Bankers Association. 

STATEMENT OF MICHAEL D. BERMAN, CHAIRMAN-ELECT, THE 

MORTGAGE BANKERS ASSOCIATION (MBA) 

Mr. BERMAN. Thank you, Mr. Chairman, and Representative 

Capito, for the opportunity to testify. 

I live in Newton, Massachusetts, and I have been in the real estate finance industry for over 25 years. I currently oversee all of 

my company’s national loan programs, including multifamily programs with Fannie Mae, Freddie Mac, and the FHA. My company 

49 

has also been active in the commercial mortgage-backed securities 

arena as an investor, lender, issuer of securities, servicer, and special servicer. 

Since the creation of Fannie Mae in the 1930’s, the Federal Government has played a key role in providing stability to the secondary mortgage market. The current housing crisis has tested 

that role and led to calls for fundamental rethinking of the part 

played by the government in the housing finance system. To spearhead this thinking, in October 2008, the Mortgage Bankers Association formed the Council on Insuring Mortgage Liquidity, which 

I chair. This 23-member council is made up of industry practitioners from single family, multifamily, and commercial sectors of 

the real estate finance industry. Its mission has been to look beyond the current crisis to what a functioning, secondary mortgage 

market should look like. 

Let me identify three principles that lie at the heart of our discussions. First, the secondary mortgage market transactions should 

be funded with private capital. Second, to promote uninterrupted 

market liquidity for the core mortgage market, the government 

should provide an explicit credit guarantee on a class of mortgagebacked securities backed by core, single family and multifamily 

mortgage products. This guarantee should not be free but should 

be financed with risk-based fees. And, third, taxpayers and the system should be protected through limits on the mortgage products 

covered, limits on activities, limits on portfolio size and purpose, 

strong risk-based capital requirements, and risk-based payments 

into a Federal insurance fund. 

The centerpiece of MBA’s plan is a new line of mortgage-backed 

securities. Each security would have two components: a securitylevel, Federal Government guaranteed wrap which would be 

backed by loan level guarantees from privately-owned, governmentchartered, and regulated mortgage credit guarantor entities. The 

government guarantee would be similar to the one provided by 

Ginnie Mae, guaranteeing timely payments of interest and principal to bondholders and explicitly carrying the full faith and credit 

of the U.S. Government. 

This government wrap will help provide affordable financing 

rates. These guarantees will be supported by a Federal insurance 

fund, capitalized by risk-based fees charged on the supported securities, which could also be a vehicle for an affordable housing fund. 

In supporting these loan level guarantees, the private entities 

would rely on their own capital as well as risk retention from originators, issuers and other secondary mortgage market entities such 

as mortgage insurers. MBS investors would not face credit risk, but 

would take on the interest rate risk from the underlying mortgages. 

It’s important to note that while MBS in this model would be 

guaranteed by the government, the companies backing these securities would not. The debt in equity issued by these entities would 

be purely private. As with other firms, investors would accept the 

potential risk of failure and loss. For this reason, we recommend 

that regulators charter enough entities to establish a truly competitive secondary market and to overcome issues associated with ‘‘tooVerDate Nov 24 2008 18:27 Aug 05, 2010 Jkt 056779 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\56779.TXT TERRIE
50 

big-to-fail.’’ At least initially, the number of entities should be two 

or three, and that number could increase as the market develops. 

The framework we proposed is not intended to be the entire market. It’s meant to focus on a narrowly defined set of core mortgage 

products that are essential to have available through all market 

conditions. Our proposal recognizes the need for a wider array of 

products through a re-emergence of the private market, including 

private label securities and covered bonds. We must also ensure 

that the transition from the current system to a new model is as 

seamless as possible. 

Measures such as focusing the GSEs on a narrow range of mortgages and winding down their portfolios can be undertaken now. 

Additionally, the use of a good bank/bad bank strategy would help 

retain the best people, processes, and infrastructure from the 

GSEs. Identifying a clear path that will move forward to remove 

uncertainty and ensure that GSE’s resources are of service now 

and in the future is essential. 

Mr. Chairman, MBA’s recommendations combine an acknowledgment that only a government guarantee can attract the depth and 

breadth of capital necessary for the market with a reliance on private capital and insistence on multiple layers of protections for taxpayers and a focus on ensuring a competitive, efficient secondary 

mortgage market. Our recommendations represent a clear and 

workable approach to ensuring liquidity in the mortgage market. 

These proposals were developed by industry practitioners who have 

been working on these issues for their entire careers. 

We understand that capital markets have perspective on what 

will work. We welcome your thoughts and comments on our ideas. 

Thank you. 

[The prepared statement of Mr. Berman can be found on page 75 

of the appendix.] 

The CHAIRMAN. Next, Mark Calabria, who is the director of financial regulation studies at the Cato Institute. 

STATEMENT OF MARK A. CALABRIA, Ph.D., DIRECTOR, 

FINANCIAL REGULATION STUDIES, THE CATO INSTITUTE 

Mr. CALABRIA. Chairman Frank, distinguished members of the 

committee, I thank you for the invitation to appear at today’s hearing. 

Before offering specific reform proposals, I think it’s useful to 

start with a set of principles that I think should guide any restructuring of our mortgage finance system. The first and foremost of 

those principles is that I believe private, at-risk capital should 

serve as the foundation of our mortgage finance system. We simply 

must put an end to privatized profits and socialized losses. 

Second, government policy should be structured to act in a countercyclical manner. Too much of our current structure magnifies 

the booms and busts in our housing markets, and we certainly 

should make every effort to dampen our housing cycles, we are unlikely to avoid them. So we should structure our housing finance 

system, keeping in mind that we will have booms and busts and 

our system should be robust to those booms and busts. 

Just as we have booms and busts, we will have companies that 

fail, and we should structure our mortgage finance system with 

51 

that in mind so that our mortgage finance system is robust to the 

failure of a small number of companies. I think it’s also important 

that the costs and benefits of that system should be transparent, 

understandable, and credible. All subsidies and contingent liabilities should be on budget. I believe the American public has a right 

to know what they’re on the hook for. I also think policy should be 

tenure-neutral. Renting should be a respectable alternative, and to 

the extent that we encourage homeownership, it should be sustainable. And, additionally, I believe all homeownership policies should 

focus on housing as shelter and not housing as a speculative investment. 

We should also reduce the current levels of leverage, the use of 

debt in our mortgage finance system, both on the part of financial 

institutions and on the part of households. Additionally, the level 

of maturity mismatch in our financial system should be reduced. 

But, with those principles in mind, I’m going to give a set of recommendations for reforming Freddie and Fannie. These recommendations should also apply to any entities that succeed 

Freddie and Fannie. 

First and foremost, I think whatever entities we have funding 

our secondary mortgage market, we should have a lot of them. Concentrating the risk of our mortgage market into a few entities is 

simply a recipe for disaster. If we were to keep some version of 

Freddie and Fannie, I believe we need to break them up into at 

least a dozen pieces. Anything else would be viewed as implicitly 

backed by the government. 

In keeping with the principle of transparency, if private sector 

debt is used to fund the secondary mortgage market, such debt 

should be explicitly not treated as government debt, should be subject to 33 and 34 Act disclosures, and we should remove references 

and statute treating it as government debt. I would emphasize the 

part of Freddie and Fannie that provided the substantial amount 

of liquidity for the mortgage market is essentially securitization of 

mortgages. Future activity should be limited to issuing mortgagebacked securities and prohibiting the holding of an investment 

portfolio. 

Additionally, any securitization should be a true securitization 

where Freddie and Fannie or their successor entities transfer all 

the risk, including credit, to the holder of the MBS’s. This would 

imply that their guarantee business be ended. We should also reduce the extent to which Freddie and Fannie debt and mortgage 

debt generally permeate our financial system. For instance, prior 

to the financial crisis, FDIC-insured depositories held GSE securities equal to over 150 percent of their tier 1 capital. 

Investment banks and mutual funds were similarly full of 

Freddie and Fannie debt. There should be explicit concentration 

limits on financial holdings of GSE securities and such debt should 

be treated no better than commercial paper for the purposes of capital adequacy. But we must also recognize that the rescue of 

Freddie and Fannie was as much a foreign policy decision as it was 

an economic one. 

If we were not going to let foreign governments or central banks 

such as the Chinese take losses on their GSE holdings, then we 

need to either have that reflected on budget or we need to prohibit 

52 

the sale of GSE securities to foreign entities. We should also consider a new ownership structure for Fannie and Freddie. I believe 

reconstituting Freddie and Fannie as a lender-owned cooperative 

could reduce the risk-taking and lower potential cost to the taxpayer. I say that, well aware of the many problems facing the Federal Home Loan Bank System. 

But, despite those problems, I believe the Federal Home Loan 

Bank System has come through this crisis in better shape than 

Freddie and Fannie. I also believe it’s appropriate to set minimal 

underwriting standards and loan requirements for whatever GSEs 

look like, such as requiring reasonable downpayments on the part 

of borrowers in addition to requiring all GSC loans to be full recourse. 

At the core of any discussion of the U.S. mortgage market, 

stands the 30-year, fixed-rate mortgage. We must start with the 

very simple observation that someone must bear that interest rate 

risk. It will never simply go away. In normal times, the borrower 

or the lender bears some or all that risk, and in extreme market 

events, the taxpayer gets hit. I believe we should ultimately let the 

market decide where that falls. 

In wrapping up, as the committee moves forward, I would strongly encourage the committee to hear from experts from other countries on the functioning of their mortgage markets. Despite the 

rhetoric during the bubble, our mortgage market is clearly not the 

envy of the world nor do we have the highest homeownership rates 

in the world. Several countries had even bigger housing bubbles 

with less ramifications, while other countries largely avoided a 

bubble, yet still maintain ownership rates similar to our own. 

For instance, the Canadian system requires significant 

downpayments, full recourse, sizable prepayment penalties, and 

leaves significant share of the interest rate risk with the borrower. 

Yet, Canada has ownership rates similar to our own without the 

recent bubble. 

I thank you, and wrap up there. 

[The prepared statement of Dr. Calabria can be found on page 

103 of the appendix.] 

The CHAIRMAN. Next, Vincent O’Donnell, who is vice president of 

the affordable housing preservation initiative of LISC. 

STATEMENT OF VINCENT F. O’DONNELL, VICE PRESIDENT, AFFORDABLE HOUSING PRESERVATION, LOCAL INITIATIVES 

SUPPORT CORPORATION (LISC) 

Mr. O’DONNELL. Thank you, Mr. Chairman, and distinguished 

members of the committee for the opportunity to testify about 

where we go with our housing finance system. 

I lead LISC’s national efforts in supporting the preservation of 

affordable rental housing, but I speak today from the perspective 

of LISC as a whole. We work through partnerships with the private 

sector, including banks and GSEs and insurance companies, mostly 

through generating loans and investments. And we have seen at 

close hand in this work the best and the worst elements of the 

housing finance system and how it affects low-income, metropolitan, and rural communities and their residents. 

53 

We have seen effective public-private partnerships that foster the 

production and preservation of affordable rental homes and sustainable homeownership, fed by a fixed-rate, 30-year mortgage and 

prudent underwriting and innovation. Even in distressed urban 

and rural communities that were previously written off, private interest served the public interest safely, profitably, and successfully, 

not out of luck, but as a result of careful public policies that blended responsibility, opportunity, prudence, capacity, and accountability. 

But we have also seen predatory lending ravage families and 

neighborhoods and we have seen public policies that oversell the 

genuine virtues of homeownership and ignore and neglect or even 

denigrate rental housing where a third of American households 

live. We have learned from this work that the long-term interests 

of consumers, lenders, investors, and communities in the financial 

system must fundamentally align rather than conflict. And we also 

must bring all communities—distressed, rural, and minority—into 

the mainstream of the financial system. 

I want to set some context, but first state some basic guiding 

principles: first, the elements of the housing finance system should 

be better integrated in a number of ways; and second, private institutions that receive public benefits should also help address public 

objectives. 

Just for perspective, our role is that of a community development 

financial institution. In that capacity, we make loans and equity investments to benefit people in a variety of circumstances. And, 

therefore, the functioning of the long-term housing finance market 

is critical to our success, because otherwise the investments we 

make will not pay off either in terms of financial return to us and 

recovery of our funds, or in the success of our mission. Our written 

testimony goes into some detail about how this interplay works. In 

particular, we use the example of affordable rental housing preservation to discuss the interplay between housing subsidies and the 

housing finance system, and the community development financial 

institutions like us that get these useful developments jump-started. 

I do want to say that other parts of the system are addressing 

this interplay. Secretary Donovan is looking at the relationship between rental assistance and stable financing, and this committee is 

also doing that. I want to commend H.R. 4868, the Housing Preservation and Tenant Protection Act of 2010, which was filed last 

week by Chairman Frank and a number of cosponsors on the committee. 

Now going back to the system, any reconsideration of the GSE 

role should note their current centrality to the housing finance system in the broad context. System fragmentation has increased risk, 

created unlevel playing fields, and reduced access to responsible 

credit. Any new system must assume the functions and capacities 

that the GSEs have developed and deal with transitional issues. 

We need coordination between primary and secondary markets. We 

need system-wide regulation, including regulation of the secondary 

markets, which are powerful drivers of the primary market. The 

painful subprime home mortgage crisis is evidence of how this can 

happen. 

54 

Both homeownership and rental housing are important. We need 

a balanced policy between both. We need policies to address both 

market rate and affordable housing, and we think it’s a false dichotomy to suggest that the capital markets should address market 

rate housing and only the government should address affordable 

housing. We also need the system to understand and support both 

debt and equity. The secondary markets have been crucial to the 

equity market with low income housing tax credits, for example, 

and there needs to be a place for that. 

The public policy objectives that we want to support, and we go 

into more detail in our written testimony, are that: we need liquidity in all economic conditions—upmarkets and downmarkets; we 

need long-term, fixed-rate mortgages for both homeowners and for 

rental housing; we need capital access for all communities, including economically distressed, low-income, rural, and minority communities on a fair and sustainable basis—not a return to redlining; 

and we need some approach to support the housing trust fund and 

the capital magnet fund. We recommend a small millage fee; by 

broadening the base, the impact on the taxpayers is reduced. I just 

want to say in conclusion that there will be an enormous, farreaching consequence coming from this. Our perspective is that the 

system needs to serve all communities in this country, including 

low- and moderate-income families. And we thank you for your 

support. 

[The prepared statement of Mr. O’Donnell can be found on page 

159 of the appendix.] 

The CHAIRMAN. Thank you. 

Mr. DeWitt? 

STATEMENT OF ROBERT E. DeWITT, VICE CHAIRMAN, CHIEF 

EXECUTIVE OFFICER, AND PRESIDENT, GID INVESTMENT 

ADVISERS LLC, ON BEHALF OF THE NATIONAL MULTI HOUSING COUNCIL AND THE NATIONAL APARTMENT ASSOCIATION 

Mr. DEWITT. Chairman Frank, Ranking Member Capito, and distinguished members of the committee, I am Bob DeWitt, chief executive officer of GID Investment Advisers, testifying on behalf of the 

National Multi Housing Council and the National Apartment Association. 

It’s important to draw a clear distinction between the performance of the single family and multifamily sectors. The multifamily 

finance system has been an unqualified success for over 2 decades. 

As Congress crafts solutions to fix the single family problems, you 

should be mindful not to do so at the expense of the much smaller, 

less understood, but vital multifamily sector. 

Since the early 1990’s, apartment developers and owners have 

had access to reasonably priced capital throughout all economic cycles as a result of the secondary market. This has allowed them to 

produce millions of apartment units affordable to working families, 

those households at or below area median income in communities 

all across the country. We didn’t overbuild, and those apartments 

produced within the system came at virtually no risk to the taxpayer. The two GSEs have had to foreclose on fewer than 100 

apartment properties over the past 20 years. 

55 

Today, their delinquency and defaults remain under one-half of 

one percent, a tenth of the size of the delinquency and default rates 

plaguing single family. In normal times, GSEs finance approximately a third of the capital going to apartments. Banks, insurance 

companies, conduits, and other private players have made up the 

other two-thirds. However, the past 18 months have not been normal times. Those purely private players abandoned the market and 

have not and cannot yet return. As a result, Fannie and Freddie 

currently finance some 90 percent of the debt capital for apartments. 

Clearly, this is not sustainable, nor desired; but, neither is the 

uncertainty regarding what role the private market can play in financing apartments. The apartment industry urges you to consider 

the following key points for inclusion in any reform measures. 

Number one, mission: the public mission of the federally supported secondary market needs to be clearly defined and should be 

focused primarily on using the government guarantee to provide liquidity to the multifamily mortgage market. This liquidity will 

help meet the current and growing need for workforce housing. 

Access to a steady stream of capital promotes affordability. Affordable housing is one of the Nation’s most pressing needs and 

multifamily housing is inherently affordable. Fully 90 percent of 

the apartment units financed by the present system over the past 

2 decades, literally millions of apartments, were affordable to families at or below area median income. This includes an overwhelming majority of market rate apartments with no direct Federal subsidy. 

The Harvard University Joint Center for Housing Studies estimates that we already have a shortage of some 5 million units of 

affordable rental housing. Our industry cannot meet the Nation’s 

current or future housing needs, or refinance the approximately 

$200 billion in mortgage debt coming due over the next 2 years 

without a fully functioning, secondary mortgage market. 

Number two, the private market simply cannot meet 100 percent 

of the multifamily demand for capital. Any new or revised secondary market system must recognize the unique needs of the multifamily sector and create a capacity to fill the gap left by the private sector. There are structural impediments facing banks, insurance companies and conduits that preclude them from financing 

more than they traditionally have. As the GSEs shrink their overall presence in the markets during this transition, we expect them 

to continue to be the primary source of the apartment sector’s 

mortgage capital. 

Number three, private capital is preferable to federalization of 

the secondary market or the creation of a new Federal entity. Federalization will limit the broad range of finance products required 

to maintain a healthy and changing multifamily market. Attracting 

private capital based on the Federal Government guarantee allows 

for needed innovation and flexibility. 

Number four, explicit guarantee: we believe that the transition 

to any new system should provide access to explicit Federal guarantees for multifamily mortgage securities and loan. We support a 

fee structure to support this backstop. Such a risk-based guarantee 

56 

on the underlying mortgage would provide reserves against mortgage losses, thus protecting and insulating the taxpayer from loss. 

Number five, portfolio lending: securitizing multifamily loans is 

not always the best way to manage credit risk. Unlike single family 

loans, they are not easily commoditized, and therefore any new system should permit the ability to hold loans in portfolio. 

And number six, secondary market infrastructure: during these 

transition years, we believe it is critical to retain many of the resources and capacities of the existing GSEs. The two firms have extensive personnel and technology expertise, and established third 

party relationships that are critical to a well-functioning, secondary 

market. 

If I can leave you with one message today, it is that a government-supported secondary market is absolutely critical, at least 

during an appropriate transition period to the multifamily industry’s ability to continue to meet the demand for safe, decent, and 

affordable rental housing. I thank you for the opportunity to be 

with you today to present the views of the apartment industry, and 

I look forward to your questions. 

[The prepared statement of Mr. DeWitt can be found on page 110 

of the appendix.] 

The CHAIRMAN. Next, Janis Bowdler, who is the deputy director 

of the wealth-building policy project at the National Council of La 

Raza. 

STATEMENT OF JANIS BOWDLER, DEPUTY DIRECTOR, 

WEALTH-BUILDING POLICY PROJECT, THE NATIONAL COUNCIL OF LA RAZA (NCLR) 

Ms. BOWDLER. Good morning. Thank you. I am the deputy director of the National Council of La Raza’s wealth-building policy 

project, and I would like to thank Chairman Frank, Mrs. Capito, 

and others for inviting NCLR to share a perspective on this issue. 

Record foreclosures in communities of color have taught us painful lessons on the consequences of predatory lending. For decades, 

qualified borrowers of color have struggled to gain access to the 

same loans as their White peers. During the bubble years, many 

believed their homeownership dream came true, only to learn that 

they were sold second class products. As we consider how to revive 

our housing finance market, it must be shaped by the lessons of 

the past and built on principles of fairness and inclusion. 

In my remarks, I will review important lessons from the old system. Then, I’ll lay out a series of principles to create a system that 

promotes true ownership opportunities for communities of color. 

Let me start with the lessons. The bubble years have become infamous for a glut of inventive but devastating financial products; 

however, we can’t lose sight of those innovations that really move 

the ball forward. As the housing counseling intermediary, NCLR 

has helped more than 135,000 families purchase their first home. 

Based on our experience, there are three areas from the old system that we must incorporate moving forward. The first is housing 

counseling. Research has shown that families who attend counseling are less likely to default. With significant support from both 

sides of the aisle, and this committee in particular, the field of 

housing counseling has become increasingly sophisticated. The secVerDate Nov 24 2008 18:27 Aug 05, 2010 Jkt 056779 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\56779.TXT TERRIE
57 

ond is flexible underwriting. The mortgage industry has learned 

how to underwrite various borrower characteristics without jeopardizing the bottom lines of banks or families. And the third is 

non-traditional credit. We also learned how to profile credit using 

data from rent, utility, and other monthly bills. Doing so opened 

the door for a whole new segment of borrowers. All too often, however, this work was overshadowed by risky yet profitable loans. 

Under the old regime, industry players had little incentive to 

think past the commission they would earn at origination or 

securitization. Building on these lessons, NCLR has two primary 

goals. The first is to ensure that qualified Latinos can access a 

home loan at fair, equal, and affordable rates. And the second is 

to ensure that home will develop into an asset they can share with 

their children. 

With that in mind, we would like to share with you six principles 

to guide the shaping of our housing finance market. The first is 

that there is a role for the Federal Government in providing liquidity and innovation. Whether directly or through quasi-public agencies, the government can help facilitate the flow of adequate capital. As a rule, they should bolster and not replace the private market and they should set a high standard for lending, secondary 

market credit, and rental financing. The second is that mortgage 

credit must be equally accessible and available to all qualified borrowers. Moving forward, policymakers must be careful not to exacerbate the tendency of the market to favor the easiest-to-serve borrowers. One way to do this would be to invest in lending tools that 

are unattractive to the private market, but for which there is 

strong public purpose. 

The third is that sound and affordable mortgages should be the 

norm. The rise of subprime mortgages was driven by Wall Street’s 

appetite for risky loans, not by borrower’s demand on the ground. 

We need to restore balance so that the system reflects true demand 

from the bottom, not from the top. 

The fourth is that diverse delivery and outreach channels must 

be incorporated. A key lesson from the financial fallout in 2008 is 

that prime banks did not compete well against more agile and less 

scrupulous competitors. Congress should look at how to maximize 

and reward those that are offering sound and sustainable loans. 

The fifth is that predatory lending should be eliminated. Much 

of the best developments in the last 10 years were blocked from the 

borrowers who needed them most, and abusive lending routinely 

beat out the slow and steady practices on the ground that would 

have created sustainable ownership opportunities. And finally, our 

sixth principle is that affordable rental housing and ownership opportunities are linked. Unfortunately, these goals of creating affordable rental and helping low-income families achieve homeownership have been pitted against one another. Yet, families can build 

savings or prepare for a homeownership when their rent is too expensive. 

Rental and ownership policy must be connected to create a clear 

national housing strategy. On a final note, NCLR strongly urges 

Congress to be data-driven. With unparalleled access to GSE portfolio data, we have the information we need to identify the strong 

tenants of affordable lending. There is a strong public demand for 

58 

a robust housing finance market that delivers a steady flow of affordable credit on fair terms to all corners of the country. History 

has shown that this is not likely to happen without targeted investment from the Federal Government. 

We look forward to working with you to determine that role. 

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

94 of the appendix.] 

The CHAIRMAN. Next, Professor Anthony Sanders from George 

Mason University. 

STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED PROFESSOR OF REAL ESTATE FINANCE, SCHOOL OF MANAGEMENT, GEORGE MASON UNIVERSITY 

Mr. SANDERS. Thank you, Mr. Chairman, Ranking Member Capito, and members of the committee. 

The Federal debt at the end of 2009 stood at $8 trillion, but the 

Fannie Mae, Freddie Mac, and Federal Home Loan Bank debt and 

MBS stands at $8 trillion as well. This combined debt load for the 

United States is $16 trillion and represents 110 percent of our 

gross domestic product. This Grecian formula of debt issuance to 

fund housing goals is not sustainable. We simply have too much leverage in the housing finance system. To make matters worse, the 

Federal Government controls 95 percent of residential mortgages 

made with FHA insurance or Fannie Mae or Freddie Mac loan purchases. Stated differently, our financial institutions will not originate residential loans unless the Federal Government ensures or 

purchases them. 

We need to take immediate action to get the financial institutions and the investment community back in the game and wind 

down the Federal Government’s involvement. We have affordable 

housing missions at HUD and at Freddie and Fannie through affordable housing goals, and at financial institutions through the 

Community Reinvestment Act and numerous other State and local 

programs. Given the massive supply of vacant housing on the market, the shadow inventory of foreclosed homes at financial institutions, and the multifamily vacancy rates, perhaps it is high time 

that we consolidate the affordable housing missions under one tent. 

Historically, the Nation’s affordable housing mission has been 

under HUD. Hence, I would recommend that any Federal affordable housing mission be housed there. 

But the FHA, our low- to moderate-income mortgage insurance 

entity, is woefully antiquated in terms of technology, and is in desperate need of modernization. Thus, my first recommendation is a 

dramatic overhaul and modernization of the FHA. My second recommendation is to slim down Fannie and Freddie’s role in the 

housing market. We can begin by: one, removing the affordable 

housing mission; two, unwinding the retained portfolios at an accelerated pace; and three, toughening the regulatory oversight of 

Fannie and Freddie by moving it to a stronger FHFA. 

My third recommendation is to pass legislation governing a covered bond market similar to the market that exists in Denmark, 

and begin with the jumbo mortgage market as an experiment. Covered bonds potentially provide an excellent vehicle to fund the residential and commercial mortgage markets going forward. 

59 

My fourth recommendation is to repair the securitization model 

that is already in existence. Having lenders retain skin in the game 

of at least 5 percent of the loans originated is a good start. Our recent downturn in housing teaches us that 5 percent would have 

been grossly insufficient to cover the future downturns in housing 

prices. On the other hand, a private securitization market should 

be a buyer-beware market, so skin in the game would be pointless. 

Lastly, we have to return to a 10 to 20 percent down or more 

downpayment standard for mortgage lending, and 10 percent in 

FHA programs. The housing bubble of the last decade was fueled 

mostly by low interest rates combined with low downpayment 

mortgages and exotic mortgages such as pay option ARMs. The 

much maligned subprime market was a convenient scapegoat for 

this crisis. Had lenders and GSEs adhered to 10 to 20 percent 

down standards, there would not have been a bubble in the first 

place and the subprime borrowers would not have defaulted in such 

numbers had the bubble not burst. 

Mr. Chairman, I thank you for letting me share my comments 

and suggestions with you and the committee. Thank you. 

[The prepared statement of Professor Sanders can be found on 

page 167 of the appendix.] 

The CHAIRMAN. And our final witness, Mr. Vince Malta from the 

National Association of Realtors. 

STATEMENT OF VINCE MALTA, 2010 VICE PRESIDENT AND LIAISON TO GOVERNMENT AFFAIRS, THE NATIONAL ASSOCIATION OF REALTORS 

Mr. MALTA. Chairman Frank, and members of the committee, 

thank you for holding this hearing today. I am Vince Malta, the 

2010 vice president of the National Association of Realtors. I am 

a third generation Realtor, and I am here to testify on behalf of 

more than 1.2 million Realtors who are involved in all aspects of 

the real estate industry. 

As our members began exploring the question of how to improve 

the U.S. housing finance sector, and developing recommendations 

on what to do about Fannie Mae and Freddie Mac, there were a 

couple of significant issues for which they sought a solution. First, 

Realtors want to ensure that in all types of markets, there is always mortgage capital available for the creditworthy housing consumer. Second, and equally important, Realtors want to ensure 

that taxpayer dollars are optimally protected. 

Among the models that our members considered were to make 

the secondary mortgage market entities either fully private or fully 

Federal. However, we believe neither option effectively addresses 

these two critical issues. Full privatization is not an effective option because a private firm’s business strategy will focus on optimizing its revenues/profit generation. As a result, such an entity 

would foster mortgage products that are more aligned with business goals rather than the Nation’s housing policy or consumers. 

Such a model could lead to the elimination of long-term, fixed-rate 

mortgage products and increase costs. We have also learned in the 

last few years that in extremely difficult markets, private lenders 

have not been willing to make loans without government backing. 

60 

On the other hand, full nationalization has its own share of problems. Either converting Fannie and Freddie to fully Federal agencies or merging them with Ginnie Mae would place taxpayers at 

significant risk. Realtors want to eliminate as much as possible any 

scenario that would place the taxpayer fully on the hook to protect 

these entities. Additionally, having only one secondary mortgage 

market entity would remove competition in the secondary market 

space and remove any incentive for innovation. Further, we fear 

that a combined secondary mortgage market entity could lose focus 

on its mission to serve low- and moderate-income families and to 

maintain liquidity in the mortgage markets. 

Realtors believe that to ensure the flow of capital into the mortgage market regardless of the state of the housing market or the 

overall economy, Fannie Mae and Freddie Mac should become government-chartered, non-shareholder-owned authorities. These new 

entities should be subject to tighter regulations on product, profitability, and minimal retained portfolio practices in a way that ensures the protection of taxpayer monies. The new authority should 

focus on standard mortgage products that are the foundation of our 

housing finance market. 

While such a focus may curtail some private participation in alternative products in this portion of the market, over time we believe private market participants will offer innovations that meet 

consumer needs. With the new entities focusing on standard, safe 

mortgage products, including 15- and 30-year, fixed-rate mortgages 

and traditional adjustable rate mortgages, we believe private capital will be free to compete for opportunities outside of that product 

window. 

Finally, Realtors believe that regardless of the secondary mortgage market model selected, there is a place for the utilization of 

covered bonds. Our members do not believe that they can replace 

the liquidity tools of our existing system, but should be encouraged 

as an additional product to provide liquidity to the secondary mortgage market. Realtors recognize that this is but the first of many 

conversations regarding how we mend and improve a housing finance system that had served us well for many years. We believe 

that our recommendations, along with some key elements that we 

mentioned today, will help Congress and our industry design a secondary mortgage model that will serve America’s best interests 

today and in the future. 

I thank you for this opportunity to present our views. As always, 

the National Association of Realtors is ready to help you as you 

work to sustain the housing and national economic recovery. 

[The prepared statement of Mr. Malta can be found on page 143 

of the appendix.] 

The CHAIRMAN. Thank you. I want to begin with an observation 

from before. There was a comment about the pressures of the Federal Reserve in warning about Fannie and Freddie, and that is 

true, but it should be coupled with a recognition that the Federal 

Reserve was given by the Congress in 1994 the responsibility for 

preventing irresponsible lending, whether it was inside or outside 

the banking system. And Mr. Greenspan, as he later acknowledged, 

refused to do it on ideological grounds. 

61 

So yes, the Fed was worried about Fannie and Freddie buying up 

mortgages, but the Fed was worried about Fannie and Freddie buying up mortgages that the Fed should have prevented from being 

made in the first place. It is important to remember that Fannie 

and Freddie were in the secondary market and they would not 

have, as a matter of fact, been impacted if there had not been problems in the primary market, although they may have encouraged 

it. So the Fed’s record here is indeed a very mixed one. 

Mr. DeWitt, I want to acknowledge—you made explicit the importance of separating out multifamily and single family, and that 

is relevant. Several people here talked about the importance of 

rental housing which was, I think, ignored, and part of the problem 

was a failure to understand that, and I agree with that. We will 

be very careful, and we ask you all to work with us, to make sure 

that it is not a failure to recognize that. 

Let me just ask Mr. Calabria—I was struck, and I appreciate 

that you stated, I think, a very important point, that our policy 

shouldn’t be based on the form of tenure, whether it is a rental or 

ownership. I’m just wondering if you would care to speculate 

about—and I would ask Mr. Malta to stay calm—the question of 

the home interest deduction on home mortgages. Would you change 

that at all? 

Mr. CALABRIA. I would. I would ultimately, in a budget neutral 

way, get rid of it. I think our tax code in general encourages excess 

leverage on the part of households and corporations, so without a 

doubt, we should be phasing out the mortgage interest deduction. 

The CHAIRMAN. Thank you. And Mr. Sanders, I appreciated your 

comments on a number of areas. On downpayments—and I was 

just checking—when you say having borrowers have skin in the 

game in subprime, would you mandate that in some way? I certainly agree with that. Should we mandate that? 

I will tell you one of the things we did do with regard to 

securitization—and I will get to that in a minute on your comments 

there—we called for 5 percent as the norm, with the regulators 

going to 10 percent if it is a particularly risky thing. But it had 

gone down to zero, and we had in mind if they had a 30-year, fixedrate mortgage with a 20 percent downpayment—not to mandate, 

but to incentivize. But would you go further? I very much agree on 

the desirability of the downpayment. Is there some way in public 

policy we should follow through on that? 

Mr. SANDERS. There is no doubt about it. I think having the 3.5 

percent down FHA, which was brought down to zero, is a—again, 

public policy viewpoint, I understand that side of it. On the other 

hand—again, in my report, you will see that the FHA insurance 

fund is suffering greatly— 

The CHAIRMAN. I agree, and we are in fact in conversations now, 

and we will have a bill when we come back that I think is going 

to raise that. But the question is, what about non-FHA, would you 

do anything about that? 

Mr. SANDERS. Well the non-FHA, and from a financial stability 

viewpoint, I think—as I put, 10 to 20 percent makes a lot of sense. 

Going back— 

62 

The CHAIRMAN. I understand that. Should public policy try to 

force that, to incentivize it? What should we do about it other than 

say it is a good thing? 

Mr. SANDERS. I would actually include it as a requirement for financial institutions, yes. 

The CHAIRMAN. Thank you. That is important, and that is in the 

private market. 

A query here on the other thing, securitization. I wasn’t sure if— 

you said the 5 percent is a good start, but then you said a private 

security market should be buyer-beware, so skin in the game would 

be pointless. I’m not sure I fully understand what your recommendation is with regard to securitization. 

Mr. SANDERS. Yes, there are two sides to it. First of all, ‘‘skin in 

the game,’’ which I have discussed with some people sitting at this 

table, is good in theory. On the other hand, on the securitization 

market, particularly the private label, I disagree with some of the 

characterizations that everyone was misled by it. I think in many 

cases, we have so many information systems and databases out 

there that investors in the market knew full well what was going 

on. So again, I’m not sure that would make that much difference. 

The CHAIRMAN. Would you be for it or against it? If it doesn’t 

make a difference, does it do any harm? 

Mr. SANDERS. To have 5 percent down? 

The CHAIRMAN. Correct—no, not down. Securitization on the 

lender now. Downpayment is on the borrower. I was assuming we 

were talking about a 5 percent requirement on the seller of the 

loan, who was the originator. 

Mr. SANDERS. And again, Chairman Frank, that is a two-sided 

issue. We could ask for 20 percent. Then we would end up drying 

up— 

The CHAIRMAN. I’m just asking for your recommendation. I don’t 

mean to be intrusive, but you did come here as a witness. 

Mr. SANDERS. You are— 

The CHAIRMAN. What would your recommendation be? 

Mr. SANDERS. 5 percent. 

The CHAIRMAN. On the lender? 

Mr. SANDERS. On the lender. 

The CHAIRMAN. And 10 to 20 percent on the borrower. That is 

perfectly reasonable. 

The gentlewoman from West Virginia. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

Mr. Berman, from the Mortgage Bankers Association, correct? 

Mr. BERMAN. Yes. 

Mrs. CAPITO. You talk a lot about how MBA has suggested a 

framework for single and multifamily mortgage markets. The centerpiece would be for the Federal Government to support the secondary mortgage market through a new line of mortgage-backed 

securities. Do you think it is possible to have a fully functioning 

private secondary market without government support? This sort of 

is a theme I have heard from others as well, but what is your opinion on that? 

Mr. BERMAN. The issue really is, how do we survive in terms of 

creating a liquid market through downturns? And it is the position 

of the MBA and the practitioners that were part of this council that 

63 

the depth of the market is not sufficient without this government 

wrap, Ginnie Mae-type wrap, in times of illiquidity such as we 

have today. And we have these 100-year floods about every 10 

years, so this is not an uncommon event. 

Mrs. CAPITO. Does anybody else have an opinion on that? Yes, 

Mr. Calabria? 

Mr. CALABRIA. I would make two quick points. We largely actually had a private label securitization market in the 1920’s, and 

granted we had a big housing bubble then too, so that is not a way 

to get out of it. But I would note that if we are going to accept the 

role of the Federal Reserve as a backer of asset markets in terms 

of the mess like we had with the asset-backed facilities in the—you 

could certainly have the Fed be the lender of last resort and buy 

mortgage-backed securities when you are hit with your 20-year 

flood. So if you are going to keep that, that is there, and we should 

recognize that is part of it. 

Mrs. CAPITO. Mr. Malta? 

Mr. MALTA. Yes, thank you. We couldn’t get around the issue. 

When we first looked at this, we were hoping that the private sector could pick up what was needed in the marketplace. And as evidenced by the last 18 months, we have seen that the private side 

does not perform or does not provide the needed capital when the 

markets are as stressed as we have been experiencing. If it had not 

been for Fannie and Freddie and the FHA, where would this market have been if we had just relied on the private sector? 

Ms. WARTELL. Yes, I think there are two different roles that we 

ought to be distinguishing here. The first is, what do you do when 

there is stress in the market, and when private capital loses confidence in housing? I hope we will not see ourselves back in the circumstance we are in now, but you do need a backstop. 

The second is a different role, which is really to deal with the 

mismatch in durations, and Mark mentioned this in his policy, although I think we probably come to a different place on this—30- 

year, fixed-rate financing allows people to have a predictable level 

of their own expenses devoted to housing. It allows middle-class 

families to plan for their own financial futures. Investors are rarely 

willing to commit dollars for that period of time, and that mismatch is what the Federal intervention or some other mechanism 

is designed to provide. And it is that—if we want to have longterm, fixed-rate financing available, that seems to be where we 

ought to focus a Federal backstop. 

Ms. BOWDLER. I just wanted to add that having a government 

provide some liquidity through whatever form is also very important for areas where the private market doesn’t find the borrower 

attractive, and they don’t find all borrowers equally and universally 

attractive. So rural areas, urban cores, moderate-income families 

don’t always have access and may not get it if it isn’t for some form 

of government intervention. 

Mr. BERMAN. I would also just like to add that the MBA proposal 

is designed to continue to have the mortgage credit guarantor entities to have 100 percent skin in the game, if you will, throughout 

all the market variations. So in what we have proposed, we have 

this consistent alignment of interest. And again, the government 

64 

wrap is really to encourage bond holders to come into the market 

at those times. 

Again, the emphasis we have is on private sector. We want to get 

private—we really don’t want the Fed to come in if we can avoid 

that. We want to encourage private investors to come in, and we 

think that government guarantee of credit will enhance that probability through the downturns. 

Mrs. CAPITO. Thank you. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

We have looked a lot in this committee at how to revive bank 

lending, but securitization was roughly half of all lending before 

the financial crisis or before the foreclosure crisis really set in. And 

I understand that with respect to issues of stock, there are fairly 

elaborate rules for standardized disclosures, periods of time, waiting periods so that potential investors can do due diligence, they 

can take their own look at what they are getting, and that the 

standards or the rules for issuing mortgage-backed securities or 

any securitization—any securitized debts, but mortgage-backed securities in particular, were just starkly different. 

Instead of having a period that investors could—instead of having standardized disclosures and allowing investors to sample the 

mortgages in the pool, it usually was the case that investors got 

a call saying, ‘‘We are going to market in 3 hours, are you in?’’ And 

not surprisingly, one of the reasons the securitization market has 

not bounced back, I understand, is that investors are leery of going 

back to that. They would like to know a little bit more about what 

they are buying. But the securitization industry has resisted greater disclosure. 

Mr. Calabria, I am always surprised when a witness from the 

Cato Institute says something I agree with, but when you called for 

the requirements of the 1933 and 1934 Securities Acts to apply to 

GSEs, is that what you were calling for, and would you extend that 

call to private label securitizers as well? 

Mr. CALABRIA. I would, and I would extend that as well to the 

Federal Home Loan Banks. I think it is very important that if we 

have the security disclosures, you have to get that with the MBS, 

and I think that is an important part of it. 

I want to touch on something very related that Sarah mentioned, 

which is the credit rating agencies, and I think we need to go very 

far in forcing regulators and the market to do due diligence. We do 

need to end that quasi-monopoly status that the rating agencies 

have, but I would focus on that as a part of it. So yes, the 1933 

and 1934 Acts, or whatever is coming forward in the future. 

Mr. MILLER OF NORTH CAROLINA. I have never seen so many 

heads nodding from what is largely an industry panel to questions 

that I have had in this committee before. 

Any other thoughts on this issue? And do you think that the SEC 

has the statutory authority now to issue rules to require this? 

Mr. CALABRIA. Currently, under Freddie’s and Fannie’s charters 

and the Federal Home Loan Banks, they are exempt. I know that 

the recent reform act put them under the 1934 Act. They are still 

exempt from the 1933 Act. So that would take a change. And as 

I mentioned in my testimony, there are a variety of pieces throughVerDate Nov 24 2008 18:27 Aug 05, 2010 Jkt 056779 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 K:\DOCS\56779.TXT TERRIE
65 

out Federal law where they are treated as ‘‘government securities.’’ 

That would need to be changed. 

Mr. MILLER OF NORTH CAROLINA. How about all the private 

label—well, there are perhaps not so many anymore, but we obviously want to return to the day when there are, but with better 

standards. 

Mr. CALABRIA. Most of the private label was subject to the 1933 

Act. They had gone through shelf registrations, and certainly I 

think it merits re-evaluating the shelf registration process to see 

whether that provided sufficient information to investors. 

Mr. MILLER OF NORTH CAROLINA. Mr. Berman? 

Mr. BERMAN. I think there are a number of issues here. One is 

transparency, which clearly is something that the Mortgage Bankers Association is in favor of. But it is not just transparency with 

respect to the entities or the securities, it is also transparency with 

respect to the rating agencies, and clearly the only reason that investors at the time were willing to make such quick decisions was 

their reliance on the ratings. I think it is important for the SEC 

to take a close look at how the rating agencies function, the transparency of their models, the transparency of their ratings. Restoring confidence is what it is all about, and without confidence in the 

rating agencies, we have a long way to go. 

Mr. MILLER OF NORTH CAROLINA. Ms. Wartell— 

Ms. WARTELL. Sure, go ahead. 

Mr. MILLER OF NORTH CAROLINA. I’m kind of accustomed to having the Center for American Progress agree with me, but go ahead. 

Ms. WARTELL. The only thing, I just wanted to emphasize your 

point, which is that our ability to attract private capital back into 

these markets will depend upon us giving markets confidence in 

the quality of private label securities. So the idea of looking at 

these proposals for comparability, whatever the government-backed 

market and the private market, really need to have rules that are 

consistent. 

Mr. MILLER OF NORTH CAROLINA. I yield back, Mr. Chairman. 

The CHAIRMAN. Let me use your remaining time briefly just to 

say, with regard to the rating agencies, I would like to make them 

better. Some of us are skeptical. And one thing I think was very 

important that Mr. Garrett and I collaborated on was to repeal all 

the statutory requirements that people rely on the rating agencies, 

because if we can’t make them better, we can at least tell people, 

you are on your own, and don’t hide behind them, and I think that 

was a very important, simple thing. 

Further, I guess I would say to Mr. Calabria—and it is nice that 

we have had this agreement—do I take it from what you said that 

if Cato had been in existence 70 years ago, it would have supported 

the 1933 and 1934 Acts? 

Mr. CALABRIA. I’m not certain that we would have. I would say 

that I think those standards need to be applied uniformly if you 

are going to have them. 

The CHAIRMAN. If you are going to have them. Thank you. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I appreciate the testimony of all the panelists. Frankly, it was 

helpful. It was illuminating. Particularly, Mr. Berman, and Mr. 

66 

Malta, on behalf of your respective organizations, I applaud you 

for, frankly, bringing a plan to the table, something the Administration hasn’t done. Mr. Berman, I found your plan particularly interesting and comprehensive. I want to study it a little more. I still 

don’t agree with it all. Mr. Malta, you have a thoughtful plan. I 

agree with it less, but it is a thoughtful plan nonetheless, and you 

should be applauded for bringing one to the table. 

I believe we have to have a plan. The status quo is simply 

unsustainable, and I’m disappointed in the Administration for really maintaining the status quo. And I believe, Mr. Sanders, you 

pointed out that the exposure of the taxpayer to Fannie and 

Freddie after the Secretary of Treasury earlier today told us that 

it is not sovereign debt, but we are going to stand behind every 

penny of it—that is a paraphrase, not a quote—not sure how—I 

guess that was particularly illuminating. But when you think 

about the debt being at roughly $8 trillion and Fannie and Freddie 

exposure of roughly $8 trillion, it is really a staggering amount. 

I also picked up this Bloomberg report that the gentleman from 

New Jersey alluded to earlier which stated, ‘‘The bond market is 

saying that it is safer to lend to Warren Buffett than Barack 

Obama. Two year notes sold by the billionaire’s Berkshire Hathaway in February yield 3.5 basis points less than Treasuries of similar maturity according to data compiled by Bloomberg.’’ And we 

know already that Moody’s is threatening to lower our AAA rating. 

I find all of this quite staggering myself, and so again, to have the 

Administration proffer no plan I believe is simply inexcusable. 

The first question I would like to ask the panel—I have been trying to study other housing markets, because I personally would like 

to see a GSE future for America. I haven’t convinced myself—although I have come to this debate with an open mind, it is not an 

empty mind. But as I look around, I see countries like Ireland, the 

U.K., and Portugal that seem to have no GSEs, a high rate of 

homeownership to our own. Denmark, no GSEs, and although they 

have had a housing bubble themselves, there has been no surge in 

delinquencies and foreclosures. Certainly, there have been some. 

I forget who it was—maybe it was you, Mr. Sanders, or maybe 

it was you, Mr. Calabria, who commented upon the Canadian system, which also has no GSEs, and frankly has a higher rate of 

homeownership there. Some of them use covered bonds. I do believe Canada has an FHA-like structure. I believe in Canada, you 

said that mortgages are fully recourse. I think there is a larger 

downpayment. I don’t know if that is simply due to market forces 

or the government. I don’t know the answer to that. 

So the question for those of you who believe that ultimately we 

must have some form of GSE, which I believe includes you, Mr. 

Malta—am I missing something in these international examples? 

I’m sorry, I was calling to you, Mr. Malta. I thought you advocated 

we needed some, essentially, government-backing to our 

securitization market. I don’t see that overseas, and so am I missing something? 

Mr. MALTA. The United States and Denmark are the only two 

countries that have the 30-year, fixed-rate mortgage. And you look 

at Canada, for instance, their mortgages reset every 5 years. 

67 

Mr. HENSARLING. So you would advocate, then, that these are 

needed—you do not believe ultimately that the market would 

produce a 30-year, fixed-rate mortgage, and you believe in order to 

achieve your goal in homeownership that we would have to see the 

30-year, fixed-rate mortgage, is that what you are advocating? 

Mr. MALTA. That is correct. I think market incentives would say 

that we would have something less than the 30-year, fixed-rate or 

15-year, fixed-rate mortgages. It would reset. 

Mr. HENSARLING. I don’t know—listen, I respect the opinion. You 

may or may not be right. I don’t know the answer to that. I know 

that I have certainly seen a study from the Federal Reserve that 

says that ultimately at the end of the day, Fannie and Freddie provided 7 basis points advantage for homeowners given that the taxpayer is already out $125 billion, given that they are on the tab 

for much more, particularly trillions. It just reminds me—and I 

just think the American dream is not to buy a home, the American 

dream is to keep a home. And I’m not sure for 7 basis points increase in the interest rate that it was worth all the human misery, 

all the foreclosures. So I’m not completely sure that achieved our 

goal. 

Mr. Calabria? 

The CHAIRMAN. Quickly. 

Mr. CALABRIA. The median life of a mortgage tends to be about 

7 years. Few people live in their house for 30 years or keep that, 

so even a mortgage that has a 5-year, fixed-rate mortgage and 

resets like in Canada covers most of that risk. I do think the reason we would still see—and I touch on this in my testimony—30- 

year mortgages out there—if they weren’t subsidized, we would 

just see the spread between adjustable and then higher, and maybe 

that is appropriate, that it reflects the full price of it. 

The CHAIRMAN. Thank you. Having lived in this House for 30 

years, I don’t find that I’m getting to be able to pay anything off. 

[laughter] 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. LANCE. Thank you, Mr. Chairman. 

Mr. Calabria, your testimony suggests breaking up the GSEs, as 

I understand it, into about a dozen equal-sized entities. Could you 

explain in a little more detail how that would work? 

Mr. CALABRIA. Sure. You could go—and I will preface—my back 

of the envelope is certainly that comes with a cost, and I think 

mortgage rates would probably go up about 6 or 7 basis points if 

we reduce— 

Mr. LANCE. How much would they go up, in your opinion? Six or 

seven— 

Mr. CALABRIA. Basis points. 

Mr. LANCE. Six or seven basis points. 

Mr. CALABRIA. If we reduce the scale of the GSEs. There is certainly a cost to that. So what I would do is I would randomly take 

one every other 12th loan and the—and I think you need to set up 

a good bank, bad bank model. Take the bad loans, take the good 

loans, just randomly set them up in 12 different spots. The things 

I would avoid to do is I would not— 

Mr. LANCE. Not geographic, I trust? 

68 

Mr. CALABRIA. Not geographic. I would not reproduce that part 

of the Federal Home Loan Bank System, nor would I make them 

cooperatively owned or jointly—I would make them just 12 independent entities. 

As I touch on in my testimony, I think you need to allow the 

charters to be issued by the regulator, and if this is a model that 

works, and other entities want to come in and charter in that 

model, they should be allowed to. I would just as well say if this 

is a model that doesn’t work, those entities should be able to apply 

their charters, go the OCC, and try to get a bank charter. 

So I think it is important to let the number of these entities grow 

and let the market determine that. But I would emphasize if you 

only have two or three, the market is going to look at these as ‘‘toobig-to-fail’’ regardless of what we say. 

Mr. LANCE. And then how would you wind down the current 

GSEs? 

Mr. CALABRIA. Well, as I mentioned, I would set up a good bank/ 

bad bank situation, which I will note the current receivership 

structure in the bill that was passed in 2008 allows the separation 

into a good bank/bad bank. So I would say you just have to set that 

up like a modern day RTC that resolves those bad assets. 

Certainly, you want to ask a broader question, which is do we 

want to set up something like the REFCORP bonds where the Federal Home Loan Bank pays us back for some of the costs of the savings and loan crisis, whether in the future or these new entities 

pay us back for some of the losses from Freddie and Fannie. But 

all of that can be structured very similarly to what was set up with 

the Federal Home Loan Banks. 

Mr. LANCE. Thank you. Is there anyone else on the panel who 

would like to comment on that proposal? Yes? 

Mr. BERMAN. Yes, Congressman. The MBA proposal would agree 

with what Mr. Calabria said with respect to good bank/bad bank 

resolution of Fannie and Freddie in order to help leverage the important good assets that we have there, not just the physical assets, but the intangibles. 

I think that the transition—and we have all agreed, I think, that 

transition is critical—might take a long time to get to 12. And 

again, I’m not suggesting that 12 is a good number or a bad number. But our thought is that creating two at the beginning is probably an easier way to a smooth transition. We have databases, 

origination systems, underwriting systems, and so on— 

Mr. LANCE. Wouldn’t that be ‘‘too-big-to-fail’’ if there were only 

two? 

Mr. BERMAN. Well, again, two wouldn’t be the end game, but I’m 

speaking about the transition. I think it would be very hard to 

wave a wand and create— 

Mr. LANCE. And how long would you presume the transition 

should be? 

Mr. BERMAN. I think that would be market determinative, which 

I agree with Mr. Calabria. It would—and up to the regulator to 

charter those. So we agree on those pieces. 

Mr. LANCE. Thank you. Mr. Sanders, in your proposal regarding 

a covered bond approach, some have said that covered bonds are 

simply another complex financial instrument. Do you think we 

69 

should be cautious in facilitating the creation of such a market in 

the United States? 

Mr. SANDERS. The answer to that is, of course, we would probably do it on a trial basis to begin with. But no, actually I think 

they are much more straightforward and clear cut. The banks 

make loans, they keep them on their balance sheet. If you have 

transparency, you have bondholders that will be receiving the cash 

flows from it. I think it is so straightforward it is shocking, and 

there is actually—as long as there is transparency, let me make 

that clear. 

Mr. LANCE. And how would you assure transparency? 

Mr. SANDERS. Again, you can write in what the average LTV interest rate, maturity of the mortgages are. Whatever product you 

are doing, making sure they are verifiable, that it is what the actual collateral looks like. 

Mr. LANCE. Thank you. And to continue, Professor Sanders, how 

would you manage the GSEs retained portfolios? 

Mr. SANDERS. What I recommend in my report was, at this point, 

wind them down as soon as possible, which in this market is a little more cumbersome than normal. But I would start with having 

three tiers of loans. 

I would start off with the bad performing loans—not like a bad 

bank, but split them off into a securitization structure where we 

throw them out there and say, here is some risky paper, what are 

the bids on it? I would have a second tier, and the second tier 

would be all the loans that Fannie and Freddie probably shouldn’t 

have purchased, such as the Alt-A mortgages, some subprime 

paper, bundle those as a second tier. And then the ones we can 

keep a little longer are the conforming loan pools, the way we used 

to do it a long time ago. That would be less— 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. LANCE. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from California. 

Mr. ROYCE. Yes, I was going to ask Mr. Calabria a question. You 

were on the Senate Banking Committee at the time. Some of these 

issues that came up over the GSEs, Fannie and Freddie, and those 

were really the boom years when you were over there, in housing. 

And I would just ask you a question on the logic of what would 

have happened had the Fed come in and cracked down on Alt-A 

loans and subprime loans. How would that have been received on 

the Senate side? You had a chance to interact there with Members, 

and some of them, like Chris Dodd, weren’t exactly in favor of 

clamping down on Fannie and Freddie, especially with respect to 

affordable housing. What do you think the reaction would have 

been in the Senate? 

Mr. CALABRIA. I think there sure would have been some skepticism. I would certainly say one of the things that I think was constantly heard in efforts to reform Freddie and Fannie was that the 

housing market was carrying the economy, which it was. Certainly, 

the housing market was a very large part of the economy in 2004, 

and we certainly heard common refrain that we should not do anything to take the air out of the housing market. 

I think, in my mind, it opens up a broader question, which is— 

and Sarah has said this, other people have said this—we need to 

70 

kind of make our mortgage finance system countercyclical, and part 

of that is a very real problem, which is we all love bubbles when 

they are going on. So how do you set up an incentive system that 

leans against that when the pressure is to keep a bubble going 

rather than to avoid the bubble in the first place? 

Mr. ROYCE. Yes, I think a lot of this was viewed—I have my own 

view of this, but I think for a lot of members, they viewed this as 

a way to get people with less than perfect credit into a home. That 

is the way they were viewing the activity over there. 

But since the failure of Fannie and Freddie, several former executives have explained that the GSEs entered into the subprime 

and Alt-A market to send a signal to the broader market, which 

was these were in fact safe loans. You and I might have considered 

them junk loans, but the perception or the intent was to send that 

signal, according to Fannie executives. I was going to ask you do 

you care to comment on this. 

Mr. CALABRIA. It is important to start with two different distinctions, which is even on the loans that Freddie and Fannie bought 

directly as whole loans that I think most of us would say were 

subprime, they did have a variety of standards set to those. They 

did not apply those standards until very late in the game, after the 

bubble had already burst, to the mortgage-backed securities, the 

private label that they pushed—that they bought. So they had two 

different standards. 

I think it is also important to look at—that if you look at the vintages of subprime loans that have performed the worst, which are 

2005, 2006, 2007, that is the time when Freddie and Fannie entered the market in force and there were larger sources of liquidity 

for that market. So I think they were the marginal buyer during 

that time, and really ended up lowering the standards that we saw 

in the marketplace. 

I would note that one of the things that I think would have been 

helpful if the second—I’m a little biased by saying it—but if the 

second Shelby bill with the portfolio restrictions had taken place, 

they would not have been able to buy those mortgage-backed securities that were subprime, and I think that is half the problem in 

terms of Freddie and Fannie’s losses. 

Mr. ROYCE. Thank you, and here is my last point. Both regulatory reform bills endorse the creation of a resolution process for 

failed or failing systemically important firms, and both bills label 

a group of institutions as ‘‘too-big-to-fail.’’ They create a resolution 

fund and they draw a line from that fund to the U.S. Treasury. Is 

there an assumption here that creditors and counterparties will be 

on the receiving end of something more than what they would receive in the case of a liquidation process through bankruptcy? 

In other words, are we recreating the moral hazard problem with 

Fannie and Freddie by allowing for the possibility that creditors 

and counterparties will be bailed out by the Federal Government? 

Because I think regardless of whether it comes from the industry 

or the taxpayer, there will be a breakdown in market discipline, 

and that is the fatal flaw in this approach. That is what has to 

change, or else we will repeat another mistake made in the Fannie 

and Freddie debacle. 

71 

Mr. CALABRIA. And I think it is very important to emphasize the 

market discipline role on the part of creditors. Any financial institution, it is 90 plus percent of their funding—is from the debt markets. For Fannie and Freddie, it was essentially 99 percent of their 

funding on a mark-to-market basis. So the market discipline has to 

come from creditors, and I do believe as long as there is a fund 

there, there will be a perception by creditors that they will be 

bailed out, and I think that is problematic. 

I think you also have to look at what sort of discretion that the 

regulator has. For instance, in the most recent Senate bill—and I 

remember we spent lots of time on the Hill arguing about ‘‘may’’ 

versus ‘‘shall.’’ It says the FDIC ‘‘may,’’ so I do think you need to 

set some certainly so that the marketplace knows they will be— 

Mr. ROYCE. Thank you, Mr. Calabria. 

The CHAIRMAN. The witnesses are thanked, and the hearing is 

adjourned. 

[Whereupon, at 1:40 p.m., the hearing was adjourned.] 

(73) 

A P P E N D I X 

March 23, 2010 

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