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HOUSING FINANCE—WHAT SHOULD THE 

NEW SYSTEM BE ABLE TO DO?: 

PART II—GOVERNMENT AND 

STAKEHOLDER PERSPECTIVES 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

APRIL 14, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–121 

( 

(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: 

April 14, 2010 ................................................................................................... 1 

Appendix: 

April 14, 2010 ................................................................................................... 59 

WITNESSES 

WEDNESDAY, APRIL 14, 2010 

Crowley, Sheila, President, National Low Income Housing Coalition ................ 36 

Donovan, Hon. Shaun, Secretary, U.S. Department of Housing and Urban 

Development ......................................................................................................... 6 

Gleason, Thomas, Executive Director, MassHousing ........................................... 41 

Hopkins, Jack E., President and Chief Executive Officer, CorTrust Bank, 

N.A., on behalf of the Independent Community Bankers of America ............. 39 

Judson, Rick, Third Vice President, National Association of Home Builders 

(NAHB) ................................................................................................................. 44 

Pollock, Alex J., Resident Fellow, American Enterprise Institute ...................... 37 

Randazzo, Anthony, Director, Economic Research, Reason Foundation ............. 42 

Reed, Anthony T., Executive Vice President, Capital Markets, SunTrust Mortgage, Incorporated, on behalf of the Financial Services Roundtable ............... 34 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 60 

Crowley, Sheila ................................................................................................. 61 

Donovan, Hon. Shaun ...................................................................................... 67 

Gleason, Thomas .............................................................................................. 80 

Hopkins, Jack E. ............................................................................................... 84 

Judson, Rick ...................................................................................................... 92 

Pollock, Alex J. ................................................................................................. 100 

Randazzo, Anthony ........................................................................................... 105 

Reed, Anthony T. .............................................................................................. 114 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Written statement of the Manufactured Housing Institute ................................. 131 

Written statement of the National Association of Local Housing Finance 

Agencies, the National Association of Counties, the National Association 

for County Community and Economic Development, the U.S. Conference 

of Mayors, and the National Community Development Association ............... 137 

Joint Treasury and HUD press release entitled, ‘‘Obama Administration 

Seeks Public Input on Reform of the Housing Finance System,’’ dated 

April 14, 2010 ....................................................................................................... 143 

(1) 

HOUSING FINANCE—WHAT SHOULD THE 

NEW SYSTEM BE ABLE TO DO?: 

PART II—GOVERNMENT AND 

STAKEHOLDER PERSPECTIVES 

Wednesday, April 14, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 9:35 a.m., in room 

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

Members present: Representatives Frank, Kanjorski, Waters, 

Velazquez, Watt, Moore of Kansas, Hinojosa, Baca, Lynch, Miller 

of North Carolina, Green, Cleaver, Klein, Perlmutter, Donnelly, 

Foster, Carson, Adler, Driehaus, Grayson, Himes, Maffei; Bachus, 

Castle, Royce, Manzullo, Biggert, Hensarling, Garrett, Bachmann, 

Marchant, Posey, Jenkins, and Lance. 

The CHAIRMAN. The hearing will come to order. This is the second hearing we are having on the restructuring of the housing finance system, and I stress that because it is not just Fannie Mae 

and Freddie Mac; to do this thoughtfully, we want to look at the 

interactivity and interoperability of Fannie Mae, Freddie Mac, the 

Federal Home Loan Bank System, the FHA and Ginnie Mae, and 

the private sector. 

I think there’s general agreement to the extent that we can have 

the private sector returned to a more vigorous role. We’re all for 

it. And I will begin. We have a Cabinet officer, so we have 8 minutes on each side, and I will start off with 4 minutes for myself, 

so put me to 4 minutes. Thank you. 

The consensus is very broad that the existing system of housing 

finance has to be changed. The question to me that is at the heart 

of it is, what do we put in place of the current system? That means 

legislation, and I hope we can proceed to start drafting that very 

soon. We had the Secretary of the Treasury testify and now we 

have the Secretary of HUD. Originally, our plan was to have them 

both together, but I think this has worked out well. 

The Secretary of HUD is always accommodating to us. Having a 

second hearing is important, because it also gives us a chance to 

hear from a wide range of people. We will have had in both hearings people from all aspects of the housing field from the producer 

side, the Realtors and the homebuilders, and mortgage vendors as 

well as the bankers. We will have had advocates for low-income 

2 

housing. We will have had academic commenters on this and all 

those are relevant. 

And it might be contentious to replace the current system, not 

simply abolish it, and then figure out what is the mix that goes beyond that. There will be some public sector entities, I believe, and 

some private sector entities. I think one thing that is clear is that 

the mix of public and private shareholder corporations with a public purpose that was embodied in the Fannie Mae and Freddie Mac 

model did not work in the end, and tension between those two contributed to the problem. I certainly am convinced of that, going forward. 

We shouldn’t have that kind of a hybrid situation, and, obviously, 

there’s a lot to be done by the private sector. That may mean nothing more than for the Federal Government to get out of the way, 

but there are questions that have been raised by Realtors, by 

homebuilders, by mortgage housers, and others about whether or 

not some sort of backup authority is there. We want to make clear 

that the Federal Home Loan Banks, which I think have worked 

very well, are also squared away in this. 

So the task of the committee is to take the lead in figuring out 

what the new mix of private and public entities should be in housing finance, and I think there is agreement that we need both. We 

have the FHA. We have Ginnie Mae. We have the Home Loan 

Banks. One thing I think is clear now is that mix should consist 

of separate institutions, that the hybrid, private shareholder corporation with a public mission contributed to this problem and we 

need to untangle that. 

I am pleased to see that the Administration has been responding 

to our requests that we get some movement here, and I know the 

Secretary will be talking about the statement that was released 

today from the Departments of Treasury and HUD, asking for comments. There were questions that they put out, and I’m going to 

ask unanimous consent to put this into the record. I believe the 

statement has been distributed. If the statement has not been distributed to all members, it should be, and I would ask the staff to 

distribute it. 

So I, at this point, will reserve the minute and 10 seconds left 

out of the 5 minutes, and I will recognize the ranking member for 

3 minutes, according to his formulation. 

Mr. BACHUS. Thank you, Chairman Frank. This is an important 

hearing on the future of housing finance and the Federal Government’s role in that. It has been nearly a year-and-a-half since the 

bailout of Fannie and Freddie, and the Administration has just released today what can only be considered as their plan for housing 

finance. The chairman referred to it, and that plan is basically to 

poll the American people to ask them what they want to do about 

housing finance and the GSEs. So they’re simply asking seven 

questions. 

I don’t think we need polls. We need leadership. The press release accompanying this list of questions says their goal is to be 

transparent. What’s abundantly clear is that the Obama Administration has no real plan for dealing with housing finance or the 

GSEs. During the last year-and-a-half, Republicans, on the other 

hand, have introduced a number of concrete measures to immeVerDate Nov 24 2008 16:10 Sep 20, 2010 Jkt 057739 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\57739.TXT TERRIE
3 

diately address the failures of Fannie and Freddie, and have issued 

a strong set of principles and proposed reforms to protect taxpayers 

from further losses and future bailouts, and to build a stable housing finance system. 

One goal I believe we can all agree on is to start with re-establishing a housing finance market characterized by long-term stability and to which private capital is a primary source for mortgage 

financing. It also means restoring liquidity to the secondary market 

for residential mortgages and preventing significant disruptions to 

the financial market. We must encourage innovation and diversity 

in housing finance that provides more choices for consumers, not 

less. Just as importantly, reform must protect taxpayers from future losses and future bailouts, and require that taxpayers be made 

whole on outstanding loans, guarantees, and capital infusions 

made by the government. 

Mr. Chairman, it’s long since past-due to deal with these bailout 

companies, which were the center of the mortgage market meltdown and cause a financial crisis. It’s inexplicable that the Administration and the Majority in this House have no plans to deal with 

Fannie and Freddie and have failed to meet their self-imposed 

deadlines to come up with any sort of response other than to issue 

seven questions. 

So far, the Administration’s answer has been to lift the caps on 

the bailout of the GSEs, guarantee the GSE’s debt, pay the executives multi-million-dollar salaries, and hide the cost. So far, the 

American people have contributed more than $127 billion to bail 

out Fannie and Freddie on at least 80 percent of these companies, 

and have explicitly guaranteed more than $1.7 trillion of their debt 

and more than $5 trillion in their mortgages. 

The CHAIRMAN. The gentleman’s time has expired. If you want 

to give yourself more time, it would come out of the other members’ 

time. 

Mr. BACHUS. No, that’s fine. 

The CHAIRMAN. The gentleman from California is recognized for 

a minute and a quarter, a minute and 15 seconds; is that right? 

Mr. ROYCE. A minute and a quarter. 

The CHAIRMAN. Yes, a minute and 15 seconds. 

Mr. ROYCE. Thank you, Mr. Chairman. 

The CHAIRMAN. 25 means 15—excuse me. I’m doing my math 

here—a minute and 15 seconds. 

Mr. ROYCE. Okay. Mr. Chairman, I think going forward, the 

mortgage finance system should be based overwhelmingly on private investment. If it is the will of Congress to continue subsidizing 

affordable housing, which I think would be a mistake, it should be 

done through direct Federal appropriations. It should not be done 

through these institutions. 

I believe that, because I believe that government intervention 

was a major contributor to the mortgage crisis and that Fannie and 

Freddie were primary culprits in this. And I think that part of the 

problem, already, we see these calls for releasing Fannie and 

Freddie back into the market as quasi-private institutions. Part of 

the problem is that when the government creates a duopoly like 

this, it has enormous power, and it has power to come into the 

market, but also power to lobby Congress. 

4 

So when Fannie and Freddie did not want to be regulated with 

respect to overleverage, what did they do? They came to Congress 

and they quashed that legislation, which the Federal Reserve had 

requested to allow the Feds to deleverage these portfolios. They 

were leveraged a hundred to one, a trillion dollars was lost. 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from Pennsylvania is recognized for 3 minutes. 

Mr. KANJORSKI. Mr. Chairman, we meet today to continue our 

discussions about the functions which the new housing finance systems should perform. I appreciate your efforts to focus the Financial services Committee on this complex set of issues and share 

your interest in these important matters. 

Today’s hearing is just one of many conversations with stakeholders that we will need to have before determining what legislative actions we should take to achieve the end goal of re-establishing a healthy, stable housing finance system. I approach these 

debates with an open mind and no preconceived notion of what the 

solution ought to be. Through careful deliberation, however, I do 

believe that we can ultimately find the right policy approach. 

In late 2008, then-Secretary Paulson placed Fannie Mae and 

Freddie Mac under conservatorship. Since then, the Treasury Department is committed to the purchase of 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. All of these actions have preserved the availability of housing 

credit through these difficult times. The government, however, has 

further scaled back its commitments in our mortgage market since 

our hearing last month on this same topic. Specifically, on March 

31st, the Federal Reserve ended the program to purchase mortgage-backed securities. 

As our markets recover from this financial crisis, we must return 

to the private sector those functions that properly belong with the 

private sector. Although we must continue to carefully monitor 

what happens to mortgage rates and investor demand, I am, so far, 

pleased with the results of this separation. 

In thinking about where we should go, we must also consider 

where we have been. In good times and in bad, Fannie Mae and 

Freddie Mac have historically proven vital to increasing liquidity 

and improving the distribution of capital available in home markets. Together, these institutions have helped tens of millions of 

middle-class families share in the American dream of owning their 

own homes. I want the new housing finance system to continue to 

achieve these goals. 

While I look forward to hearing the testimony of all the participants today, I am especially eager to learn the thoughts of the Secretary of HUD. His thoughts would help to guide the Capital Markets Subcommittee, as we continue with the explorations begun 

last June regarding the housing finance system. In our forthcoming 

hearings, I anticipate that we will explore specific questions like 

the need for mortgage insurance, the housing finance systems of 

other countries, and the structure of guaranteed fees. In sum, Mr. 

Chairman, these important matters are ripe for debate and represent the next big mountain that our committee must climb. 

5 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from Texas, Mr. Hensarling, is recognized for 11⁄2 minutes. 

Mr. HENSARLING. The principal reason we have experienced economic turmoil is Federal policy that has incented, mandated, and 

cajoled financial institutions to loan money to individuals to buy 

homes that they could not afford to keep. By most estimates, 2⁄3 of 

all the bad mortgages in our system today were either bought by 

government agencies or required by government regulations with 

the CRA, FHA, HUD best practices, and perhaps, worst of all, the 

GSE’s affordable housing mandate, all of which combined to wreak 

havoc in our residential housing market. 

So far, the American citizens can think of 127 billion reasons to 

terminate the GSE’s government-sanctioned monopoly status. 

Clearly, I’m talking about their cost to the taxpayer. I see no economic, practical historical, compassionate or reasonable rationale 

why our housing markets need Government-Sponsored Enterprises. 

As they further monopolize our housing markets and hemorrhage 

taxpayer money, the Administration wants to take at least another 

year or so to monitor them. The Senate implicitly exempts them 

from their financial markets’ regulatory bill, and the House explicitly exempts them. Enough is enough. 

That’s why I have introduced H.R. 4889, the GSE Bailout Elimination and Taxpayer Protection Act, that over 5 years would phaseout their monopoly status, give them a level playing field, provide 

market competition, market discipline, and market innovation. And 

I would encourage the consideration of this committee. I yield back 

the balance of my time. 

The CHAIRMAN. The gentleman from New Jersey is recognized for 

11⁄2 minutes. 

Mr. GARRETT. I thank the chairman for holding this hearing. I 

thank the Secretary for your testimony today. I wish I could also 

say I would like to thank both of you for actually presenting a plan 

to this committee that would actually reform the housing finance 

system and end the taxpayer-funded bailouts of Fannie and 

Freddie, but I can’t do that, because they have not presented that 

plan. 

After the trillions of dollars that Congress and the Federal Reserve has committed to the credit crisis to bail out basically large 

financial institutions, most Americans who are watching would 

probably think that Congress would prioritize things, and prioritize 

things by fixing the most significant problems first. In this case, 

that would be Fannie and Freddie, the GSEs, which have cost the 

taxpayers the most money, and, as most experts would agree, are 

the central cause of this crisis. 

Fortunately, that’s not the case in this instance. The price tag of 

bailing out Fannie and Freddie is currently close to $400 billion 

and counting, with no limit. This is more than all of the other bailouts combined, and, yet, this Administration and this Majority 

have remained silent and has not even proposed a plan to end the 

ongoing bailouts and reform the housing finance system. 

Worse, and some would say, they are using these two companies 

as a slush fund, if you will, to support an existing failed housing 

policy. Mr. Secretary, this cannot stand. This is unacceptable. We 

6 

must end the bailout of these entities right now. And with that, I 

yield back. 

The CHAIRMAN. I will yield myself my one remaining minute and 

15 seconds, and then the gentleman from Alabama has 45 seconds 

left. And I want to reiterate that we agree that the system needs 

to be changed. 

Where we have a disagreement between our two sides is that I 

agree with the Realtors, the homebuilders, the mortgage lenders, 

the low-income housing advocates, and a wide range of people who 

are on all sides of the housing industry that simply ending Fannie 

and Freddie with no idea of the replacement would do damage at 

a time of economic difficulty. We are in the midst of recovering 

from a very deep recession, but we are clearly not fully out of it 

and have much to do, and the housing sector is a part of it. 

I have read the Republican plan. I read the plan that they submitted in the bill that we did on financial reform, although we will 

note in their recommittal motion, which was the last vote that they 

offered in the Financial Reform bill, the proposed to kill their proposal. That is, they offered a recommittal motion that if it had 

passed would have led to no action in this area. So they have been 

on again, off again. 

I also regret they didn’t join us in trying to limit the salaries, so 

the key question then is not whether or not we abolish them, but 

whether we at the same time work to put something in their place. 

The gentleman from Alabama is recognized for 45 seconds. 

Mr. BACHUS. Mr. Chairman, it is time to quit asking questions 

and introduce legislation. I yield the balance of my time to Mr. 

Royce. 

Mr. ROYCE. Well, the other point I would just like to make is 

that I am hoping that we learn something, and my worry is that 

we erased market discipline in this equation by this government 

backing or implied government backing of Fannie and Freddie. And 

unless we figure out a strategy that brings the market back, I don’t 

know how we avoid a situation in which Fannie and Freddie will 

again grow into a powerful duopoly, come up here, lobby Congress 

to get out from under the regulators and avoid the kind of regulation of the portfolios that we saw. Thank you. 

The CHAIRMAN. Mr. Secretary. And let me say we have the Secretary here. We do not hold Cabinet officers generally to a strict 

5 minutes. We hope you talk faster than the Chairman of the Federal Reserve generally talks, but we won’t be cutting you off at 5 

minutes. 

STATEMENT OF THE HONORABLE SHAUN DONOVAN, SECRETARY, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Secretary DONOVAN. I will endeavor to do so, Mr. Chairman. 

Thank you. 

Mr. Chairman, Ranking Member Bachus, and members of the 

committee, thank you for inviting me to talk about Fannie Mae and 

Freddie Mac, together often referred to as the GSEs and the 

Obama Administration’s efforts to reform our housing finance system. 

7 

As Secretary Geithner reviewed during his testimony before this 

committee last month, there were many contributing factors that 

led to the housing crisis of the past few years. I will not revisit 

those factors in detail, but suffice it to say that there is plenty of 

blame to go around from Wall Street to government to consumers 

and, of course, the GSEs. 

The Obama Administration’s comprehensive response to the crisis has helped restore stability to the housing market, easing the 

very painful fall in home prices and contributing to our broader 

economic recovery. According to the Federal Reserve Board, stabilizing home prices and lower financing costs nationwide have supported the recovery of homeowner wealth. Homeowner equity started to grow again in the second quarter of 2009, and to date has 

increased over a trillion dollars or $13,000 on average for the Nation’s nearly 78 million homeowners. 

Over 4 million borrowers have refinanced their homes in the past 15 months, saving an average of $1,800 per year on housing costs, 

pumping an additional $7 billion annually into local economies and 

businesses, and generating additional revenues for our Nation’s cities, suburbs, and rural communities. And, just last month, our 

economy started creating jobs again—162,000 of them. 

At the end of 2009, quarterly economic growth increased at the 

fastest pace in 6 years. For all this progress, however, it is important to recognize that the housing recovery remains fragile. And, 

while the current status of Fannie Mae and Freddie Mac in conservatorship is a temporary one, they are playing a critical role in 

these still uncertain times. That is why as we think through the 

next steps in reforming our housing finance system, we must proceed carefully to avoid undermining the stability that has been 

achieved. 

As we consider housing finance reform and the role of the GSEs, 

I would like to speak today in more depth on three particular subjects. The first is the importance of maintaining equal access to 

housing credit. The second is facilitating a responsible, sustainable 

form of homeownership that involves safe, easily understood products. And the third is ensuring that reform creates a sustainable 

and stable market for rental housing, which is directly related to 

and influenced by the single family ownership market. 

America has a long tradition of leveraging capital markets to 

make long run investments that produce significant benefits. In recent decades, we witnessed a great democratization of credit. This 

broadening of access allowed many families who had previously 

been shut out to make investments in homeownership, and we subsequently witnessed the dramatic growth in ownership among underserved groups. Though the current crisis reminds us that great 

care is needed to promote homeownership that is sustainable over 

the long term, the Obama Administration will remain committed to 

providing access to underserved groups so that they can make longterm, sustainable investments in housing. 

Responsible homeownership can be a critical foundation upon 

which American families build wealth and stability. At the same 

time, we must also make sure that our commitment to access does 

not encourage the taking of imprudent risks. Consumer behavior 

was a contributing factor to the housing crisis, and we have seen 

8 

the devastation that such risk-taking has inflicted upon families 

and communities across the country. 

Many borrowers simply used their homes like ATM machines 

without sufficiently considering the risk involved. Ultimately, we 

need a housing finance system that will help us once again see 

housing, not simply as a tool for investment returns, but as the 

platform for stability that it has been throughout our history. That 

will mean that for some, homeownership will not be the right answer. As you have noted on numerous occasions yourself, Mr. 

Chairman, while we continue to promote affordable homeownership, for many Americans, renting will continue to be the only or 

the preferred option. 

Therefore, the next generation housing finance system must also 

facilitate a healthy rental market as part of a comprehensive, balanced national housing policy that supports responsible homeownership and affordable rental housing alike. That requires ensuring 

that those renting have a real choice, meaning affordable housing 

that is close to schools, work, and amenities. A well-functioning 

rental market also will be particularly important in the immediate 

future as rental markets will absorb a larger than usual number 

of families who owned homes during the bubble, but will be renting 

in the near future. 

We thus cannot consider reforms to the ownership market without also factoring in the effects on rental markets. Those families 

with the fewest assets and resources, namely those who rely on the 

rental market, or are tenuously attached to homeownership, would 

potentially be exposed to greater volatility and turmoil absent a 

stable rental market infrastructure. We therefore must be careful 

to promote policies that provide countercyclical support for rental 

markets as we have for single family ownership markets. All of 

these issues point to the need for fundamental, but careful reform. 

Transition from where we are today to where need to be, however, 

presents several important challenges. 

The Administration is committed to supporting the continued activities of the GSEs in ensuring they have sufficient capital to 

honor any guarantees issued now or in the future and the ability 

to meet any of their debt obligations. Given the nascent state of our 

recovery, the Administration will take care not to pursue policies 

or reforms that would threaten to disrupt the function or liquidity 

of these securities, or the ability of the GSEs to honor these obligations. 

We recognize the central importance the mortgage finance market plays in the broader capital markets and we will ensure that 

this market is not allowed to be disrupted. Maintaining the GSEs’ 

current securitization operational flow, TBA liquidity, secondary 

MBS market liquidity, and their ability to issue corporate debt securities during the transition will remain key priorities for the Administration. In his testimony before the committee last month, 

Secretary Geithner announced that we would be releasing a series 

of questions to solicit the public’s thoughts on housing finance reform. In keeping with that commitment, HUD and the Treasury 

have today released a copy of these questions, and they will be submitted tomorrow to the Federal Register to be published for formal 

public comment. The questions are as follows: 

9 

‘‘How should Federal housing finance objectives be prioritized in 

the context of the broader objectives of housing policy? What role 

should the Federal Government play in supporting a stable, wellfunctioning housing finance system, and what risks, if any, should 

the Federal Government bear in meeting its housing finance objectives? Should the government approach differ across different segments of the market, and if so how? How should the current organization of the housing finance system be improved? 

How should the housing finance system support sound market 

practices? What is the best way for the housing finance system to 

help ensure consumers are protected from unfair, abusive or deceptive practices?’’ And, finally: ‘‘Do housing finance systems in other 

countries offer insights that can help inform U.S. reform choices?’’ 

These questions will help us consider what functions should be 

served by different factors in the system, the structure or structures that they should take, how they should fit within both our 

broader housing finance system and housing policy goals, and the 

best steps to get from where we are today to a stronger system. 

The public’s input will be invaluable as we think through these 

difficult and complex issues, so we will take that input in two 

forms. First, we will ask the public to submit written responses to 

the questions. The Federal Register notice will contain guidance on 

where and when the public should submit their responses. Second, 

we intend to hold a series of public forums across the country over 

the summer, and follow this year to give the public an additional 

opportunity to share with us their thoughts on reform. 

Together, these opportunities for input will give the public the 

chance to deepen our understanding of the issues and shape our response as we move forward over the coming year. This is both in 

keeping with the Administration’s commitment to openness and 

transparency and the careful, deliberative way that we have approached our housing recovery today. We are committed to ensuring that all the stakeholders around GSE reform are heard from. 

And, so, Mr. Chairman, Ranking Member Bachus, and members 

of the committee, the Obama Administration is committed to building a next generation system of housing finance that meets the diverse housing needs our country requires while building on the 

nascent housing recovery we have established to date: protecting 

the taxpayer, and above all, ensuring we prevent a crisis of this 

magnitude from ever happening again. Given the challenges we 

still face, we must take a responsible approach to housing finance 

reform in which transition is not marked by hasty changes that 

could threaten another breakdown in the market, but by care and 

deliberation as we work with Congress to develop proposals, to support the institutional structure for the next generation of housing 

finance. 

In the months to come, I look forward to working with you, Mr. 

Chairman and the members of the committee, to make this charge 

a reality. Thank you. 

[The prepared statement of Secretary Donovan can be found on 

page 67 of the appendix.] 

The CHAIRMAN. Mr. Secretary, as I said, I believe there was 

agreement that we should abolish Fannie Mae and Freddie Mac, 

and there was reference only to their lobbying power. I would refer 

10 

people to Secretary Paulson’s book in which he describes how he 

became Secretary of the Treasury in 2006. And he then describes 

the relationship he had with this committee in particular from then 

on, in which Fannie Mae and Freddie Mac were not successful in 

efforts to slow things down. 

We worked with him, as he noted, and he points out that at the 

point when he was determined that they had to be put into conservatorship because of the serious problems, that he anticipated 

they might resist, and he notes that he checked with Members of 

Congress, including me, and was reassured that we would be fully 

supportive of his efforts. So from the time he became Secretary, he 

was in charge of this for the Bush Administration and as he notes, 

received pitiful cooperation other than what he was looking for, 

and so I think people here are projecting to an earlier period when 

they conjure up this image of an irresistible Fannie Mae and 

Freddie Mac. 

They had a pretty good run for a while, but as Secretary Paulson 

points out, in 2006, when he became Secretary, because of the unhappy consequences the Administration felt it encountered in the 

Congress at the time, he said he wanted to approach the Congress 

to reengage on this reform effort and most of the White House advisors said no, but he, at the advice of Karl Rove, went to the President. Mr. Rove told him that the President would listen to him. 

And he went to the President, got the mandate to make the 

changes, and was unable, he said, to make some very real progress 

that came too late. He was then obviously—it had been done years 

earlier. 

But from the time he became the Secretary, he was able to move 

fairly quickly, so I didn’t want to put that one I think to rest. The 

question I would have for you is this, and you talked about it. If 

we were to abolish Fannie Mae and Freddie Mac and not do anything else, not legislate for the structure going forward, what would 

be the result, in your judgment? 

Secretary DONOVAN. Let me address that question in two parts, 

Mr. Chairman. First of all, if we were to do that quickly and the 

long run effects of that to the market—I can’t emphasize this 

enough: I believe, given our strong actions around housing, we 

have made significant process, and I have detailed that progress in 

my testimony. But this recovery remains fragile. Let’s remember 

that the loans that have caused the devastation to the GSEs to taxpayers were loans that were on the books at the time the prior Administration took them into conservatorship, and anything that we 

would do that threatens this housing recovery that would push 

housing prices down again will only increase the losses on those 

loans. And hasty action to quickly change the composition of the 

GSEs or to eliminate them, I have no doubt would further drive 

down this housing market and cause taxpayer losses to increase. 

The CHAIRMAN. Because we are talking about the sunken cost, 

in the current ongoing activities of Fannie Mae and Freddie Mac, 

new activities, new communities, are we incurring losses? 

Secretary DONOVAN. Every indicator that we have of new loans 

being made, given the increased fees that they have put into place, 

the higher underwriting standards, and the fact that we have seen 

home prices—Case-Shiller index up or flat, 8 months in a row—has 

11 

meant that these new loans at this point appear to be high quality 

loans that will make money— 

The CHAIRMAN. So, the ongoing activities are not causing further 

losses? 

Secretary DONOVAN. The losses that they are experiencing are 

due to loans that were on their books at the time of— 

The CHAIRMAN. And apologizing does not make that obligation go 

away. 

Secretary DONOVAN. That’s exactly right. In fact, hasty action 

would have the effect of potentially increasing those losses as well 

as putting newer loans at risk. So, let’s be very clear here that 

while there were enormous mistakes made, that doesn’t mean that 

the GSEs are not playing an important role in stabilizing the market. One only needs to look at the difference between the jumbo 

market today and what is happening in the market where FHA, 

Fannie Mae, and Freddie Mac are providing credits. The enormous 

difference is in interest rate costs and availability of credit to see 

the important role they are playing. 

Let me just add one other thing. Going forward, I also believe 

that while there are very difficult complex issues in balancing the 

role that the Federal Government takes in the housing market, if 

we look at this crisis and imagine if you will, not having the ability 

of the FHA or the GSEs or other institutions to step in to the market, if we eliminated them entirely or at least eliminated the ability for the Federal Government to support the market during these 

times, I would think that we would have had a much worse housing crisis than what we have seen today at this point in this market. 

The CHAIRMAN. Thank you. 

There are plenty of seats, so if people would just take a seat— 

let me just say there are also seats in the front row. Some Administration officials who testify need more backup than others. Secretary Donovan comes to us with some knowledge of housing. The 

benefit of that is there are a lot of empty seats behind him, because 

he doesn’t need 18 people to answer questions for him. So people 

should feel free to take all the seats and that would—let’s get everybody in quickly, please, and take some seats. Well, this is not 

hard sitting down. Thank you. The gentleman from Alabama. 

Mr. BACHUS. Thank you. Secretary Donovan, I think we all agree 

that the GSEs will continue to hemorrhage losses as the government uses them to support expensive foreclosure mitigation programs and advance other Obama Administration housing priorities. 

I think you are aware the Federal Reserve Chairman, Ben 

Bernanke, has urged immediate attention to resolve the GSE’s future. Do you agree that there needs to be immediate action? 

I noticed that Secretary Geithner told the Budget Committee recently that the Administration is not prepared to address the 

GSE’s long-term future even though Chairman Bernanke told our 

committee that he believes the plan for reform should come as soon 

as possible, ‘‘The sooner you get some clarity about where the ultimate objective is, the better.’’ Would you like to comment on his 

statement? 

Secretary DONOVAN. I would say two things. First of all, if you 

look in detail at the way the GSEs are implementing their loan 

12 

modification programs or other efforts, it very carefully looks 

through the use of net present value tests and other tools at modifying or reducing principal on loans where that will have a net 

present value positive to the GSEs. So I believe strongly and I 

think if you look at the details of it, the actions that they are taking on modifying mortgages are not only good for homeowners, but 

they are good for the GSEs and for the taxpayer as well. 

Mr. BACHUS. Do you think we need a reform proposal for the 

GSEs as soon as possible? 

Secretary DONOVAN. I would say that we need a reform proposal 

for the GSEs as soon as possible, given the need to maintain the 

stability of the current market. As I said just a moment ago— 

Mr. BACHUS. When do you think—right now we just seem to be— 

your all so-called plan that was released just today, it just asks 

questions. I guess you’re hoping that somebody else will give you 

the answer but— 

Secretary DONOVAN. I laid out in my testimony, Congressman, 

four goals for the housing finance system, nine different principles 

that we see as critical. You talked about principles in your opening 

statement. We laid out nine principles in my testimony that we 

think are important for the system, and we believe that the public 

should have the ability to have input and to learn, to benefit from 

their knowledge about this system. We cannot move hastily on an 

issue as complex as this or as important as this to the housing 

market and risk a downturn that as I said a moment ago, could 

end up costing the taxpayer millions of additional dollars if you 

take a wrong step. 

Mr. BACHUS. Well, let me ask you this, and I don’t mean to interrupt you, but it has been 18 months since the Obama Administration took over, and these questions could have been asked 18 

months ago. Why did it take 18 months to come up with a group 

of questions? You look at these questions; one of them just says, 

‘‘Do housing finance systems in other countries offer insights that 

can help inform U.S. reform choices?’’ Couldn’t we have answered 

that 18 months ago, with just a ‘‘probably’’ or ‘‘possibly?’’ 

Secretary DONOVAN. Congressman, we believe it is time to engage in a full and thoughtful dialogue leading to a likely legislative 

proposal that would get moved through Congress this year— 

Mr. BACHUS. Well we have had— 

Secretary DONOVAN. If I could finish answering the question, 

please. We believe that—and we have been completely focused on 

healing this housing finance system and the housing market and 

the economy more broadly. We have made substantial progress on 

that and we feel strongly that had we embarked on this process a 

year ago, we would have put that recovery at significant risk. And 

so, we believe this is the responsible way to engage in a process 

on a timeline that is responsible in terms of making sure that 

American homeowners and the taxpayer are not put at further 

risk. 

Mr. BACHUS. Okay, well, let me ask you this. There is time for 

action, the time for questions and dialogue—we have been doing 

this for 18 months. The Republican plan has been out there for 18 

months; we have made our proposals. And here today to just ask 

13 

some more questions, don’t you agree that the time for just asking 

questions is over and the time— 

The public has had input for 18 months. You could have asked 

them those—and I’m not criticizing you personally, but let me 

say—when can we expect legislation? That will be my last question. 

Secretary DONOVAN. As Secretary Geithner said in his testimony, 

our expectation, particularly given the full legislative calendar that 

you have, is that we would have full discussion with the public, 

with the committee, with the Senate as well, and that we would 

move to legislation in the following year that would reform— 

Mr. BACHUS. The following year? 

Secretary DONOVAN. I think—I would certainly expect it will be 

difficult to move legislation and complete that legislation this year. 

And we believe again, that the housing market at this point is fragile enough that we need to—and let me just be clear, we have 

taken substantial actions on the housing market. 

Just as an example, as you know and I very much appreciate the 

constructive work that you have done with us around FHA to improve the underwriting that we have taken—extensive actions, we 

have on a number of different fronts, whether it is ensuring low interest rates, ensuring continued availability of mortgage capital, 

keeping homeowners in their homes, helping communities hurt by 

this housing crisis. We have taken extensive actions on the housing 

crisis and on the housing finance system. We simply do not feel 

that moving in a way that could hurt this housing market further 

is responsible at this point. 

Mr. BACHUS. Thank you. 

Mr. KANJORSKI. [presiding] Thank you, very much. I know the 

gentleman from Alabama is careful with his facts and figures, but 

I just want the record to reflect that we can’t count the Obama Administration in office for 18 months, unless I am radically mistaken, as the best I calculate is something like 15 months. 

Also, I think we—and the reason I bring it up is that we have 

just gone through a horrible example of misrepresentation of pertinent facts in the healthcare act. Having returned from my break 

period, I was overwhelmed by how much information, misinformation, and disinformation has been put out to the public over the 

last year on healthcare. I would hope we do not do the same thing 

on financial reform, regulatory reform, or housing and GSE reform. 

Let us try to hold to the real facts, and the facts are the Administration has not been in office 18 months, do we agree with that? 

Mr. BACHUS. I would say maybe 15 months, I just say that is 

long enough to ask questions— 

Mr. KANJORSKI. Mr. Secretary, there are a few things that disturb me. We have, of course, a bifurcation of legislative responsibility, and we have some very important pending legislation that 

has been passed by this committee and the House of Representatives that seems to go to ‘‘no-no’’ land when it gets over into the 

other side. Do you have any insight as to what may happen on 

housing reform bills? I have several of them that are pending 

there. Have you had some inside information or intelligence as to 

what the Senate is going to do on those pieces of legislation, or can 

we just assume they are going to do nothing? 

14 

Secretary DONOVAN. I am sorry, Congressman, could you be more 

specific about which pieces of legislation? Is this financial regulatory reform or other housing bills? 

Mr. KANJORSKI. Well, as part of a regulatory reform we have included in some of the housing reform legislation in the House, and 

that is presently pending. However, the Senate bill does not include that, so we can assume that they have abandoned that reform in the regulatory reform bill. Then, we have a freestanding 

bill with the same information of appraisals, etc., and how we 

should handle that. Are you getting any insight as to whether or 

not they are going to move forward with that reform bill? 

Secretary DONOVAN. What I can tell you is the entire economic 

team has been working closely with the Senate committee. Obviously, they have moved a bill at the committee level and we continue to work with them. I can’t give you any insight into their legislative calendar in terms of bringing those to an actual vote. 

Mr. KANJORSKI. Do you see a possibility that we can actually 

strive to accomplish something here, as opposed to just having political objectives over the next 7 to 8 months, since we are in the 

silly season? Can we just anticipate that nothing serious is really 

going to transpire and that is why you are saying we have to wait 

until next year to get serious reform in GSEs? 

Secretary DONOVAN. What I believe—first of all, let me say that 

serious reform is not only possible; it is absolutely necessary. There 

is no question that we cannot allow the crisis we witnessed to happen again. That is why the President has been so focused on broader financial regulatory reform and it is why we are absolutely committed to making sure we have a housing finance system in the 

long run that creates the right incentives and provides the right 

opportunities. 

What I will also say is we are absolutely committed to having a 

full and thorough examination of these issues, and whatever the 

discussions may be in Congress about what could move or couldn’t 

move, we will be moving forward with a thorough process which I 

discuss today to ensure that we think through all of the potential 

implications as well as the complexities of the transition from the 

system where we are today to what it should look like going forward. 

Mr. KANJORSKI. Mr. Secretary, I am joined as a co-sponsor on a 

piece of legislation involving covered bonds commonly used in Europe but not in the Unites States. We are looking at the best practices around the world in creating a situation for liquidity and responsibility for mortgage market expansion in the United States, 

and we have not even held hearings yet on the covered bond bill 

that is pending here; the ranking member sponsors that legislation, 

too. Therefore, I just want to make the point that we certainly 

could not be adopting best practices around the world if we had not 

had the chance to consider that type of legislation; would you 

agree? 

Secretary DONOVAN. Absolutely. I think it is an area that is 

worth looking at, and in fact, we do have certain structures in this 

country already that are similar to and function similar to the 

kinds of structures that you are talking about. I think the issue is 

really going to be thinking seriously about whether a market of our 

15 

scale and our sophistication can adopt practices like that in a way 

that they would be equally functional here. And I think there are 

some mechanical as well as institutional issues about whether in 

fact those examples are replicable or the right examples for here. 

And I look forward to discussing that further with you. 

Mr. KANJORSKI. Thank you very much, Mr. Secretary. The gentleman from California, Mr. Royce, is recognized for 5 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. Secretary Donovan, in 

your written testimony, you lay out the four priorities for the Administration for a well-functioning mortgage market in the future. 

You say a widely available mortgage credit, housing affordability, 

consumer protection, and financial stability. And I think in principle, these are worthy goals. In practice, we found that these can 

be competing interests, right? So looking back, would you agree 

that too much of an emphasis was placed on housing affordability 

and too little of an emphasis was placed on financial stability? 

Secretary DONOVAN. I do not agree that an overemphasis on 

housing affordability was the primary cause of the crisis that we 

saw. I believe that the affordability goals lacked clarity and that 

too often we mixed certain affordability goals without either clarity 

or precision with broader mandates, and that for affordability going 

forward we need to have a much clearer set of objectives and mechanisms to achieve them; I think that is laid out in the testimony. 

However, I think if you look really at the facts of—for example, 

take the affordability goals of the GSEs. Our recent study which 

we presented to Congress on the causes of the financial crisis 

looked in detail at the full range of loans that were eligible for the 

GSE affordable goals; it discounted all of the high costs or riskiest 

loans. So just within the pool of good, low interest rate loans that 

would have qualified for the affordable housing goals, the GSEs 

only purchased about a third of those loans. And so what does that 

mean? That means that they were not forced to go into risky lending to able to achieve those goals. 

Mr. ROYCE. Now, wait a minute. Let me stop you there, because 

we had Secretary Geithner here last month, and he described how 

the GSEs used those goals to justify their purchases of subprime 

and Alt-A loans. He went over this, and over the years, those total 

roughly one trillion dollars. Now, many have attributed those loans 

to making up the bulk of the losses of the GSEs. Numbers that I 

have seen show that it is the vast majority of the losses. 

So based on Secretary Geithner’s testimony and based on economists that have looked at this, they have come to a different conclusion there and they see the trillion dollars in meltdown that the 

GSEs were either holding in their portfolio or had guaranteed as 

a real problem. And he made the observation that the whole financial calamity started in this housing sector and it started with the 

collapse of Fannie and Freddie. 

Secretary DONOVAN. There are two things I would say about 

that. First of all, the large majority of the worst loans that led to 

this crisis were PLS Private Label Security loans that were not ultimately GSE loans. They did buy a portion of those but I don’t 

think— 

Mr. ROYCE. Let me ask you this, because I have looked at that— 

Countrywide. 

16 

Secretary DONOVAN. If I could just—I don’t think it is right to 

say that the GSEs led into this crisis, there were plenty of other— 

Mr. ROYCE. Let me quote somebody from within Fannie who 

said, ‘‘We went out and we bought Countrywide, and the reason we 

were doing it every quarter was to a send a signal to the market 

that if the Government-Sponsored Enterprises were buying this 

and putting it in their portfolio, and if it were half of their portfolio—these subprime and Alt-A loans—half of $1.5 trillion, that 

was then a message to the rest of the market to do the same.’’ 

Getting back to my opening statement, my worry here is that 

what wilted on the vine here was the market discipline. And one 

of the ways that we ran off-market discipline and due diligence was 

that we implied a government backing and that we knew what we 

were doing in government when we put these goals out there and 

we said, yes, these were safe purchases. The junk that was Countrywide was held by Fannie and Freddie, and everybody else then 

began buying it, that is the concern I have. 

Secretary DONOVAN. And you and I agree Congressman, first of 

all, that those—you call them junk loans— 

Mr. ROYCE. Yes. 

Secretary DONOVAN. And I can’t disagree, were the primary 

cause of the downfall of the GSEs; I agree. And Secretary Geithner 

and I agree on this as well. They were an enormous problem and 

it was when they began buying those loans that we ended up heading down the path that we had. Where I am disagreeing—and Secretary Geithner and I do not disagree about this point—the primary cause of their buying those loans was not—and I think if you 

look at the record, if you look at the report we did to Congress— 

was not driven by the affordable housing goals. They were chasing 

profits; they were allowed to buy those loans— 

Mr. ROYCE. Look, I carried the legislation to stop them from 

doing— 

The CHAIRMAN. The gentleman’s time has expired. We are well 

over, and have a Secretary here, so everybody wants to ask questions. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. I would like to thank the 

Secretary for being here. And I thank him also for being in Charlotte in my congressional district during the break, and for the very 

positive visit he had there. 

Mr. Secretary, one of the things that you said in your statement 

is that we have to do this GSE reform in a way that doesn’t have 

an adverse impact on affordable rental housing. Can you give me 

a brief statement on the extent to which the GSEs if any, were involved in rental housing finance as opposed to homeownership finance? 

Secretary DONOVAN. I would say really over the last decade the 

GSEs have become an increasingly important presence in the 

multi-family markets with the—as we saw in the single-family 

market, during the recent, during the crisis that we have experienced, their role growing significantly as has FHA to ensure that 

mortgage capital remains available at a time when the private 

market had withdrawn. And so, it is a very similar kind of role 

that ensures that there is capital significantly available. 

17 

In addition to that, the other very important role that they had 

historically and that grew over the last decade was providing equity for low income housing tax credits, and that is something that 

has been really eliminated in terms of their purchasing new tax 

credits since they went into conservatorship, which has been a 

major challenge for the rental housing finance market. 

Mr. WATT. And going forward, would you think that separating 

whatever the new model’s responsibilities are for homeownership 

should be separated in some way from rental? Would that make 

our tasks simpler or would it complicate matters, from your view? 

Secretary DONOVAN. That is something in fact if you look at the 

questions that we are examining that we released today, that is 

one of the specific areas that we are very focused on, is the segmentation of the market; and I see this at FHA as well. 

What I will tell you is that there are significant benefits of having those two functions aligned, but I think it is an important question of how much they need to be aligned and which pieces of housing, rental housing finance and support, mission support, should be 

brought together. So I can’t give you at this point a specific answer 

about whether we should keep them together, but I will say that 

there are real benefits to that. And I also think we need to look 

very carefully at the question of the more deeply targeted affordability and where real subsidies are needed, how we ensure that 

continues. And that, I think is more likely something that remains 

a mission of HUD at FHA rather than being mixed into the GSEs 

missions. 

Mr. WATT. You mentioned that you will, when you put these 

questions out to the public, put a timeline on it, and I—one of the 

concerns that I do have and share with my Republican colleagues 

is making sure that the Administration’s timeline for getting responses to this series of questions corresponds with the timeline on 

which this committee and Congress is moving. When do you anticipate the cutoff date for responding for the public’s response to the 

questions that you will be—you and the Secretary of Treasury will 

be posing? 

Secretary DONOVAN. As I said, we will be transmitting them to 

the Federal Register. I expect that they will be published next 

week, given the time that they work on. And we would—our expectation is to set a 60-day timeline for responses on those questions. 

Mr. WATT. So you think it is realistic for this committee and 

Congress to be thinking about this as a next-year project to deal 

with the GSEs? Is the Administration going to have a specific proposal by that time early next year, do you think? 

Secretary DONOVAN. That is why we are setting up the forums 

that we talked about, in addition to the public comment process on 

the questions. 

Mr. WATT. When will those be completed? 

Secretary DONOVAN. Those will be happening through the summer and the fall, so I would certainly expect that the timeline you 

talked about to be able to have a legislative proposal next year 

would be one that we could work towards. 

Mr. WATT. My time has expired. I thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you Mr. Chairman, Mr. Secretary. 

18 

Forgive me, I had an appointment outside, so we may be covering some old ground here, as I think I heard you say that in your 

opinion, it was the profit seeking of Fannie and Freddie that 

caused their demise as opposed to their affordable housing goals. 

Did I understand that correctly? 

Secretary DONOVAN. What I was saying is that if you look at the 

facts about the broad pool of loans that qualified for the GSE goals 

and the fact that the GSEs only bought about a third of the save 

loans that would have qualified for GSE goals, I think it is pretty 

clear that the goals didn’t force the GSEs to start buying the 

subprime and riskiest loans that ultimately caused their demise. 

Based on our investigation of the causes there had to be— 

Mr. HENSARLING. Then what did cause their demise? 

Secretary DONOVAN. I believe—and this is what our report 

showed—that the lack of strong controls on their reserve requirements, their ability to purchase those loans, and put them into 

their portfolio was—and chasing substantial profits, as much of the 

rest of the market did at that point in these subprime, highly risky 

loans was ultimately what lead to their demise. That is why I 

think it is so clear that as we think through this system, we have 

to be very, very careful about how we construct this blend that existed or how we replace the blend that existed of private entity 

with public mandate. That— 

Mr. HENSARLING. Mr. Secretary, I think I agree with something 

the chairman said earlier. I hope there is a consensus that this neither private nor public model has worked, that it has failed. 

But if you say that to some extent it was profit seeking of the 

GSEs, why is it that the Administration hasn’t taken any action to 

reduce the portfolio limits, which have traditionally been the huge 

profit center of Fannie and Freddie? And as you well know, in earlier legislation we increased the conforming loan limits that has 

created, again, more revenue stream for Fannie and Freddie and 

created more taxpayer—why has the Administration not taken any 

initiatives in this regard? 

Secretary DONOVAN. In fact the requirement was for FHFA to reduce their portfolios, and we have—FHFA has begun reducing 

those portfolios along the lines that were required by Congress. So 

that is, in fact, happening. Those actions are being taken by FHFA, 

and—I’m sorry, in terms of your second question? 

Mr. HENSARLING. It was portfolio limits and conforming loan limits. 

Secretary DONOVAN. The conforming loan limits, just to be 

clear—and we had this discussion before while you had stepped 

out. I want to be clear that what is driving the losses at the GSEs 

is the bad loans that were on the books, in the portfolio at the time 

they were taken into conservatorship. Every indication is—and obviously this depends on the strength of the housing market going 

forward—that new loans that they are taking onto the books, given 

the improved underwriting that they have implemented, the higher 

fees, and a rage of other steps, is that new loans are not the biggest risk to the taxpayer. 

What is the biggest risk, at this point, is if we were to have a 

double dip in the market, the market were to go in the wrong direction, that would have the effect of significantly increasing losses 

19 

to the taxpayer, and that is why we believe it is so important that 

we take a measured, careful approach to reform that would not 

cause the housing market to be sent into a double dip. 

Mr. HENSARLING. I’m not sure how careful it is. Certainly, the 

Administration is not rushing into this, I would say, having spent 

lo these many months still monitoring the situation. 

I think you mentioned stability in the marketplace. Frankly, 

what I see in the marketplace now is that if we want a mortgage 

in America, there is a 90 percent chance I have to go to the Federal 

Government. It is either controlled by the GSEs or FHA. I see taxpayers are hemorrhaging at roughly $6 billion a month. If that is 

stability, I think I might want to look at something else. I would 

hope that this is not what the ultimate Administration goal is, is 

to have 90 percent of the American people have to go to their Federal Government to get a mortgage. 

Secretary DONOVAN. So, there are two things I would say. First 

of all, again, we have to be very clear about loans that are on the 

books versus new loans that are being made. If you look at our expectations of FHA’s new lending reflected in our 2011 budget, we 

expect to return more than $5 billion to the taxpayer based on new 

loans that we make in 2011. So these are good loans. 

But more importantly, I think we have to look at the fact that 

these loans that were made, if we do not stabilize this market— 

we have had 8 months in a row of increasing or stable house prices. 

We have had significant positive impacts on the market. We cannot 

do something that would cause this market to fall further. We are 

absolutely committed, and I couldn’t agree with you more, that our 

goal is to bring the market back, and we have begun to do that 

by— 

The CHAIRMAN. That is all your time. 

Secretary DONOVAN. —the Fed and other steps. FHA is raising 

its pricing— 

The CHAIRMAN. The time has expired. 

The gentleman from Indiana. 

Mr. CARSON. Thank you, Mr. Chairman, and Mr. Secretary. 

First, Mr. Secretary, can you definitively say reform will serve 

underserved populations and communities; and second, how can 

housing and finance reform offer access to capital by as wide a variety of institutions as possible, including small business, community banks, and credit unions? 

Secretary DONOVAN. To go back to the chairman’s opening statement, I think it is very important as we are engaging in this process—and this has been a focus of ours—that we look not just at the 

GSEs, but more broadly at the housing finance system to look at 

the impacts that FHA can have, the Federal Home Loan Banks, 

other institutions, but also CDFIs, other institutions that can—so 

I think it is very important as we engage on this that we do look 

at broad availability and access to capital. I think that in part can 

be through the direction we take with reform of the GSEs. 

But I think equally and perhaps more importantly, the creation 

of a strong consumer financial protection agency as a part of financial regulatory reform to ensure that we are offering safe products 

across the board, and that those are widely available, is a critical 

part of ensuring that we do that. 

20 

So I do think as we move forward—and this was emphasized in 

my testimony today—that broad access to capital is critical, as well 

as ensuring standardization in the market and broad availability 

of entry into the market so that we get small businesses and others 

being able to participate. Absolutely important. But I don’t think 

that we can put all the weight of that on whatever the reform process for the GSEs looks like. We have to look more broadly at the 

financial regulatory system and efforts we make there in financial 

regulatory reform. 

Mr. CARSON. Thank you, Mr. Secretary. 

Mr. Chairman, I yield back my time. 

The CHAIRMAN. The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and welcome, Secretary Donovan. 

Secretary DONOVAN. Thank you. 

Mrs. BIGGERT. It seems to me that the GSEs have exposed the 

fallacy of bifurcated 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, it seems the result 

was a $127 billion and growing bill for the American people. 

Do you think that the—I’m worried that the Obama Administration is poised to make the same mistake by creating a consumer 

financial protection agency. Can you explain how the financial institution supervision would be more effective when one regulator 

has a focus on consumer protection and might potentially conflict 

with the safety and soundness? 

Secretary DONOVAN. I guess I would have to disagree. The fact 

of the kinds of loans that were made that led into this crisis—if we 

had had a stronger consumer protection focus rather than within 

the mortgage space having seven different regulatory agencies that 

had some piece of responsibilities for consumer protection—a single 

agency focused on that task—that would have made a real difference in terms of the lack of focus on consumer protection and 

the types of loans that were being made. 

I think there is no question that we also need stronger safety 

and soundness, that there was not adequate focus, but I don’t agree 

that it was—the fact that those two might have been together 

interagency. I think it was the very disperse nature and fragmented nature of that system that led to the problem, and that is 

exactly what financial regulatory reform is intended to resolve. 

Mrs. BIGGERT. I guess there is the difference with regulators and 

OFHEO, not that seven regulators that were really involved with 

the GSEs. But let me just ask another question, and that is we 

need transparency. And the public I think really does deserve easy, 

accessible information about the actions of the FHFA, which runs 

the GSEs, and they need information about the actions of the Fed 

and the Treasury that are supplying the funds. Would you support 

legislation to increase the GSE transparency? 

Secretary DONOVAN. I would—first of all, I think that increasing 

transparency broadly is a very important goal that we have, an objective. It is actually reflected in my written testimony. I didn’t talk 

about it in the oral testimony, but it is absolutely a critical piece 

of what we need to achieve with the new system. And one of the 

21 

real problems that we had was the pricing of guarantees and the 

transference of risk was not transparent in the system. That included the GSEs, but more broadly within the market. 

And any direction we take with reform of the broader housing finance system and the GSEs must achieve greater transparency in 

terms of the way the guarantees are priced so that—and the risks 

that are inherent are priced. So more information, more transparent information, is absolutely a central part of achieving that. 

Mrs. BIGGERT. I would ask you to consider legislation that I have 

introduced. It is H.R. 4581, and it is for the audit by an inspector 

general and a report back to the Congress, and I hope that you 

would take a look at that. 

Secretary DONOVAN. I would be happy to take a look. Thank you. 

Mrs. BIGGERT. That would be helpful. 

Then, we have on the losses issue in a letter, February 2nd, from 

FHFA Director DeMarco. He said that since the establishment of 

the conservatorships, Fannie Mae has realized losses of $111 billion and Freddie Mac $63 billion. Now they have drawn down $127 

billion. How much more should we expect that the taxpayer is 

going to have to expend before there is some decision? You have 

the— 

The CHAIRMAN. The gentlewoman’s time has expired. If you 

want, we will give him about 30 seconds to answer—remember, if 

you ask questions right at the time, we are not going to have time 

for long answers. But Mr. Secretary, in about 30 seconds? 

Secretary DONOVAN. Let me go back to something I said earlier 

in the testimony. The reason—the primary thing driving those 

losses is loans that were on the books at the time of conservatorship, and anything we do going forward to further strength and 

stabilize the market will lessen any losses that taxpayers have. 

And so it is critical that as we engage in this debate that we continue to focus on the broad set of measures that we have been focused on to stabilize this market with significant results. The market is still quite fragile, and so we must continue to focus on the 

immediate results of being able to stabilize the market, to improve 

performance of those loans. 

And what that means is going forward, moving quickly to reform, 

whatever we do, that doesn’t change the fact that these loans were 

made, they are already on the books, and the losses are coming 

from those. That is important. 

The CHAIRMAN. Your time has expired. 

The gentleman from Massachusetts. 

Mr. LYNCH. Thank you, Mr. Chairman, and thank you, Mr. Secretary for your willingness to help this committee with its work. 

I want to take the opportunity to focus on question number five 

that the Administration has put out here in its list of questions to 

the public, how should the housing finance system support sound 

market practices? The gentlelady from Illinois just talked about 

transparency, and I agree wholeheartedly, and I know in your remarks you have emphasized that as well. 

But I want to point out a couple of gaps in that push for transparency. The Administration has not addressed the problems with 

the rating agencies, and I think they help greatly. They are one of 

the factors here. They allowed triple A to be stamped on some very 

22 

questionable loans, and to have that triple A stamp accepted by the 

markets as a credible mark, I think, and so that continues to be 

unresolved. 

And secondly, the existence of the over-the-counter derivatives 

market and the continuance of a black box model. Now the housing 

finance system, as you know, is greatly served by the securitization 

process, and if we allow this black box model to exist for over-thecounter derivatives, many of which consist of asset-backed securities of these mortgages that we are generating, and also CDOs that 

replicate the performance of these blocks of mortgages. 

How do those—the lack of rating agency reform and the existence of a black box model in over-the-counter derivatives, many of 

which are real estate related and housing related—how does that 

help the system support sound financial practices in the housing 

industry? I don’t get that. 

Secretary DONOVAN. I think you raise two excellent points, and 

I would say just broadly that securitization can be an effective tool 

for raising capital— 

Mr. LYNCH. Oh, I agree. 

Secretary DONOVAN. —and introducing benefits broadly across 

the market in terms of more affordable lending and more affordable home mortgages for the American family. But without the 

transparency we just talked about with Congresswoman Biggert, as 

well as a focus on ensuring the rating agencies are accurately reflecting risk in their ratings, as well as the over-the-counter market, it is difficult to get an efficient and effective securitization 

market. 

Frankly, that is why, as you know, this committee has worked 

hard to get to an effective set of reforms as part of broader financial regulatory reform there. So I think it emphasizes, again, why 

broader financial regulatory reform is critical, broadly for the economy, but also for the housing market as well. 

Mr. LYNCH. I just agree with you on that last point. The opaque 

and complex nature of the derivatives market, especially in this 

OTC market going forward, allows—it actually enhances 

mispricing of risk, and that was the root of our initial problem, and 

I just think we are making that same mistake again in this. But 

I thank you for your testimony. I yield back. 

The CHAIRMAN. The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. 

Mr. Secretary, just to follow up on the questions that were asked 

by the gentleman from North Carolina, Mr. Watt, on the timeline. 

And I don’t know if this is a comment or a question, but I’m concerned about that. I worry when questions are put out and you 

wait for the public to respond and that kind of thing from a time 

point of view, but I think it is well and good, and I think the questions are fine and we should do that. But we asked the same questions of Secretary Geithner, and it is uncertain to me what exactly 

the final timeline is. I heard your comments that probably by the 

time this is all done, next year for legislation or something of that 

nature. 

My question is, is the Administration working on something 

now? It is fine to get all these comments, etc., but this has been 

going on for about a year-and-a-half, and you have been around 

23 

dealing with it for over a year now. And I am concerned that we 

need to have some sort of final answers by the people who are 

going to be in charge who know a lot about this, and I consider you 

do. And I hope that is being worked on, even at the same time that 

we are waiting for answers to questions, etc. 

Secretary DONOVAN. Absolutely, and I didn’t talk about it in my 

oral statement today, but in my written testimony, we have laid 

out a series of four key goals for the housing finance system, nine 

different objectives that we think are important to achieve. 

And we have obviously begun a process of putting a lot of 

thought and effort. These are not simple questions, particularly as 

we think is right and the chairman laid out at the beginning of the 

hearing, that you have to do this in the context of FHA, the Federal Home Loan Banks, and other pieces of the mortgage finance 

system, because what you do with the GSEs affects and is affected 

by what is available in other parts of the market. 

So we have embarked on that. We will continue to do that in a 

thorough way, and I look forward to a thorough dialogue of it with 

you and the committee going forward. 

Mr. CASTLE. My next point is discussions you have in your written statement and your oral statements—I think you have said 

here today—but the whole business of democratization of credit 

and housing affordability. We are all for being able to put people 

in houses if they can pay for those houses or whatever, but obviously those issues were a major factor in some of the loans that 

were being made, the no doc loans, etc., in some of the problems 

that exist today. 

I would hope that we are going to impose strong requirements, 

though, with respect to credit and the issuance of mortgages, not 

only with the GSEs but with the companies that originally issue 

mortgages to make sure we are preventing this problem as far as 

the future is concerned. Will that be a part of the consideration of 

what will come forward? 

Secretary DONOVAN. Absolutely, and I want to—just to give you 

an example of that, we have, within FHA, begun a process, we 

have implemented a number of reforms raising standards, particularly for the highest-risk borrowers and a range of other steps. It 

has to be. It is one of the central issues that led us into the problem that we are in, and I do think that we have, as I said in my 

testimony, too often emphasized homeownership at the detriment 

of rental housing as an option. 

But let me just say one thing. I think too often we confuse, in 

the discussions about this, the idea that somehow low- to moderate-income people can’t be homeowners, and in fact, if the home 

is affordable to them, if they get a decent mortgage at the right 

cost, they can very effectively become homeowners and it is still 

and will remain one of the primary wealth building vehicles in this 

country. So access to homeownership done right is important across 

the economic spectrum. 

And I know this from my own experience in New York where I 

was housing commissioner. We had created about 17,000 units of 

homeownership with about 5 foreclosures. The reason for that? Because we ensured that families could afford the home, we ensured 

they didn’t get piggyback or exotic mortgages, there was counseling 

24 

that made sure they were prepared for homeownership. If it is done 

right, a broad spectrum of the economic groups in this country can 

be homeowners, but we have to ensure, as you said rightly, that 

it is done the right way with the right standards. 

Mr. CASTLE. You probably won’t have time to answer this question fully, but I’m concerned about rental housing. And I think 

about apartment housing when I say that—and some of the problems they are having. I have met with Delawareans, and they are 

becoming increasingly concerned with vacancies, etc. Are you hearing more and more about that? 

Secretary DONOVAN. It is not— 

The CHAIRMAN. A very quick answer, please. 

Secretary DONOVAN. Yes. There is no question in the multi-family markets, but more broadly in the commercial markets, that 

there is still significant distress out there, and FHA as well as the 

GSEs—it doesn’t get focused on as much. I tried to do it in my testimony. That is a significant part of the liquidity that is being provided into the market today on multi-family to ensure that there 

is reasonable priced credit available. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. My 

recollection from March of 2004 when Mr. Watt and I introduced 

legislation to regulate, restrict subprime lending to require that 

anyone—any lender make sure the borrower had the ability to 

repay the loan—my recollection is that was a lonely position, that 

not many people were supporting it. But I’m struck by how many 

members now remember that they were right there with me all 

along. 

My questions, though, are about securitization that follows up 

largely on Mr. Lynch’s questions. One of the reasons the rating 

agencies ratings meant so much was there was essentially no other 

information available to investors for securitized debt, in contrast 

to the kinds of disclosures or procedures required for issuing stock, 

which requires standardized disclosures, waiting periods so investors could do their own due diligence. 

Typically, an investor would get a call saying, we are going to 

market in 3 hours with a collateralized debt, an asset-backed debt 

security. It has a triple A rating. Are you in? Investors are not real 

happy about the idea of going back to that, and the securitization 

market has pretty much collapsed. 

We have spent a lot of time in this committee trying to figure 

out how to revive lending by regional and community banks, but 

that was 20 percent of bank lending, and bank lending was 20 percent of lending. The securitization market which has largely gone 

away—I think the first residential mortgage backed securities issue 

is probably going to come out in the next month or two, and no one 

quite knows how it is going to do. 

Why should there not be disclosures and procedures that allow 

investors to do their own due diligence that is comparable to what 

the SEC requires and the securities laws require with respect to 

stock issue? 

Secretary DONOVAN. First of all, let me just say I’m not an expert 

on the SEC disclosures and I don’t want to get into too much detail 

25 

on that. I think it is important to have those discussions with those 

within the Administration who are most focused on it. 

Mr. MILLER OF NORTH CAROLINA. But the— 

Secretary DONOVAN. But I will say there is no question that 

transparency, disclosure, more information has to be a central part 

of getting to a more efficient and effective market. Information 

about the performance, there is no question, will be critical to a 

better functioning housing finance system. 

The other thing I would say, though, is ensuring—and this is a 

key part that you are looking at in the reg reform bill—looking at 

what kind of risk retention is required is also a piece of this as 

well. It is information, but it is also effectively ensuring that those 

originating loans’ brokers, originators, others—we ensure their interests are aligned with us as the public and the taxpayer to make 

sure that they have the right interests at heart as they are originating them as well. So I think information is a piece of it in disclosure, but also aligning incentives properly when you have 

securitization as the primary vehicle. 

And in fact next week we expect—I think it is Redwood—to do 

the first securitization. We have seen the first one in the commercial mortgage backed securities side. So we are hopeful with our efforts to try to bring the private market back. We had this discussion earlier. We are absolutely committed to do that, and we do see 

early signs that is beginning to happen. 

Mr. MILLER OF NORTH CAROLINA. And have you heard the same 

objections I have heard from investors that they need to be able to 

do due diligence and not just rely on rating agencies and something 

has to change? They are not going to invest in asset-backed securities that were issued the way the ones were that caused this problem. 

Secretary DONOVAN. I have heard similar concerns. 

Mr. MILLER OF NORTH CAROLINA. Okay. I yield back. 

The CHAIRMAN. If the gentleman would yield to me— 

Mr. MILLER OF NORTH CAROLINA. I yield to the chairman. 

The CHAIRMAN. —because the SEC has proposed some rules that 

should pick up where we started in our bill and that is relevant 

to what my colleague from Massachusetts said. I think one of the 

best things we did in our bill was to repeal these requirements that 

people rely on the rating agencies, because the best we can do is 

to tell people, don’t get this false sense of security, and we did it 

where it was statutory. 

The SEC has proposed two things. First of all, a risk retention 

and securitization, and secondly—in the mortgage area—and secondly, no requirement of a rating so that they have to do some of 

their own and I intend to express our support for that. 

So those are two areas where we have in fact moved in this same 

direction, mainly—and this was bipartisan. The gentleman from 

New Jersey and I felt very strongly that there was this false sense 

of security people got from ratings, and they won’t be able to get 

that anymore. It used to be required, and it won’t be. 

The gentleman from Texas, Mr. Marchant. 

Mr. MARCHANT. Thank you, Mr. Chairman. 

Mr. Secretary, I would like to talk briefly about the failure of the 

private mortgage insurance industry and how it affected the GSEs. 

26 

Do you have an opinion on that, and has there been any study as 

to what the financial impact on the losses to the GSEs— 

Secretary DONOVAN. FHFA has done extensive research in looking at the issue, not just of the losses that have resulted, but I 

think in some ways equally or more importantly, looking forward, 

the strength of the mortgage insurance companies that exist and 

still hold a portion of the risk on existing GSE obligations. So it 

is an important issue, not just historically, but going forward in 

terms of the risks to the GSEs, and ultimately to the taxpayers. So 

it is something that I think FHFA could provide significant detail 

on. 

What I would say is, it is important, as we talk broadly about 

reestablishing the private market, which we are very much focused 

on, and the Fed steps, Treasury steps, our own steps have helped 

to begin to encourage, we are beginning to see the private mortgage 

insurers begin to step back into the market so that FHA can begin 

to step back in the GSEs. 

And I think the bill we have before this committee to reform 

FHA and our insurance premiums is a very important step, and I 

want to thank you and the committee for working very effectively 

with us on that. If we can move quickly, I think, and get our pricing structures right, it is one of the most important things we can 

do to encourage the private market to return. 

Mr. MARCHANT. Has the issue of the 85/15 and the 80/15 loans 

that were being made primarily to get around the private mortgage 

insurance industry so that many of the loans made by Fannie Mae 

and Freddie Mac were actually zero down loans—because in fact if 

closing, they were obtaining a 15 or 20 percent second lien to put 

the first lien down, primarily to cut out the private mortgage insurance premium, and I guess to qualify them. Has that practice 

stopped? 

Secretary DONOVAN. Their underwriting has changed substantially on those issues, so yes, that practice has stopped. And I 

would say more broadly, we have been very focused at FHA on 

similar concerns about past products, as you know, seller-funded 

downpayments and other issues. We recently increased our downpayment requirements for the riskiest borrowers. So in a range of 

ways, we are ensuring that those kinds of practices don’t recur. 

Mr. MARCHANT. I missed the hearing yesterday afternoon, but 

watched it last night on C-SPAN concerning the companies that 

are currently holding these same second liens and have the first 

liens. Do we have a handle on how many of the delinquent borrowers out there who are facing foreclosure are trying to participate in these other programs, where in fact the servicer has the 

first lien and the second lien, and that second lien is not anything 

more than just the downpayment? 

Secretary DONOVAN. We have a lot of detail on this and would 

be happy to follow up with you and your office with more specifics. 

But what I can say generally is for borrowers at risk—if you look, 

for example, at broadly borrowers who are deeply underwater, say 

more than 120 percent LTV—about half of those borrowers have 

second liens and that as you go to more and more risky deeper and 

deeper underwater, the share of the underwater debt that is made 

up by second liens increases. So the second liens are a significant 

27 

part of the problem for those borrowers, and it makes up a large 

share, about 50 percent, of troubled borrowers. 

Mr. MARCHANT. Thank you. 

The CHAIRMAN. Let me go to the gentleman from Colorado, then 

the gentleman from Texas. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. It is good to have 

you here, Mr. Secretary. 

Secretary DONOVAN. It is good to see you again. 

Mr. PERLMUTTER. Just a couple of questions, I was visited by the 

mortgage bankers this morning—they are on the Hill—and they 

raised a couple of points. Let’s see how you react to them. 

One is FHA, which has gone from 3 percent of the market to 30 

percent or—everybody is getting an FHA mortgage. They were 

complaining that the computer systems or the technology there is 

antiquated and it really is having trouble keeping up. And I think 

within your budget there has been a request to update the system. 

Can you tell us what is happening or whether you all are looking 

at that? 

Secretary DONOVAN. Thanks to Congress, we, in our 2010 budget, 

got significantly increased resources to invest in improved technology, and we are in the process of implementing that. I would be 

happy to provide you a more detailed update. 

One of the things I would mention on that is we are investing 

heavily generally in systems, but particularly in fraud detection 

and risk evaluation systems as well. We have taken 6 times more 

enforcement actions in the past year than HUD took in the 10 prior 

years combined. 

Mr. PERLMUTTER. Okay, good. 

Secretary DONOVAN. And ensuring that we are making good 

loans and that we are not allowing lenders that shouldn’t be making FHA loans to make FHA loans. We have an $80 million procurement that is under way now on a broad range of fraud and risk 

systems. So that is one particular example of what we are doing. 

Mr. PERLMUTTER. Second question, second point. When I think 

the chairman carried a bill a year or two ago on Fannie Mae, 

Freddie Mac kind of restructuring, we were talking about skin in 

the game and the 5 percent retention. We did get some resistance 

from the mortgage bankers, the independent guys who are really 

more or less agents, and then they sell the loan into the secondary 

market somehow or to Fannie Mae/Freddie Mac. And I think at 

least in one of the bills was a carve-out for vanilla products such 

as a Fannie Mae, Freddie Mac, FHA-approved loan document, a 

HUD form. 

When we started into the bigger bank bill where we were dealing 

with the consumer financial products agency, there was initially a 

section on vanilla products which I think ultimately—either we 

passed it out of the House or it got changed. Do you—what is the 

Department’s position on, in effect, carving out from the risk retention component a 5 percent skin in the game thing if it is a vanilla— 

The CHAIRMAN. Would the gentleman yield briefly please? 

Mr. PERLMUTTER. Yes sir. 

28 

The CHAIRMAN. Because what we have is that we—the Administration had asked for an ability to require certain projects. That is 

where the vanilla came in. We threw that out so there was no— 

Mr. PERLMUTTER. Right so— 

The CHAIRMAN. What we have is in our securitization requirement, the expectation is 5 percent, but the appropriate regulator 

for each entity can go up to 10 or down to zero based on this. And 

while we didn’t write it in specifically, the assumption was that a 

fixed-rate 30-year mortgage with a significant downpayment would 

probably be rated a zero. So that is what is in the bill. 

Secretary DONOVAN. And what I would say, I think it is a very 

important point broadly, and I think a piece of this is direct risk 

retention, but there are other elements that I think are important 

to look at as well that can align incentives at the broker level, at 

all different levels in the chain. 

So given the discussions that are going on, I think it is very important that we continue with the Administration more broadly. 

We have had significant conversations internally that we continue 

to discuss this and find ways to ensure that we are aligning those 

incentives at every step, not just on the—not just a loan with a risk 

retention requirement. 

Mr. PERLMUTTER. Thank you. I yield back. 

The CHAIRMAN. The gentleman from Illinois. 

Mr. MANZULLO. Thank you, Mr. Chairman, and Mr. Secretary, 

thank you for coming here this morning. 

I have a couple of questions, but let me start with this. Every 

time we open up the paper, there is yet another program to help 

out people who are underwater on their home mortgages or behind, 

etc., knowing full well the reason they are behind is because we 

have lost so many jobs in this country. In many cases you can take 

somebody’s home mortgage and cut it in half, and they still can’t 

make the payments because the job isn’t there anymore. 

But then I read of yet another new program—I think it would 

be appropriate to call it that—that would somehow ‘‘encourage’’ private lenders to forgive a principal debt of tens of billions of dollars 

worth of home mortgages as to which the homeowners have negative equity. Are you familiar with that program? 

Secretary DONOVAN. Yes. 

Mr. MANZULLO. What is that? 

Secretary DONOVAN. So what we have done with FHA is to encourage, as you said, private lenders to cut principal— 

Mr. MANZULLO. They would eat it. 

Secretary DONOVAN. Yes. 

Mr. MANZULLO. All right. 

Secretary DONOVAN. And just to be clear, what we are finding 

more and more—the GSEs are seeing this in their own portfolios 

and as are other lenders—we are beginning—we are seeing increasingly that lenders are cutting principal because financially 

they will see improved performance in those loans and improved 

recovery. So this is something that is happening in the market 

broadly without any government incentives. 

Mr. MANZULLO. That was my issue. That is a voluntary program? 

Secretary DONOVAN. Yes. 

29 

Mr. MANZULLO. So there is no official, for lack of a better word, 

non-bankruptcy cramdown that is being given to the banks to force 

them to do this. Would that be a correct statement? 

Secretary DONOVAN. In the program we announced, it is not a— 

it is a voluntary— 

Mr. MANZULLO. It is voluntary. 

Secretary DONOVAN. That is correct, yes. 

Mr. MANZULLO. And the banks are not penalized for not participating in this? Would that be also correct? 

Secretary DONOVAN. In that—yes, in that specific program. 

Mr. MANZULLO. The reason I say that is that we have been through these cycles before where property would sell for $200,000, 

say, in 1987, new, drop in value 8 or 9 years later to $160,000, 

$170,000, and then go up to half a million dollars 7 or 8 years 

later. We do have cycles in this country, do we not, where people 

who put on—put down relatively modest downpayments find themselves underwater from time to time. Would that be a correct statement? Obviously, it is correct, or I wouldn’t have asked the question in the first place. 

Secretary DONOVAN. I think it is hard to compare what we have 

seen in this country, perhaps since the Great Depression, to the 

cycle that we have been through. The extent of negative equity— 

Mr. MANZULLO. And the length. 

Secretary DONOVAN.—scale of it is unlike anything we have seen 

since then, and what I would say is reducing negative equity is an 

important piece of helping to get us— 

Mr. MANZULLO. If I could— 

Secretary DONOVAN. And that banks do, I believe, need to start 

doing more of that. 

Mr. MANZULLO. Mr. Secretary, the other issue is, as you stated 

in your testimony, where GSEs were encouraged to buy Alt-A and 

subprime private crap that had been generated for the purpose of 

increasing affordable housing goals, and that it says that underwriting standards were lessened in order to buy these portfolios 

that really were not intended to sell to the GSEs in the first place. 

This occurred, I think, between 2003 and 2005. It is about $190 billion worth. 

And the issue there is—and I know you weren’t there. It was a 

different Administration. But it is a fact, is it not, that even with 

that mandate or Executive Order or pressure—call it what you 

want—is that GSEs still have the authority to say even though 

these instruments were never intended to be sold to us, that we 

could have imposed our underwriting standards and made it stricter in not buying them? 

Secretary DONOVAN. Just to be clear, there was a large pool of 

safe loans—not Alt-A, not subprime—that would have met the 

goals that the GSEs didn’t buy. So I don’t believe that the goals 

forced them to buy the Alt-A or subprime. They did so for other— 

our evidence shows they did so for other reasons, and that is what 

led them down that path. The affordable housing goals did not require them to buy Alt-A or subprime loans. 

Mr. MANZULLO. Thank you. 

The CHAIRMAN. Let me just—to answer his question, there is no 

program anywhere in the Federal Government that I am aware of 

30 

that compels any holder of paper to write down the principal. None 

whatever. 

The only thing we have done in that regard is we did pass, I 

think virtually unanimously, tax legislation—not out of this committee—that said that a homeowner who was a beneficiary of such 

a write down would not owe taxes on that amount. So that was an 

encouragement, maybe, but there was zero requirement that anybody who holds this write down any part of either the interest or 

the principal. 

The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman, and thank you Mr. Secretary for appearing. 

A quick comment before I get to what was my initial agenda. We 

find that businesses—they do have an opportunity to write off 

losses by way of something called bankruptcy, and continue to 

function, as permitted. The unfortunate circumstance for most 

Americans who happen to be holders of primary homes is that they 

don’t have that as an option such that bankruptcy can benefit them 

to the extent that they can maintain their residences. If you have 

a secondary residence, a tertiary, or quaternary, you can with 

those. Anything beyond your primary, bankruptcy can benefit you. 

But we don’t have that for homeowners. Homeowners don’t have 

the benefit of bankruptcy to the extent that businesses do. That is 

just a fact. They do not. And there are some who make the argument that it would be beneficial for homeowners to have the same 

opportunity that businesses have to reorganize and stay in business, and homeowners can do that to a limited extent with debts 

other than the primary home, the primary mortgage. And that was 

just a comment so that I could at least say to the people who are 

viewing this that there are other means by which we can achieve 

a goal of dealing with this negative equity that are not in place 

simply because the laws don’t permit homeowners, people who 

have their primary residence, to go into bankruptcy court and save 

their primary residence. 

And there is more that can be said on this, but let’s go back to 

the Great Depression, because it was during the Great Depression 

that we—I think is a good point of departure for us in this brief 

dialogue that you and I will have. We didn’t have 30-year fixed-rate 

mortgages. We had 3- to 5-year mortgages. People would refinance 

and refinance again. 

And it is the evolution through the years that got us into Fannie 

and Freddie such that we have 67 percent of Americans who own 

their own homes, and over 70 percent of these, of course, have 

mortgages, so when you say mortgages, they are buying. They are 

in a position to own at some point. 

And while Fannie and Freddie are not perfect, and while they 

have not served us as well as I would like for them to serve us, 

I don’t think that we can overlook the fact that a good many Americans who have homes now, who are legitimate, hard-working people who have 30-year mortgages or some longer period than 5 

years—they have these because of the evolution that took place 

with Fannie and Freddie. And just as we have friends and I have 

friends who would favor keeping credit default swaps and who 

would favor some sort of negative amortization in products, they 

31 

don’t want to end all of the things that created the circumstance, 

they want to make them work better. 

I think that there has to be a way for us to deal with this and 

not just obliterate Fannie and Freddie and do nothing, and that is 

my concern. The option that some seem to put forth is that of doing 

nothing more than ending Fannie and Freddie. A bad idea becomes 

a really bad idea when you try to implement it, and it is unfortunate that we have to have the good sense not to let that happen. 

We have to have the good sense not to let this bad idea become an 

actual facility to the extent that it exists. 

What do I mean? If we literally allowed for the departure of 

Fannie and Freddie—just overnight, let’s just get rid of it—what a 

thing—this bad idea would become a really bad idea when the experiences that we would have to encounter would manifest themselves. 

So tell me, if you would, if we eliminated Fannie and Freddie 

right now, what would be some of the effects of doing so? 

Secretary DONOVAN. I think that the risks to the housing market 

and the economy more broadly would be substantial, and if you 

look at the jumbo market, other forms of lending, you look at the 

enormous gap in interest rates and availability of credit in those 

other markets, there is no question that whatever mistakes Fannie 

Mae and Freddie Mac made, which were substantial, that currently 

they are playing a very important role in stabilizing our housing 

market and the economy more broadly. 

So we do need to reform them, there is no question, and we have 

embarked on that process, but we have to do so in a responsible, 

measured way so that we don’t end up doing more damage to the 

housing market, and in fact damaging the taxpayer through increased losses at Fannie Mae and Freddie Mac. 

Mr. GREEN. Thank you, I yield back. 

The CHAIRMAN. The gentleman from Florida, Mr. Grayson. 

Mr. GRAYSON. Thank you, Mr. Chairman. It is nice to see you, 

Mr. Secretary. 

What percentage of mortgages in the United States are underwater? In other words, how many households owe more than they 

own, where the balance of their mortgage is more than the value 

of their property? 

Secretary DONOVAN. There are varying estimates that are in the 

range of 15 percent to as high as 25 percent. About a third of all 

underwater mortgages, the estimate is, are close enough to being 

above water that with a few years of modestly increasing house 

prices, they should be back above water, but there are about 2⁄3 of 

those who are severely underwater, typically beyond 115 or 120 

percent LTV. 

Mr. GRAYSON. Do you happen to know what the percentage is in 

Florida and other hard-hit places, like Nevada? 

Secretary DONOVAN. They range as high as above 50 percent in 

the hardest-hit places. 

Mr. GRAYSON. For people in those circumstances, particularly the 

ones who have dramatically more debt than the property is worth, 

and in many places where there are a lot of empty houses—in Orlando, for instance, 10 percent of all the houses are now unoccupied. In situations like that, do you think that people should conVerDate Nov 24 2008 16:10 Sep 20, 2010 Jkt 057739 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\57739.TXT TERRIE
32 

tinue to pay their mortgages or should they just move across the 

street and start over again? 

Secretary DONOVAN. I believe that we have a system that depends on consumers paying their mortgages, and I would not, here 

or elsewhere, recommend to people that they not pay their mortgages. 

What I would say is—and this is why we announced changes and 

new initiatives just a couple of weeks ago—I do believe, the Administration believes, that negative equity is a significant problem in 

our market. Given the fact that we are seeing increasing write 

downs by lenders in their own portfolios, taking negative equity, I 

believe that it is increasingly clear to lenders that writing down 

negative equity in specific cases actually benefits lenders—homeowners as well as the lenders themselves, because they are not 

going to recover on those, and loans will perform better. 

And that is why we announced a series of initiatives that try to 

accelerate what we are seeing as a trend already, and to get rid 

of some of the misalignments. There are accounting treatments in 

a range of ways that currently I think we have financial institutions that are reflecting the value of second liens or other loans at 

unrealistic levels that will not be recoverable in a foreclosure or in 

other actions. So we are beginning to see some movement on that, 

and we are trying to accelerate it with the efforts we have under 

way. 

Mr. GRAYSON. We live in a market economy where we expect 

businesses to maximize profits and minimize losses. Why would we 

expect anything different from consumers, and in particular, homeowners? Why would we expect them to keep paying on a mortgage 

where the mortgage value is far more than the value of the property that underlies the mortgage? 

Secretary DONOVAN. I think—and this is one of the reasons I 

work in housing—a home is much more than an investment, and 

they are—those are complex decisions that involve negative impacts to families themselves in terms of their credit, displacement 

of families and children. There is a whole—it is a very complex set 

of decisions that a family makes when they buy a home or when 

they decide to give up a home. So I don’t think it is as simple as 

saying that this is a purely rational economic decision that is only 

based on investment rather than the other values of a home. 

Mr. GRAYSON. My own impression—and you can correct me if I’m 

wrong—is that for at least 90 percent of the people in that particular circumstance where they owe more than they own, there is 

no policy of the Federal Government at this point that has, in any 

way, ameliorated their problems. Is that a fair statement? 

Secretary DONOVAN. I don’t think that is a fair statement, actually. First of all, a significant number of those homeowners, if they 

remain and pay about a third, based on our estimates, will be 

above water within a few years. 

Second, we have taken a series of steps with the announcements, 

changes to our modification program that prioritized principal reduction, the FHA refinancing effort that we talked about earlier, 

those are all efforts to try to attack the problem of negative equity, 

recognizing that we cannot nor should we put the burden of writing 

down that negative equity on the taxpayer. We would be talking 

33 

about hundreds of billions of dollars, and those losses must remain 

and should remain the responsibility of the private lenders who 

made those loans to absorb the bulk of the losses. 

Mr. GRAYSON. My time is up. 

The CHAIRMAN. Your time has expired. 

Mr. GRAYSON. Thank you. 

The CHAIRMAN. The gentlewoman from California. 

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

for being here today. 

I know this hearing is focused on housing finance. I want to talk 

a little bit about CDBG and section 108. In some ways, it is connected to housing finance because CDBG funds can be used to help 

fund housing and section 108 is more on the economic development 

side, but it is used to support maybe Choice Communities. I know 

that is an initiative that you have put a lot of time in on. 

I have been concerned about CDBG for quite some time. I know 

that you have some ideas about some reform in CDBG. And I and 

some other members of this committee are concerned about the 

various ways that CDBG funds are used in cities that do not inure 

to the benefit oftentimes of those who we intend to benefit of it. 

Many of us believe that CDBG funds are used almost like campaign funds out of the back pockets of local elected officials who 

find ways to get the money to those groups and organizations that 

basically are their supporters rather than plans that actually deal 

with providing a combination of housing opportunities and/or support opportunities for families, etc., etc. And of course CDBG has 

been revamped, cut back in ways that I don’t think really accomplishes economic development. 

And I also understand from my staff that you are envisioning 

some kind of fee for use of section 108 funds. So could you relate 

to both CDBG and section 108 a bit around those concerns? 

Secretary DONOVAN. Just to start with the section 108 program, 

it has been an effective program, it has expanded, the use of it has 

expanded significantly, and as I think you have seen us do in a 

range of different areas in FHA and elsewhere, the proposal was 

to, now that we have a real history with 108, to be able to understand the true costs of the guarantees and to begin to set a pricing 

for that to reflect the actual performance of the loans so that the 

program effectively pays for itself rather than requiring appropriations. So that is what we had proposed for 108. And given the 

strong performance of it, it is a pretty modest fee. 

On CDBG, more broadly what I would say is that it has been 

critical for us to improve oversight of the program. I don’t think the 

kinds of things you have talked about are widespread in the program. However, where we have seen examples that CDBG funds 

have not been used appropriately, we have stepped up the actions 

that we are taking. We would be happy to give you more details 

on that. But I think CDBG is an important resource in many communities and we believe, particularly given the economic crisis that 

we have seen, that having a tool that can attack economic development and create jobs is important, but I would be happy to talk 

to you about further improvements that you think are necessary. 

Ms. WATERS. Okay, my time basically is up, so I will be happy 

to talk with you further about both of those programs. 

34 

The CHAIRMAN. Thank you for your testimony, and we will now 

call the next panel. 

Secretary DONOVAN. Thank you. 

Ms. WATERS. [presiding] Thank you very much. I would like to 

call up our second panel: Mr. Anthony T. Reed, executive vice 

president, Capital Markets, SunTrust Mortgage, Incorporated, on 

behalf of the Financial Services Roundtable; Ms. Sheila Crowley, 

president and chief executive efficer, National Low Income Housing 

Coalition; Mr. Alex J. Pollock, resident fellow, American Enterprise 

Institute; Mr. Jack E. Hopkins, president and chief executive officer, CorTrust Bank, NA, on behalf of the Independent Community 

Bankers of America; Mr. Thomas Gleason, executive director, 

MassHousing; Mr. Anthony M. Randazzo, director of economic research, Reason Foundation; and Mr. Rick Judson, third vice chairman, National Association of Home Builders. 

Okay. We will start with Mr. Reed. 

STATEMENT OF ANTHONY T. REED, EXECUTIVE VICE PRESIDENT, CAPITAL MARKETS, SUNTRUST MORTGAGE, INCORPORATED, ON BEHALF OF THE FINANCIAL SERVICES 

ROUNDTABLE 

Mr. REED. Thank you. Madam Chairwoman and members of the 

committee, my name is Anthony T. Reed. I am the executive vice 

president for capital markets with SunTrust Mortgage. I am appearing today on behalf of the Housing Policy Council of The Financial Services Roundtable. 

Thank you for the opportunity to testify on the future of the 

housing finance system. Today, I would like to focus my remarks 

on reforming the secondary mortgage market for conventional 

mortgage loans. The secondary mortgage market is an essential 

feature of our system of housing finance. It has produced a steady 

supply of mortgage finance for home buyers. The secondary mortgage market has permitted the development of products with 

unique benefits to U.S. borrowers, such as the 30-year fixed-rate 

mortgage. 

For many years, and even throughout the financial crisis, the 

GSEs facilitated this market efficiently and effectively. Yet, the crisis has revealed several fundamental flaws. Correcting these flaws 

presents Congress with an opportunity to make significant improvements in the operation of the secondary market that will benefit homeowners in the economy. 

Reform should be based upon the following three principles. 

First, reform should continue to ensure a steady flow of reasonably 

priced housing finance for borrowers and should not disrupt the 

economic recovery. Second, reform should minimize risk to taxpayers. Third, reform should include some flow of funding to affordable housing. 

The housing policy council proposes to achieve these goals in the 

following ways. First, creation of federally chartered but privately 

owned mortgage securities insurance companies or MSICs to perform the credit enhancement function currently performed by the 

GSEs; second, a strong Federal regulator; third, the establishment 

of a single MBS issuance facility to create and administer mortgage-backed securities guaranteed by the MSICs; fourth, in exVerDate Nov 24 2008 16:10 Sep 20, 2010 Jkt 057739 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\57739.TXT TERRIE
35 

change for their Federal charter, MSICs would be required to contribute a stream of revenue to State and local housing finance 

agencies to support competitively-evaluated affordable housing programs. 

Finally, the recent financial crisis has demonstrated that the 

Federal Government is fully capable of performing the liquidity 

function in times of market stress. Therefore, any successors to the 

GSEs should not be required or permitted to maintain large portfolios. MSICs would not be backed by the Federal Government. 

And I would like to repeat not be backed by the Federal Government. However, the Federal Government should provide an explicit 

backup guarantee on MBS still insured by the MSICs. 

To be clear, this catastrophic guarantee would not apply to the 

MSICs themselves. It would only apply to the MBS that they guarantee. This exquisite guarantee for MBS is needed to give a broad 

range of MBS investors confidence in these securities and to help 

ensure consistent and reasonably priced mortgage finance to borrowers. 

The government’s guarantee should cover interest and principal 

payments on MBS only after all private capital backing and MBS 

is exhausted. And MSIC would pay a fee to the government for the 

government guarantee, and the fees paid by all MSICs would be 

placed in reserve that would provide an additional buffer between 

private capital and the Federal guarantee. In total, the layers of 

private capital standing before the government’s guarantee would 

be downpayments made by homebuyers, private mortgage insurance, shareholders equity in the MSICs, and the reserve fund. 

Moreover, this explicit guarantee is intended to be budget neutral. MSICs should be required to transfer a percentage of revenue 

to affordable housing programs, much like the Federal Home Loan 

Banks do today. The current numerical housing goal should be 

ended. The funds for affordable housing could be contributed under 

a competitive grant program similar to the FHLB program, or it 

could be transferred to HUD for subsequent distribution to State 

and local housing finance agencies. 

We also called for the creation of a single MBS issuance facility 

to perform the securitization function. This issuance facility would 

support the creation of a single MBS. Today, there are some differences between the MBS marketed by the two GSEs, which can 

from time to time impair market liquidity. All MSICs should be required to adhere to a standard form of MBS that has the same 

terms and conditions in order to promote investor understanding of 

the MBS. This would help ensure homebuyers consistent access to 

reasonably priced home finance. 

Thank you for the opportunity to testify on the future of mortgage finance. I would be happy to answer any questions you might 

have. 

[The prepared statement of Mr. Reed can be found on page 114 

of the appendix.] 

Ms. WATERS. Thank you very much. 

Ms. Sheila Crowley? 

36 

STATEMENT OF SHEILA CROWLEY, PRESIDENT, NATIONAL 

LOW INCOME HOUSING COALITION 

Ms. CROWLEY. Good morning, Ms. Waters, Mr. Hensarling and 

other members of the committee. 

I am Sheila Crowley, president of the National Low Income 

Housing Coalition. The Coalition is dedicated solely to achieving socially just public policy that assures people with the lowest incomes 

in the United States have affordable and decent homes; thus, we 

are interested in the topic of today’s hearing, because the housing 

finance system in the United States has failed miserably in assuring enough housing for all Americans and any reform that Congress undertakes must address this serious shortcoming. 

In the United States today, there are 9.2 million extremely lowincome renter households, and only 6.1 million rental homes available that they can afford—71 percent of extremely low-income 

renter households pay more than half of their income for their 

housing. That’s an unacceptable situation. In the wake of the foreclosure crisis, some will assert that we have an excess supply of 

housing; and, while that may be the case for high-cost housing, the 

supply of low-cost rental housing continues to dwindle. Moreover, 

rents continue to rise. 

The Coalition’s annual study of housing costs called, ‘‘Out Of 

Reach’’ will show that the 2010 national housing wage, that is, the 

hourly wage that a full-time worker must earn in order to afford 

a two-bedroom rental home is $18.44 an hour. That is up from 

$17.84 an hour in 2009. A stable home is the platform for success 

and all other spheres of individual and family life, and all the other 

interventions we devise to help low-income people improve their social and economic well-being. Or, if not, if we do not first make 

sure they have safety in affordable homes, given this understanding of the housing crisis today, we offer several principles to 

guide reform of the housing finance system in the United States. 

One, Federal subsidies to the housing sector should be directed 

to meeting the needs of those with the most serious housing problems first. In Fiscal Year 2009, the Federal Government spent $300 

billion to support housing—80 percent of that subsidized homeownership, primarily with tax deductions, and the remaining 20 percent supported rental housing primarily through the HUD budget. 

A truer picture of the Federal commitment to housing would also count the nearly $2 trillion in support for mortgage credit and 

other insurance through FHA, Ginnie Mae, the VA, Rural Housing 

Services, the Flood Insurance Program, Fannie, Freddie and the 

Federal Home Loan Banks. Despite this considerable Federal involvement in the housing sector, we have a persistent structural 

deficit of housing that the lowest-income people can afford. Clearly, 

subsidies are not being directed to where they are needed and 

where they could do the most good. 

Second, all segments of the housing finance sector have a duty 

to contribute to solving the most serious housing problems. Some 

would argue that the conflicting goals of maximizing profits and 

serving a public purpose contributed to the downfall of Fannie and 

Freddie. We would argue that housing, like healthcare, is so essential to human well-being that any profit-seeking enterprise must be 

grounded by social responsibility that is assured by government 

37 

regulation. In 1992, Congress directed Fannie and Freddie to take 

a more active role in ensuring the availability of affordable housing 

by establishing affordable housing goals. 

In July 2008, Congress added a further affordable housing obligation in the form of contributions to the National Housing Trust 

Fund, which was designed specifically to address the shortage of 

rental housing. Whatever form Fannie and Freddie or their successors take in the future the obligation to contribute to the National 

Housing Trust Fund must be renewed and expanded. And, further, 

we think all federally regulated financial institutions should be required to make similar contributions. 

Third, Federal policy should not favor one form of tenure over 

another. Rather, Federal policy should incentivize balance in the 

housing market and the full range of housing choices in every community. Federal policy clearly favors homeownership of rental 

housing as indicated by the skewed nature of Federal housing subsidies. A more balanced Federal housing policy would make sure 

that rental housing enjoys the same advantages as homeownership 

in lending and in the tax code. 

Assuring that all members of a given community have homes 

they can afford in the neighborhood of their choosing will also require strict enforcement of fair housing laws and the full implementation of the duty to affirmatively further fair housing is a condition of receiving direct and indirect Federal subsidies. I will close 

with three specific suggestions for dedicating funding sources for 

the National Housing Trust Fund that will help us take the trust 

fund to the scale that we recommend: at least $15 billion a year 

for 10 years. 

These are things Congress could do right away. First, the Federal Government provides private financial institutions with lowcost funds through a variety of sources—a 5 percent basis point annual fee on outstanding low-cost funding balances could raise several billion dollars a year for the trust fund; second, Congress 

should levy a fee on the securitization of mortgages by any capital 

markets participant; and third, homeowners can gain a tax deduction for capital gains on the sale of their homes, a surcharge on the 

percentage of capital gains that a seller realizes at the time of sale 

would generate several billion dollars. 

Thank you. 

[The prepared statement of Ms. Crowley can be found on page 61 

of the appendix.] 

Ms. WATERS. Thank you very much. 

Mr. Pollock? 

STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. POLLOCK. Thank you, Madam Chairwoman, Congressman 

Hensarling, and members of the committee. 

I would like to propose for your consideration seven steps toward 

sound mortgage finance in the future for the United States. These 

are: to create a private secondary market for prime conforming 

mortgage loans; to transition to a world of no GSEs; to facilitate, 

but not require, risk retention by mortgage originators; to develop 

countercyclical strategies; should there be surviving GSEs, in spite 

38 

of my previous recommendation, to ensure that we do not use government insured banks to promote the financing of the GSEs; to 

develop clear, straightforward key information for borrowers; and 

to reintroduce savings as an explicit goal of mortgage finance. 

I’ll expand briefly on three of these points. First, a private, secondary market for prime mortgages of conforming size should have 

been a natural market development. Why did it never happen? It 

never happened because no private entity could compete with the 

government granted advantages of the GSEs. There could be no 

private prime conforming mortgage market while the GSEs used 

their advantages, both to make private competition impossible and 

to extract duopoly profits or economic rents from the private parties. This element of the old housing finance system should not survive. 

Second, we should structure a transition to a world of no GSEs. 

I would like to commend Congressman Hensarling’s bill, which he 

mentioned earlier, for suggesting how this might be done and how 

an orderly transition might actually be put in gear. Housing finance inflation was at the center of the financial crisis, and the 

GSEs were at the center of housing finance inflation. No mortgage 

system reform can be meaningful, which fails to address Fannie 

Mae and Freddie Mac. Everyone now agrees with this. 

In my view, this is the core issue: you can be a private company 

with market discipline, or you can be part of the government with 

government discipline of which there are many kinds, but you can’t 

be both. Fannie and Freddie or parts of Fannie and Freddie should 

become one or the other. This desired transition is somewhat easier 

now, because Fannie and Freddie are not now GSEs. They are government housing banks owned almost entirely and controlled entirely by the government. 

Therefore, in my opinion, it’s quite clear that as recommended by 

the Congressional Budget Office, they should be on the Federal 

budget. They should not get off balance sheet accounting treatment, which comes in for so much criticism in other areas. In this 

context, I would also like to commend Congressman Garrett’s bill, 

H.R. 4653, the Accurate Accounting of Fannie Mae and Freddie 

Mac Act. 

Third, we should develop countercyclical loan to value (LTV) requirements. Financial cycles, particularly in real estate, are inevitable, but they could be moderated by developing countercyclical 

elements of the mortgage system. Bubbles involve an unstable positive feedback loop between asset prices and credit availability. As 

asset prices inflate higher and higher in a boom, the risk of loans 

appears to be growing less when it’s in fact greatly increasing. 

As asset prices go further and further above their trend, the risk 

of their fall and the risk of the loans is becoming greater and greater. The logical and necessary thing to do is reduce the amount 

being lent against the current market price of the asset. But what 

generally happens, and always happens in a bubble, is the exact 

opposite. With increasing optimism, LTVs rise instead of being reduced. We need to create a mortgage finance system in which LTVs 

fall and downpayments rise as asset prices inflate. Then we would 

have countercyclical LTVs. 

39 

Congressman Foster, in a very interesting draft paper, has proposed some straightforward mathematical ways that inflating asset 

prices might define requirements for lower LTVs. It’s clear that 

something along these lines would be extremely beneficial for our 

future mortgage system, and we ought to figure out how to do it. 

I would be happy to address any of the other proposals discussed 

in my written testimony, and I thank you again for the chance to 

share these views. 

[The prepared statement of Mr. Pollock can be found on page 100 

of the appendix.] 

Ms. WATERS. Thank you very much. 

Mr. Hopkins? 

STATEMENT OF JACK E. HOPKINS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CORTRUST BANK, N.A., ON BEHALF OF 

THE INDEPENDENT COMMUNITY BANKERS OF AMERICA 

(ICBA) 

Mr. HOPKINS. Madam Chairwoman, members of the committee, 

thank you for the opportunity to testify today on the future of 

housing finance. 

My name is Jack Hopkins, and I’m the president and CEO of 

CorTrust Bank, a $600 million community bank located in Sioux 

Falls, South Dakota. I am pleased to testify today on behalf of 

ICBA and its 5,000 members nationwide. The housing GSEs are 

very important to community banks. Fannie Mae and Freddie Mac 

provide a reliable secondary market for residential mortgage loans, 

and the Federal Home Loan Banks offer liquidity, asset liability 

management, and long-term funding. 

My bank uses all three extensively. We are a seller servicer for 

both Fannie and Freddie, servicing more than 3,500 loans with a 

balance of more than $400 million, and we have used the Federal 

Home Loan Bank advances to fund lending activities with $34 million currently outstanding. Were it not for these finance options, 

our customers would be at the mercy of the big banks and brokers 

for mortgage services and we would not be able to compete. 

That’s why fixing the housing finance system and getting it right 

is so important to community banks. Our priority for this committee, either as part of housing finance reform or separately, must 

be correcting the injustice suffered by more than a thousand community banks when Treasury allowed the value of their GSE preferred shares to plummet when Fannie and Freddie went into conservatorship. Community banks invested in preferred shares with 

the encouragement of the regulators, only to have the rug pulled 

out from under them. 

Even former Treasury Secretary Paulson, under whose watch 

this happened, called it an ambush. In my opinion this led directly 

to the failure of a large number of ‘‘too-small-to-save’’ banks by 

wiping out excess capital and making it almost impossible to raise 

new capital. This was unconscionable. Restoring the $15 billion to 

$20 billion in community banks’ capital value that vanished as a 

result of the Treasury actions can foster $150 million to $250 million in new lending and help in the economic recovery. And that 

is not an insignificant sum. 

40 

I would like to thank the members of this committee who have 

spoken out in support of community banks on this subject. There 

is a wide range of proposals being considered to restore the housing 

GSEs and reform the housing finance system, and some would 

function better for community banks than others. 

We believe any discussion should begin with the fundamentals 

and consider what the corporate ownership and governance structures of the secondary markets should look like, and whether the 

mission of the GSEs is still adequate or needs to be changed. Resolving these issues is an important part of the reform effort; ICBA 

is still in the process of examining these issues and others. However, as the matters are sorted out, ICBA has developed a set of 

core principles we feel should guide the debate. These principles 

are spelled out in my written testimony, and I will highlight a few 

of them here. 

The secondary mortgage market must be impartial and provide 

equitable access and pricing to all lenders regardless of size or volume. The secondary market must have a limited mission focused 

on supporting residential and multi-family housing in all communities. The conflicting requirements of a public mission with private ownership must be eliminated. The accumulation of retained 

earnings must be an important component of the secondary market 

structure to help attract equity capital when needed. And there 

should be more than one secondary market to foster competition 

and provide better access for community banks. 

The functions of Fannie Mae and Freddie Mac should not be incorporated into the Federal Home Loan Bank System whose focus 

must remain that of providing liquidity to their members. And 

Congress must ensure that the secondary market continues to have 

government ties. Whether the Fannie Mae and Freddie Mac charters are retained or a new secondary market is created, they must 

have some government tie to ensure continued, steady, and favorable access to the capital markets. 

Finally, I would like to address the importance of the Federal 

Home Loan Bank System to community banks. Federal Home Loan 

Banks have not been immune from the financial stress that has affected the entire financial industry. Yet, throughout the financial 

crisis, they continued to provide advances to their members without disruption, while other segments of the capital markets ceased 

to function. Congress must ensure that this stable, reliable, and resilient source of funding, liquidity, and other products continues 

and is not diverted to other social goals. 

For example, some are already coveting the Federal Home Loan 

Bank’s Refcorp payments when the system’s Refcorp obligations 

are satisfied. I understand how tempting this may be, but the Federal Home Loan Banks and their members, and consumers and 

businesses that they serve should not be penalized because the 

Federal Home Loan Bank paid off their debts early. These earnings 

should be kept in the system to build retained earnings for the system’s financial condition and not be siphoned off for other programs. 

Thank you for the opportunity to present these views on our Nation’s community banks. 

41 

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

84 of the appendix.] 

Ms. WATERS. Thank you very much. 

Mr. Gleason? 

STATEMENT OF THOMAS GLEASON, EXECUTIVE DIRECTOR OF 

MASSHOUSING 

Mr. GLEASON. Madam Chairwoman and members of the committee, thank you very much for this opportunity today. 

My name is Tom Gleason. I’m the executive director of 

MassHousing based in Boston, Massachusetts, and I’m testifying 

today on behalf of the National Council of State Housing Agencies, 

which represents this country’s housing finance agency system. 

I want to thank Congress and the Administration for making 

housing a recovery priority. You provided HFAs with Federal recovery resources and did it in a way that allowed us to break through 

the barriers in the financial market. As a result, we are right now 

helping to fuel the country’s economic recovery, financing hundreds 

of thousands of affordable homes for America’s working people, and 

generating jobs and tax revenue. 

Madam Chairwoman, I especially want to thank you and the 

members of this committee led by Chairman Frank for your efforts 

to keep tax credit resources flowing over these last few years, providing additional bonding authority in supporting the Administration’s bond purchase initiative. 

We appreciate your efforts to continue and expand several of 

these initiatives. Today, NCSHA calls on Congress and the Administration to require future GSEs to make a powerful commitment 

to affordable housing. We also recommend that Congress direct future GSEs to use the proven HFA delivery system to fulfill this 

commitment. We believe that a strong secondary market is an essential component of our housing finance system that must be preserved and strengthened, but Federal Government support of the 

secondary market is also necessary to finance affordable and sustainable homes and to reach underserved people. These public purpose obligations should be mandated and enforceable under Federal law and regulation, and not simply be aspirational goals. 

Some would argue that GSEs should not make affordable housing investments, because that is what caused Fannie Mae’s and 

Freddie Mac’s financial demise. We strongly disagree. Buying affordable loans did not get the GSEs into financial trouble. Buying 

bad loans did. Unfortunately, Fannie Mae and Freddie Mac both 

made investments in subprime and non-traditional mortgages that 

contributed significantly to their financial woes. But this shouldn’t 

negate the sound, affordable housing investments that they made 

in housing finance agencies. These investments have performed exceedingly well. 

Further, while it’s also true that the Federal Home Loan Bank 

System is experiencing its own financial distress, bank partnerships with FHAs have not contributed to it. In fact, recognizing the 

strength of HFA lending, Fannie Mae has entered into several exclusive arrangements with us, offering preferred mortgage pricing 

in terms. Fannie and Freddie have also purchased HFA mortgages 

based on their high quality, and several member banks of the FedVerDate Nov 24 2008 16:10 Sep 20, 2010 Jkt 057739 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\57739.TXT TERRIE
42 

eral Home Loan Bank System have extended HFA’s liquidity based 

on the strength of our portfolio. 

HFAs have proven over many decades that affordable housing financing done right is not just good lending but good business. We 

do it the old fashioned way: flexible but prudent underwriting; fully 

documented and verified loans; extensive homebuyer counseling; 

and a commitment not just to put a family in their home, but to 

keep them there. I would like to give you one specific example from 

Massachusetts, if I may. 

My agency’s loan portfolio has a delinquency rate right now of 

5.4 percent, compared to a 9.7 percent delinquency rate for the conventional market in Massachusetts. That’s a 44 percent lower delinquency rate in our portfolio. Because of our proven track record, 

NCSHA urges you to turn again to the time-tested and consistently 

high-performing FHA delivery system to help future GSEs achieve 

their affordable housing mandates. 

We urge you to direct the GSEs to prioritize their relationships 

with HFAs in designing their programs and rely on us to carry 

them out. These public purpose mandates for GSEs will require 

them to integrate a dedication to affordable housing throughout 

their business culture and not simply treat it as an niche business. 

Capitalizing the housing trust fund from GSEs is essential, however, it should not be used as a way to allow them to buy their way 

out of fulfilling their public purpose mandates. 

Future GSEs should make low-cost capital available to support 

a broad range of housing finance for both homeownership and rental housing. The GSEs should have broad authority within prudent 

standards of safety and soundness to be innovative. They should be 

able to respond quickly and nimbly to changing market conditions 

and to take measured risks. 

Finally, NCSHA recommends that HFAs play a key role in GSE 

governance and have a seat at the regulatory table. This will ensure that GSEs meet their affordable housing mandates by informing those efforts and evaluating their success. 

I thank you for this opportunity to testify, and I ask that my full 

statement be included in the record. I would be happy to answer 

any questions that you have. 

[The prepared statement of Mr. Gleason can be found on page 80 

of the appendix.] 

The CHAIRMAN. Without objection, any information that any of 

the witnesses want to provide will be made a part of the record. 

Mr. Randazzo? 

STATEMENT OF ANTHONY RANDAZZO, DIRECTOR OF 

ECONOMIC RESEARCH, REASON FOUNDATION 

Mr. RANDAZZO. Chairman Frank, Congressman Hensarling, and 

distinguished members of the committee, thank you for the invitation to testify today. 

My name is Anthony Randazzo, and I am director of economic research at Reason Foundation, a nonprofit think tank that advances 

the ways free market can be leveraged to improve the quality of life 

for all Americans. There are two overarching problems plaguing 

the housing industry today: uncertainty about the future; and cripVerDate Nov 24 2008 16:10 Sep 20, 2010 Jkt 057739 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\57739.TXT TERRIE
43 

pling price distortions that threaten to prevent sustainable housing 

recovery. 

Housing finance reform must be focused on addressing these two 

issues. GSE reform is urgently needed and a plan should be put 

into motion this year instead of waiting until 2011 or beyond. As 

I discussed further in my written testimony, there is a growing 

shadow inventory of homes, houses for which foreclosure has only 

been temporarily delayed, rather than prevented, and this is creating an excess of supply. 

If current Federal housing policies and programs remain in 

place, and the Federal reform process is dragged out, that supply 

is only going to expand in the coming months, indicating prices are 

artificially inflated and the market is distorted. The current policy 

of the Treasury Department, as Secretary Geithner has testified 

before this committee, is to wait until housing markets are more 

stable before reforming the GSEs. However, any such stable housing recovery will be artificial and susceptible to sudden declines, either from another bubble bursting, or from the emergence of a 

large supply of homes out of the shadow inventory hitting the market. 

Fannie and Freddie’s support of the housing market, backed by 

low interest rates from implicit government guarantee led to rapidly increased home sales in the last decade, which contributed to 

the spike in housing values from 2002 to 2006. Those perpetuate 

and pretend prices turned out to be unsustainable, since they were 

distorted by boom and bust government policies. As such, fixing the 

GSE problem is necessary before a real sustainable recovery can 

actually take hold. 

Fannie and Freddie cannot immediately be eliminated, because 

virtually the entire mortgage market is dependent on them as a 

wastebasket for toxic mortgage debt, and this stems from the 

Treasury Department’s bailout of the GSEs, propping them up as 

the main source of liquidity in the mortgage market today. But a 

strategy for dissolving them over the next few years can and should 

be created now. 

My written testimony offers some suggestions on how they could 

be wound down in a prudent way without shocking the market, 

and allows the government to continue its affordable housing mission to the Federal Housing Administration. Some specific principles for reform: First, Congress should focus on encouraging and 

fostering a sustainable recovery not bailing out homeowners in the 

near term. Waiting to reform the GSEs would perpetuate the boom 

and bust cycle and risk the creation of yet another housing bubble 

that will eventually collapse. 

Furthermore, waiting perpetuates the uncertainty in the financial markets that is largely frozen capital. Keeping lenders in perpetual limbo on what the future market for housing finance will 

look like and waiting increases risk to taxpayers. The longer the 

GSEs are allowed to operate in their current role as political rather 

than business entities, the greater the potential for financial losses 

will be for taxpayers. 

Second, Congress should support a framework for mortgage financing that does not distort prices. In order for the mortgage and 

housing markets to be stable for lenders to act more responsibly, 

44 

perverse incentives must be removed from the system. Only when 

price distortions are removed and assets are more realistically and 

competently valued will private capital return to the market allowing the GSEs to wind down prudently. 

Third, there should be an effective framework for the private sector to step into the current role that the GSEs play in the market. 

It is important to note that Congress cannot engineer the exact 

means for how the private sector will innovate and engage the 

mortgage and secondary mortgage markets. Congress should simply design rules to encourage private capital as the main source of 

mortgage financing, avoid market distorting policies, ensure transparency, and keep taxpayers from shouldering risk. 

In conclusion, the housing market must be permitted to find its 

natural bottom, because that is the only real way to begin to fix 

it after years of distortion. While the housing market is weak is 

precisely the time to act in reforming the GSEs and promote innovation. GSE reform is not an ace of spades to trump all housing 

woes. Principal reform will mean short-term paying as negative equity and foreclosures get worse. 

But, in the long term, homeowners and businesses will benefit 

from a soundly valued market and access to growing private capital. Meanwhile, taxpayers will be spared the inappropriate risks 

and crippling debt being taken on by the government. The result 

would be a stable foundation for growth that puts America on a 

path to a sustainable housing market. 

Again, thank you for the opportunity to testify. I look forward to 

answering any questions you may have. 

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

105 of the appendix.] 

STATEMENT OF RICK JUDSON, THIRD VICE PRESIDENT, 

NATIONAL ASSOCIATION OF HOME BUILDERS (NAHB) 

Mr. JUDSON. The housing GSE system functioned well for decades, but the past few years have seen unprecedented turmoil, to 

say the least. 

While we are here today to discuss the future of the housing finance system, one thing is clear. The status quo cannot be maintained. NAHB has had a strong and long-standing interest in the 

maintenance of an efficient secondary mortgage market system, 

and the role of the GSEs. 

NAHB believes that it is crucial for the Federal Government to 

continue to provide some type of backstop for the housing finance 

system. Such conditions are underscored by the current state of the 

system, where Fannie Mae, Freddie Mac, and the Federal Home 

Loan Banks and the Federal Housing Administration and Ginnie 

Mae are the only conduits for residential mortgage credit. 

NAHB believes a Federal backstop must be a permanent fixture, 

in order to ensure consistent supply of mortgage liquidity, as well 

as allow rapid and effective responses to market dislocations and 

crises. 

With regards to the future of Fannie Mae and Freddie Mac, however, NAHB recommends major, major changes, in terms of structure and operations. NAHB recommends creating private companies called ‘‘conforming mortgage conduits,’’ or CMCs, which would 

45 

be chartered to purchase conforming conventional mortgages that 

are originated by approved mortgage institutions such as banks, 

savings and loan associations, mortgage banking companies, and 

credit unions. These CMCs would issue securities backed by those 

mortgages, which would carry a Federal Government guarantee of 

the timely payment of principal and interest for the securities and 

their investors. 

CMCs would guarantee the timely payment of the mortgages 

that are pooled in the government-guaranteed securities. However, 

CMCs and the mortgages themselves backing these securities 

would not have implicit or explicit support from the Federal Government. CMCs would be required to be well-capitalized, and to 

maintain reserves at levels appropriate for the risk exposure. 

The CMCs would also pay fees in exchange for their securities 

receiving the Federal guarantee. Those fees would capitalize an insurance fund similar to what is maintained by the FDIC currently, 

which, along with the CMC reserves and private mortgage insurance coverage, would cover loss exposure on the mortgages and the 

CMC securities. 

The Federal Government, therefore, would only be called upon to 

support conforming, conventional mortgage markets under catastrophic situations when the capital and the insurance of the securities insured and the resources of the CMC mortgage insurance 

companies’ fund have been depleted. 

NAHB believes that the mortgages eligible for inclusion in these 

securities and in an explicit Federal guarantee would be tested and 

well-understood features in the well-known risk characteristics, including fixed-rate mortgages, standard adjustable rate mortgages, 

and selected multi-family mortgages. Such standards could be set 

by Congress. 

As this committee moves forward framing a new secondary market structure, NAHB urges careful consideration of the short-term 

and the unintended consequences that could occur during the transition to a new housing finance system. Any changes should be undertaken with extreme care, and with sufficient time to ensure that 

U.S. home buyers and renters are not placed in harm’s way, and 

that the—efficiently and effectively, as the old system is being 

abandoned, a new system can be put in place. 

Thank you for the opportunity to speak to you. 

[The prepared statement of Mr. Judson can be found on page 92 

of the appendix.] 

The CHAIRMAN. Thank you. Again, as I said, I believe there is a 

consensus that we need to replace the current system. The question 

is whether that’s all we need to do. There are some who say that’s 

just—let me start with Mr. Reed. 

Would it be sufficient, in your judgement, to pass legislation 

phasing out Fannie Mae and Freddie Mac, and take no other legislative steps? 

Mr. REED. Thank you for the question, Mr. Chairman. I think 

that would not be sufficient. I think certainly something has to be 

done with the existing assets. An equitable and fair solution has 

to be arrived at for the existing assets. 

The CHAIRMAN. Well, you talk, though, in your testimony about 

some other entities that you thought should be—let me— 

46 

Mr. REED. Yes, sir. That was—that would be the second point I 

would like to make, which is in our proposal there—we do call for 

the establishment of a single utility that would be responsible for 

the physical creation of the MBS, the transformation— 

The CHAIRMAN. Well, that’s my question. Should we legislate 

them so that they take effect simultaneously? 

Mr. REED. I would, yes. I think—to your point, I think one could 

start to build out the infrastructure that we are describing while 

the current GSEs are in process. 

The CHAIRMAN. Yes. I am concerned that if we them, and don’t 

put that in place, then I don’t know quite how we would carry out 

some of what they need. 

Mr. Judson, let me ask you a similar question. Would it be sufficient simply to phase out the GSEs and then take no further legislative steps? 

Mr. JUDSON. A transition to the new entity, whether that be a 

utility-type company or the conforming mortgage conduit that I referenced, whatever that transition would be, it does need to be a 

transition. And a dismantling of the GSEs would be appropriate, 

because they are not working under the current condition. 

The CHAIRMAN. I understand. And, as I said, I think the dismantling of the GSEs is not in question, and we have to deal with the 

assets. But we’re talking about some functions that are not performed there, whether or not you can simply put them out of business and not have this new utility. And that, when people ask 

about the delay, the issue is to make sure we get that right. That’s 

what we’re looking for, is some kind of input on that. So, I appreciate what you said. 

Let me ask Mr. Gleason. What do you think? Can we just move 

to that, or would it be sufficient simply to phase them out as 

they—and you’re speaking for the Council of State Housing Authorities, correct, not just Massachusetts? 

Mr. GLEASON. Yes, Mr. Chairman, that’s right. To your question, 

I don’t think it would be appropriate to phase out the GSEs and 

not put anything simultaneously in their place. We clearly need a 

functioning secondary mortgage market. I don’t think there is any 

doubt about that. 

I think dismantling Fannie and Freddie without putting an alternative mechanism in place would not be the way to go. 

The CHAIRMAN. Let me ask again from the supply side. Mr. Hopkins? 

Mr. HOPKINS. My concern would be that if we didn’t have a functioning secondary market, it would—without competition from the 

community banks, that the cost to the homeowners would go up. 

There would be no price competition. We help with the price competition, so there needs to be a functioning secondary market. 

The CHAIRMAN. I appreciate that, and I think while, obviously, 

the private sector we hope to increase and encourage that, my own 

view is that simply abolishing Fannie Mae and Freddie Mac, which 

is going to happen, without making sure that we have taken steps 

to facilitate, if necessary, the creation and set the rules of the private secondary market, it would be a mistake. 

Let me ask Mr. Randazzo. You talked about the further problems 

for the taxpayers if we don’t immediately abolish them. The SecVerDate Nov 24 2008 16:10 Sep 20, 2010 Jkt 057739 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\57739.TXT TERRIE
47 

retary testified that the ongoing activities are not causing a loss, 

that the losses result from the kind of sunken cost. Did you disagree with his analysis on that? 

Mr. RANDAZZO. No, I think that’s correct. I think that the future 

further tax losses will come from the fact that building a recovery 

on the way that the current policies and—the current way that 

we’re funding mortgages today is going to create another bubble. 

The CHAIRMAN. I appreciate— 

Mr. RANDAZZO. Eventually that bubble is going to pop, and— 

The CHAIRMAN. And that’s a valid argument. But it’s not that the 

activities of Fannie Mae and Freddie Mac, in and of themselves, 

are causing tax losses. 

Mr. RANDAZZO. The activities of Fannie Mae and Freddie Mac, in 

what they are issuing right now into the—or not issuing. The mortgages that they are purchasing right now in their current portfolio, 

those have the potential, as the Secretary actually testified this 

morning, to actually have losses in the future. Those are the tax 

losses. 

The CHAIRMAN. Yes, everything has the potential. But the ongoing activities are not now causing losses. 

Mr. RANDAZZO. No, the ongoing activities—or the existence of 

Fannie Mae and Freddie Mac right now, the—what they had before, those are losses that are leaking into the system. 

The CHAIRMAN. Right. And so no matter how quickly we abolish— 

Mr. RANDAZZO. There will be losses, no matter how fast— 

The CHAIRMAN. Those don’t diminish because of that. 

Mr. RANDAZZO. Absolutely. 

The CHAIRMAN. Thank you. Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. Earlier, I think 

many of you were here for Secretary Donovan’s testimony, where 

he opined that the affordable housing goals of the GSEs played no 

role in their demise. 

I note that in 1992, Congress required the GSEs to purchase 

CRA loans as part of its affordable housing mandate. In 1995, 

HUD authorized Fannie and Freddie to purchase subprime securities, including loans made to low-income borrowers. In 1996, HUD 

required that 42 percent of Fannie/Freddie mortgage financing go 

to borrowers with income levels below the median, later increased 

to 56 percent by 2008. In 2004, Fannie and Freddie purchased $175 

billion in subprime mortgage securities, which accounted for almost 

half of the market that year. And the record goes on. 

Mr. Pollock, do you believe that the affordable housing goals of 

the GSEs played any role in their demise? 

Mr. POLLOCK. Yes. 

Mr. HENSARLING. Well, I could not ask for a more clear answer 

there. 

Let me ask another question. I have had a number of witnesses 

say that apparently we need government guarantees. We need 

some kind of GSE structure, and I didn’t hear anybody talk about 

this in their testimony. 

But it appears to me, as I look at the mortgage market prior to 

the meltdown, we had a fairly competitive mortgage market in the 

jumbo market. We had a fairly competitive market in subprime. 

48 

I look internationally, and I see countries like Denmark, who 

has—their housing prices have declined, similar to ours, but there 

has been no surge in delinquencies or foreclosures. They use a covered bond market. And, to the best of my knowledge, there are no 

government guarantees in that particular system. I see Canada has 

no housing GSEs. Their homeownership rate, I believe, exceeds our 

own. In Canada, loans are full recourse to the mortgage borrower. 

So, I just question, when I look at our own historic experience, 

when I look at international examples, I am having a hard time believing that somehow you must have a government-sponsored enterprise, and the taxpayer hemorrhage that goes along with that, 

to have a functioning secondary mortgage market, much less high 

rates of homeownership. 

So, if there is somebody who studied these examples and wants 

to push back, or—Mr. Pollock, yes, I will let you comment again. 

Mr. POLLOCK. I don’t want to push back, but I have studied these 

examples with some care, Congressman. What you say about Denmark is true. That’s an exceptionally interesting housing finance 

system. 

I gave a presentation in Denmark a few years ago about the 

American system of GSEs. When I was done, the CEO of one of the 

main Danish mortgage banks which issues their covered bonds said 

to me, ‘‘Everybody always says about us in Denmark that we are 

the Socialists and America is free enterprise.’’ He said, ‘‘I see that 

when it comes to housing finance, it’s the opposite.’’ 

Mr. HENSARLING. I appreciate that observation. I have also 

seen—I don’t have it at my fingertips, but I believe there is a study 

by the Federal Reserve showing that the GSE benefit to the home 

purchaser was ultimately something like eight basis points, which 

means that, ultimately, maybe a purchaser was able to purchase 

at 4.92 percent, instead of 5 percent. 

But on the flip side, when you pay your mortgage, you are also 

paying the principal, which means that if you artificially increase 

demand, you might drive up the cost on the principal side, and ultimately you’re no better off, because what you gain, which, arguably, is very little on the interest side, you lose on the principal 

side. And now, as I said in my opening statement, there are at 

least 127 billion reasons that the taxpayers would not like to see 

the GSEs maintained, particularly with anything remotely resembling a Federal backstop. 

Again, I ask, what is the necessity and what is the benefit, when 

we are a nation that is already on the road to bankruptcy, and 

Fannie and Freddie will obviously prove to be the mother of all 

bailouts? 

Mr. Reed, I would be happy to let you comment. 

Mr. REED. Thank you, Congressman. To be clear, our proposal 

does not call for a continuation of the GSEs in the current form. 

What we advocate is that the guarantee, if there is one, be placed 

on the MBS, not on the corporate entities themselves, which I 

think is an important distinction between the ‘‘GSE model’’— 

Mr. HENSARLING. And who is guaranteeing the MBS? 

Mr. REED. The MSICs. Actually, there would be several layers of 

capital. First, the home buyer’s equity mortgage insurance, the eqVerDate Nov 24 2008 16:10 Sep 20, 2010 Jkt 057739 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\57739.TXT TERRIE
49 

uity in the MSICs, and then a reserve fund that we propose be in 

between them, as well. 

But to your point, it’s an important question. Why have any government guarantee at all? And I think it is an important question. 

I think everyone would agree that—has agreed on the importance 

of the secondary market, as a means of financing the housing market that we have here in the United States. And I think—I have 

seen studies as well that have pointed to the past decade and said 

there has really been very little benefit. 

The CHAIRMAN. Finish up. 

Mr. REED. But I think that might miss the point, which is over 

the past decade perhaps investors—and lenders, and everyone in 

the process—were not evaluating the risks appropriately. 

So, if you go back and you just use the past decade, and you 

say—and I agree with you, if you look at the spread between AAA, 

non-agency securities, and MBS securities, there has been a fairly—range. But the point of the policy, and the point of why Fannie 

Mae and Freddie Mac were created in the first place, was to ensure 

consistent access to reasonably-priced finance. And what you will 

see is that spread between AAA, non-agencies, and MBS could 

range somewhere—it has been as low as, say, 20 basis points. It 

has been as high as 200 basis points. And, in fact, the non-agency 

market has ceased to exist. 

So, if the policy objective is to ensure consistent and reasonablypriced homeownership, then we would advocate the most efficient 

way to do that is to put private capital in the first loss, and a government guarantee on the MBS, only in the event of catastrophe. 

The CHAIRMAN. Thank you, Mr. Reed. The gentlewoman from 

California. 

Ms. WATERS. Thank you very much. Let me thank our panelists 

for being here today. 

It is no secret that I was and I am a supporter of GSEs. I did 

not support and do not support the move to risky mortgages that 

our GSEs ended up involving themselves in. I think that the mission of the GSEs is a credible mission. 

But the fact of the matter is, as I understand it, our GSEs started to compete with our private mortgage companies like the one 

that was—Countrywide, Mr. Mozilo, and they were putting a lot of 

risky products out on the market. They were—actually, Mr. Mozilo 

was the poster child for the ARMs and the other risky mortgages 

that were put out there. And it caused Fannie Mae—even though 

I don’t support the fact that they tried to compete with them for 

it. 

So, here you have a mortgage company like Countrywide and 

others which, instead of giving people prime loans who were deserving of prime loans, were giving them subprime loans and all 

of the exotic products that you could think of. 

So, you had a private market, you had people eligible for prime 

loans. They were not getting them. They were thrown into 

subprime. GSEs started to compete to get that business, and of 

course that has created all of that debt, and I think the downfall 

of the GSEs. 

How do you propose to have a private, totally private secondary 

market that could operate in the way Countrywide was operating 

50 

and take care of our needs with low- and moderate-income wouldbe home buyers? Mr. Pollock? 

Mr. POLLOCK. Thank you, Congresswoman. I think the case is 

that with a private secondary market, Countrywide would not have 

been able to operate in the way that it did operate. Countrywide 

and Fannie Mae, for a long time, had a symbiotic, mutually supporting and mutually dependant relationship. 

There are secondary markets in debt securities of all kinds—in 

corporate bonds, in municipal bonds, in charge card loans—which 

are pure, private secondary markets in debt. And that’s what we 

should have for prime conforming loans. And I think that market 

would work quite well. 

For loans which are non-market loans, that other part of the 

GSEs, that, if we wanted to have the government do it, should be 

honestly made into a government function, like the FHA is. 

Ms. WATERS. So, I guess what I just heard was that the private 

market should be able to take care of all of the prime loans, the 

secondary prime loans, without any problem. Is that what I heard? 

Mr. POLLOCK. Congresswoman, it’s never the case in human affairs—and certainly not in financial affairs—that we operate without any problem. We always have problems. And finance has its 

own problems. But it is my view that if the GSEs were not there 

to dominate the market, and extract monopoly rents from it, that 

a private market in prime conforming loans would operate quite 

successfully. 

Ms. WATERS. And so, your preference is to transition to no GSEs, 

period. Is that right? 

Mr. POLLOCK. That is correct. 

Ms. WATERS. Thank you very much. I yield back. 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. LANCE. Thank you, Mr. Chairman. Good afternoon to you all. 

If we move to a private secondary market, as I favor—and, Mr. 

Pollock, you indicate that, as I understand it, you favor that as 

well. How about you, Mr. Randazzo, could you explain your position regarding that? 

Mr. RANDAZZO. I think it’s important to understand that a private secondary market is going to look very different than what we 

have right now. 

Mr. LANCE. Yes. 

Mr. RANDAZZO. And it’s impossible for this committee, for Congress, to engineer exactly what that’s going to be. So it’s—for us 

to sit here and explain exactly what it’s going to look like to the 

detail would be impossible, and would be unwise. 

What is important to understand is that without the GSEs there, 

there will be less distortions in the market, and there will be wider 

room for private capital to step into place, whether that’s through 

the use of covered bonds, restarting securitization, or something 

that we don’t even know or have heard of. 

Mr. LANCE. And I presume it would be your position that the 

sooner the GSEs are wound down, the sooner the private market 

can be involved in this. 

Mr. RANDAZZO. Absolutely. As I put forward in my written testimony, the longer, actually, that we have the GSEs around, the 

harder it’s going to be to let the private sector into the market. 

51 

Mr. LANCE. Regarding the question Congressman Hensarling 

asked Mr. Pollock based upon the testimony of the Secretary earlier today, is it your position that the GSEs were involved to some 

extent in the financial situation that affected this country? 

Mr. RANDAZZO. Absolutely. They were a driving force. 

Mr. LANCE. I believe they were certainly one of the driving 

forces. There may have been— 

Mr. RANDAZZO. Absolutely. 

Mr. LANCE. —others, but they were certainly one of them. 

Is there anybody on the panel who disagrees with Mr. Randazzo 

and Mr. Pollock, and agrees with the Secretary? 

Ms. CROWLEY. Agrees with the Secretary, that the GSEs did not 

cause the financial meltdown? 

Mr. LANCE. Yes. 

Ms. CROWLEY. I would say that the supposition that the requirement that the GSEs participate in the affordable housing market 

is—and that was what led to the financial meltdown is not accurate, nor any of the other requirements that the financial institutions engage in meeting social obligations. 

I think that Mr. Gleason said it best. It wasn’t that they did affordable loans, they bought bad loans, and that those were loans 

that shouldn’t have been purchased. 

There is going to be a lot written about what it is that caused 

the financial meltdown— 

Mr. LANCE. I know I wouldn’t say the GSEs did it alone. I don’t 

want to be interpreted as meaning that they alone were responsible. I think that’s clearly inaccurate. I would say they, with others, but certainly not alone. 

Ms. CROWLEY. I would say that there is—we had a culture, a 

message that was permeated throughout our country, that homeownership was the preferred form of housing tenure. Homeownership was idealized to the extent that if you weren’t a homeowner, 

there was something wrong with you, and rental housing was demonized and had a very negative connotation. 

And so, you couldn’t turn on the TV without having somebody 

tell you how to become a homeowner, which would make you a better person, and how to do it cheaply, and how to get it—get that 

money very fast. And so I think that message, along with the availability of those kinds of very bad mortgages led us to this situation. 

And I think we all bear responsibility for that. 

Mr. LANCE. Thank you. My own view is that the culture in this 

society is that we have far too much debt. The Federal Government 

is certainly a prime culprit in that regard. And the culture that 

somehow we can all get rich quick is something that, obviously, I 

disagree fundamentally. 

I hope that the new culture of this country will be much more 

responsible, fiscally, across-the-board regarding various entities, including the successors to GSEs, I hope in the private market, and 

certainly, ultimately, getting our fiscal house back in order here at 

the Federal level. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

The CHAIRMAN. The gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. I want to direct my questions to Mr. Judson and Mr. Pollock. Mr. Judson, I welcome him, 

52 

he is from my hometown, so I told him I was going to pick on him 

a little bit. 

The chart that you have on the back of your testimony deals 

with—all the way on the last page of the testimony, there is a 

chart that looks pretty complicated. But it seems to me to deal only 

with conforming, conventional mortgages, nothing—so I assume 

one part of your approach would be to deal only with conforming, 

conventional mortgages in the Federal Government context of any 

kind. 

Mr. JUDSON. That is correct, Congressman. Whatever entity is 

created to replace the GSEs, they would be conforming loans only. 

Mr. WATT. Okay. And so, if one would not qualify for a conforming, conventional mortgage security, the government might set 

up some external entity to help that person qualify, possibly by 

providing downpayment assistance, or getting them ready to go 

into a conventional mortgage loan. Is that correct? 

Mr. JUDSON. That is absolutely correct. That would help solve 

the problem that had occurred. 

Mr. WATT. I took it to be. Now, Mr. Pollock, the approach that 

you advocated for in your answer to Ms. Waters’s testimony would 

involve solely conventional loans also. Isn’t that right? 

Mr. POLLOCK. Congressman, what I was saying is for the market 

of conforming, conventional prime loans, which is, by far, the biggest part of the market— 

Mr. WATT. And you think that can be done only in the private 

sector, without any government involvement? 

Mr. POLLOCK. That is correct, Congressman. 

Mr. WATT. Now, would you need, under your theory, this mortgage insurance fund? I gave you a copy of what Mr. Judson’s organization, the Home Builders, have proposed. Would you even need 

the mortgage insurance fund part of that? Or what would happen 

if somebody defaulted? That would be just the cost of doing business for the lender, or would there be some mortgage insurance 

fund that would take up that slack? 

Mr. POLLOCK. Congressman, this diagram which we have here is 

not too bad, in my view, as one possibility for how private conforming loan financing might work. We wouldn’t need the Federal 

Government guarantee on there, in my opinion, since government 

guarantees always call forth the leverage which causes them to be 

needed. 

Mr. WATT. So you would drop the government, Federal Government, guarantee part of it? 

Mr. POLLOCK. I would drop that Federal Government guarantee. 

Whether or not you needed a fund would be a matter of design of 

the system. You can certainly design private systems that have 

back-up insurance funds. That is a— 

Mr. WATT. But without the government guarantee, it might increase the premium in the fund, I take it. 

Mr. POLLOCK. It might. 

Mr. WATT. Okay. Mr. Judson, how do you react to what Mr. Pollock is saying? Do you need a Federal Government guarantee? 

Mr. JUDSON. I think you do need a Federal Government guarantee. 

Mr. WATT. Why? 

53 

Mr. JUDSON. To provide some security to the investor. Now this 

is for the mortgage securities. One of the problems has been in the 

past— 

Mr. WATT. But if this is a private market situation, why do you 

need to provide that security? Why would the government be involved in this, if we are providing our subsidies or input from the 

borrower side, getting them ready for a conforming market, giving 

them—providing them possibly downpayment assistance so that 

they have an equity in whatever they are investing in from the outset, why would you need a Federal Government guarantee? 

Mr. JUDSON. If these are non-conforming or non-qualifying loans 

under normal conditions, whether— 

Mr. WATT. No, these are conventional loans. 

Mr. JUDSON. The— 

Mr. WATT. You said—that was the first question I asked you. 

This is a conventional market. That’s the only way you get us involved, right? 

Mr. JUDSON. That is correct. And it’s only at roughly an 80 percent level. There are three layers of insurance, we will say, between you—between the Federal Government and that investor. 

Mr. WATT. Okay. I yield back. I will ask you questions back in 

Charlotte. 

Mr. JUDSON. Okay. 

The CHAIRMAN. The gentleman from California. 

Mr. ROYCE. Thank you, Mr. Chairman. Mr. Pollock, Mr. Donovan 

and I were discussing earlier the issue of the affordable housing 

policies implemented by the Federal Government, and whether or 

not that contributed to the housing boom and bust. What do you 

think on that issue? 

Mr. POLLOCK. I think it did. I think housing booms are fed by 

credit. The more credit you push at an asset, the higher the price 

of that asset tends to be. As I said in my testimony, Congressman, 

there tends to be, in a boom, let alone a bubble, a positive disequilibrium feedback loop between those two factors. 

And, as Congressman Hensarling suggested a minute ago, one of 

the problems when we try to make housing more affordable by increasing credit is we tend to push up the price of the housing. We 

need to consider both of those factors. 

Mr. ROYCE. We are talking about the future of mortgage financing. But it appears that we may not have learned these lessons 

about the clear distortions in the market that can be caused by 

intervention by the Federal Government. That’s part of the concern 

I have. 

Getting every American into a home was the goal. The GSEs 

were the primary vehicle for that. But unfortunately, today our 

economy is dealing with the consequences of that misguided decision, along with other misguided decisions which helped get us into 

this predicament. 

But, Mr. Pollock, why did a private secondary market for prime 

mortgages never develop? 

Mr. POLLOCK. Congressman, I think the answer to that is it 

never developed because it was crowded out by the government-advantaged market of Fannie Mae and Freddie Mac. No private marVerDate Nov 24 2008 16:10 Sep 20, 2010 Jkt 057739 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 K:\DOCS\57739.TXT TERRIE
54 

ket could compete with the various and very large advantages that 

the two GSEs had. 

Mr. ROYCE. So, we ended up with a duopoly and a certain 

amount of moral hazard that economists argue always comes when 

a Government-Sponsored Enterprise is presumed to have the government behind it. 

Let me ask Mr. Randazzo a question. Many have noted that the 

mortgage finance market has been unusually susceptible to boom 

and bust cycles. And let me ask you, what do you believe is the 

major contributor to this phenomenon? 

Mr. RANDAZZO. In the most recent boom, I think, as Mr. Pollock 

pointed out, credit drives a bubble, and we had both the GSEs and 

various other policies of the Federal Government, including the 

CRA, that fed into that—that helped feed credit into that bubble. 

And when you have a distortion of the amount of credit that’s 

available, you drive down mortgage prices. When you drive down 

mortgage prices, it is easier for more people to get mortgages. That 

drives up the prices of homes, in general, and you create a boom. 

Without the GSEs or any government price distorting aspect, you 

are going to have less of a boom and bust cycle. If there is any 

boom and bust cycle, it would be a minimum. 

Mr. ROYCE. And so, what would be a couple of your suggestions 

for ending the tendency towards these pronounced boom and busts, 

anyway, that have plagued the market? Why don’t you give us 

some of your suggestions on that front? 

Mr. RANDAZZO. Well, in terms of winding down the GSEs in— 

over the next few years, I think that the first thing that you need 

to do is to begin to lower the conforming loan standards of the 

GSEs. This will begin to allow the private sector to step into—step 

in behind that, as the conforming loan standards drop, and there 

is more open space in the secondary market. 

And then you can begin to, over time—as the secondary market 

is taken over by the private sector, you can, over time, wind down 

the GSEs’ portfolios and their MBS pools. 

Mr. ROYCE. And do you think, also, the Federal Government setting the interest rate at below inflation also— 

Mr. RANDAZZO. Yes, and I think that’s absolutely a critical part. 

What this committee can do to encourage the Federal Reserve to 

begin to increase interest rates is very important, because as long 

as the interest rate is set at an artificially low level, you will have 

a distorted supply of credit. 

And, in particular, I think as long as the interest rate is as low 

as it is, there is no incentive for the private sector to be lending 

money in the mortgage markets, because they can use other means 

to sort of ride out this unstable period of uncertainty, without having to use mortgage—use profit from mortgages to generate profit. 

Mr. ROYCE. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. And I want to thank the 

Independent Community Bankers. Mr. Hopkins, you represent 

them. I want to thank them for the role that they did not play in 

the crisis. 

I would like to drill down just a moment on this question of how 

the GSEs played a role in the crisis, because the products somehow 

55 

are being equated to the institutions. It was subprime loans wherein buyers were qualified for teaser rates, but not qualified for adjusted rates that created a problem in the subprime market. 

Does everybody agree that was a problem, that buyers who qualified for teaser rates did not qualify for adjusted rates, and then 

these loans were passed on to someone or some other entity, the 

originator of the loan passed on all of the liability to some other 

entity, maybe GSE, but passed it on? 

And so, it was the product that created a real problem, in terms 

of the subprime market. And I would like to debate that, but I 

don’t have the time, Mr.—is it ‘‘Randazzo?’’ Am I pronouncing your 

name— 

Mr. RANDAZZO. ‘‘Randazzo.’’ 

Mr. GREEN. ‘‘Randazzo,’’ all right. I don’t have the time to debate 

that with you, but I would like to debate at some point the question of the products versus the institutions, because the products 

were all products that were—came into being because of changes 

in the laws. The Alternative Mortgage Transaction Act, 1982 I believe it was, changed that—made it possible for us to have a lot of 

these exotics. So, it was products. 

But now, let’s come to something that I did want to talk to a couple of you about, and do want to talk about in the—I hate to follow 

the same paradigm as Mr. Watt, but the truth is he and I had the 

same thoughts, so I have to pursue it the same way. 

Mr. Reed—not you, Mr. Judson, but Mr. Reed now—on page 

seven of your testimony, you indicate that the Federal Government 

would not back the MSICs. But it would back the secured transactions, the securities themselves. Is this correct? 

Mr. REED. Yes, sir, that’s correct. 

Mr. GREEN. Okay. So now you have the government as a backstop. Mr. Judson, you have the government as a backstop, as well. 

And, Mr. Pollock, it’s your opinion that is not a good idea. Is this 

correct? 

Mr. POLLOCK. That’s correct, Congressman. 

Mr. GREEN. And you would simply allow the market to function 

without the benefit of a government backstop with any sort of entity, whether you call it GSEs or you call it MSICs. In your world, 

it’s the same, eventually. 

Mr. POLLOCK. For the prime conforming market, yes, Congressman, that’s right. 

Mr. GREEN. Okay. Now, let’s just see how many folks agree with 

this. Because at some point—I don’t mean to put you on the spot, 

sir, but we need to get some sense of where we are here. 

If you are of the opinion that there should be no government 

backstop at all, kindly extend a hand into the air, so that—or let 

me just start. Mr. Reed, yes or no? No government backstop at all? 

Mr. REED. No. No, sir. We believe there should be a government 

backstop. 

Mr. GREEN. Should be. Okay, Ms. Crowley? 

Ms. CROWLEY. Yes, there should be a government— 

Mr. GREEN. Should be. We know where you are, Mr. Pollock. Mr. 

Hopkins? 

Mr. HOPKINS. Yes, there should be a government backstop. 

Mr. GREEN. All right. Mr. Gleason? 

56 

Mr. GLEASON. Should be. 

Mr. RANDAZZO. There should not be. 

Mr. GREEN. Should not be? 

Mr. JUDSON. Yes. 

Mr. GREEN. Yes. 

Mr. JUDSON. Should. 

Mr. GREEN. Okay. I—the public is always interested in knowing 

the source of all of these things. Do you find that most people, Mr. 

Reed, that you work with in the industry—in the industry—are of 

the opinion that there should be some sort of backstop? 

Mr. REED. Thank you, Congressman. The committee that I am 

co-chairing represents about 18 of the top lenders in the country, 

and mortgage insurance companies, and others involved in the 

lending industry. And I think there is an almost unanimous opinion that, again, if what we are trying to achieve here is consistent 

access to reasonably-priced home finance, that a government guarantee is— 

Mr. GREEN. Mr. Hopkins, quickly. Are you with the bankers, or 

do you find that most people in the industry, who have a handson experience, what are their thoughts? 

Mr. HOPKINS. Well, I think they believe there should be some 

sort of a government backstop on it. We are dealing with Fannie 

Mae and Freddie Mac. We have done it for many, many years. And 

we have very low foreclosures. On 3,000 loans last year, we only 

had 4 foreclosures for Fannie Mae and Freddie Mac. So it can be 

done right. You have to use appropriate underwriting. 

Mr. GREEN. Yes, sir? 

Mr. REED. Congressman, just to emphasize again, what we advocate, again, is not a guarantee of the corporate entities themselves. 

They should be allowed to fail. 

Mr. GREEN. Yes. 

Mr. REED. They make bad decisions, they ought to be allowed to 

fail. But we do advocate some mechanism to assure MBS investors 

of what they are getting. 

Mr. GREEN. Okay. 

Mr. REED. And— 

Mr. GREEN. Thank you. I will have to yield back now. Thank you 

very much. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman. Just two short questions. Ms. Crowley, as I struggle with the whole issue with the 

GSEs—and you have been around here a great deal—I am wondering if perhaps one of the problems is the mission. The two main 

missions would be to make a profit and to increase the supply of 

affordable housing. Do you see those as conflicting? 

Ms. CROWLEY. Well, I would say that certainly some people see 

that as conflicting. Our view would be that when you are dealing 

with a commodity that is so necessary as housing or health care 

or other things that are basic human needs, that—and you’re relying on the private sector to do the majority of the provision of that 

basic human need, and that there is a profit to be made from that, 

that in fact there should be some corollary social responsibility that 

goes along with that. 

57 

And it would be lovely if everybody who made a profit understood 

they had a social responsibility, but that’s not always the case. And 

so, usually that has to be regulated by the government in some 

way. 

Mr. CLEAVER. Thank you. 

Ms. CROWLEY. Okay. 

Mr. CLEAVER. Mr. Randazzo, my last question. This is more philosophical, but how difficult do you think it would be for Congress 

to eliminate Medicare? 

Mr. RANDAZZO. To eliminate Medicare? 

Mr. CLEAVER. Yes, sir. 

Mr. RANDAZZO. I think it would be difficult, though probably 

needed. 

Mr. CLEAVER. How difficult do you believe it would be to eliminate the GSEs, or some kind of a backstop? 

Mr. RANDAZZO. Difficult, but it would be easier. 

Mr. CLEAVER. Easier than Medicare? 

Mr. RANDAZZO. Easier. I think it’s absolutely doable, if—with the 

principle that the mortgage market is going to change. The secondary mortgage market would not look the same as it is today, 

with the GSEs. 

Mr. CLEAVER. Yes. Of course, you could explain all the things 

that would happen in Medicare, as well. 

Mr. RANDAZZO. Sure. But the— 

Mr. CLEAVER. And— 

Mr. RANDAZZO. The GSEs, it would be unpleasant in the short 

term. It would benefit all homeowners and taxpayers in the long 

term. 

Mr. CLEAVER. So we call a press conference and say, ‘‘Everybody 

here is going to suffer for a while, but just suffer in joy because 

it’s going to change later?’’ 

Mr. RANDAZZO. There are short-term pains that are going to 

come with any significant change in government policy. And the 

GSEs have been well-rooted into American society and— 

Mr. CLEAVER. Yes, that’s the point— 

Mr. RANDAZZO. —the market for a long time. But yes, there will 

be some short-term pains as a process of phasing out the GSEs, as 

we try to figure out how the private sector is going to step in behind them. 

Mr. CLEAVER. All right, thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. If the gentleman would yield to me his remaining time, I would just like to say that while the gentleman from 

Missouri, for rhetorical purposes, talked about eliminating Medicare, I want to reassure all my fellow Medicare recipients, that is 

not something being currently contemplated—heading off some 

phone calls before they come. 

I thank the witnesses and the members. This has been helpful 

in advancing this discussion. And the hearing is over. 

[Whereupon, at 12:50 p.m., the hearing was adjourned.] 

(59) 

A P P E N D I X 

April 14, 2010 

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