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[Senate Hearing 112-408]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 112-408
 
            OVERSIGHT OF THE FEDERAL HOUSING FINANCE AGENCY 

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

     EXAMINING THE OVERSIGHT OF THE FEDERAL HOUSING FINANCE AGENCY

                               __________

                   NOVEMBER 15 AND DECEMBER 13, 2011

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

                 Available at: http: //www.fdsys.gov /

                               ----------
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Washington, DC 20402-0001 

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director
              William D. Duhnke, Republican Staff Director

                       Charles Yi, Chief Counsel
              Erin Barry Fuher, Professional Staff Member
                 Beth Cooper, Professional Staff Member
                 William Fields, Legislative Assistant

                 Andrew Olmem, Republican Chief Counsel
            Dana Wade, Republican Professional Staff Member
            Chad Davis, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk
                     Riker Vermilye, Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor

                                  (ii)

                            C O N T E N T S

                              ----------                              

                       TUESDAY, NOVEMBER 15, 2011

                                                                   Page

Opening statement of Chairman Johnson............................     1
    Prepared statement...........................................    26

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2
    Senator Menendez.............................................     4

                                WITNESS

Edward J. DeMarco, Acting Director, Federal Housing Finance 
  Agency.........................................................     5
    Prepared statement...........................................    26

                              ----------                              

                       TUESDAY, DECEMBER 13, 2011

                                                                   Page

Opening statement of Chairman Johnson............................    39
    Prepared statement...........................................    54

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................    40

                                WITNESS

Steve A. Linick, Inspector General, Federal Housing Finance 
  Agency.........................................................    42
    Prepared statement...........................................    54

                                 (iii)

        OVERSIGHT OF THE FEDERAL HOUSING FINANCE AGENCY--PART I

                              ----------                              

                       TUESDAY, NOVEMBER 15, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order.
    I would like to thank Mr. DeMarco for being here today.
    As I mentioned at our hearing on November 3, we have been 
planning to hold an FHFA oversight hearing and am pleased it 
was able to come together so quickly.
    As Ranking Member Shelby and others have so accurately 
noted during the consideration of the Housing and Economic 
Recovery Act in 2008, one of the most important aspects of the 
bill was the establishment of the Federal Housing Finance 
Agency as an independent regulator. This ensures that it can 
operate without undue political interference and that the 
appropriations process cannot be used to hold the regulator 
hostage. With this independence, the Banking Committee must 
exercise Congressional oversight to ensure that the agency is 
balancing its attention among the entities it regulates and the 
role as conservator of Fannie Mae and Freddie Mac.
    To give the Committee and the public greater confidence in 
the new regulator, HERA also established the FHFA Office of the 
Inspector General to investigate potential concerns and ensure 
transparency of the regulator's operations. I plan to invite 
Inspector General Linick before the Committee at a date to be 
determined. It is only appropriate that we should hear from 
him, as well. The Inspector General's role is even more 
important while FHFA is acting as both conservator and 
regulator.
    It is important for this Committee to understand how FHFA 
evaluates new opportunities and programs at Fannie Mae and 
Freddie Mac during the conservatorship, including the decision 
to allow them to participate in certain Making Home Affordable 
programs and the decision not to participate in or initiate 
other programs.
    The internal operations at FHFA are also important, as 
staffing of the regulator will affect its oversight of the 
GSEs. Oversight of executive compensation structures and 
evaluations of executive performance goals both require the 
regulator's attention. FHFA must have proper management of 
operational risks as well as secure and updated information 
systems and privacy policies. I am concerned about recent 
reports that show problems in each of thee areas and that FHFA 
does not have adequate certified staff to perform examinations 
of the entities under its supervision.
    FHFA is tasked with regulating two of the largest entities 
in the mortgage market, Fannie Mae and Freddie Mac, which 
together backstop about $5 trillion in mortgages and help 
support nearly $11 trillion in the U.S. mortgage market. 
Unfortunately, that market is now supported by $170 billion in 
assistance from the taxpayers. As we have heard from other 
witnesses before this Committee, the mortgage market would be 
even worse off than it is today if they had not been placed 
under conservatorship during the Bush administration. But as we 
have said over and over again, we need to find ways to end the 
need for future support without destabilizing the housing 
market further.
    Finding a path out of conservatorship is a task for both 
the FHFA and the Committee. I would like to thank Senator 
Shelby and his staff for working so closely with me and my 
staff in laying out the hearings the Committee has held so far 
this year. I hope we can continue to work together to do our 
homework and create a sustainable system for the housing market 
going forward that can protect taxpayers and spur economic 
growth.
    An adequately staffed and engaged regulator is a key 
component to a stable housing market. Mr. DeMarco, I look 
forward to hearing about the steps you have taken as Acting 
Director of FHFA since the last time you were before the 
Committee.
    With that, I turn to Senator Shelby for his opening 
statement.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Thank you for 
calling this hearing.
    Today, the Committee will hear from the Federal Housing 
Finance Acting Director Ed DeMarco, as the Chairman has 
indicated. The FHFA is the regulator of Fannie Mae, Freddie 
Mac, and the Federal Home Loan Banks. Since 2008, the FHFA has 
served as the conservator for Fannie and Freddie. It has been 
more than 2 years since this Committee has heard from Director 
DeMarco on the conservatorships of Fannie and Freddie and the 
future of the GSEs. Since then, the taxpayer has lost an 
additional $84.1 billion, bringing the total cost of these 
conservatorships to $169 billion. Worse yet, Fannie and Freddie 
have already stated that they will need another $14 billion for 
last quarter's losses.
    These conservatorships were never intended to last for 3 
years, yet because Congress has failed to address the future of 
GSEs, the conservatorships go on with no end in sight. This has 
cast a cloud of regulatory uncertainty over our mortgage market 
while taxpayers have had to continue to inject money into 
Fannie and Freddie to keep them afloat.
    If at any point during the last 3 years the administration 
and the majority party had done more than talk about the need 
for reform, we might be looking at a very different picture in 
the housing market. If Congress had acted, Fannie and Freddie 
could have been prevented from crowding out the private sector 
by backing 71 percent of mortgage originations. If Congress had 
acted, a comprehensive solution could have been devised to deal 
with foreclosures and struggling homeowners. If Congress had 
acted, taxpayers would not be subsidizing the pay of Fannie and 
Freddie executives. Instead, there has been no action, despite 
the fact that the GSEs were a significant player in the 
financial crisis.
    In calling for this hearing, the Chairman has focused on 
the over $12 million in bonuses paid to senior officers at 
Fannie and Freddie. I hope today that Director DeMarco will 
tell us exactly how these compensation packages were designed 
and which officials were involved and why. The American 
taxpayers should not have to subsidize million dollar 
compensation packages for Fannie and Freddie executives. This 
is just another example of the flawed structure of the GSEs. 
Their public-private structure has always meant that taxpayers 
were effectively subsidizing the pay of their CEOs. This is one 
of the many reasons I have long advocated reforming the GSEs.
    Mr. Chairman, last week here, I asked that a representative 
of the Department of the Treasury be present at today's 
hearing. I am disappointed that Secretary Geithner or his 
representatives were not asked to participate. The U.S. 
Treasury Department played an important role in creating the 
bonus structure in question. The Treasury and the FHFA are both 
parties to the preferred stock purchase agreement, which is the 
contract that governs how the U.S. taxpayer will support Fannie 
Mae and Freddie Mac.
    Section 510 of that contract requires that the Federal 
Housing Finance Agency consult--this is important--consult with 
the Treasury Secretary before allowing Fannie and Freddie to 
enter into any new compensation arrangements. I understand that 
Treasury was actively consulted by the Federal Housing Finance 
Agency on these compensation arrangements and never disapproved 
them.
    Furthermore, while the Treasury Secretary has no authority 
to direct the Federal Housing Finance Agency in matters 
involving conservatorship, the purchase agreement prevents the 
FHFA from taking a variety of actions without, quote, ``the 
prior written consent of the Treasury Department.'' These 
matters include permitting Fannie and Freddie to issue stock, 
transfer assets, and incur certain indebtedness. Given the 
ability to veto and these other actions, the Treasury 
Secretary, I believe, has a lot of authority in matters dealing 
with the conservatorship.
    Finally, the administration has been actively involved with 
the Federal Housing Finance Agency in making changes to the 
Home Affordable Refinance Program. The President stated that 
he, quote, ``directed his economic team to work with the 
Federal Housing Finance Agency'' in the lead-up to the recently 
announced changes and has referred to executive actions he took 
in this matter. These changes to HARP could have a significant 
impact on the financial health of GSEs and could impact housing 
finance reform.
    Accordingly, if the Treasury Secretary were here today, we 
could have had a discussion on the future of Fannie and Freddie 
that included the two officials with the most knowledge and 
responsibility for the GSEs. Apparently, that discussion, Mr. 
Chairman, will have to wait for another day.
    Thank you.
    Chairman Johnson. Thank you, Senator Shelby.
    Are there any other Members who wish to make a brief 
opening statement?

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman. I, just briefly, 
I want to thank you first for holding this hearing. I think it 
is overdue and an important one. There are a lot of issues to 
explore in getting our housing market moving again, so many 
that it is difficult to know where to begin.
    Let me just say, first, that I applaud the FHFA's recent 
initiative to remove barriers to help underwater homeowners 
refinance, and I think that is a step in the right direction. 
The problem is that it is a bright spot in what I believe has 
otherwise been a dismal lack of initiative at the FHFA in 
taking aggressive steps that could get the housing market 
moving again.
    Congressional intent for the conservatorship is to save 
taxpayers money, but it is clear that taxpayers will do much 
better with a housing market that is functioning again and the 
resulting economic boom that will be derived from that, and I 
believe that that can be done without sacrificing taxpayers' 
interests because Fannie and Freddie's financial health is 
directly tied to how quickly the housing market recovers.
    So I look forward to discussing the many ways in which we 
can do that, including principal reduction, converting vacant 
and foreclosed properties to rental in certain areas, and 
better outreach to borrowers, among others, as a way in which 
we both get this housing market moving and improve the status 
of taxpayers that right now are the focus of the 
conservatorship's efforts, but in my mind, we are just not 
doing what is necessary to enhance their position at the end of 
the day.
    Thank you, Mr. Chairman.
    Chairman Johnson. I thank the Ranking Member for his 
comments, but would note that this hearing is an oversight 
hearing of the Federal Housing Finance Agency. As the Ranking 
Member has stressed during the consideration of the Housing and 
Economic Recovery Act which created the FHFA, it is an 
independent regulator. Recognizing that independent role, I 
invited the Acting Director, Mr. Ed DeMarco, to testify before 
the Committee regarding the responsibilities of FHFA.
    As my staff discussed with your staff 2 weeks ago, the 
minority is permitted to invite a witness. As has been the 
traditional practice of the Committee, your staff invites that 
witness and my staff sends a confirmation letter with 
procedural details. Nothing has prevented you from doing that. 
Alternatively, a representative from the Treasury Department 
will be before the Committee next month and Members can ask 
questions regarding the consultative role at that point.
    Are there any other questions?
    Thank you all. I want to remind my colleagues that the 
record will be open for the next 7 days for opening statements 
and for any other materials you would like to submit.
    Now, I would like to briefly introduce our witness here 
today. Mr. Ed DeMarco is the Acting Director of the Federal 
Housing Finance Agency and is no stranger to this Committee. 
Mr. DeMarco has served as Acting Director since 2009, having 
previously served as Deputy Director and Chief Operating 
Officer at OFHEO, the former regulator of both Fannie Mae and 
Freddie Mac.
    We welcome you here today, Mr. DeMarco, and thank you for 
your time. Mr. DeMarco, you may proceed with your testimony.

   STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL 
                     HOUSING FINANCE AGENCY

    Mr. DeMarco. Thank you, Chairman Johnson. Good morning, 
everyone. Chairman Johnson, Ranking Member Shelby, Members of 
the Committee, I am pleased to be here today.
    My written statement provides updates on a range of topics 
regarding FHFA's oversight of Fannie Mae and Freddie Mac, or 
the Enterprises, as I will refer to them, and the Federal Home 
Loan Banks. I would be pleased to discuss any of those issues 
with you.
    In the few minutes I have, I would like to focus on two 
matters. First, Fannie Mae and Freddie Mac have been in 
conservatorship for more than 3 years. The draws from the 
Treasury now exceed $180 billion, reflecting losses from 
mortgages originated during the years leading up to 
conservatorship. Minimizing those losses as much as possible 
while maximizing assistance to homeowners is a key focus of 
FHFA and the Enterprises. Since conservatorship, the 
Enterprises have completed more than 1.9 million foreclosure 
prevention actions, including nearly one million permanent loan 
modifications.
    While in conservatorship, we are also seeking to ensure the 
country continues to have a reliable supply of mortgage 
finance. The Enterprises have guaranteed roughly three out of 
four conforming mortgages since conservatorship.
    While we await Congressional action in the future of 
housing finance, FHFA has initiated several projects to prepare 
for that future system. These are detailed in my statement and 
include standards for mortgage servicing, reconsideration of 
mortgage servicing compensation, and establishing loan level 
disclosures for mortgage-backed securities.
    Second, I recognize that there is a great deal of concern 
today with executive compensation at the Enterprises. My 
written statement details the background and history 
surrounding the compensation program and my views about it. I 
would like to make just three observations here.
    First, the executives most responsible for the poor 
business decisions that led the Enterprises into 
conservatorship and that led to these taxpayer losses are long 
gone from the companies.
    Second, the best way to address concerns with executive 
compensation is action by Congress to restructure the nation's 
housing finance system and dissolve the conservatorships. 
Conservatorship is not designed to be a multiyear holding 
state.
    Third, as conservator, I need to ensure that the 
Enterprises have people with the skills needed to manage $5 
trillion worth of mortgage assets and $1 trillion of annual new 
business that the American taxpayer is supporting. Others may 
believe that this sort of talent is easily and quickly hired at 
compensation far below that of competing private firms, but I 
do not. Bottom line: This is a question of judgment, judgment 
exercised by balancing the need to limit compensation as much 
as possible while ensuring stable, continuous operations at the 
Enterprises in support of the country's housing finance system.
    It has been FHFA's judgment that taxpayers who are 
providing financial support to the Enterprises and their 
guarantees on $5 trillion of mortgages would not be better off 
if we provoke a rapid turnover of senior management by further 
slashing compensation. Indeed, such pay cuts would increase the 
risk of higher losses in the future. Executive compensation was 
already reduced by 40 percent on average when the compensation 
program was put into place.
    I would also note that continued employment at an 
Enterprise risks substantial career uncertainty. By working at 
Fannie Mae or Freddie Mac, your work comes under a much higher 
degree of scrutiny and criticism than exists at other private 
firms. Executives who have spent a career developing their 
reputations risk tarnish to their reputations under the highly 
charged environment in which these companies operate today. 
This is regardless of how well they perform their duties or how 
great a financial sacrifice they may have made by forsaking 
other private sector opportunities in order to assist the 
country's housing finance system.
    There has been intense criticism launched at corporate 
executives not even employed by the companies when the bad 
loans leading to the majority of today's losses were booked, 
people who arrived after conservatorship to try and make things 
better. I am trying to encourage these people to stay and 
continue to mitigate losses and keep the current infrastructure 
of the country's housing finance system operating.
    To repeat myself on one point, the only way to finally 
resolve this question is for Congress to act to end the 
conservatorships and chart a new course for the country's 
housing finance system, and Mr. Chairman, I certainly heard you 
in your opening remarks and FHFA stands ready to work with you 
and all the Members of this Committee on that very important 
effort.
    So with that, Mr. Chairman, thank you again for this 
opportunity to be here today. I do look forward to responding 
to the Committee's questions.
    Chairman Johnson. Thank you for your testimony.
    As we begin questions, I will ask the Clerk to put 5 
minutes on the clock for each Member.
    Mr. DeMarco, in August of 2009, you probably never imagined 
you would still be the Acting Director 2 years later.
    Mr. DeMarco. That is correct.
    Chairman Johnson. Has the lack of a confirmed Director 
created additional challenges for FHFA? Are there oversight 
responsibilities that cannot be executed without a confirmed 
Director?
    Mr. DeMarco. That is a fair question, Mr. Chairman, and you 
are right in your opening remarks. I did not anticipate being 
Acting Director for more than 2 years. But I did not know when 
I took it over how long I would be Acting Director, so from the 
first day on, I have tried to lead the agency and conduct the 
agency's activities without paying much mind to what the 
ultimate tenure of me in this position would be.
    So I do not think that it has altered or affected things 
that we have done. I do think that it certainly has created 
another hole in the agency, which meant I stepped up into an 
acting role. I had to ask others to likewise step up. So it 
created a domino effect where we did have fewer people at the 
top leading the agency. I was a little slow to start filling 
that under the belief that I would not be acting for very long, 
but I have since changed direction on that and have created 
some additional senior positions in order to fill out these 
responsibilities more completely and permanently with other 
senior executives at the agency.
    Chairman Johnson. With several executive level vacancies to 
fill at the Enterprises, how involved will FHFA be in the 
hiring process? Will its involvement include negotiating 
compensation?
    Mr. DeMarco. So certainly for any of the senior officers, 
any of the named executive officers at Fannie and Freddie that 
need to be hired, we do delegate, at least below the CEO level, 
to the management to initiate the recruitment process. But in 
terms of the interview process, the selection, and then 
ultimately the compensation for a selected individual, that is 
all subject to the review and approval of FHFA. So both the 
selection and then ultimately the compensation, and with the 
compensation, as has been noted, we do then, after we are 
comfortable with a compensation package, we consult with the 
Treasury Department on it before it is finalized.
    Chairman Johnson. The Preferred Stock Purchase Agreement 
provides a consultative role for the Treasury Department 
regarding executive compensation. Does the PSPA limit FHFA's 
authority to approve or deny a compensation package? In other 
words, are you forced to accept the suggestions from the TARP 
Special Master?
    Mr. DeMarco. We are not forced to, Mr. Chairman. It is a 
consultative role and that is how it has been carried out. I 
would say that, particularly back in 2009 when the compensation 
structure was being developed, I believe FHFA benefited from 
the consultations with Mr. Feinberg, who at the time was the 
Special Pay Master, and it enhanced what we were doing in fine-
tuning that. But the ultimate decisions here remain the 
responsibility of FHFA.
    Chairman Johnson. You have stated that competitive 
executive compensation is necessary to attract qualified 
executives. Do you have evidence that higher compensation 
yields better results in recruiting and retaining qualified 
executives?
    Mr. DeMarco. Well, I certainly think we have an entire 
competitive marketplace in the financial industry that suggests 
that compensation is an important factor in attracting and 
retaining high-quality talent. I would also say that in our 
time as conservator, we have had quite a number of senior 
executives depart both companies and it has not always been 
easy to fill these positions with people from the outside, and 
compensation and the uncertain future of the companies are both 
often cited as key reasons why potential--why candidates for 
these positions end up backing out or not wanting to continue 
the process further or ultimately turn us down when an offer is 
made.
    Chairman Johnson. On the issue of conservatorship, FHFA did 
not permit the Enterprises to participate in the FHFA Short 
Refinance Program. Can you describe how you came to that 
conclusion and how the evaluation of the program differed from 
the recent decision to expand the HARP program?
    Mr. DeMarco. Certainly, Mr. Chairman. It was the judgment 
of the FHFA that the Short Refi Program, and, frankly, the 
principal reduction alternative in the HAMP program, did not 
meet our mandate as conservator to minimize losses on these 
mortgages.
    With regard to the HARP program, we reached a different 
conclusion and believe that the HARP program, which, in fact, 
has been in place since early 2009, which we have made several 
adjustments to since that time, including some larger 
adjustments last month, we believe that that program is 
consistent with our conservatorship responsibility and our 
other statutory responsibilities to support the housing market 
and maximize assistance to homeowners.
    But with regard to the program you mentioned, that would 
impose certain losses on the Enterprises without an opportunity 
to recoup that.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you.
    Mr. DeMarco, the Housing and Economic Recovery Act of 2008 
requires you to, and I will quote, ``preserve and conserve the 
assets and property of Fannie and Freddie,'' is that right?
    Mr. DeMarco. That is correct, Senator.
    Senator Shelby. Explain how you determined that the bonus 
structures of Fannie and Freddie fulfilled this requirement. 
You have already alluded to this.
    Mr. DeMarco. Right. It essentially boiled down to this, 
that we were overseeing two companies with $5 trillion worth of 
mortgages----
    Senator Shelby. Five trillion dollars.
    Mr. DeMarco. Five trillion dollars--that these are large 
companies, 10,000, 12,000 employees or more, with complex 
operations, operating in global financial markets with 
challenging hedging operations and credit and interest rate 
risk management responsibilities.
    These are specialized skills, and with the American 
taxpayer backing this $5 trillion worth of mortgage guarantees, 
it was our judgment that we needed to ensure we had highly 
competent people coming in to operate the companies to ensure 
that these losses were mitigated, that the companies run well. 
Otherwise, we risked far greater losses to the American 
taxpayers.
    Senator Shelby. And how do you get these people? I mean, 
they are in the marketplace, are they not?
    Mr. DeMarco. They are, Senator, and so we are recruiting 
people away from other major financial institutions to fill 
these positions.
    Senator Shelby. In your bonus structure, did you have 
incentives for these executives to do things, or how do you 
structure them?
    Mr. DeMarco. We----
    Senator Shelby. I know it is probably very complex.
    Mr. DeMarco. Well, it is a little complex, Senator. We 
modeled it after the compensation structure that was developed 
for the exceptionally assisted TARP firms, although I will say 
it largely reflects what we put in place in the first days 
after conservatorship. It has three basic components to it. It 
has a base salary that is paid over the course of the year, a 
deferred base salary that is paid out over the following year. 
Half of that has incentive components to it.
    Senator Shelby. Is that how you keep people----
    Mr. DeMarco. It is, very much----
    Senator Shelby. ----otherwise they would----
    Mr. DeMarco. The deferred salary, Senator Shelby, is a very 
key component in the retention aspects of this compensation 
structure. So executives that leave during the course of the 
year are leaving a considerable amount of their compensation 
for that year on the table.
    And then, finally, the last one-third of target 
compensation for executives is what we call a target incentive 
opportunity and it is based on the corporate performance.
    Senator Shelby. The Preferred Stock Purchase Agreement--I 
alluded to that earlier--established the rules by which the 
taxpayer funds the bailout of Fannie and Freddie. That contract 
requires you to consult with the Secretary of the Treasury on 
any new executive compensation arrangement, does it not?
    Mr. DeMarco. It does.
    Senator Shelby. Did you consult with the Treasury 
Department while you were establishing the current compensation 
arrangement?
    Mr. DeMarco. Yes, Senator.
    Senator Shelby. Did that consultation result in Treasury 
being aware of the compensation arrangement prior to their 
ultimate adoption?
    Mr. DeMarco. It did.
    Senator Shelby. Did Secretary Geithner or any of his 
representatives at Treasury express disapproval of the final 
structure of the executive compensation arrangement that you 
had proposed?
    Mr. DeMarco. No, Senator.
    Senator Shelby. How does the compensation arrangement of 
Fannie and Freddie compare with that of AIG and other TARP 
recipients? Did you base it on that, or what?
    Mr. DeMarco. Yes, Senator. The structures are comparable. 
The key difference is AIG and the other exceptional assistance 
TARP firms remained private firms with trading stock and they 
were not in a conservatorship or receivership. So the deferred 
base salary component of our compensation in the TARP world, 
that was done in the form of stock, but it made no sense to use 
equity grants to Fannie Mae and Freddie Mac employees and so we 
replaced that with cash, deferred cash.
    Senator Shelby. I am going to get into another area while I 
have got a minute. Recently, Director DeMarco, the Senate 
approved language to raise the conforming loan limits for FHA, 
Fannie Mae, and Freddie Mac. What message did that send to the 
Enterprises by voting to raise these loan limits?
    Mr. DeMarco. Well, the Enterprises certainly know from me 
that we are working to gradually step back their imprint on the 
mortgage market and to try to, over time, reduce the taxpayers' 
exposure to the mortgage market. And the fact that the 
reduction in the conforming loan limit was something that 
everybody saw coming, was prepared for both by Fannie and 
Freddie and by the marketplace, it sends a different signal to 
now be stepping back in after we had started to step away.
    Senator Shelby. It is my understanding, although it has not 
yet passed Congress, that the Conference Report for the 
appropriations bill is probably going to contain or will 
contain a compromise on conforming loan limits that would raise 
the loan limit made for FHA but not for Fannie and Freddie. 
That is kind of a strange deal there. If that happened, what 
would be the result of that?
    Mr. DeMarco. Well, it certainly could lead in certain 
markets to some confusion about what loan limits we are 
applying to what loans a borrower might make. So I think that 
it certainly could contribute to some confusion and another 
sense of in which direction are we moving with regard to the 
Government's role in the mortgage market.
    Senator Shelby. Thank you. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Tester.
    Senator Tester. Well, thank you, Mr. Chairman, for holding 
this hearing, and thank you, Mr. DeMarco, for being here today. 
And I appreciate your offer to meet last week. Unfortunately, I 
was on a jet plane flying back to Montana and then I did not 
get back until late last night, but I appreciate the contact.
    This hearing is important as we deal with executive 
compensation for Fannie Mae and Freddie Mac consistent with 
protecting taxpayers, yet keeping these institutions running. 
As you have said yourself, Mr. DeMarco, the Enterprises operate 
today only with the support of taxpayers. It is obvious. And 
yet the compensation packages and the description of 
performance-based that these executives--I think has failed to 
recognize that point.
    Now, you have suggested that the salaries for executives 
should be benchmarked against private firms in the banking and 
mortgage sector. Freddie Mac's corporate filings list companies 
like Wells Fargo and U.S. Bank for comparison. There is a big 
difference, and the big difference is that these companies are 
profitable and they are solvent and they do not rely on 
taxpayer funds to keep their lights on.
    We are talking about the CEOs of Fannie and Freddie 
receiving $12.2 and $7.5 million in compensation in 2009 and 
2010, respectively, to run a large but insolvent housing GSE. 
The taxpayers is what we need to keep in mind. Even the 
executives of many of the TARP banks and CEOs of Detroit 
automakers in hearings held by this Committee that got bailed 
out, decided to forgo their salaries. Quite frankly, they had 
to be shamed into it in some cases, but they did it.
    Did it ever cross your mind when dealing with these 
compensation packages to say, hey, this is a tough year. The 
housing market is in a bad place. The taxpayers are on the hook 
for the Government Enterprises. Let us revisit this and use of 
common sense on the executives' pay for this year.
    Mr. DeMarco. In fact, that judgment was applied in 2008 in 
the year in which the Government placed these two companies 
into conservatorship. All bonuses, awards, incentives, and so 
forth were dispensed with in 2008. At the same time, there was 
a great deal of turnover in the executive leadership at both 
Fannie and Freddie, including bringing in new executives from 
outside the firms that were not involved in making the loans 
here but were being asked to come in and manage highly complex 
financial institutions.
    Where to set this dial on CEO compensation, what I can say 
about that is that from my predecessor, this was a challenging 
determination, and the CEO compensation, as large as it is--and 
I will readily admit, Senator, it is large, it is--the last 
time Fannie and Freddie's CEOs saw that level of compensation 
prior to conservatorship was 1999, which is an indication of 
two things, an indication that the executives that have been 
leading Fannie and Freddie during the years running up to 
conservatorship were being paid an extraordinary amount of 
money. It also is indicative that our major financial 
institutions, in competing for talent to run these companies, 
they all pay a considerable amount of money.
    Senator Tester. I understand that. I understand what you 
are saying. The problem is, at this point in time, where we are 
at, heck, there are even ``Occupy Wall Street'' demonstrations 
as you were developing these--would it not have been more 
prudent on your part--and I am not in your shoes but I am in 
mine and I deal with folks when I go home every week that want 
to know about executive compensation with taxpayer dollars--
would it not have been more prudent just to say, let us take a 
step back. This is a special time, we are dealing with the 
worst economic problems since the Great Depression, we are not 
out of it yet, to say, let us dial them back.
    Now, let me give you an example. You guys oversee the Home 
Loan Bank of New York, for example, that you folks oversee. The 
executive compensation is $4.9 billion--$4.9 million, I will 
make that clear--$4.9 million--it is a much smaller entity, but 
it is profitable. Would it not have been--I mean, there is 
plenty of room there for reasonableness, unless you think you 
were just going to lose your executive staff if that happened.
    Mr. DeMarco. Basically, that last point, Senator, is the 
biggest concern that has driven where these compensation levels 
have settled out. I do not believe that the Federal Home Loan 
Banks generally are the appropriate market comparables for 
Fannie and Freddie. They are much simpler and much smaller 
institutions. They employ far fewer people. But I certainly 
take the point, Senator, and I agree with it.
    The one thing I can say, I do not know if it will help you 
or not, but we set these--there were judgments made in 2009 to 
set both the compensation structure and the level. Since that 
time, I have, with each opening of an executive position, and 
we have had plenty of those, worked to step down the 
compensation. So just like we are trying to gradually withdraw 
Fannie and Freddie's footprint in the market, just like we are 
trying to gradually shrink their retained portfolio, we are 
trying now to go from where we set it in 2009 to gradually pull 
compensation back further.
    Senator Tester. OK. Just as a sidebar, and I have run out 
of time, but just as a sidebar, I will just say this. Twelve-
point-two million dollars is pile of money. I mean, it is a 
pile of money. And when we are dealing with folks in the State 
of Montana or in the State of Tennessee or in the State of 
Colorado that are having a hard time paying their electric 
bills or paying for their prescription drugs or making their 
books balance at the end of the month and they see these kind 
of compensations come down utilizing taxpayer dollars, there is 
a reason people are protesting on the streets.
    Mr. DeMarco. Yes. I understand that, Senator. I think the 
point that you are making, the concern that Americans have 
about this, is something that I well understand and I 
appreciate them. We will continue to focus on this issue and 
see what we can do to further address the concerns you are 
raising, Senator.
    Senator Tester. Thank you for being here. I only say this 
because there are folks in this body that want to see Fannie 
Mae and Freddie Mac done away with so that there is no backstop 
on the housing. This does not help. This does not help.
    Thank you very much, Mr. Chairman.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman.
    Mr. DeMarco, thank you for being here and for the work you 
are doing. I find these hearings a lot of times semi-humorous 
in that we have really given you no clarity whatsoever as to 
the future of these organizations, or if we have, could you 
share that with me.
    Mr. DeMarco. Not a whole lot of clarity, Senator.
    Senator Corker. Let me ask you, are there concerns about--
is there a danger with having a permanent conservatorship as we 
now have?
    Mr. DeMarco. I do, and I think that Senator Tester's 
questioning starts to get at some of those various concerns. I 
mean, before conservatorship, Fannie Mae and Freddie Mac were 
these odd institutions. They were not Government agencies, but 
they were not fully public, right? I am sorry, they were not 
really private firms, and they often sort of operated in this 
sort of gray area in between. Being in conservatorship is 
actually continuing that weird place between being a Government 
agency and being a truly private firm. We have got the 
taxpayers even more explicitly on the hook here.
    But as conservator, when you are overseeing a company, you 
are trying to make long-term decisions about the direction of a 
company, both the investment in human capital, the investment 
in business processes and platforms, and it is very difficult 
to try to decide how to make those judgments while we are in 
this holding state of conservatorship.
    Senator Corker. So, in essence, we have a conservatorship 
that has been set up and Congress has not done its job as it 
relates to telling you what you would like these organizations 
to be. I would expect that the CEOs and others who run these 
companies have no idea whether Fannie and Freddie will exist as 
they are forever or whether they are going to be out of 
business. Is that the case?
    Mr. DeMarco. That is the case. It is difficult for the CEOs 
and the boards.
    Senator Corker. To that end, I have offered a piece of 
legislation to deal with these two organizations and I have 
offered it in a way to actually try to solve the problem and 
hope to bring some bipartisan support toward that end and to 
really backfill. In other words, as Fannie and Freddie decline 
in the amount of percentage that they have of mortgage 
originations in the country and guarantees, that we backfill 
that with the private sector.
    Let me ask you, what have you seen as we have these 
declining amounts, from 729 to 625, what actually took place in 
the private sector to backfill those?
    Mr. DeMarco. Well, it is a little early to tell, Senator, 
since the loan limit just went down a couple of months ago, but 
I have not been presented with any information or evidence 
suggesting that there has been a sudden disruption in the local 
markets where that happened. I am sure that there has been a 
change in pricing for mortgages that are in that affected band. 
But, frankly, Fannie and Freddie didn't purchase a whole lot of 
mortgages above the 625 limit when they had the capacity to. It 
is still a fairly small market.
    Senator Corker. What would be a reasonable amount of time 
to wind down the efforts of Fannie and Freddie? And I think 
there has actually been consensus that that needs to occur, and 
people have talked about replacement mechanisms and all that. 
But what would be a reasonable timeframe to wind down the 
actual operations? I know the mortgages will run on for some 
time, but what would you view to be a reasonable time?
    Mr. DeMarco. It would--I would have to qualify this in one 
way. It sort of depends on how much legal certainty is in place 
or what private capital engagement in the mortgage market would 
look like as Fannie and Freddie are stepping back. But I would 
think that over the course of a few years, we should be able to 
start making meaningful progress to seeing the Enterprises' 
imprint on the marketplace be able to recede without causing 
major disruption in the marketplace.
    Senator Corker. And so do you think if we had a wind-down 
of, say, a 10-year period, would that be something reasonable 
to look at?
    Mr. DeMarco. That would certainly seem plenty gradual to 
me, Senator.
    Senator Corker. So, again, I thank you for what you are 
doing, and we, in order to try to fill the vacuum, have offered 
a piece of legislation that, again, we are getting input from 
both sides of the aisle right now, trying to make it better. We 
will probably reintroduce it again. But in order to place a 
marker and to move us ahead, we have looked at limiting the 
amount that the Federal Government guarantees on the mortgages, 
not by the loan limit but by saying 90 percent of the mortgage 
itself will be guaranteed, 80 percent. That way, you have some 
market signals. You can tell the difference in pricing between 
what the Government is guaranteeing and what it is not. We can 
get a good indication of how the private sector is responding. 
Does that seem like a reasonable approach to look at how we 
might unwind Fannie and Freddie?
    Mr. DeMarco. It certainly is a reasonable approach, 
Senator. In fact, it is one that is not dissimilar from one I 
mentioned in a speech a couple of months ago, where I said that 
I was looking to gradually increase the Enterprises' risk 
sharing with the private sector so that some of the mortgage 
credit risk that Fannie and Freddie are taking on board today 
with the taxpayers backing, if we cannot find some way of 
gradually putting some of that on private capital. So I believe 
your approach is well consistent with that thought process.
    Senator Corker. Well, we certainly welcome your input and I 
thank the Chairman for having this hearing. I encourage Members 
on both sides to look at how we might do that.
    I will say that unless Congress comes forward and gives you 
concrete direction, we are going to end up in a permanent 
conservatorship, and Mr. Chairman, it seems to me that Mr. 
DeMarco ought to be interviewing us instead of us interviewing 
him because the fact is, we have taken no action. There has 
been a lot of chest beating about Fannie and Freddie, a lot of 
people saying what ought to happen, but candidly, we have done 
nothing. Hopefully, that will change very quickly. And again, I 
thank you for your service.
    Mr. DeMarco. Thank you, Senator.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you, Mr. DeMarco, for your testimony.
    You note in your testimony on page 3, and I think you 
mentioned in your opening comments that you have three goals: 
minimizing taxpayer losses, first; second, providing stability 
and liquidity to the market; and third, maximizing assistance 
to homeowners to avoid foreclosure. In your testimony, you do 
address the revisions of the HARP program on page 7. Those have 
been pretty widely discussed. Largely, the impression I have 
received from just about everyone in the housing world is that 
rather than a sense of urgency and leadership, FHFA has been 
more in the role on those HARP revisions of fighting them and 
finally acceding to them.
    In terms of actually helping homeowners, there is a 
reference in your testimony that says FHFA is proceeding 
prudently but with a sense of urgency to lay the groundwork for 
development of good initial pilot transactions. I must say, we 
are years into this now and here is FHFA testifying--you are 
testifying that you are kind of thinking about some possible 
initial pilots. That does not convey any sense of urgency. And 
indeed, it has been enormously frustrating to FHFA to have 
Fannie and Freddie very resistant to their Short Refinance 
Program. It has been very frustrating to folks throughout the 
rest of the housing world, the administration, that have been 
pushing for the HARP revisions.
    And in terms of the pilots, the hardest hit funds, a good 
share of--a good chunk of the hardest hit funds went to Oregon 
for a pilot in which they have worked with your agency--Oregon 
has worked with your agency to try to acquire mortgages that 
are in severe risk of default, highly underwater, income vastly 
reduced. And after a great deal of effort, 100 tentative 
mortgages were sent out to Oregon and they identified, I think, 
37 of those.
    But it has been--even those 37, well, now there is an 
accounting problem and it took a long time to get the 
accounting problem sorted out. And then there was an issue over 
selling the mortgages versus short-sale strategy and that took 
forever. Then FHFA was insisting on individual appraisals while 
Oregon was pushing for a block approach, and now FHFA says it 
wishes it had done a block approach rather than doing 
individual appraisals.
    In other words, at every point, no sense of urgency, no 
sense of leadership. We are years into this crisis. We are not 
at the beginning of this in 2007. This is 2011 and we are still 
talking about initial pilots and there is still no sense of 
top-level drive saying we have got to find ways to keep 
families in their home.
    The reason this is so troubling is because we have millions 
of foreclosures yet to come. You are at the head of the agency 
that has the biggest potential influence to be powerful, 
creative, in driving a vision of how we can seize this 
opportunity. We have so many working families, that if they 
could buy homes now at these low prices and low interest rates 
would be empowered for the rest of their lives and help absorb 
this overflow of empty homes that has been driving down the 
price of houses.
    So I say all of this to basically encourage you to shift 
gears, to shift out of neutral and into drive, to really help 
lead this conversation about restoring the housing market 
rather than being this highly resistant force that has not 
taken the third piece of the mission seriously.
    Mr. DeMarco. I appreciate your concern, Senator. I will 
just briefly respond with a couple points. First, with regard 
to HARP, you are correct that it has been characterized that 
FHFA was dragged into these HARP changes. I do not agree with 
that characterization. I think FHFA showed a lot of leadership 
in actually pulling together the mortgage industry and the 
mortgage insurance companies to figure out how we could make 
this program that had already been around for 2\1/2\ years work 
more effectively.
    For the benefit of the rest of the Senators, the pilot that 
you are referring to in my written statement has to do with our 
look at how we can otherwise dispose of real estate owned, that 
is foreclosed properties that Fannie Mae and Freddie Mac have. 
We did solicit public comment on this in August and we received 
4,000 comment letters with regard to that. This is not 
something new. We--in fact, Fannie and Freddie have each tried 
some bulk approaches to REO disposition in the marketplace and 
the results were clearly not satisfactory from a conservator 
standpoint, and we decided to take this approach of inviting 
market input into how to do this better so that maybe we could 
have a more robust framework for REO disposition, one that was 
more transparent and competitive. I am sorry this does take a 
little time, but I am--I want you to know, Senator, I am 
committed to this REO program moving forward.
    And with regard to everything else in the housing market, I 
have in past forums addressed some of these concerns about what 
FHFA is or is not doing in its role as conservator. I do think 
hard about the statutory framework in which we operate as 
conservator, the mandate that we have and the funds that were 
provided to FHFA--to Fannie and Freddie through the Treasury 
Department and the purpose for that, and I have contended in 
the past that if there were things that the lawmakers felt were 
in the best interest of the country and the country's housing 
finance system to legislate the use of taxpayer money for these 
things, FHFA would be ready to participate in that. But with 
the authorities that we have today, we made decisions about 
certain programs we just felt that the authority was not there 
for us given our conservatorship responsibilities. It is a 
respectful disagreement that I have with certain people 
regarding that.
    But we are trying to be consistent in our application of 
the law and we certainly recognize the trouble and hardship 
that is out there in the housing market around the country, and 
so I appreciate your concern. We will continue to press ahead, 
Senator, to provide the assistance and support to the market 
that we are charged with doing, and I appreciate your comments.
    Senator Merkley. I will say, even in your response, I do 
not sense that you have come to embrace that third mission 
seriously, and I just--there was a hope, and certainly the 
Treasury Department, the Treasury Secretary had this hope that 
the general market would recover in a way that would make 
serious direct action to support homeowners unnecessary. I 
think we all know that did not happen. I think it is time to 
reframe our conversation again, 4 years into this, and realize 
that, for example, the Short Refi Program that FHA put forward 
would be enormously improved if it had the full encouragement, 
partnership, desire to sit down and say, how can we make this 
happen, as opposed to what feels like that is not our concern 
and not our interest.
    Mr. DeMarco. I will say, Senator, because this FHA Short 
Refi Program is focused on underwater borrowers, I do not think 
it is appreciated enough in sort of public discussions, that 
while Fannie and Freddie certainly are guaranteeing mortgages 
that are underwater. The majority of these American homeowners 
that are underwater, continuing to perform in their mortgage, 
they are honoring their financial obligation, and I think that 
is the best thing to minimize taxpayer losses, is that folks 
that have committed to paying a mortgage, they have seen their 
house price decline. They are continuing to make good on that 
payment, and that is why I think things like the HARP program 
changes we made are actually the more appropriate way for us to 
reach out and provide added support to these folks to be able 
to continue to perform in their mortgage and provide stability 
to the marketplace.
    The one other thing that might be useful with regard to 
your comments, I think that one of the really important things 
FHFA did earlier this year was through our Servicing Alignment 
Initiative with Fannie and Freddie. We established a new set of 
standards for mortgage servicers dealing with a mortgage from 
the moment it first goes delinquent, and what we did here is we 
tried to learn from the mistakes of the last couple of years. 
We tried to simplify the process and to provide very uniform, 
for Fannie and Freddie, uniform guidance to mortgage servicers 
what to do the next day after that mortgage payment has been 
missed, because the experience has been that the best way to 
help a homeowner in a troubled situation is to get hold of that 
homeowner right away when they first start missing their 
payments and work with them in those early days. That maximizes 
the opportunity for success, and we have invested a lot of 
resources this year in terms of Fannie and Freddie working with 
servicers to reorient mortgage servicing to take that approach.
    Chairman Johnson. Senator Kirk.
    Senator Merkley. Thank you.
    Senator Kirk. Thank you, Mr. Chairman.
    Mr. Chairman, I just would like to ask that, again, that we 
do do a Committee hearing on the European debt crisis and 
especially the exposure of U.S. institutions to that. I would 
just note this morning, the market is rendering a fairly 
surprising judgment on U.S. debt. German 30-year bonds are 
selling at 2.48 percent, while U.S. bonds are selling at 3.9 
percent. That means that the U.S. is borrowing at 24 percent 
more cost than the Germans, and I think it shows a fairly 
devastating expectation for the supercommittee and where we are 
going.
    And also with regard to the FHA, I just ask, I know you 
have probably read Morganstern and Rosner's book, right, 
Reckless Endangerment?
    Mr. DeMarco. I have, Senator.
    Senator Kirk. Yes. Robert Reich--I have not read it, but I 
read Robert Reich's summary of it in the New York Times and he 
talks about Fannie and Freddie losing another $13.8 billion of 
taxpayer money, worsening the perception that we are quite bad 
with being able to repay our loans. These institutions--one of 
the colossal failures in U.S. history, $182 billion now that 
taxpayers have squandered on these institutions.
    James A. Johnson pocketed, according to the book, $100 
million for himself, and the GAO said that of the subsidies 
Congress provided starting in the 1990s, that Fannie and 
Freddie pocketed one-third for themselves. That Franklin Raines 
followed this policy, that Lawrence Summers buried a report 
recommending privatization of the institution, that Ken Starr 
intimidated Members of Congress for asking about compensation.
    Now, we have dealt with that issue a lot. I want to touch 
on two things. First, the Wall Street Journal reported that 
since last year, the White House has been pushing DeMarco's 
agency to embrace the biggie of housing bailouts principal 
write-downs in which lenders would be required to outright 
forgive a portion of homeowners' outstanding mortgage debt. The 
White House sees it as a free stimulus, no Congressional 
approval or official spending estimate needed. Fannie and 
Freddie would then swallow additional losses, quietly adding to 
the $141 billion already sunk into the loss of the insurance.
    But DeMarco, a 51-year-old regulator who is a career 
professional, will not play ball. Thank you. He pushed back on 
these housing schemes because he takes his mission as 
conservator seriously while still posting an impressive record, 
it says, of engaging in 1.9 million transactions to actually 
help homeowners out. You pushed back because you have said, and 
you told this Committee earlier that there is no upside to the 
taxpayers in what the White House is trying to push on you.
    And then I note this morning the Wall Street Journal 
reports the Federal Housing Administration's cash reserves have 
fallen so low there is close to a 50 percent chance the agency 
will run out of money and require a taxpayer bailout next year, 
according to an annual independent audit of FHA's finances. The 
audit, to be released Tuesday by FHA, estimated the value of 
the agency's reserves stood at $2.6 billion as of September 30, 
down 45 percent from the $4.7 billion last year.
    So I wonder if you could comment on that, and I commend you 
for being a career professional who took conservatorship 
correctly. We are already now running on close to $200 billion 
in losses from these corrupt institutions, and with the credit 
rating of the United States under attack and markets now saying 
that it is probably safer to lend Germany money in the middle 
of the European--than the United States, I think your 
conservator message is well taken.
    Mr. DeMarco. Thank you, Senator. I appreciate that.
    Senator Kirk. Can you just comment on the fact that this 
independent auditing agency now says there is a 50 percent 
chance that the agency will run out of money, requiring a 
taxpayer bailout next year?
    Mr. DeMarco. Senator, I have seen the same headlines you 
have referenced, but I am afraid I am not familiar with the 
report and I have kind of got my hands full with Fannie and 
Freddie's finances, so I am probably not the best one to speak 
to FHA's current financial condition.
    Senator Kirk. Well, I would just say that I would 
underscore the conservator side of your mission because we have 
already lost enough and it is imperative for the Congress and 
for you to differentiate our exposure from practices that we 
see in Europe. I just noted yesterday, I heard that the average 
Italian retirement age was 58, and so they were basically 
banking 15 years' work for 30 years' pension, and we need to 
differentiate ourselves from policies like that so that we once 
again appear to be a good creditor, and I commend you for your 
leadership on this conservator issue.
    Mr. Chairman, thank you.
    Mr. DeMarco. Thank you, Senator.
    Chairman Johnson. Senator Reed, are you----
    Senator Reed. No.
    Chairman Johnson. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman. Thank you for 
holding this hearing.
    Mr. DeMarco, I wanted to shift gears a little bit while we 
have you here today to ask you a couple of questions about the 
Property Assessed Clean Energy, the PACE Program, which, as you 
know, Colorado actually was a leader in implementing that 
program before the FHFA halted it in 2010, I think, because of 
concerns about second lien status. Are you familiar with what I 
am talking about?
    Mr. DeMarco. I am, Senator.
    Senator Bennet. The puzzle that I have is that there are, I 
think, 37,000 Special Assessment Districts in the United 
States, including many that are similar to PACE Districts. They 
have different purposes, but there are, for example, Septic 
Tank Remediation Districts, Geologic Hazard Abatement 
Districts, and others that are similar in many ways to PACE, 
although what we liked about PACE in Colorado was that we were 
actually seeing substantial retrofits and job creation as a 
result. And just as in these other programs, property owners 
can voluntarily opt into them or out of them. The assessments 
are a similar size and duration to PACE Districts.
    So I wonder--I would like to get to a place, and as you 
know, I have some draft legislation to do it, to a place where 
a program that seemed to make all the sense in the world could 
actually go forward, but that you are reassured that your 
position is what you need it to be, and I wonder in that spirit 
whether you would talk a little bit about where the FHFA is and 
where we might be able to go together to try to get this 
program moving again.
    Mr. DeMarco. Certainly. Thank you, Senator. You know, the 
general goal of PACE programs in Colorado and around the 
country are certainly laudable. They are designed to enhance--
to provide financing for energy retrofits for an aging housing 
stock so that we become more energy efficient as a country and 
can reduce costs to homeowners of energy expense over time.
    The challenge that FHFA saw with regard to the PACE program 
as it was emerging was that it made a material change in the 
credit risk exposure of the first mortgage after that first 
mortgage had been made. Because the way the PACE was structured 
is that this was a sizable advance, but essentially a loan to a 
homeowner to make a home improvement to the house, and normally 
that is done in a second lien position. By using the tax status 
of the local jurisdiction, it was taking this home improvement 
loan and making it something that came in advance of the first 
mortgage.
    And so the first mortgage holder would price the credit 
risk on this transaction at the time the loan was made and was 
suddenly being put in a subordinate position, and this really 
is not like normal tax assessment jurisdictions here because it 
is really designed for the benefit of a particular dwelling. It 
is--oftentimes, these things as normally done are not voluntary 
and they are not nearly the same dollar amount or duration as 
these PACE loans are. We also, when this first emerged, raised 
concerns with a number of the jurisdictions doing it regarding 
consumer protections and disclosures regarding the cost of 
these programs.
    I really do look forward to working with you, because I 
think that the principle of energy retrofits and these sorts of 
home improvements have a lot of positive elements to it, but I 
think that the financing structure for that is better done in a 
traditional way of being subordinate to the first mortgage that 
has already been in place.
    Senator Bennet. Well, I would like to take you up on your 
offer to work on it, because I think there is, both with 
respect to PACE and some other work that Johnny Isakson and I, 
Senator Isakson and I are doing in something called the SAVE 
Act, a huge opportunity here if we can think about how to do 
the financing, because the up-front costs that people have, 
which we then know can be paid back if we do the math properly 
and prudently, among other things, will make us more energy 
efficient but also give the 25 percent of people in the trades 
who are unemployed something to do before this housing market 
actually comes back.
    So I hope that we could look at this with some urgency and 
try to figure out how to get it done.
    Mr. DeMarco. OK. Thank you.
    Senator Bennet. Thank you. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman.
    Mr. DeMarco, the focal point of this hearing is the bonuses 
that have been received by executives at Fannie and Freddie. 
Just to try to, in my own mind, at least, clarify, these 
contracts were approved by FHFA, not by the Department of 
Treasury, is that correct?
    Mr. DeMarco. Both the structure and the amounts were the 
responsibility and approved by FHFA. FHFA has a contractual 
responsibility to consult with the Treasury Department on it to 
get and consider their feedback, but we are ultimately 
responsible for the decision.
    Senator Reed. So that there is no legal ability for the 
Department of Treasury to veto your decision. You simply give 
them--they give you their advice as to what you should do, is 
that----
    Mr. DeMarco. That is--consultation, yes, Senator.
    Senator Reed. Typically, and I do not have to tell you, you 
are quite aware of it and the country is aware, there are so 
many people desperately looking for a job. The idea of these 
huge bonuses just is inconceivable to so many people. But 
typically in a bonus arrangement, there are some performance 
criteria. Can you outline the performance criteria that would 
entitle these individuals to bonuses?
    Mr. DeMarco. Certainly, and these are actually detailed in 
the public disclosures that Fannie Mae and Freddie Mac make in 
their SEC filings, but I can give you a sample of them. It has 
included loss mitigation activity, such as getting folks for 
taking foreclosure prevention activities, getting folks into 
loan modifications. It has included remediating the operational 
and risk management deficiencies that FHFA in its supervisory 
practice has identified for the companies so that they become 
more efficient and less risky, more safe and sound as they go 
forward. And it has gone to ensuring that they remain active 
participants on the mortgage market so that we have stability 
in the marketplace.
    Senator Reed. There are many who would look at the 
performance of Fannie and Freddie and say that, frankly, they 
have not done a very good job in those areas that you have 
pointed out--loss mitigation, getting people into 
modifications. In fact, I think some troubling numbers, 2010 
modifications were significantly far ahead of what we have seen 
this year, and yet they are still collecting bonuses. And that 
is one point, which is how do you sort of rationalize what we 
are seeing and the award. And the second more specific 
question, who makes the judgment that they have achieved these 
objectives? Is it the Board of Directors or is it you or is it 
a combination of the Directors and you?
    Mr. DeMarco. So it is a combination. We do work with the 
Boards of Directors, so the scorecards are there in advance. 
The assessment of it is done by management. Those assessments 
are reviewed by internal audit of the companies. Those 
assessments are then reviewed both by the Boards of Directors 
and by my own staff before the ultimate sort of determination 
is left with me.
    With regard to the question about bonuses and these losses, 
I think it is a very fair observation, Senator, and it is one 
that I think many citizens have, and I would like to maybe 
expand on it for just a moment, if I may. Here is the real 
challenge of overseeing Fannie Mae and Freddie Mac in 
conservatorship. These losses that the American taxpayer has 
been incurring are a result of business decisions that were 
made at Fannie and Freddie, principally in the period from 2005 
until the first half of 2008. So those were business decisions 
that were made at a time past by a leadership team that is no 
longer with the company.
    We are now in conservatorship with a new leadership team 
faced with the prospect of a lot of poorly underwritten 
mortgages that were badly priced, but we cannot undo that. The 
best we can do is to see, given these lousy mortgages, what can 
we do to minimize the losses on them and what can we do to 
strengthen the business going forward.
    So we know that we are going to see over a period of 
several years, from 2008 really certainly at least through next 
year, we are going to see these losses start to wash through 
the financial statements, but these are losses that are on 
mortgages that were originated a while ago. But I need to have 
a management team come in and be willing to do the hard work of 
trying to clean this up and build something better for the new 
mortgage book that we are having, and so getting that sort of 
separation in mind is one of the things I feel I have to do and 
it is a challenge in sort of recruiting people into these 
positions.
    Senator Reed. No, I think we understand that. But I think 
my office has been in touch with you on several different 
initiatives----
    Mr. DeMarco. Mm-hmm.
    Senator Reed. ----and let me suggest that your individual 
activity is absolutely critical, but there are many other 
factors here--what the State Attorney Generals do with respect 
to their activities. But Fannie and Freddie have such a 
dominant position, particularly with, literally, the collapse 
of all the private label folks who were eating their lunch in 
2005 and now they are no longer there, leaving Fannie striving 
to keep the housing markets moving forward.
    But I think we all have to be much more creative, and I 
think you have to be much more demanding in terms of those 
types of performance ends you expect and also the innovative 
ways in which your management, or the management of these two 
companies, carry out their responsibilities, because 
ultimately, the only way we can justify these types of 
compensation arrangements is discernible progress that is 
recognized not just here, but across the country. And you have 
a difficult job and I think you are obviously putting a great 
deal of effort in, but we all have to do much better.
    Mr. DeMarco. Well, I accept that, Senator, and as I tried 
to say in my written statement, I am committed to looking at 
these scorecards and how we go about doing that and taking some 
further steps in the coming year in the direction that you have 
outlined.
    Senator Reed. And if I may, one final point. The overall 
health of the housing market, its sort of stabilizing and then 
beginning to slowly appreciate, is ultimately what will make 
the balance sheets of Fannie and Freddie look much, much, much, 
much better. Do you agree?
    Mr. DeMarco. Yes. No, I think that is right, Senator.
    Senator Reed. Thank you.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. DeMarco, I want to pick up where Senator Reed just left 
off. Earlier this past month, former Treasury Secretary Larry 
Summers published an op-ed piece in the Washington Post that 
pretty much, I think conveys the sentiments that I have, which 
is that the FHFA has taken a narrow view of the public interest 
and that it has neglected its conservatorship mandate to ensure 
that the GSEs help stabilize the nation's housing market. It 
has taken no account for the reality that the GSEs' health 
depends on a national housing recovery. And instead, you know, 
it seems to me that you all have been focused on reversing 
previous policies, heedless of the changes in the environment, 
and treating mortgage finance as a morality play.
    The question for me, I have never seen the Nation move into 
an economic recovery without housing being one of the drivers, 
and in terms of ensuring the best results for the taxpayers, 
having a housing market that is on the move and thriving again 
is going to be critical to that. So it seems to me that you 
have a narrow and cramped view of the public interest that is 
hurting the housing market's recovery. What is your response to 
that?
    Mr. DeMarco. Well, Senator, I have had the honor of working 
with Mr. Summers. I have a great deal of respect for him. But 
on this, I do disagree, and I would not say that I have a 
cramped view. I think I have a view that is following the law 
as I understand it has been written by Congress. I do not 
believe that the Congress of the United States has authorized 
me to expend taxpayer funds for the general support and uplift 
of the housing market.
    I believe that the funds that the Congress gave to the 
Treasury Department to purchase securities of Fannie Mae and 
Freddie Mac were designed to support the operations of this 
conservatorship, and as conservator, Congress has given me a 
statutory obligation to conserve and preserve the property and 
assets of these companies, and that does not extend to 
providing general support. If general support is what lawmakers 
believe is what is going to help the country's economy and 
housing sector recover, I believe that that needs to be 
appropriated for that purpose by Congress.
    Senator Menendez. How do you define conserve and preserve? 
Give me your definition of that.
    Mr. DeMarco. I believe that it means that we are not 
supposed to dissipate assets. We are supposed to work to 
mitigate the losses that are there so that there is--we are 
maximizing what is left for the owners of the company. In this 
case, with the Treasury Department essentially having these 
warrants in the company that give it an 80 percent ownership 
interest, that goes to minimizing losses for the taxpayer. But 
that is the view and interpretation that the agency has taken 
as it has studied the statute.
    Senator Menendez. So if you want to minimize the loss of 
the taxpayer, one of the things you want to do is make sure 
that, for example, my understanding is that GSEs lose about 
$65,000 per property per foreclosure. Is that a fair estimate?
    Mr. DeMarco. It could be. I am sorry, Senator. I do not 
know----
    Senator Menendez. So it seems to me that if we were looking 
at how do we deal with mitigation if we were looking at a more 
aggressive borrower outreach and response, which we have 
written letters to you about and which Freddie Mac has not been 
responsive to, that maybe we would be avoiding on behalf of the 
taxpayers a loss of $65,000 per foreclosed property. Is Freddie 
Mac going to be in the midst of implementing a similar borrower 
outreach program that Fannie has begun?
    Mr. DeMarco. Honestly, Senator, I am not sure which 
particular outreach effort that Freddie Mac is not doing that 
you are talking about. But, look, both companies have been 
working on outreach efforts and working with mortgage servicers 
to contact troubled borrowers rapidly.
    There is no disagreement with you, Senator. You are 
absolutely correct that the best thing we can do to minimize 
losses on these troubled mortgages is to contact borrowers 
early and to try to find foreclosure alternatives for them, 
ideally where the homeowner stays in their home. And I believe 
we put a great deal of effort into that. We have had 1.6 
million successful foreclosure alternative transactions done 
that have resulted in the borrower staying in their home. But 
we do need to continue to do more and I do believe that we have 
taken some important steps, Fannie and Freddie together with us 
this year, to improve the instruction to servicers to contact 
borrowers and work with them in an aggressive way from the 
moment they first become delinquent on their mortgage.
    Senator Menendez. Well----
    Mr. DeMarco. Because you are quite right, Senator. This is 
very costly, especially when the mortgage goes to foreclosure.
    Senator Menendez. Well, Fannie is headed in the right 
direction. Freddie Mac has a dismal record. I would commend it 
to your attention and like to see your response to it.
    Second, under the Emergency Economic Stabilization Act of 
2008, you have a statutory responsibility to, quote, 
``implement a plan that seeks to maximize assistance for 
homeowners''--maximize assistance for homeowners--``and use its 
authority to encourage the servicers of the underlying 
mortgages in considering net present values to the taxpayer to 
take advantage of available programs to minimize 
foreclosures.'' Is that not an equal responsibility that you 
have?
    Mr. DeMarco. It is, Senator, and I believe it is one that 
we have been working very hard on since Congress enacted it, 
and we send a monthly report to the Senate Banking Committee 
outlining--updating the Committee on the actions that have 
taken place in the last month and running a--we have a running 
tally of what are all the different things that have been done 
and how many homeowners have been assisted by that, and that is 
provided monthly, and that is where that 1.6 million figure 
that I mentioned a moment ago is reported at.
    Senator Menendez. But if that answer you gave Senator Reed, 
that a robust housing market is ultimately going to place the 
taxpayers in a better position, why is it that you view so 
narrowly the ability to think a little bit outside of the box 
and help to achieve a housing market that is more robust?
    Mr. DeMarco. Well, that is fair, Senator, but the statutory 
provision that you read includes in that a consideration of the 
net present value to the taxpayer, which I believe is 
consistent with the HERA mandate that we have as conservator to 
preserve and conserve the assets of the Enterprise. And so we 
look at all these various programs, HAMP, HARP, and other 
proprietary loan modification programs that Fannie and Freddie 
do, but we do it with a consideration of will this foreclosure 
alternative transaction reduce the cost to the taxpayer 
relative to foreclosure? If the answer to that question is yes, 
by all means, Senator, we want that transaction to be executed, 
whether it is a loan modification, a forbearance plan, a short 
sale, depending on the facts and circumstances.
    If that transaction is going to lower costs relative to 
foreclosure, we are very committed to wanting to see that done 
because we believe it is consistent with the EESA mandate, and 
that is how we are interpreting the EESA mandate, to maximize 
assistance, and we think it is in harmony with our HERA mandate 
to conserve and preserve the assets of the----
    Senator Menendez. Well, finally, Mr. Chairman, as someone 
who supported and voted for the legislation, it seems to me 
that I have a different vision, and I think many of us share 
that vision, of what your mandate is. At the end of the day, 
the biggest holders of these mortgages is all of us as U.S. 
taxpayers through the GSEs. We want to maximize the opportunity 
for people to be able to mitigate our losses, and in part, that 
means a robust housing market.
    Let me ask you one last question with the indulgence of the 
Chair. Do you not agree--this issue of loan limits was raised, 
something that I and Senator Isakson have been pursuing and 
that 60 members of the Senate supported--CBO says keeping the 
loan limits at the higher rate that had expired will not cost 
taxpayers one dime. Do you agree with that statement?
    Mr. DeMarco. I have not seen the CBO statement, but the 
loan limits themselves, I am not sure how I would say that it 
would add or subtract from the taxpayer. The mortgages would 
certainly have to be underwritten properly and priced properly 
and that is what we have been doing.
    Senator Menendez. Well, the CBO says keeping the limits 
would not cost taxpayers one dime because the cost of the 
defaults are paid by the premium loan fee of 15 basis points 
per year from the loans that benefit from this. And in a 
housing market that certainly we might think that this is not 
appropriate 2 years from now, but in a housing market right 
now, certainly along the coasts it would be pretty devastating, 
not only because of the higher limits, but 125 median ratio, 
and that would dramatically affect housing across the country.
    So I just hope that we are adopting policies that give us 
long-term growth in the housing market, which is going to be 
part of our solution, versus just whittle ourselves down to a 
set of circumstances in which we may be viewing that we are 
saving the taxpayers from a greater liability instead of 
growing and mitigating more effectively. I hope that you will 
consider that as part of your deliberations moving forward.
    Mr. DeMarco. Well, thank you, Senator. We will. Obviously, 
the conforming loan limit is a matter that has been for 
Congress to set and adjust.
    The one thing about the bill of yours that you mentioned, 
of course, is that this added fee does not go to Fannie and 
Freddie to offset their credit risk directly. It is going to 
the Treasury Department and then would need to be appropriated 
back. I do not entirely follow the connections there in how 
that would--so that might affect the answer in terms of how 
this loss would affect the taxpayer versus how it would show up 
on Fannie and Freddie if the fee was going away from them.
    Senator Menendez. Clearly, the fee is meant to ensure that 
the borrower is the one who bears the burden, not the entities, 
and so I am sure that issue can be easily resolved.
    Thank you, Mr. Chairman, for your indulgence.
    Chairman Johnson. Mr. DeMarco, thank you for your testimony 
and being here with us today.
    Oversight of FHFA is and will continue to be an extremely 
high priority of the Committee. With the housing market still 
in flux, a robust and proactive FHFA is essential.
    This hearing is adjourned.
    [Whereupon, at 11:27 a.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
    I would like to thank Mr. DeMarco for being here today. As I 
mentioned at our hearing on November 3, we have been planning to hold 
an FHFA oversight hearing, and I am pleased it was able to come 
together so quickly.
    As Ranking Member Shelby, and others, so accurately noted during 
consideration of the Housing and Economic Recovery Act in 2008, one of 
the most important aspects of the bill was the establishment of the 
Federal Housing Finance Agency as an independent regulator. This 
ensures that it can operate without undue political interference and 
that the appropriations process cannot be used to hold the regulator 
hostage.
    With this independence, the Banking Committee must exercise 
Congressional oversight to ensure that the agency is balancing its 
attention among the entities it regulates and the role as conservator 
of Fannie Mae and Freddie Mac.
    To give the Committee and the public greater confidence in the new 
regulator, HERA also established the FHFA Office of the Inspector 
General to investigate potential concerns and ensure transparency of 
the regulator's operations. I plan to invite Inspector General Linick 
before the Committee at a date to be determined. It is only appropriate 
that we should hear from him as well. The Inspector General's role is 
even more important while FHFA is acting as both conservator and 
regulator.
    It is important for this Committee to understand how FHFA evaluates 
new opportunities and programs at Fannie Mae and Freddie Mac during 
conservatorship, including the decision to allow them to participate in 
certain Making Home Affordable programs and the decision not to 
participate in or initiate other programs.
    The internal operations at FHFA are also important, as staffing of 
the regulator will affect its oversight of the GSEs. Oversight of 
executive compensation structures and evaluations of executive 
performance goals both require the regulator's attention. FHFA must 
have proper management of operational risks, as well as secure and 
updated information systems and privacy policies. I am concerned about 
recent reports that show problems in each of these areas, and that FHFA 
does not have adequate certified staff to perform examinations of the 
entities under its supervision.
    FHFA is tasked with regulating two of the largest entities in the 
mortgage market, Fannie Mae and Freddie Mac, which together backstop 
approximately $5 trillion in mortgages and help support the nearly $11 
trillion U.S. mortgage market. Unfortunately, that market is now 
supported by $170 billion in assistance from the taxpayers. As we've 
heard from other witnesses before this Committee, the mortgage market 
would be even worse-off than it is today if they had not been placed 
into conservatorship during the Bush Administration.
    But as we have said over and over again, we need to find ways to 
end the need for future support without destabilizing the housing 
market further.
    Finding a path out of conservatorship is a task for both the FHFA 
and this Committee. I would like to thank Senator Shelby and his staff 
for working so closely with me and my staff in laying out the hearings 
the Committee has held so far this year. I hope we can continue to work 
together to do our homework and create a sustainable system for the 
housing market going forward that can protect taxpayers and spur 
economic growth.
    An adequately staffed and engaged regulator is a key component to a 
stable housing market. Mr. DeMarco, I look forward to hearing about the 
steps you have taken as Acting Director of FHFA since the last time you 
were before the Committee.
                                 ______
                                 
                PREPARED STATEMENT OF EDWARD J. DeMARCO
            Acting Director, Federal Housing Finance Agency
                           November 15, 2011
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, I am pleased to be invited here today to discuss the Federal 
Housing Finance Agency's (FHFA) oversight of our regulated entities 
(Fannie Mae and Freddie Mac, together the Enterprises) and the Federal 
Home Loan Banks (FHLBanks).
    The main focus of my testimony will be on key topics related to 
FHFA's role as the Enterprises' conservator and regulator. I will 
update you on the financial condition of the Enterprises in 
conservatorship. Then I will review FHFA's approach to preparing for 
increased private market participation in housing finance and describe 
significant activities that FHFA has undertaken during the past year to 
further our conservatorship goals. I will then briefly report on 
several Federal Home Loan Bank (FHLBank) issues and, as requested, on 
recent reports issued by the FHFA Office of Inspector General.
    I will conclude with a review of FHFA's oversight of the executive 
compensation structure for Fannie Mae and Freddie Mac. I will explain 
how the Enterprises' executive compensation program supports the 
statutory mandates of the Enterprises in conservatorship, how it was 
developed, and how it is structured.
Introduction
    As it has been more than 2 years since I appeared before this 
Committee at a general oversight hearing, it may be useful for me to 
begin with a brief overview of what it means for Fannie Mae and Freddie 
Mac to be in conservatorship and what legal responsibilities FHFA 
operates under as conservator.
    The determination to place Fannie Mae and Freddie Mac, or the 
Enterprises as I will refer to them, in conservatorship, was made as 
the financial crisis of the autumn of 2008 was taking shape. At that 
time, the private mortgage securitization market had already vanished, 
house prices were declining rapidly, and the Enterprises' eroding 
financial condition and inability to access capital markets threatened 
a collapse of the country's housing finance system. FHFA, with 
financial support from and substantial consultation with the Treasury 
Department, placed the Enterprises into conservatorship on September 6, 
2008.
    Conservatorship, along with financial support from Treasury, 
permitted the Government to take greater management control of the 
Enterprises and give investors in the Enterprises' debt and mortgage-
backed securities confidence that the Enterprises would have the 
financial capacity to honor their financial obligations. The 
alternative, receivership, was rejected at the time, in part because 
such action would have placed greater limits on the timing and approach 
for the Congress and the incoming Administration to analyze and respond 
to the problems confronted by the Enterprises and the country's housing 
finance system. At the time, Treasury Secretary Paulson referred to 
conservatorship as a ``time-out'' to allow markets to continue to 
function while policymakers considered and acted on a permanent 
resolution. More than 3 years later, we are still waiting for that 
resolution.
    As conservator, FHFA stands in the place of each company's 
shareholders, boards, and management, with the responsibility to 
``preserve and conserve the assets and property'' of the companies. The 
statute also charges the conservator with the responsibility to place 
the companies in ``a sound and solvent condition.'' At the time the 
conservatorships were established, FHFA was less than 6 weeks old as an 
agency, and had fewer than 400 employees. To accomplish these 
responsibilities, FHFA made the practical judgment that the most 
effective means to carry out these functions was to replace the boards 
and senior management, and then delegate to new boards and management 
day-to-day responsibility. Since then, reconstituted boards of 
directors have worked with FHFA to define the operational goals in 
conservatorship and to support FHFA in its work to guide and oversee 
management in fulfilling these goals. Likewise, the new CEOs and 
executive officers have worked with FHFA to these same ends.
    As conservator and regulator, FHFA has three principal mandates set 
forth in law that direct and motivate FHFA's activities and decisions 
involving the Enterprises.
    First, as I have noted, FHFA has a statutory responsibility as 
conservator of the Enterprises to ``take such action as may be: 
necessary to put the regulated entity in a sound and solvent condition; 
and appropriate to carry on the business of the regulated entity and 
preserve and conserve the assets and property of the regulated 
entity.'' As FHFA has stated on numerous occasions, with taxpayers 
providing the capital supporting the Enterprises' operations, this 
``preserve and conserve'' mandate directs us to minimize losses on 
behalf of taxpayers.
    Second, even though the Enterprises are in conservatorship, without 
further statutory changes they have the same mission and obligations as 
they did prior to being placed into conservatorship. FHFA has a 
statutory responsibility to ensure the Enterprises ``operate in a safe 
and sound manner'' and that ``the operations and activities of each 
regulated entity foster liquid, efficient, competitive, and resilient 
national housing finance markets.'' We typically refer to this 
requirement as ``supporting a stable and liquid mortgage market.''
    Third, under the Emergency Economic Stabilization Act of 2008, FHFA 
has a statutory responsibility to ``implement a plan that seeks to 
maximize assistance for homeowners and use its authority to encourage 
the servicers of the underlying mortgages, and considering net present 
value to the taxpayer to take advantage of . . . available programs to 
minimize foreclosures.''
    These three mandates form the basis for how FHFA views its 
responsibilities as conservator of the Enterprises. In view of the 
critical and substantial resource requirements of conserving assets and 
restoring financial health, combined with a recognition that the 
Enterprises operate today only with the support of taxpayers, FHFA has 
focused the Enterprises on their existing core business, including 
minimizing credit losses. This means that FHFA is not permitting the 
Enterprises to offer new products or enter new lines of business. Their 
operations are focused on their core business activities and loss 
mitigation. This type of limitation on new business activities is 
consistent with the standard regulatory approach for addressing 
companies that are financially troubled. And it is even more pertinent 
for the Enterprises given their uncertain future and reliance on 
taxpayer funds.
    As a final introductory comment, the Enterprises' equity holders 
retain an economic claim on the companies but that claim is subordinate 
to taxpayer claims. As a practical matter, taxpayers are not likely to 
be repaid in full, so Enterprise stock lower in priority is not likely 
to have any value. Prior to conservatorship, much executive 
compensation, and indeed some staff compensation, was in the form of 
company stock, so the value of such compensation has essentially 
vanished. Finally, the company leaders most responsible for the 
business decisions that led to the Enterprises ending up in 
conservatorship had either left the company before conservatorship, at 
the time of the conservatorship, or shortly thereafter. The boards of 
directors were also replaced.
    Thus, the leadership working at the Enterprises today is not the 
same as those chiefly responsible for the business decisions that led 
to conservatorship and that continue to drive the financial results. 
Moreover, they are there to further the goals of conservatorship and 
ensure the country has a functioning secondary mortgage market while 
lawmakers deliberate the future structure for housing finance. The 
boards, executives, and staff have been and are working with FHFA in 
its efforts to minimize taxpayer losses, provide stability and 
liquidity to the market, and maximize assistance to homeowners to avoid 
foreclosure. They do so knowing that the long-term outlook is that 
neither Enterprise will continue to exist, at least in its current 
form, in the future.
Third Quarter 2011 Financial Performance and Condition of the 
        Enterprises
Providing Liquidity to the Market
    Since conservatorship, Fannie Mae and Freddie Mac have been the 
largest issuers of mortgage-related securities in the secondary market, 
guaranteeing roughly three-quarters of single-family mortgage-backed 
securities (MBS) issued.
Capital
    Combined Treasury support as a result of financial performance in 
the third quarter of 2011 was $13.8 billion. The Single-Family Credit 
Guarantee segment continued to drive losses as credit-related expenses 
remained high. Additionally, the Investments segment results turned 
negative in the third quarter of 2011, due primarily to a significant 
decrease in interest rates and a widening of credit spreads on 
nonagency securities. This was partially offset by a 2 percent increase 
in net interest income. Four point one billion dollars of the $13.8 
billion draw is to pay interest to the Treasury on previous draws.
Credit Quality of New Single-Family Book of Business
    The quality of new business remained high in the third quarter of 
2011. The percentage of new business volume with FICO scores below 620 
remained below 2 percent and the average loan-to-value ratio (LTV) for 
new business was roughly 70 percent for both Enterprises, reflecting in 
part the high degree of refinance activity.
Loss Mitigation Activity
    Loan modifications are on pace to be below 2010 levels. Total home 
retention actions as of August, 2011, were approximately 375,000 
compared with 832,000 for all of 2010. Significantly, loans modified 
since late 2009 continue to perform substantially better than loans 
modified before then.
    Since conservatorship, the Enterprises have completed 1.9 million 
foreclosure prevention transactions, of which nearly 1 million have 
been permanent loan modifications and another 650,000 have been other 
forms of assistance that have allowed homeowners to retain home 
ownership. Separately, another 260,000 transactions have resulted in 
households leaving their homes but without going through foreclosure. 
Most of these actions have been short sales.
Projections of Financial Performance
    To provide additional information on future Enterprise financial 
performance, beginning in October, 2010, FHFA published financial 
projections of the Enterprises' financial performance across different 
house price scenarios. Those initial projections were updated a few 
weeks ago, and the projected combined cumulative Treasury draws (which 
includes 10 percent dividend payments to Treasury) through the end of 
2014 range between $220 and $311 billion. In general, these financial 
projections show that under less stressful house price scenarios, the 
cumulative draws from Treasury would stabilize in the next year or so, 
with the Enterprises earning enough income to cover dividend payments 
to Treasury.
FHFA Initiatives
    Recent Congressional efforts to begin serious discussion of a 
gradual transition to greater private capital participation in housing 
finance and greater distribution of risk to participants other than the 
Government are important. FHFA has already begun taking actions in 
support of these objectives. Since conservatorship, underwriting 
standards have been strengthened and several price increases have been 
initiated to better align pricing with risk. Additionally, we have had 
several guarantee fee price increases and we will continue to gradually 
increase guarantee fee pricing to better reflect that which would be 
anticipated in a private, competitive market. Also, we will soon be 
exploring more private sector risk-sharing opportunities. Such steps 
are consistent with actions already taken in conservatorship and we are 
examining further options along these lines in support of a stable 
transition over time.
    While debate over the future of the housing finance system 
progresses, FHFA has and will continue to focus on meeting the goals of 
the conservatorships through a series of initiatives aimed at retaining 
value in the business operations of Fannie Mae and Freddie Mac, 
maintaining their support for the housing market, and mitigating losses 
to taxpayers.
Recovering Certain Losses
    Consistent with FHFA's mission to preserve and conserve the 
Enterprises' assets on behalf of taxpayers, this year we filed lawsuits 
against 18 financial institutions to recover certain losses suffered by 
Freddie Mac and Fannie Mae that we believe are the legal responsibility 
of others. We believe that the loans in these private-label mortgage-
backed securities had different and more risky characteristics than the 
descriptions contained in the marketing and sales materials provided to 
the Enterprises for those securities.
Real Estate-Owned Request for Information
    In August, FHFA in conjunction with the Department of Housing and 
Urban Development (HUD) and the Treasury Department, issued a Request 
for Information (RFI) seeking input on new options for selling single-
family real estate owned (REO) held by Freddie Mac, Fannie Mae, and 
FHA. We are looking for approaches to reduce the REO portfolios of the 
Enterprises in a cost-effective manner, as well as to reduce the losses 
on individual distressed properties. We are seeking alternatives that 
will maximize value to taxpayers and increase private investments in 
the housing market, including approaches that support rental and 
affordable housing needs. We are not trying to develop a single, 
national program for REO disposition. We are most interested in 
proposals tailored to the needs and economic conditions of local 
communities. Based on the input of RFI responders we understand the 
magnitude of the task at hand. FHFA is proceeding prudently, but with a 
sense of urgency, to lay the groundwork for the development of good 
initial pilot transactions.
Uniform Mortgage Data Program
    In May, 2010, FHFA directed the Enterprises to develop uniform 
standards for data reporting on mortgage loans and appraisals. This 
Uniform Mortgage Data Program is designed to improve the consistency, 
quality, and uniformity of data that are collected at the front end of 
the mortgage process. By identifying potential defects at the front end 
of the mortgage process, the Enterprises will improve the quality of 
mortgage purchases, which should reduce repurchase risk for 
originators. This initiative will be phased in over the rest of this 
year and next.
Loan Level Disclosures
    Earlier this year I announced that FHFA is considering ways to 
enhance loan-level disclosures on Enterprise MBS, both at the time of 
origination and throughout a security's life. I believe that improving 
Enterprise MBS disclosures over time will help establish consistency 
and quality of such data. Moreover, it will contribute to an 
environment in which private capital has the information needed to 
efficiently measure and price mortgage credit risk, thereby 
facilitating the shifting of this risk away from the Government and 
back into the private sector.
Servicing Alignment Initiative
    Our Servicing Alignment Initiative (SAI), which we announced last 
April, responded to concerns about how delinquent mortgages were being 
serviced. SAI meets the conservatorship objectives of minimizing losses 
and assisting homeowners with alternatives to foreclosure. FHFA 
instructed Freddie Mac and Fannie Mae to establish a single, consistent 
set of procedures for servicing Enterprise mortgages, from the time 
they first become delinquent. The updated framework, which went into 
effect on October 1, prioritizes early borrower outreach, streamlines 
documentation requirements, simplifies mortgage modification terms and 
requirements, and establishes a schedule of performance-based incentive 
payments and penalties aimed at ensuring that servicers review 
foreclosure alternatives in a timely manner. We are also working to 
align and improve Fannie Mae and Freddie Mac policies regarding 
unemployment forbearance to reflect the realities of the current job 
market.
Foreclosure Attorney Networks
    Last month, as an adjunct to SAI, FHFA directed Freddie Mac and 
Fannie Mae to change the way foreclosure attorneys are selected in an 
effort to produce uniform foreclosure processing standards to assist 
servicers, homeowners, and lenders. Under current practice, in certain 
States each Enterprise designates law firms eligible under the 
Enterprise's criteria to undertake foreclosure work and mortgage 
servicers then select and work with these firms. FHFA instructed Fannie 
Mae and Freddie Mac to transition away from current foreclosure 
attorney network programs and move to a system where mortgage servicers 
select qualified law firms that meet certain minimum, uniform criteria. 
These efforts will lead to greater transparency and benefit delinquent 
borrowers who become subject to the foreclosure process. FHFA is now 
working with other regulators and industry stakeholders to create 
uniform qualifications and oversight of foreclosure attorneys.
    I am hopeful that these new directives, which create uniform 
procedures for servicing delinquent loans and processing foreclosures, 
will gain acceptance beyond the Enterprises and become ``best 
practices'' throughout the industry.
Home Affordable Refinance Program
    On October 24, we announced a series of changes to the Home 
Affordable Refinance Program (HARP). These changes should make HARP 
refinances accessible to more households with mortgages owned or 
guaranteed by the Enterprises. Changes to the program include: 
eliminating or reducing certain risk-based fees; removing the current 
125 percent LTV ceiling; waiving certain representations and 
warranties; eliminating the need for certain property appraisals; 
improving the process for carrying over mortgage insurance coverage; 
and extending the end date for HARP to December 31, 2013.
    Importantly, such refinances should also reduce the Enterprises' 
credit risk, and thus losses to taxpayers. HARP, even with the new 
enhancements, is not a mass refinancing program; it was designed to 
help a defined set of borrowers with Fannie Mae and Freddie Mac 
mortgages that are underwater or nearly underwater.
    It is impossible to project accurately how many homeowners will 
benefit from the enhancements to HARP because of unknowable factors, 
such as future interest rate fluctuations and the desire of borrowers 
to enter into a refinance transaction. Since HARP was introduced in 
2009, more than 900,000 homeowners have refinanced through the HARP 
program. We believe the announced changes may double the number of 
homeowners helped through HARP. The Enterprises plan to issue guidance 
with operational details about the HARP changes to mortgage lenders and 
servicers today. Since industry participation in HARP is not mandatory, 
implementation schedules will vary as individual lenders, mortgage 
insurers and other market participants modify their processes.
    Separately, the Enterprises have refinanced approximately 9 million 
mortgages since 2009.
Servicing Compensation Initiative
    The last initiative I will discuss today, the Joint Servicing 
Compensation Initiative, made up of FHFA, Fannie Mae, Freddie Mac, and 
HUD, is one of the initiatives we have directed the Enterprises to 
undertake that are designed to broadly consider changes that will lead 
to improvements in the operations of the Enterprises and the overall 
mortgage market. The goals of the Joint Initiative are to improve 
service for borrowers, reduce financial risk to servicers, and provide 
flexibility for guarantors to better manage nonperforming loans, while 
promoting continued liquidity in the To Be Announced mortgage 
securities market. In addition to those specific goals, the Joint 
Initiative seeks broader options for mortgage servicing compensation 
that lead to enhanced competition in mortgage servicing and 
origination, and that can be replicated across multiple future states 
of housing finance.
    At the end of September, the Joint Initiative released a discussion 
document seeking comments on two alternative servicing compensation 
structures for servicing single-family mortgages. One proposal would 
establish a reserve account within the current servicing compensation 
structure. The other proposal would create a new fee-for-service 
compensation structure that would replace today's fixed fee approach. 
We requested that comments be submitted by late December, after which 
they will be considered and evaluated by the Joint Initiative.
Federal Home Loan Bank Supervision
Third Quarter 2011 Performance and Condition of the FHLBanks
    Total assets of the FHLBanks declined by $31 billion in the third 
quarter of 2011 and by $100 billion during the first three quarters of 
the year. From a peak in 2008 of $1.4 trillion, combined assets have 
nearly halved to $778 billion at September 30, 2011. Advances 
(collateralized loans to members) are driving the decline, as balances 
have fallen from a 2008 high of $1.0 trillion to just $415 billion, or 
about the level of advances last seen in the first quarter of 2000. 
More recently, advances declined $13 billion in the third quarter of 
2011, and $63 billion year-to-date through September. The decline, in 
part, reflects high levels of liquidity at member banks with a 
consequent decline in the demand for advances. At September 30, 2011, 
advances comprised 53 percent of assets, non-MBS investments were 19 
percent, agency and Federal MBS were 15 percent, mortgage loans were 7 
percent, and private-label mortgage-backed securities (PLMBS) were 4 
percent. Though PLMBS assets are relatively small, their distribution 
among FHLBanks is uneven, leading to pockets of concentration at some 
FHLBanks.
    The FHLBanks principally fund themselves by issuing consolidated 
obligations in the capital markets. Market access remains excellent, 
and spreads to comparable Treasury securities are narrow. Total 
regulatory capital at September 30, 2011, was $55.4 billion or 6.5 
percent of assets.
    Net income is declining at the FHLBanks as fewer earning assets 
generate less net interest income, and as lower interest rates reduce 
the return on the FHLBanks' invested capital. Offsetting these factors 
is a decline in credit-related other-than-temporary impairment (OTTI) 
on PLMBS, though this remains a potentially volatile item, with the 
possibility to increase should collateral performance or the broader 
housing market deteriorate further. On a year-to-date basis through 
September 30, 2011, all FHLBanks were profitable, though some did have 
quarterly net losses. Combined net income was $475 million for the 
third quarter of 2011 and $1.1 billion year-to-date. This is down from 
comparable periods in 2010, when net income was $680 million in the 
third quarter and $1.3 billion year-to-date through September 2011. A 
significant factor in the lower quarterly net income was mark-to-market 
losses on derivatives. These derivatives are part of a prudent risk-
management strategy, and the losses should reverse as the derivatives 
approach maturity. Credit OTTI charges were lower in 2011 relative to 
2010--credit OTTI totaled $775 million in the first three quarters of 
2011, down from $905 million for the same period in 2011. To-date, the 
FHLBanks have reported a total of $4.4 billion in credit-OTTI charges 
on PLMBS, which amounts to about 5 percent of the peak balance of this 
asset category. PLMBS remain a supervisory concern.
Resolution Funding Corporation
    In 2011, the FHLBanks satisfied their collective obligation to make 
payments related to the Resolution Funding Corporation (REFCORP), a 
funding mechanism used during the savings and loan crisis. Related to 
this accomplishment, the FHLBanks collectively entered into a Joint 
Capital Enhancement Agreement, which requires each FHLBank to allocate 
20 percent of its net income to a restricted retained earnings account, 
from which it cannot pay dividends and which serves to enhance the 
joint-and-several liability features inherent in FHLBank consolidated 
obligations.
FHLBank of Chicago
    On September 31, 2011, FHFA approved the capital plan of the 
FHLBank of Chicago, a requirement of the 2007 Consent Order with that 
FHLBank. Implementation is expected on January 1, 2012. Until then, the 
FHLBank of Chicago remains the only FHLBank still operating under a 
pre- Gramm-Leach-Bliley Act capital structure.
FHLBank of Seattle
    The FHLBank of Seattle faces a declining advance franchise, a 
problematic PLMBS portfolio, and insufficient retained earnings. 
Although the FHLBank has capital equal to 6.8 percent of assets, FHFA 
has exercised its discretion to classify the FHLBank as 
``undercapitalized.'' The FHLBank of Seattle has operated under a 
Consent Order to resolve outstanding capital and supervisory matters 
since October 2010.
Office of Inspector General Reports
    Mr. Chairman, you asked me to comment on the recent reports issued 
by FHFA's Office of Inspector General (OIG). In response, I offer four 
observations.
    First, my staff has heard from me repeatedly that I believe 
Inspectors General are in place to help make Federal agencies better, 
to see what we sometimes cannot see for ourselves, or see things in a 
different way from those who are up close to an issue. Since FHFA is 
committed to continually improving itself, I look forward to input from 
the Office of Inspector General to assist us in that objective.
    Second, FHFA has agreed to carry out all of the formal 
recommendations made by the Office of Inspector General in each of 
these reports. I believe it reflects a good-faith partnering with the 
OIG to be complete and timely in responding to the various 
recommendations and we are doing so.
    Third, while we are implementing all the recommendations in these 
recent reports, I do not agree with some of the statements, inferences, 
and conclusions drawn in some of these reports. Where we do have 
disagreements, I believe they reflect a new office and staff getting to 
learn the FHFA's statutory responsibilities, safety and soundness 
regulation, and the business of the regulated entities. By the same 
token, FHFA is learning how to work with an OIG. I expect such 
disagreements to decline with time.
    Finally, it appears from these reports that the OIG's view is that 
FHFA should be a larger organization than it is today. A recurring 
conclusion in the OIG reports to-date is that FHFA is understaffed and 
that it should be more directly engaged day-to-day in the Enterprises' 
business activities, independently repeating and validating numerous 
business decisions and calculations. This could involve a costly build-
up of staff at FHFA with an uncertain long-term future for this work if 
Congress legislates away the conservatorships. It would also result in 
greater taxpayer draws to fund this build-up through assessments on 
Fannie Mae and Freddie Mac. It also raises questions as to the purpose 
of Enterprise management and boards if FHFA reviews and repeats so much 
of their work. As I noted earlier in my statement, conservatorship has 
been predicated on a delegated authority for the Enterprises to run 
their day-to-day business. This approach is aimed at achieving 
operational savings and reducing operational risks. I believe changes 
to this approach would need to demonstrate benefits that outweigh the 
costs.
    In any event, FHFA is already undergoing considerable growth, 
albeit not at the pace and ultimate size that may be contemplated by 
the OIG. From the fewer than 400 people composing FHFA at the outset 3 
years ago, we now have more than 520 staff and have budgeted for growth 
to a level slightly above 600. Furthermore, the OIG itself is growing 
rapidly to a scale unprecedented for an agency OIG. The OIG's budget 
request for FY2012, which Congress has not yet acted on, would provide 
the OIG with a budget of $48 million and a staffing level of 150. This 
would give the OIG one staff member for every four at FHFA, to my 
knowledge an unprecedented ratio. The ratio of our respective budgets 
would be of similar magnitude. Since both FHFA and OIG are funded by 
assessments on FHFA's regulated entities, the growth at FHFA and OIG is 
adding costs to the conservatorships and to the FHLBanks.
Executive Compensation
    You have asked me to address executive compensation for Fannie Mae 
and Freddie Mac executives. At the outset let me state that the best 
way to address concerns with executive compensation is action by 
Congress to restructure the nation's housing finance system and 
dissolve the conservatorships. In the absence of that resolution, FHFA 
will continue to evaluate the appropriateness of executive compensation 
at the Enterprises given their ongoing activities.
    Before getting into the details, I would like to begin by sharing 
my own frustration with compensation issues in conservatorship. Nothing 
like this has been done before--placing two of the largest private 
financial institutions in the world into Government conservatorship and 
then overseeing their operations in that State for multiple years. 
Determining appropriate compensation in this situation is vexing. As a 
career-long Federal employee, I, too, perceive the compensation 
agreements as large. I also share the frustration of many that past 
leaders of these companies received enormous compensation pre-
conservatorship. Yet, while frustration with the past business 
decisions of Fannie Mae and Freddie Mac leadership, past policy 
failures, and the resulting enormous taxpayer costs is understandable--
and I share it--it cannot distract us from the task at hand.
    As conservator, I need to ensure that the companies have people 
with the skills needed to manage the credit and interest rate risks of 
$5 trillion worth of mortgage assets and $1 trillion of annual new 
business that the American taxpayer is supporting. I have concluded 
that it would be irresponsible of me to risk this enormous contingent 
taxpayer liability with a rapid turnover of management and staff, 
replaced with people lacking the institutional, technical, operational, 
and risk management knowledge requisite to the running of corporations 
with thousands of employees and more than $2 trillion in financial 
obligations each. That conclusion is further buttressed by the 
realization that, from an Enterprise executive's or staff's point of 
view, continued employment at an Enterprise risks substantial job and 
career uncertainty. The public scrutiny and criticism is often harsh, 
and almost everyone expects the Enterprises to cease to exist, at least 
in their current form, in the future. At the same time, the taxpayer is 
backing Enterprise financial commitments that have 30-year lives, and 
we will need expert management of those guarantees for years to come. 
Given the amount of money at risk here, small mistakes can easily be 
amplified to losses far greater than the compensation paid to 
Enterprise executives.
    In short, as Congress considers executive compensation at the 
Enterprises, the basic fact is that despite the large amounts of 
Government support provided to the Enterprises they remain private 
companies with uncertain futures, not Government agencies. They employ 
thousands of people. We cannot maintain operational effectiveness while 
suddenly treating them as ongoing Government agencies--something they 
are not. Major changes to compensation, for executives or staff, cannot 
be done safely and soundly in a short period of time and attempting to 
do so would pose substantial risk to the mortgage market and a greater 
risk of loss to taxpayers.
    In the next section, I will review the history of how FHFA 
established the executive compensation program operating today, and 
describe the details of that program and how it has been working. I 
will then conclude with a few thoughts on the program going forward and 
the role Congress might play to bring this difficult matter to an end.
Initial Conservatorship Decisions
    During FHFA's intense preparations for placing the Enterprises into 
conservatorship, we received some valuable insights from discussions we 
had with the Federal Deposit Insurance Corporation (FDIC). The FDIC's 
experience in bank failure resolutions, including conservatorships, 
supported our view that achieving the goals of conservatorship depended 
on retaining capable and knowledgeable staff. At the same time we 
sought to no longer employ those executives most responsible for the 
conditions leading to our action. As a part of our planning process, we 
hired Hay Group, a well-respected executive compensation consultant, to 
help us design a plan to encourage the best employees to stay, while 
not rewarding poor performance.
    In placing the Enterprises into conservatorship, our foremost 
concern was that their troubled condition was leading them to withdraw 
their services from housing finance markets at a time when they were 
greatly needed. Their combined market share in 2008 was more than 
double what it had been 2 years earlier, as most other participants 
went out of business or sought to avoid new risk exposure to the 
mortgage market. For the sake of our country's economy and especially 
its housing sector, it was and remains essential that the Enterprises 
continue to bring liquidity, stability, and affordability to the 
mortgage market. Furthermore, the Enterprises' enormous size, including 
more than $5 trillion of mortgage credit risk, and taxpayer exposure to 
that risk in the face of rapidly deteriorating housing markets, made it 
imperative that the Enterprises strengthen their management in the 
areas of risk control and loss mitigation. In addition, it was and 
remains imperative that the Enterprises attract and retain the 
particular and specialized skills needed to manage these activities.
    To address these concerns, FHFA discussed our retention approach in 
some detail with both new Chief Executive Officers (CEOs) on the day 
before their new jobs officially began. Both CEOs agreed with our view 
of the importance of such a plan, and over the next few weeks worked 
with us, Treasury, and Hay Group to customize plans for their 
respective institutions. Payments under the plans were virtually the 
only nonsalary compensation for Enterprise employees for the 2008 
performance year, as no bonuses were paid for that year at either 
Enterprise.
    At the inception of the conservatorships, we also announced that 
the incumbent CEOs would be leaving after a brief transition period. 
They received no severance payments. In prohibiting such payments, we 
relied in large part on the golden parachute provisions in the Housing 
and Recovery Act of 2008 (HERA). In addition, because most of their 
remuneration had been in the form of Enterprise stock, roughly two-
thirds of their previously reported pay during their tenures as CEOs 
vanished with the collapse in the market prices of their shares. The 
golden parachute provisions were also helpful in other cases, as 
ultimately, five of the six Fannie Mae executives that were highest 
paid before the conservatorships and the top four Freddie Mac 
executives left in one fashion or another during the first months of 
conservatorship, but none of them received severance or other golden 
parachute payments. They also saw a substantial reduction in the value 
of their past compensation due to the collapse in their company's stock 
price. While I know all the attention today is on executive pay, I'd 
like to add that many of the more than 11,000 rank and file employees 
at the Enterprises also had large portions of their life savings in 
Enterprise stock and suffered accordingly.
New Compensation Structure
    FHFA's development of a new compensation structure for senior 
Enterprise executives for 2009 and beyond was delayed, first by our 
appointment of new boards of directors at the Enterprises, with new 
compensation committees, then by the departure of the CEOs hired at the 
start of the conservatorships.
    Additionally, FHFA had agreed, under the Senior Preferred Stock 
Purchase Agreements that control financial support to the Enterprises, 
to consult with Treasury about new compensation arrangements with 
executive officers at the Enterprises. We wanted to consider fully the 
approach being developed at the Treasury for institutions receiving 
exceptional assistance from the Troubled Assets Relief Program (TARP). 
After Kenneth Feinberg was appointed Special Master for TARP Executive 
Compensation, Treasury asked us to consult with him, and we began to 
discuss how we could adapt to the Enterprises the approach he was 
developing for TARP institutions.
    In making that adaptation, a major consideration was that 
compensating Enterprise executives with company stock would be 
ineffective because of the questionable value of such stock. Further, 
large grants of low-priced stock could provide substantial incentives 
for executives to seek and take large risks. Accordingly, all 
components of executive compensation at the Enterprises are in cash.
    Another consideration was and remains the uncertain future of the 
Enterprises as continuing entities, which is in the hands of Congress 
and beyond the control of Enterprise executives. It is generally best 
to focus management's incentives toward its institution's performance 
over the long-run rather than just the near-term. In the case of the 
Enterprises, that is nearly impossible. Therefore, compensation for 
current work does not depend on results more than 2 years out. To 
encourage talent to stay put, FHFA made deferred payments generally 
dependent on an executive's continued employment at the Enterprise. We 
also made half of the deferred pay subject to adjustment based on 
corporate performance to partially simulate the effect of corporate 
performance on the corporate shares paid to executives at TARP firms 
for their deferred pay. That allows for reductions in deferred salary 
if the Enterprise's goals, as set by the Board with increasing input 
from FHFA, are not met. As I will explain further below, corporate 
performance in this context is tied to the goals of conservatorship.
    FHFA also looked to existing practice elsewhere to determine the 
appropriate levels of total target compensation for the most senior 
positions. We considered data from consultants to both Enterprises, 
data received earlier from our own consultant, and the reported plans 
of TARP-assisted firms. It was important to set pay at levels 
sufficient to compete for quality talent because the Enterprises had 
many key vacancies to fill, potential departures to avoid, and pay has 
been a significant issue in some cases. That need was, as it must be, 
balanced by our efforts to keep the cost to taxpayers as low as we 
possibly could.
    Based on review of past compensation, the market comparables 
identified by outside pay consultants, discussions with each board of 
directors, recent experience in recruiting CEOs, and consultation with 
the Treasury Department, FHFA settled on a target of $6 million a year 
for each CEO, $3.5 million for the Chief Financial Officers (CFOs), and 
less than $3 million for Executive Vice Presidents and below. That 
amount rolls back Enterprise CEO pay to pre-2000 levels. It is less 
than half of target pay for Enterprise CEOs before the 
conservatorships. For all executive officers, Fannie Mae and Freddie 
Mac have reduced target pay by an average of 40 percent.
    The basic compensation structure for senior executives at both 
Enterprises, as at institutions receiving exceptional TARP assistance, 
comprises three elements: base salary, a performance-based incentive 
opportunity, and deferred salary. Salary scales have been sharply 
reduced from pre-conservatorship levels at both Enterprises. As at the 
TARP-assisted firms, base salaries generally are capped at $500,000 
with a few exceptions. Before the conservatorships, the two Enterprises 
had 16 officers earning base salaries higher than that amount, now 
there are only four.
    Both Enterprises' charter acts, which remain operational in 
conservatorship, require that ``a significant portion'' of executive 
compensation be tied to corporate performance. Consistent with that 
requirement, while also following the approach taken for TARP-assisted 
firms, target incentive pay for the Enterprises is limited to a third 
of overall compensation. Payment is based on Enterprise performance, as 
measured by scorecards developed by each Enterprise subject to FHFA 
approval, and individual performance. In reviewing scorecards, we are 
particularly sensitive to ensuring that executives are not given 
incentives to take inappropriate risks. Our special examinations of 
accounting failures at each Enterprise in 2003-2006 revealed that badly 
constructed compensation incentives contributed significantly to 
excessive focus on near-term earnings reports to the serious detriment 
of the Enterprises.
    Accordingly, FHFA has required a much broader focus that emphasizes 
remediation of operational and risk management weaknesses, loss 
mitigation, and mission achievement. For 2009, I approved for each 
Enterprise funding of incentive payment pools at 90 percent of 
aggregate targets. For 2010, I again approved Fannie Mae funding of its 
pool at 90 percent, and I approved funding of Freddie Mac's pool at 95 
percent. Individual executives could receive more or less, as long as 
the aggregate did not exceed the pool amount. Both Enterprises made 
substantial progress in loss mitigation and risk management, while 
meeting the challenges of implementing Treasury's Making Home 
Affordable Programs. However, the boards of both Enterprises, with my 
encouragement, recognized that those successes needed to be tempered by 
consideration of the sizable contributions of taxpayers needed to 
offset Enterprise losses, which occurred despite the generally strong 
efforts of the executives. Next year's goals will emphasize not only 
loss mitigation and progress on REO disposition, but improvements that 
will benefit mortgage market functioning, whatever new structure 
Congress may ultimately decide on, such as improved servicing 
standards, improved securities disclosures, the Uniform Mortgage Data 
Program, and development of risk-sharing pilots.
    The remaining portion of compensation is deferred salary, which is 
paid with a 1-year lag to executives still working for their Enterprise 
at that time. For the highest paid executives, deferred salary is the 
largest component of their compensation. As noted earlier, deferred 
salary motivates retention. An executive that voluntarily departs 
forfeits their deferred but not-yet-paid salary. Any exceptions require 
FHFA approval, in consultation with the Treasury. Starting with 
payments made in 2011, the amounts are adjusted up or down, based on 
each Enterprise's performance on its deferred salary scorecard. I 
approved a 10-percent deduction for Fannie Mae and a 12-percent 
deduction for Freddie Mac.
    The revised compensation structure was designed to align pay with 
taxpayer interests. Deferred salary and incentive pay for all executive 
officers are subject to claw backs by the Enterprises in the event of 
gross misconduct, gross negligence, conviction of a felony, or 
erroneous performance metrics. The structure also adopts and in some 
respects expands on reforms advanced by the Special Master for firms 
receiving exceptional TARP assistance. This structure, established in 
2009, and the annual targeted compensation amounts for executive 
officers remain in place today. Whenever Congress acts to direct how 
and when the conservatorships end and to decide the ultimate resolution 
of the companies, these executive positions, and the compensation 
program, are subject to change or elimination.
    News reports have described $12.8 million of 2010 pay as 
``bonuses.'' That number is the sum of $7.5 million in deferred salary 
and $5.3 million in target incentive opportunity payments.
Turnover and Compensation Under the Program
    Both Enterprises have experienced some increase in turnover. 
Freddie Mac's voluntary turnover rate over the past two quarters has 
averaged more than 13 percent compared to its 5-year average of 8\1/2\ 
percent. Fannie Mae's has risen to about an 11 percent annual rate so 
far this year after averaging a bit above 6 percent over the preceding 
3 years. Among officers at Fannie Mae, more than 11 percent have left 
so far this year. Five of Freddie Mac's 16 executive officers have left 
voluntarily since the beginning of the year. Both Enterprises have 
experienced some difficulty filling vacancies from outside, as 
candidates have expressed concern about the Enterprises' future and the 
lack of any remuneration in the form of equity.
Compensation in the Near-Term
    At the present, my plan for executive compensation is to continue 
to seek opportunities for gradual reductions, particularly when 
executives leave. This approach is consistent with the Administration's 
notion of a gradual wind down. I also believe it important for FHFA to 
continue to assess the corporate scorecards used to improve the 
alignment between the scorecards and the goals of conservatorship.
    Earlier in this prepared statement I described positive steps FHFA 
has undertaken to prepare the mortgage market for the future, with or 
without the Enterprises. I have recently spoken publicly of my goal to 
bring greater private capital participation into the Enterprises' 
mortgage purchases so that the taxpayer is not the sole source of 
support. And I have spoken of my goal to continue a gradual program of 
guarantee fee increases by the Enterprises so that their pricing better 
reflects that one would expect from a purely private company operating 
with its own capital at risk. I believe the executive compensation 
program in place today would be enhanced by more tightly aligning 
corporate goals with the successful achievement of these recently 
established conservatorship goals. Likewise, I believe we should be 
striving to simplify and shrink the operations at each Enterprise, and 
should award successful steps toward those ends.
Executive Compensation--Concluding Thoughts
    I recognize that this Committee, or the full Senate, may soon 
consider legislating changes to the executive compensation program I 
have just described. The House Financial Services Committee is 
scheduled to consider legislation today that would put Enterprise 
employees on the Federal Government's GS-pay scale. I have already 
testified before that body why I do not think that would be a good 
idea.
    I am grateful for this opportunity to explain the program that is 
in place today, its rationale and its features. I hope that this 
explanation has cleared up some misunderstandings and placed the matter 
in a different light. I would like to close with a few final thoughts, 
respectfully submitted for your consideration.
    I believe that commitments already made by the Government through 
the compensation already awarded by FHFA should be respected, whether 
lawmakers completely agree with the judgments FHFA made or not. 
Changing compensation going forward, thereby allowing Enterprise 
employees to make an informed choice about their continued employment, 
is fair. Changing what has already been promised and earned is not.
    Some have suggested that we should have no trouble maintaining 
adequate staffing at far smaller pay levels, pointing to outstanding 
cabinet members who serve or have served with distinction on Government 
pay scales. I have serious doubts about taking this approach to the 
management of the Enterprises. People come to work for the Government 
for a variety of reasons. The opportunity to serve our country is 
important for many of us. Some especially desire the relative job 
security of the career service, others the policymaking roles and the 
stature that comes with temporarily filling high-ranking jobs. If you 
want to influence the determination of our nation's financial and 
economic policies, a job in the Government may well be what you want, 
despite better pay offers elsewhere. But if you are working at an 
Enterprise in conservatorship, you have less say in the direction or 
outcome of your company than in normal businesses. And one of our first 
rules of conservatorship is that company employees may not lobby or 
participate in the policymaking process to decide the future of housing 
finance. At the same time, by working at Fannie Mae or Freddie Mac your 
work comes under a much higher degree of scrutiny and criticism, and 
with a lot less job security than comes with working for any other 
private firm engaged in housing finance. Executives who have spent a 
career developing their reputations risk tarnish to those reputations 
under the highly charged environment in which these companies operate 
today, regardless of how well they perform their duties or how great a 
financial sacrifice they make forsaking other private sector 
opportunities to assist the country's housing finance system.
    I do not question that, despite these drawbacks, some might be 
willing to sign up at Fannie Mae or Freddie Mac for relatively little 
pay, and I am committed to finding capable people willing to do so. But 
I have not seen, even in this marketplace, that people with the right 
skills to run these two companies, as they exist today with all the 
uncertainty involved and the negative atmosphere, are easy to find.
    But even if it could be done, and I think it might be possible if 
the missions and operations of the Enterprises were sufficiently 
streamlined, it would require a careful transition over time. The 
people who are there now did not choose Government jobs. A sudden and 
sharp change in pay would certainly risk a substantial exodus of 
talent, the best leaving first in many instances. The Enterprises 
likely would suffer a rapidly growing vacancy list and replacements 
with lesser skills and no experience in their specific jobs. A 
significant increase in safety and soundness risks and in costly 
operational failures would, in my opinion, be highly likely. Thus, 
sharp and sudden pay cuts should not be expected to lower taxpayer 
costs, but rather to raise them. Because of the huge size of these 
institutions, the potential consequences of any increases in risk are 
magnified. Additional losses amounting to just one basis point on their 
$5 trillion of assets and liabilities would translate to $500 million, 
nearly 40 times the ``bonuses'' that have received so much attention.
    Should the risks I fear materialize, FHFA might well be forced to 
limit the Enterprises' business activities. Such cut backs likely would 
drive much larger business volumes to FHA and Ginnie Mae, potentially 
straining their capacities. Some of the business the Enterprises would 
be unable to undertake might simply not occur, with potential 
disruption in housing markets and the economy.
    No one wants that. Whether you prefer that the secondary mortgage 
market be a purely governmental or a predominately private sector 
activity, we need to have an orderly transition, not a sudden shock. 
The best way to accomplish that is for lawmakers and the Administration 
to decide on the future structure of housing finance, especially as it 
regards the secondary mortgage market. Then we could have a final 
resolution of Fannie Mae and Freddie Mac in conservatorship, which 
would resolve the compensation issue once and for all.
    Mr. Chairman, thank you again for this opportunity. I have tried to 
provide the Committee with a clear overview of key aspects of our 
current activities and oversight goals as we await direction on the 
future of the housing finance markets. I look forward to responding to 
the Committee's questions.

        OVERSIGHT OF THE FEDERAL HOUSING FINANCE AGENCY--PART II

                              ----------                              

                       TUESDAY, DECEMBER 13, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I would like to call this 
hearing to order. I would like to welcome the first Inspector 
General of the FHFA, Steve Linick, before the Committee today.
    As we wrap up the hearings for this year, I am pleased that 
the Ranking Member and I were able to agree to a plan for the 
hearings that the Committee held on housing finance reform this 
year and hope that we will be able to continue that bipartisan 
approach next year.
    The 12 housing finance-related hearings we held this year 
have highlighted some general principles I believe we hold in 
common that will guide us going forward. Small institutions 
that maintained sound underwriting standards during the boom 
should still have access to any secondary market that is 
created in the future. This is important for maintaining 
strong, responsible home ownership opportunities in rural and 
underserved areas. Fully documented underwriting should be the 
standard practice in any system going forward. Clear rules of 
the road are essential for providing stability to the market, 
but the transition must be a gradual one, given the current 
fragile state of the market.
    The Committee's exploration of these specific topics has 
helped inform members and build a record on which the Committee 
can evaluate legislative efforts. Looking ahead to next year, 
there are some topics that still need to be explored, but I am 
hopeful that Senator Shelby and I can continue moving forward 
on housing finance reform in the same bipartisan way that we 
have conducted hearings and markups this year.
    In nearly every hearing this year, the current state of the 
economy and strategies for improving the housing market were 
topics of discussion. The need to reform our housing finance 
system and the need to improve the housing market go hand in 
hand. The Federal Housing Finance Agency, as the conservator of 
Fannie Mae and Freddie Mac, could play a significant role in 
improving the housing market, but based on reports from the 
Inspector General's office, there are deficiencies at the 
agency that are holding back those efforts.
    I am concerned that the reports produced by the Inspector 
General's office show several negative trends in FHFA's 
oversight of operations at Fannie Mae and Freddie Mac. First, 
the regulator defers to the GSEs on major decisions without 
independently verifying the benefits to the conservatorship or 
the taxpayers. Second, the FHFA appears to allocate staffing 
resources in a manner that limits its ability to enforce 
directives and adequately oversee operations at the GSEs. These 
two trends appear to restrict the FHFA's ability to help 
stabilize the housing market and protect taxpayer dollars while 
also continuing the problematic relationship that Fannie Mae 
and Freddie Mac had with their previous regulator.
    Despite its independent status, which was granted on a 
bipartisan basis in 2008 as a single director with 
congressional appropriations and expanded powers as 
conservator, FHFA could be doing more to prevent losses and 
enforce required changes at Fannie Mae and Freddie Mac. As the 
regulator of two of the largest entities in the housing market, 
it is essential that FHFA prioritize oversight as one of the 
strategies necessary to stabilize our housing market. This 
would benefit the taxpayers both by strengthening the current 
state of the GSEs and also providing guidance and consistency 
to a large sector of the housing market to further create 
stability for homeowners and potential homebuyers.
    I look forward to hearing your recommendations for 
improvements and the possible reasons for the trends that you 
continue to see, Inspector General Linick.
    With that, I turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    Today, as the Chairman has mentioned, the Committee will 
hear the testimony of the Inspector General of the Federal 
Housing Finance Agency, Mr. Steve Linick. This will be his 
first appearance before us.
    The Office of the Inspector General oversees the Federal 
Housing Finance Agency's regulation of Fannie Mae, Freddie Mac, 
and the Federal home loan banks. I look forward to hearing the 
testimony today from the Inspector General about the status of 
Fannie, Freddie, and the Federal Housing Finance Agency, as 
well as how he plans to carry out his duties. I am interested 
to hear how his office can help FHFA, the Federal Housing 
Finance Agency, oversee the conservatorship of Fannie and 
Freddie.
    Unfortunately, before Mr. Linick was confirmed, the post of 
the Federal Housing Finance Inspector General was vacant for 2 
years, a period when the need for oversight I believe was 
critical. During that time Fannie and Freddie were placed into 
conservatorship, and taxpayers began paying for their losses. 
So far, Fannie and Freddie have cost almost $183 billion and 
counting.
    Despite their financial problems, Fannie and Freddie's 
dominant role in the housing market persists as they currently 
back 71 percent--71 percent--of new mortgage-backed securities. 
The delay in filling the IG post means that Mr. Linick has a 
lot of important work, I believe, to catch up on.
    First and foremost, I believe we must provide oversight of 
the Federal Housing Finance Agency's conservatorship of Fannie 
and Freddie to ensure that the taxpayers' dollars are spent 
wisely. During its short existence, the Office of the Inspector 
General here has already identified several ways in which the 
Federal Housing Finance Agency can do a better job of 
protecting taxpayers. For example, in its semiannual report, 
the Inspector General noted that the FHFA did not effectively 
oversee Fannie and Freddie's negotiations with Treasury on the 
administration's Home Affordable Modification Program that we 
call ``HAMP.''
    According to the report, this contributed to the GSEs' 
entering into a poorly drafted agreement. As a result, there 
have been significant disputes between the Federal Housing 
Finance Agency and the Treasury about how the GSEs should run 
HAMP.
    The report also notes that HAMP has undermined the ability 
of the GSEs to perform their core functions. Indeed, FHFA 
Acting Director Ed DeMarco concluded in a letter, and I will 
quote. He said, ``HAMP created operational risk with the 
enterprises and diverted staff and resources from other 
critical priorities.'' This report recommends that the Federal 
Housing Finance Agency better engage with Treasury and the GSEs 
to clarify certain aspects of the HAMP agreements, including 
establishing a dispute resolution mechanism.
    Another issue that the IG mentions in his semiannual report 
is FHFA's lack of analysis or compensation for Fannie and 
Freddie executives here. According to the Office of the 
Inspector General, and I quote again, ``FHFA had not considered 
factors that might have resulted in reduced executive 
compensation costs.''
    To improve FHFA's framework for making executive pay 
decisions, the Office of Inspector General recommended that 
FHFA use performance data and independent verification of 
compensation levels. Taxpayers I believe should never be put in 
the position of paying millions to executives of any company. 
Yet as long as we have had the GSEs, this has been the case. 
The OIG recommendations are intended to ensure that taxpayers 
spend only what is required, what is necessary.
    The OIG's work also shines a light on the larger issue of 
the costs arising from the administration's failure to propose 
a detailed plan to end the conservatorship of Fannie and 
Freddie. It has been 3 years and 98 days since the 
conservatorship began. The conservatorship was never intended 
to last this long. Nor was FHFA designed to handle the 
``conservatorship to nowhere'' that we face today.
    It should not be surprising that the OIG has found 
significant shortfalls in the FHFA's examination program, 
including having too few examiners overall to ensure the 
efficiency and effectiveness of FHFA's oversight of the GSEs.
    This is no small finding since examination is the primary 
means by which the FHFA supervises and regulates the GSEs. This 
serious problem here exists in large measure because the 
perceived short-term nature of the conservatorship makes it 
difficult for FHFA to hire enough qualified examiners. This is 
just one of many problems created by the GSEs' prolonged 
conservatorship, and the longer we wait to reform our housing 
finance system, the larger these problems will grow, and the 
solutions will become more expensive for the taxpayer.
    Nevertheless, the majority decided not to tackle housing 
finance reform in Dodd-Frank, as many people on this Committee 
recommended. At some point, however, the majority is going to 
find that it can no longer kick the can down the road. We need 
to work together on this.
    Thank you.
    Chairman Johnson. Thank you, Senator Shelby.
    [Whereupon, at 10:15 a.m., the Committee proceeded to other 
business and reconvened at 10:22 a.m.]
    Chairman Johnson. Returning from Executive Sessions, are 
there any other Members who wish to make a brief opening 
statement?
    [No response.]
    Chairman Johnson. Thank you all. I want to remind my 
colleagues that the record will be open for the next 7 days for 
opening statements and other materials you would like to 
submit.
    Now, I would like to briefly introduce our witness here 
today. The Honorable Steve A. Linick is Inspector General of 
the Federal Housing Finance Agency. Mr. Linick has served in 
this capacity since October 2010, having previously served in 
various senior positions at the Department of Justice. We 
welcome you here today Mr. Linick and ask you for your time.
    Mr. Linick, you may proceed with your testimony.

   STATEMENT OF STEVE A. LINICK, INSPECTOR GENERAL, FEDERAL 
                     HOUSING FINANCE AGENCY

    Mr. Linick. Thank you, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee, for inviting me to 
testify today. I will provide an assessment of our emerging 
trends based on the work we have conducted to date and describe 
our operations.
    I am the Agency's first Inspector General. My office began 
operations after I was sworn in in October of 2010. Over the 
past 14 months, we have hired a professional staff and have 
gotten the office up and running. To date, we have published 10 
audits and evaluations. We have commenced multiple criminal and 
civil investigations. We have issued our second semi-annual 
report to Congress just 2 weeks ago.
    I want to tell you about emerging trends we have seen in a 
number of our reports, to which Chairman Johnson has alluded. 
Let me begin with some of the positives for which FHFA deserves 
credit.
    For example, FHFA has eliminated golden parachute 
compensation awards to terminated Fannie Mae and Freddie Mac 
executives. In addition, FHFA has accepted our recommendations 
to improve its effectiveness and efficiency and to reduce its 
vulnerability to fraud, waste, and abuse.
    On the other hand, however, our reports have also 
identified deficiencies reflecting two significant and related 
emerging trends. First, FHFA often relied on determinations of 
the Enterprises without independently testing and validating 
them, thereby giving undue deference to Enterprise decision 
making. Second, FHFA's decisions about how it allocated its 
resources may have affected its ability to oversee the GSEs.
    Let me start with the first emerging trend. FHFA has not 
independently tested and validated Enterprise decision making. 
In brief, we believe FHFA has displayed undue deference to the 
Enterprises in a number of areas. The Agency's actions appear 
to reflect its approach as conservator to delegate most 
business decisions to the Enterprises. In four of our reports, 
we identified instances in which the Agency relied upon review 
and corporate governance processes already in place at the 
Enterprises. However, we believe there are some matters that 
are sufficiently important to warrant greater involvement and 
scrutiny by the Agency. Here are illustrations from two of the 
four reports.
    First, I will discuss FHFA-OIG's report on the review and 
approval of the Freddie Mac settlement of repurchase claims 
with Bank of America. At the end of 2010, FHFA approved a $1.35 
billion settlement of mortgage repurchase claims between 
Freddie Mac and Bank of America. In approving the settlement, 
FHFA relied on Freddie Mac's analysis of the settlement 
benefits. But there was reason to question the settlement based 
on a significant flaw identified in the Freddie Mac loan review 
process. Before the settlement came up, an FHFA senior examiner 
questioned whether Freddie Mac's process accounted for housing 
boom loans. Freddie Mac's internal auditors raised similar 
questions at the end of 2010 and in the middle of 2011. 
Nonetheless, FHFA did not independently test the assumptions 
underlying Freddie Mac's settlement. According to the senior 
FHFA examiner, he believed the flaw he identified could be 
costing Freddie Mac a significant amount of money.
    In the wake of our report, FHFA has suspended approvals of 
additional repurchase settlements, agreed to improvements in 
its internal management process, and has initiated further 
study of the issue.
    Second, I will discuss another example involving FHFA's 
review and approval of executive compensation. In another 
report, we found that for 2009 and 2010, Fannie Mae and Freddie 
Mac paid their top six executives over $35 million in salaries 
and benefits over those 2 years. FHFA reviewed and approved 
those payments based on recommendations made by Fannie Mae and 
Freddie Mac. But FHFA did not independently test or validate 
the recommendations. And given the amounts involved, we 
concluded that FHFA should have done more, for instance, by 
including a wider range of salaries for pay comparison purposes 
and a review of performance metrics used to judge the 
executives' compensation levels.
    Let me now turn to the second emerging trend. FHFA's 
resource allocations may have affected its ability to oversee 
the GSEs and enforce its directives. Again, in brief, we 
identified in four reports situations in which FHFA was not 
proactive in its oversight and enforcement. Inadequate resource 
allocations may explain these failings. Here are two 
illustrations.
    First, I will discuss a report involving FHFA's oversight 
of foreclosure process abuses. News reports about foreclosure 
abuses in the foreclosure process by law firms and their agents 
began to surface in a big way starting in the summer of 2010. 
But only after the news surfaced did FHFA begin to schedule 
comprehensive examination coverage of foreclosure issues. 
Before that time, FHFA had not considered the risks associated 
with foreclosure processing to be significant. However, our 
report identified multiple indications of foreclosure abuse 
issues prior to mid-2010 that could have led FHFA to foresee 
the heightened risk in foreclosure processing abuses. FHFA had 
not acted on the issue before mid-2010 because neither the 
Agency nor its predecessor agency considered the matter to be a 
priority.
    The second illustration involves a report addressing FHFA 
examination capacity. As noted in this report, FHFA believes it 
has too few examiners monitoring the operations of Fannie Mae, 
Freddie Mac, and the Federal Home Loan Banks. Moreover, about 
only a third of FHFA line examiners are accredited. Our report 
concluded that this examination shortage may have contributed 
to FHFA's lack of oversight in significant areas, such as real 
estate owned property.
    I would now like to provide a brief overview of my office's 
operations. Broadly, our plans for audits and evaluations 
include reviews of the following Agency activities: Management 
of the Enterprise conservatorship, including servicing and real 
estate owned property; oversight of the Federal Home Loan 
Banks; and FHFA internal operations.
    We also operate a separate Office of Investigations. It, 
too, has made significant contributions to a range of mortgage-
related investigations. For example, we recently participated 
in the investigation, prosecutions, and convictions associated 
with the Taylor, Bean & Whitaker case. In that case, the 
defendants perpetrated a $2.9 billion fraud that has been 
described as among the largest in history. Freddie Mac reported 
losses in that case alone of $1.8 billion.
    The Office of Investigations also operates the FHFA-OIG 
Hotline, which allows for confidential reporting of fraud, 
waste, or abuse, and that hotline can be reached at 1-800-793-
7724.
    In closing, we look forward to continuing to work with the 
Committee to provide independent, relevant, and objective 
assessments of FHFA's operations and programs. FHFA continues 
to face significant challenges based on the continuing 
fragility of the Nation's housing market and the continuing key 
roles still played by Fannie Mae, Freddie Mac, and the Federal 
Home Loan Banks, and I hope the work by my office will be of 
assistance in meeting those challenges.
    Thank you, and I am happy to answer your questions.
    Chairman Johnson. Thank you very much for your testimony.
    As we begin questions, I will ask the Clerk to put 5 
minutes on the clock for each Member.
    Mr. Linick, according to your semi-annual report, FHFA and 
its predecessor have failed to enforce requirements that Fannie 
Mae implement an operational risk program. Does this lack of 
follow-through pose an operational risk to the conservatorship 
and taxpayer dollars, in your opinion? What is providing the 
Agency, especially now as conservator, from taking further 
actions to force compliance?
    Mr. Linick. Senator, operational risk involves identifying 
losses caused by people, processes, and external events, such 
as foreclosure abuses. Operational risk is critical to 
corporate governance. Good operational risk programs would 
require the Enterprise to self-identify, report, and correct 
risks as they emerge.
    What we found in our report on operational risk is that for 
5 years, between 2006 and 2011, FHFA and its predecessor 
agency, OFHEO, had repeatedly cited Fannie for not implementing 
an effective operational risk program. In 2009, FHFA said it 
was a critical concern and issued numerous citations. Yet 
despite these findings, Fannie Mae has not implemented an 
operational risk program and FHFA has not required it to, and 
that is of concern to us.
    It is of concern to us because FHFA's own examination 
shortages cause concerns, and if FHFA is weak as a regulator or 
as a conservator, it is important that Fannie's and Freddie's 
operational risk programs be strong because they go hand-in-
hand. So that is why operational risk is a critical element to 
oversight and accountability.
    In terms of what is preventing the Agency from enforcing 
this and requiring Fannie Mae to develop an operational risk 
program, I do not know why. It is rather shocking, since they 
have been telling Fannie Mae for 5 years that they need an 
operational risk program. FHFA has broad authorities as 
conservator. They can fire people. And as regulator, they 
certainly can issue cease and desist orders and the like.
    They have promised that they will implement an effective 
operational risk program by 2012 and we are monitoring it.
    Chairman Johnson. Can you give examples of areas where 
staff and resources are not being allocated to prioritize 
oversight and how this could impact FHFA's ability to limit 
taxpayer losses.
    Mr. Linick. We have issued a report on examination capacity 
at the Agency, and this report reflected what the Agency told 
us about staffing shortages resulting in limited transaction 
testing, scaled back examination, and delays in examination. We 
heard that from the Agency. In part, it involved the HAMP 
program. Transfer of risk examiners to the HAMP program early 
on caused stressors on the examination program.
    The examination program is absolutely critical to assessing 
risk management at the Enterprises, and we have noticed that as 
a result of these shortages, there have not been targeted 
examinations of real estate owned property until every 
recently. There have not been examinations of critical business 
lines, such as multifamily housing. And there have been 
insufficient examinations at the Federal Home Loan Banks.
    Clearly, if FHFA does not have the capacity to examine 
critical programs at the GSEs, there is a risk of loss to 
taxpayers and it is very important that the Agency takes steps 
to mitigate these shortfalls, which it is doing.
    Chairman Johnson. Does the FHFA have the resources and 
staff to provide proper oversight and examinations of a $5 
trillion mortgage portfolio and entities responsible for 
supporting the majority of the $11 trillion mortgage market?
    Mr. Linick. The staffing issue is a complicated issue 
because there is no doubt that the Agency, in our view, could 
do a better job prioritizing and allocating resources. But we 
have not done an across-the-board human capital assessment to 
determine whether, overall, the Agency needs to staff up to 
address the conservatorship.
    We have looked at staffing in one area, examination 
capacity, and we concur with the Agency that they need more 
examiners. We are also concerned because their Office of 
Conservatorship Operations has six individuals in it, and we 
are looking at that issue now to determine whether or not that 
is sufficient.
    But staffing also relies on other considerations. Bigger is 
not necessarily better for an organization. So, for example, it 
is possible that the Agency can beef up its conservatorship 
operations if their examination operations are not strong, or 
vice-versa.
    The Agency can also ensure through operational risk 
programs, that Fannie and Freddie and the Federal Home Loan 
Banks have their house in order to compensate for examination 
shortfalls.
    So, clearly, more can be done to improve. We have 
recommended that the Agency study this issue to determine how 
it can mitigate these examination shortfalls. Ultimately, Mr. 
DeMarco is going to have to find the optimal point of how to 
staff the Agency in a way in which resources are allocated 
appropriately and strategically.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Mr. Linick, in addition to managing a brand new Inspector 
General's office, you lead a very unique office here. The 
conservatorship of Fannie Mae and Freddie Mac have now lasted 
for over 3 years, as I mentioned in my opening statement, at a 
cost of $183 billion, I understand, and growing. In your 
position, you provide oversight of the Federal Housing Finance 
Agency not only in its traditional role as a regulator, but 
also now as a conservator.
    During your tenure, and I know you have not been there that 
long, what will be your priorities, number one, and what issues 
do you intend to focus on specifically? I know there will be 
some that will pop up to you, but on the overall substantive 
issues. And how will you implement your agenda going forward as 
an independent Inspector General at the Federal Housing Finance 
Agency?
    Mr. Linick. Senator, as you mentioned, our role is unique 
given we have a conservatorship and a regulator all wrapped in 
one.
    In terms of our priorities, our number one priority is 
looking at conservatorship management and Enterprise oversight. 
We are looking at every stage of the mortgage loan process, 
from underwriting all the way to deficiency judgments. We are 
looking at various stages of servicing, from the beginning of 
servicing to the end of servicing. And we have already issued 
reports on default-related legal services, how attorneys relate 
to the servicing process and foreclosure processing abuses, and 
we have issued an operational risk report.
    We are also looking at risk management. The operational 
risk report addresses that and we are looking at other types of 
risk management and Enterprise board governance. We are also 
looking at how the $183 billion is being spent, just to name a 
few.
    We are also looking at the Federal Home Loan Banks----
    Senator Shelby. Good.
    Mr. Linick. ----and there are a number of issues associated 
with management of the Federal Home Loan Banks as well as FHFA 
capacity and internal operations.
    Senator Shelby. And also the Federal Home Loan Banks' risk 
to the taxpayer?
    Mr. Linick. Absolutely. Regarding the Federal Home Loan 
Banks, there are a number of issues we are looking at. In fact, 
we have a couple of reports which are in progress now, 
including one on the four troubled banks. We are also looking 
at advance and collateral management and we are looking at 
capital management, as well.
    We also have a robust Investigations Division which we 
would like to hold people accountable and institutions 
accountable for defrauding the GSEs and defrauding individuals 
holding GSE loans. So our investigations section, combined with 
our audit and evaluation section, is how we plan to attack the 
issues facing the Agency.
    Senator Shelby. OK. In your testimony, you also mentioned 
that the Federal Housing Finance Agency views operational 
risk--you alluded to it earlier--as an important safety and 
soundness challenge to all of us facing, of course, Fannie and 
Freddie. Yet, during the past 5 years, Fannie has consistently 
failed to manage operational risk. Although the Federal Housing 
Finance Agency has the authority to discipline the GSEs for 
such failures, including removing personnel, FHFA so far has 
not chosen to exercise this authority. That does not mean you 
will not in the future. I understand that.
    In your view, should the Federal Housing Finance Agency 
take stronger action to discipline the GSEs for their failure 
to manage operational risk, and why has FHFA not taken stronger 
remedial action, and does the perceived temporary nature of 
FHFA's role as a conservator create challenges to managing 
these significant and ongoing risks, $5 trillion, I believe the 
Chairman mentioned.
    Mr. Linick. Senator, let me start with the question of 
enforcement. The operational risk report is just one report we 
have done on the issue of enforcement. But enforcement, in our 
view, is critical to ensuring that losses are mitigated and 
that there is proper oversight. Enforcement not only in 
ensuring the operational risk program is implemented, but also 
enforcement in servicing, in foreclosure processing abuses.
    We are in the middle of a servicing report now, but 
standards alone are not sufficient. There is an initiative 
currently proposed by FHFA, a servicing alignment initiative, 
and we are monitoring that, and that is a good step forward. 
However, what we want to see is not just standards but 
compliance with those standards and enforcement by FHFA.
    Senator Shelby. What additional challenges have been 
created by the--for, not by, but for the Federal Housing 
Finance Agency--by the uncertain nature of the ongoing 
conservatorship of the GSEs? In other words, you do not know 
what the future is going to be.
    Mr. Linick. Senator, uncertainty is always a bad thing, and 
the uncertainty factor has created difficulties for the Agency 
in recruiting qualified personnel to the Agency. It has 
affected their ability to plan, how to staff resources, such 
as, whether they should staff the conservatorship operations or 
the regulatory operations. And I think it has had an effect on 
oversight, as well, because one of the factors that Mr. DeMarco 
has cited as the reason for employing a delegated approach to 
conservatorship is the prospect of a wind-down.
    Senator Shelby. Sure. FHFA was created to be an agency 
independent of executive branch influence, whoever the party 
was in power. There have been multiple reports of executive 
branch officials attempting to pressure the Federal Housing 
Finance Agency and the GSEs into implementing programs with 
political benefits to the Administration.
    Do you believe that it is important for the Federal Housing 
Finance Agency to continue to operate free from executive 
branch influence, as is mandated by the statute that created 
the Federal Housing Finance Agency? And two, how can your 
office most effectively ensure that your independence is not 
compromised by the executive branch? And third, do you believe 
that increased transparency requirements are needed for FHFA 
and the GSEs regarding their interactions with the executive 
branch?
    Mr. Linick. Senator----
    Senator Shelby. I know that is a lot, but I just had a 
little time.
    Mr. Linick. Let me answer the third question.
    Senator Shelby. OK.
    Mr. Linick. Transparency is always a good thing. Our role 
is to promote transparency----
    Senator Shelby. Right.
    Mr. Linick. ----in Government operations, and we have 
recommended that the Agency be transparent in a number of 
different areas, from executive compensation to operational 
risk, whatever it is.
    One of the reports we issued is the Treasury Making Home 
Affordable report, in which we looked at the independence of 
the Agency. We do believe that it is absolutely essential for 
the Agency to be independent and to act independently, and we 
found in that particular report that with respect to FHFA's 
role negotiating the financial agency agreements for HAMP that 
its independence was not undermined. The problem in that 
particular review was the lack of engagement by FHFA in 
participating in those negotiations and----
    Senator Shelby. And what brought that about?
    Mr. Linick. Well, FHFA decided to leave those negotiations 
up to the Enterprises and Treasury, and----
    Senator Shelby. But that is not always a good idea, is it?
    Mr. Linick. It is not a good idea. These involve 5-year 
commitments by the Enterprises to administer efforts to 
potentially modify millions of mortgages, and there were 
significant financial obligations. The Enterprises were in 
conservatorship at the time. We recommended that FHFA be more 
engaged. This was another example of a situation where the 
Agency deferred too much to the Enterprises----
    Senator Shelby. But would that not have been at a cost to 
FHFA, perhaps, to allow that modification, or those 
modifications?
    Mr. Linick. I am sorry, a cost to FHFA?
    Senator Shelby. I said, a lot of the modifications that we 
are talking about, somebody has to pay for that. Was FHFA going 
to have to absorb some of that?
    Mr. Linick. Well, one of the issues that we looked at is 
whether or not the Treasury was going to be paying for the 
administrative efforts----
    Senator Shelby. Mm-hmm.
    Mr. Linick. ----of the Enterprises, and that was a point of 
contention that was never ironed out in the agreement.
    Senator Shelby. OK. Well, we wish you well in your job.
    Mr. Linick. Thank you, Senator.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
thank you, Mr. Linick, and your staff for your efforts.
    You are very clear in your September 23 evaluation that the 
FHFA has too few examiners, which goes to the very basic 
ability to conduct their operations. Just can you confirm that 
is, in fact, your conclusion? And second, what can they do to 
increase the examiners? Otherwise, they are under-resourced and 
noneffective.
    Mr. Linick. Well, the FHFA told us that they have too few 
examiners and we concur with that assertion. We have 
recommended a number of things that they undertake to remedy 
that.
    Number one, we asked them to study the issue because, as I 
mentioned earlier, shortfalls in examination capacity may be 
mitigated by strengthening operational risk or strengthening 
conservatorship. So we asked them to study that.
    The Agency has taken a number of actions to mitigate that 
and we have recommended that they train, examiners to increase 
the number of accredited examiners, potentially hire detailees 
and contractors from other agencies, and finally, to be 
transparent about these examination shortfalls because Congress 
and the American public need to understand their ability to 
regulate Fannie and Freddie.
    Senator Reed. Are they moving aggressively to fulfill your 
recommendations and to correct this, and do they have the 
resources to do it?
    Mr. Linick. Well, I believe that they are moving 
aggressively in this area. I know that they have reorganized 
the Agency and made examination a priority. But it has been 
very difficult, from what I understand, based on my 
conversations with Mr. DeMarco, to attract examiners. It is 
already difficult when you are not in a conservatorship--when 
you are not in a financial crisis. It is very difficult when 
you are. I do think that examiners are reluctant to come to the 
Agency because they do not know where their future lies.
    This has been a very difficult area. I know the Agency has 
been putting out notices and advertisements. I am confident 
that they are trying as best as they can. From what I have 
heard, however, they are having trouble meeting their goals, 
and we are continuing to monitor and work on this and we will 
certainly brief you and the Committee----
    Senator Reed. I think you will have to, because you have 
identified this key fault line in the Agency.
    Let me just shift gears slightly, but I think we have all 
been talking around this topic. The essence of the 
conservatorship is to maintain as best you can the value of the 
assets of the Enterprises. At least, that is my view point. And 
there is a constant debate whether that is done simply by sort 
of the status, maintaining the status quo, or it is done by 
engaging in modifications of some of the mortgages. All of that 
is at the heart of these discussions about HAMP and its 
successor programs.
    Have you taken your office's perspective on how well they 
are doing managing or maintaining the value of the Enterprises, 
and have you evaluated whether alternative approaches, like 
mortgage modifications, et cetera, would yield more value over 
time?
    Mr. Linick. Senator, let me respond in two parts to your 
question. I think, first, this issue about monitoring the sale 
of assets and the modifications issue sort of underscores the 
tension that we have seen between the housing mission and 
safety and soundness mission. We are looking at how the 
Director is balancing those missions as he promulgates policies 
and so forth. So transparency is absolutely critical. We are 
trying to take a look at the rationale, the analysis that is 
being done, and trying to ensure that independent judgment is 
exercised and not undue deference on the Enterprises.
    Let me see. The second question--can you just repeat the 
second question? I am sorry. I have lost my train of thought.
    Senator Reed. You assume my train is running better than 
your train.
    [Laughter.]
    Senator Reed. What I----
    Mr. Linick. I had two parts.
    Senator Reed. You had two parts.
    Mr. Linick. I got the second part.
    Senator Reed. You had two parts. But I think, basically, 
the remaining question rests on this whole topic of how well 
they are doing maintaining the value as a conservator, and let 
me just--you have given me the opportunity to elaborate just a 
bit, and very quickly. One part of this is all about where the 
housing market is moving. If the housing market starts 
appreciating, then guess what. They will look like geniuses 
because they have held on to these assets, or they have had 
Fannie and Freddie hold on. If the market keeps deteriorating, 
then I think you could make the argument they should have 
disposed of the assets, modified the mortgages, done all sorts 
of things, and they have not done that. So there is uncertainty 
based on market movements.
    But the other complicating factor, frankly, is because of 
the sheer size of Fannie and Freddie, what Fannie and Freddie 
each does, influences the market. So it is a very complicated, 
volatile situation, and again, from your perspective, are you 
trying to evaluate how well they are doing maximizing or 
maintaining--I guess maintaining would be better--the value of 
Fannie and Freddie, given that the market's future is uncertain 
and the fact that Fannie and Freddie influence the market? This 
is--it is almost like particle physics. It is pretty 
complicated, so----
    Mr. Linick. Got it.
    Senator Reed. Thank you, sir.
    Mr. Linick. Senator, we are looking at this issue from a 
number of different angles. Our Repurchase Claims Report is one 
way we have addressed this, looking at how well they are doing 
in recovering taxpayer monies through the repurchase process. 
There are a lot of different ways to slice this.
    The other way we have started looking at this is the real 
estate-owned property. Holding that property or selling it 
quickly is a very important and tricky balance that needs to be 
made. If you hold that, obviously you have carrying costs and 
you have potential blight issues and so forth. If you sell it 
too quickly, it could affect the housing prices. We have an 
ongoing audit in that area, but we are looking at loss 
mitigation from a number of different angles.
    Senator Reed. Right. Well, I appreciate that, and I think 
that is absolutely critical, because you are--we do not want to 
compromise the independence of FHFA, but we do not want an 
agency that is paralyzed because of the complexity of the 
issues they face, and the uncertainty. And your office can help 
direct them, and I think you put your finger on the right 
terminology that I have been struggling with, which is minimize 
losses, either through a creative REO, renting it out, selling 
it quickly, modifications, et cetera. To take all those off the 
table and just sit pat I think is not the way to minimize 
losses going forward, unless you are very lucky and the market 
comes back on its own.
    Thank you.
    Chairman Johnson. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman, and thank you for 
being here, Mr. Linick.
    You addressed the $35 million FHFA-approved compensation 
package in the March 30th report for the enterprises' top six 
officers. You referenced the fact that FHFA failed to identify 
or acknowledge the benefits of Federal assistance in enabling 
senior executives meet corporate and other performance goals. 
You also found that FHFA lacked the processes and controls 
necessary to monitor the GSEs' compensation decisions and that 
the FHFA failed to provide necessary transparency. You talked 
about it in your opening remarks.
    You made a number of recommendations, and they agreed with 
some and they disagreed with others. Can you explain to me why 
FHFA disagreed with your recommendation to take a look at 
disparities between executive compensation at Fannie Mae and 
Freddie Mac and other Federal housing agencies, and a second 
recommendation that the FHFA test and independently verify the 
GSEs' individual salary recommendations? Can you give me any 
insight into their thought process on this?
    Mr. Linick. Senator, I think they actually have changed 
their tune on the comparability, and they are actually 
undertaking that analysis.
    Senator Tester. So to test and independently verify, or the 
first one you are talking about?
    Mr. Linick. I believe they have actually agreed to all of 
the recommendations.
    Senator Tester. Really?
    Mr. Linick. And they are actively engaged in looking at 
that.
    Senator Tester. OK. And so what are they doing looking at 
it? I mean, are they--OK. You can take a lot of heat off 
yourself and say, ``Yes, well, I agree with the recommendation 
now, and we are going to look at it.'' But what is the outcome 
of that?
    Mr. Linick. This is an area that concerns us because we are 
in compensation season right now when they are developing 
bonuses and so forth. And the way it works is essentially there 
is a base salary and then there is a performance base, and that 
performance piece is influenced by individual and corporate 
goals. Those corporate goals are developed and blessed, if you 
will, by the FHFA at the very beginning of the process, and 
those corporate goals influence what grade those executives 
get.
    Senator Tester. Right.
    Mr. Linick. We found in our report that there was not a lot 
of vetting being done of those goals. For example, one of the 
goals required the enterprises to increase market share. I 
think they were required to sell 37 percent of mortgage issue, 
37 percent of----
    Senator Tester. So where you are going with this, what you 
are saying is next year it is going to be different.
    Mr. Linick. Well, what I am saying is I am concerned that 
we are going to be in the same exact spot next year as we are 
at this year.
    Senator Tester. Even though they agreed with the 
recommendation and said they are going to look at----
    Mr. Linick. Well, I believe that they are going to do it. 
The problem is whether they are going to do it in time for the 
next cycle. That is what concerns me, and I have alerted Mr. 
DeMarco to this particular concern, that they need to get 
procedures in place so they can evaluate these goals to make 
sure these goals are in sync with the conservatorship.
    Senator Tester. Did he seem to be open that it would make a 
difference next time around?
    Mr. Linick. He acknowledged the need to do that. I do not 
know what the status--I know that it is supposed to be done by 
the end of the year. The problem is all of this occurs right 
now and in November.
    Senator Tester. OK. Have you had an opportunity--taking our 
eyes off the six top folks, have you had an opportunity to look 
at the compensation of the other senior-level employees which 
we have heard bonuses are significant there?
    Mr. Linick. We have not issued a report on that topic.
    Senator Tester. Are you going to take a peek at it maybe?
    Mr. Linick. We have actually asked for documents reflecting 
what those salaries are.
    Senator Tester. Oh, good. So you have already started.
    Mr. Linick. We are looking at it, but we do not have a 
report, and I have no findings or conclusions in that regard.
    Senator Tester. OK. Well, we look forward to that, too, 
because that will also have an indication of how serious they 
are to deal with the problem that you pointed out that they 
disagreed with and then they agreed with, with the six top 
employees, in my opinion.
    A previous questioner asked about reports, he had read 
reports of the administration's pressure on FHFA. I have not 
read that report, and sometimes you wonder about what you read 
about back here anyway. But your perspective is more important 
than any report I might read, anyway, except if it is your 
report. And that is, have you seen any examples of the 
administration applying pressure to the FHFA?
    Mr. Linick. No. Well, we have only looked at one sliver of 
the variety of relationships. The one relationship we looked at 
is the relationship between Treasury and negotiating the 
financial agency agreements, and we did not find that FHFA's 
independence was compromised in that arena.
    Senator Tester. All right. Well, thank you very much. That 
is probably about it. I could ask about solvency since the 
conservator took over, but I do not know that you can answer 
that question. Since FHFA has taken over, how has their 
portfolio looked from that time forward? Or have you had a 
chance to take a look at that?
    Mr. Linick. I do not have any independent findings on that, 
so I would rather defer to Mr. DeMarco and others.
    Senator Tester. Super. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Johnson. Mr. Linick, your work only strengthens my 
view that we need a permanent Director at FHFA. Unfortunately, 
the President's first nominee, Joe Smith, was blocked from 
confirmation despite a bipartisan vote of support in this 
Committee. Because of the importance of FHFA's mission, I urged 
the President to send to the Senate a new nominee as soon as 
possible.
    Mr. Linick, I thank you for your testimony and for being 
here with us today. This Committee takes their oversight of 
FHFA very seriously, and your role as Inspector General serves 
as a valuable resource that we appreciate. FHFA continues to 
play a key role in the stabilization of the housing market, and 
a robust Inspector General will only assist them in this 
process.
    This hearing is adjourned.
    [Whereupon, at 11:02 a.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
    I would like to welcome the first Inspector General of the FHFA, 
Steve Linick, before the Committee today.
    As we wrap up the hearings for this year, I am pleased that the 
Ranking Member and I were able to agree to a plan for the hearings the 
Committee held on housing finance reform this year, and hope that we 
will be able to continue that bipartisan approach next year.
    The 12 housing finance related hearings we held this year have 
highlighted some general principles I believe we hold in common that 
will guide us going forward. Small institutions that maintained sound 
underwriting standards during the boom should still have access to any 
secondary market that is created in the future. This is important for 
maintaining strong, responsible home ownership opportunities in rural 
and underserved areas. Fully documented underwriting should be the 
standard practice in any system going forward. Clear rules of the road 
are essential for providing stability to the market, but the transition 
must be a gradual one given the current, fragile state of the market.
    The Committee's exploration of these specific topics has helped 
inform Members and build a record on which the Committee can evaluate 
legislative efforts. Looking ahead to next year, there are some topics 
that still need to be explored, but I am hopeful that Senator Shelby 
and I can continue moving forward on housing finance reform in the same 
bipartisan way that we have conducted hearings and markups this year.
    In nearly every hearing this year, the current state of the economy 
and strategies for improving the housing market were topics of 
discussion. The need to reform our housing finance system and the need 
to improve the housing market go hand in hand. The Federal Housing 
Finance Agency, as conservator of Fannie Mae and Freddie Mac, could 
play a significant role in improving the housing market, but based on 
reports from the Inspector General's office, there are deficiencies at 
the agency that are holding back those efforts.
    I am concerned that the reports produced by the Inspector General's 
office show several negative trends in FHFA's oversight of operations 
at Fannie Mae and Freddie Mac. First, the regulator defers to the GSEs 
on major decisions without independently verifying the benefits to the 
conservatorship or the taxpayers. Second, the FHFA appears to allocate 
staffing resources in a manner that limits its ability to enforce 
directives and adequately oversee operations at the GSEs. These two 
trends appear to restrict the FHFA's ability to help stabilize the 
housing market and protect taxpayer dollars while also continuing the 
problematic relationship that Fannie Mae and Freddie Mac had with their 
previous regulator.
    Despite its independent status, which was granted on a bipartisan 
basis in 2008 as a single director with Congressional appropriations, 
and expanded powers as conservator, FHFA could be doing more to prevent 
losses and enforce required changes at Fannie Mae and Freddie Mac. As 
the regulator of two of the largest entities in the housing market, it 
is essential that FHFA prioritize oversight as one of the strategies 
necessary to stabilize our housing market. This would benefit the 
taxpayers both by strengthening the current state of the GSEs and also 
providing guidance and consistency to a large sector of the housing 
market to further create stability for homeowners and potential 
homebuyers.
    I look forward to hearing your recommendations for improvements and 
the possible reasons for the trends that you continue to see, Inspector 
General Linick.
                                 ______
                                 
                 PREPARED STATEMENT OF STEVE A. LINICK
           Inspector General, Federal Housing Finance Agency
                           December 13, 2011
    Thank you, Chairman Johnson and Ranking Member Shelby, for inviting 
me to testify before the Senate Banking Committee. I appreciate the 
opportunity to summarize the work and findings of the Federal Housing 
Finance Agency Office of Inspector General (FHFA-OIG) to date.
    I am the Agency's first Inspector General, and my office began 
operations following my swearing in on October 12, 2010, in the midst 
of a housing crisis of historic proportions. Over the past fourteen 
months, we have made great strides in hiring a professional staff and 
getting the organization up and running. We have published 10 audits 
and evaluations and have commenced numerous criminal and civil 
investigations. We also issued our second Semiannual Report to Congress 
2 weeks ago. \1\ Today, I will provide an assessment of emerging trends 
based on the work we have conducted to date, describe our operations, 
and answer the Committee's questions.
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     \1\ Available at http://www.fhfaoig.gov/Content/Files/
second%20semiannual%20report.pdf.
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    FHFA-OIG oversees FHFA's operations and programs. This oversight 
includes the Agency's regulation of the housing Government-sponsored 
enterprises (GSEs)--Fannie Mae, Freddie Mac, and the 12 Federal Home 
Loan Banks; the GSEs' approximately 12,000 employees; as well as the 
conservatorships of Fannie Mae and Freddie Mac. Fannie Mae and Freddie 
Mac currently own or guarantee home mortgages worth over $5 trillion 
and account for 70 percent of the Nation's secondary mortgage market. 
To date, they have received $183 billion in taxpayer money in order to 
ensure their continuing solvency.
    FHFA-OIG's mission is to promote the economy, efficiency, and 
effectiveness of FHFA's programs and operations. To carry out its 
mission, FHFA-OIG conducts, supervises, and coordinates audits of 
FHFA's programs and operations. FHFA-OIG also works to prevent and 
detect fraud, waste, and abuse in those programs and operations through 
investigations involving FHFA, Fannie Mae, Freddie Mac, and the Federal 
Home Loan Banks. Important features of FHFA-OIG's work are the 
promotion of transparency in FHFA programs and GSE oversight, as well 
as public understanding of matters affecting FHFA, the GSEs, and 
housing policy.
Emerging Trends
    Our reports have revealed a number of emerging trends. These 
reports credit FHFA's work in several areas, both as regulator of the 
GSEs and conservator of Fannie Mae and Freddie Mac (the Enterprises). 
For example, FHFA-OIG has found:

    FHFA has eliminated golden parachute compensation awards to 
        terminated Fannie Mae and Freddie Mac executives;

    FHFA has taken steps to mitigate its shortage of qualified 
        examiners;

    FHFA has increased underwriting standards and raised 
        guarantee fees;

    FHFA has taken steps that may improve Enterprise repurchase 
        claims recoveries, thereby reducing Enterprise losses; and

    FHFA has positively responded to FHFA-OIG's recommendations 
        to improve FHFA's effectiveness and efficiency and to reduce 
        its vulnerability to fraud, waste, and abuse.

    On the other hand, FHFA-OIG reports also have identified 
deficiencies in FHFA operations, and these deficiencies appear to 
reflect two significant and related trends. First, FHFA often relied on 
determinations of the Enterprises without independently testing and 
validating them, thereby giving undue deference to Enterprise decision 
making. Second, FHFA was not proactive in oversight and enforcement, 
and accordingly, resource allocations may have affected its ability to 
oversee the GSEs and enforce its directives. Both trends have emerged 
in a number of our reports.
I. FHFA Has Not Independently Tested and Validated Enterprise Decision 
        Making
    In four reports, FHFA-OIG identified significant instances in which 
FHFA has displayed undue deference to Enterprise decision-making. 
Without adequately testing or validating data, FHFA has deferred to the 
Enterprises regarding: (1) Freddie Mac's assessment of mortgage 
repurchase claim issues involving Bank of America; (2) the Enterprises' 
participation in the Making Home Affordable programs (MHA); (3) the 
Enterprises' decisions regarding executive compensation; and (4) 
numerous Enterprise transactions.
    The Agency's actions in each case reflect its approach as 
conservator to delegate most business decisions to the Enterprises. In 
each case, it relied upon review and corporate governance processes 
already in place at the Enterprises. However, FHFA-OIG concluded that 
some matters are sufficiently important to warrant greater involvement 
and scrutiny by the Agency.
a. FHFA Deferred to Freddie Mac's Analysis of Repurchase Claim Exposure
    At the end of 2010, FHFA approved a $1.35 billion settlement of 
mortgage repurchase claims that Freddie Mac asserted against Bank of 
America. In approving the settlement, FHFA relied on Freddie Mac's 
analysis of the settlement without testing the assumptions underlying 
the Enterprise's existing loan review process. An FHFA-OIG report found 
that FHFA did not act timely or test concerns raised by an FHFA senior 
examiner months prior to the settlement about limitations in Freddie 
Mac's existing loan review process for mortgage repurchase claims. The 
senior examiner was concerned that the loan review process Freddie Mac 
used for repurchase claims failed to account adequately for changes in 
foreclosure patterns among loans originated during the housing boom. 
According to the senior examiner, this could potentially cost the 
Enterprise a considerable amount of money. \2\ Freddie Mac's internal 
auditors independently identified concerns about the process and in 
June 2011, recommended that the issue be studied further. Following 
initiation of FHFA-OIG's report, FHFA suspended future Enterprise 
mortgage repurchase settlements premised on the Freddie Mac loan review 
process and set in motion activities to test the assumptions underlying 
the loan review process.
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     \2\ Available at http://www.fhfaoig.gov/Content/Files/EVL-2011-
006.pdf.
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b. FHFA Provided Limited Oversight of the Enterprises' Administration 
        of the Home Affordable Modification Program
    In early 2009, the Department of the Treasury initiated the Making 
Home Affordable (MHA) programs. A key initiative of MHA is the Home 
Affordable Modification Program (HAMP), which involves servicers 
agreeing to modify mortgages for borrowers facing default or 
foreclosure. In early 2009, the Enterprises began participating in 
HAMP. They started modifying mortgages in their portfolios and entered 
into 5-year agreements with Treasury to manage the program and oversee 
participants' compliance with program requirements. An FHFA-OIG report 
found that FHFA largely removed itself from overseeing the negotiations 
of the 5-year agreements. FHFA believed its appropriate role was to 
ensure the Enterprises were legally authorized to administer HAMP, not 
to participate actively in negotiations between the Enterprises and 
Treasury. In other words, FHFA did not engage in any formal substantive 
review to evaluate the agreements' feasibility, risks, or the 
suitability of the Enterprises to serve as Treasury's financial agents. 
This lack of engagement may have contributed to the agreements' 
omission of significant details concerning payments to the Enterprises, 
the scope of their responsibilities, and processes to resolve 
differences. As a consequence of the omissions, significant problems 
developed in these areas almost from the beginning, requiring FHFA and 
the Enterprises to devote substantial time and resources to resolve 
ambiguities. \3\
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     \3\ Available at http://www.fhfaoig.gov/Content/Files/EVL-2011-
003.pdf.
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c. FHFA Did Not Fully Analyze Factors Related to Executive Compensation 
        at Fannie Mae and Freddie Mac
    For 2009 and 2010, the Enterprises awarded their top six officers a 
cumulative total of over $35 million in compensation. FHFA reviewed and 
approved these compensation awards based on the Enterprises' 
determinations and recommendations. However, an FHFA-OIG report found 
that FHFA did not independently test or validate the means by which the 
Enterprises calculated their recommended compensation levels and did 
not consider factors that might have resulted in reduced executive 
compensation costs. These factors included the lower compensation 
levels paid to senior officials at Federal agencies supporting the 
housing market and the extent to which Federal support for the 
Enterprises may facilitate the ability of Enterprise officers to meet 
individual and corporate performance targets. \4\
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     \4\ Available at http://www.fhfaoig.gov/Content/Files/
Exec%20Comp%20DrRpt%2003302011%20final,%20signed.pdf.
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d. FHFA Does Not Perform Sufficient Transaction Testing of Enterprise 
        Activities
    Transaction testing is the method employed by financial institution 
examiners to make independent judgments about the financial and 
operational conditions of an institution, as well as its compliance 
with applicable laws and regulations. An example of transaction testing 
would be reviewing a regulated entity's loan files to test the veracity 
of statements concerning loan underwriting and performance. During an 
evaluation of FHFA's capacity to examine the GSEs, a senior FHFA 
manager acknowledged to FHFA-OIG that examiners too often accept 
assertions made by Enterprise managers rather than independently 
validate such assertions through appropriate transaction testing. \5\
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     \5\ Available at http://www.fhfaoig.gov/Content/Files/EVL-2011-
005.pdf.
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II. FHFA's Resource Allocations May Have Affected Its Ability To 
        Oversee the GSEs and Enforce Its Directives
    In four reports, FHFA-OIG identified instances in which FHFA was 
not proactive in oversight and enforcement, and accordingly, resource 
allocations may have affected its ability to oversee the GSEs and 
enforce its directives. For example, FHFA did not assign sufficient 
priority and resources to handle consumer complaints. Additionally, 
FHFA-OIG found that FHFA (along with its predecessor agency, the Office 
of Federal Housing Enterprise Oversight (OFHEO)) has permitted Fannie 
Mae to delay for 5 years the directives to implement an effective 
operational risk management program. Further, FHFA may not have 
allocated resources to or prioritized addressing new and emerging risks 
that may impact the GSEs. Finally, FHFA reported that it may have too 
few examiners to meet its oversight responsibilities. Some of FHFA's 
lack of oversight may have resulted from a lack of examination 
capacity, while other shortfalls may stem from a misallocation of 
resources.
a. FHFA Did Not Allocate Sufficient Resources To Handle Consumer 
        Complaints
    Due in part to deteriorating financial conditions in the housing 
market, FHFA and OFHEO experienced a substantial increase in consumer 
complaints about the Enterprises. A number of these complaints 
contained important information about alleged foreclosure processing 
abuses and fraud. However, an FHFA-OIG report found that FHFA did not 
adequately process consumer complaints. For example, the Agency did 
not: develop and maintain a consolidated system for receiving or 
processing complaints; consistently follow up on complaints referred to 
the Enterprises; prioritize complaints or assess the timeliness of 
responses to complaints; refer complaints to law enforcement for 
evaluation or possible investigation; or perform substantive analyses 
to identify overall trends in complaints. These deficiencies occurred 
because FHFA did not establish adequate internal controls and did not 
assign sufficient priority and resources to complaint processing. FHFA-
OIG found that FHFA assigned only two employees--on a part-time basis--
to handle consumer complaints. \6\ FHFA's lack of oversight and 
prioritization in this area stemmed from its view that, among other 
things, addressing consumer complaints was not its role.
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     \6\ Available at http://www.fhfaoig.gov/Content/Files/AUD-2011-
001.pdf.
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b. FHFA Has Not Enforced Directives Regarding Fannie Mae's Operational 
        Risk Program
    In 2006, OFHEO issued a Consent Order requiring Fannie Mae to 
establish an operational risk management program. FHFA views 
operational risk management as an important financial safety and 
soundness challenge facing the Enterprises. The Agency defines 
operational risk as the risk of loss resulting from failures in people, 
processes, systems, or from external events (such as foreclosure 
abuses). Between 2006 and 2011, FHFA and OFHEO repeatedly found that 
Fannie Mae had failed to establish an acceptable and effective program 
despite outstanding requirements to do so. As Fannie Mae's conservator 
and regulator, FHFA's authority over the Enterprise is broad and 
includes the ability to discipline or remove Enterprise personnel to 
ensure compliance with Agency mandates. However, an FHFA-OIG report 
found that FHFA has not exercised this or other authorities to compel 
Fannie Mae's compliance with the operational risk requirement. \7\ 
Fannie Mae's lack of an acceptable and effective operational risk 
management program may have resulted in missed opportunities to 
strengthen oversight of law firms with which it contracts to process 
foreclosures.
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     \7\ Available at http://www.fhfaoig.gov/Content/Files/EVL-2011-
004.pdf.
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c. FHFA Did Not Identify and Address New and Emerging Risks Potentially 
        Impacting the GSEs
    Only after news of foreclosure abuses surfaced in mid-2010 did FHFA 
begin to schedule comprehensive examination coverage of foreclosure 
issues, including allegations of abuse by its default-related legal 
services vendors. FHFA had not previously considered risks associated 
with foreclosure processing to be significant. However, an FHFA-OIG 
report found that there were multiple indications of foreclosure issues 
prior to mid-2010 that could have led FHFA to foresee the heightened 
risk in foreclosure processing abuses. These indications included 
significant increases in the volume of foreclosures (which accompanied 
the collapse of the housing market), rising consumer complaints 
alleging improper foreclosures, contemporaneous media reports about 
foreclosure abuses by the Enterprises' law firms, and public court 
filings highlighting such abuses. \8\
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     \8\ Available at http://www.fhfaoig.gov/Content/Files/AUD-2011-
004.pdf.
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d. FHFA May Not Have Enough Examiners To Meet Its Regulatory and 
        Conservatorship Oversight Responsibilities
    FHFA has critical regulatory responsibilities with respect to the 
GSEs and conservator responsibilities regarding the Enterprises. To 
satisfy these responsibilities, Congress provided FHFA significant 
budget and hiring authority. Nonetheless, an FHFA-OIG report noted that 
FHFA had found shortfalls in the Agency's examination coverage. 
Internal Agency reviews also corroborated that FHFA believes it has too 
few examiners to ensure the efficiency and effectiveness of its 
examination program. Additionally, only 34 percent of the Agency's line 
examiners are accredited Federal financial examiners. FHFA has taken 
steps to mitigate its shortage of qualified examiners, but it needs to 
move quickly and aggressively in this area. Last winter, for example, 
the Acting Director announced and implemented a substantial 
restructuring of FHFA's supervision units and reassigned numerous 
staff. These steps, which also include plans to add examination staff 
and implement an examiner accreditation program, are designed to 
enhance FHFA's supervision program. Further, although FHFA's near-term 
plans include hiring up to 44 additional staff in the supervision 
divisions, FHFA believes there is substantial uncertainty as to whether 
this number of additional examiners will enable FHFA to overcome its 
examination capacity shortfalls and ensure the success of the Agency's 
2011 reorganization of its examination structure. \9\ Insufficient 
examination capacity contributed to FHFA's lack of oversight by leaving 
key areas unchecked. For example, until recently there had been no 
targeted examinations involving the real estate owned (REO) area.
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     \9\ Available at http://www.fhfaoig.gov/Content/Files/EVL-2011-
005.pdf.
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OIG Audits and Evaluations
    In addition to monitoring and reporting on FHFA's progress in 
implementing report recommendations, FHFA-OIG will continue to release 
new audits and evaluations covering key areas. FHFA-OIG maintains a 
detailed Audit, Evaluation, and Survey Plan that focuses strategically 
on the areas of FHFA's operations posing the greatest risks and 
providing the greatest potential benefits to FHFA, Congress, and the 
public. Originally developed with input from an independent, third-
party risk assessment, the Audit, Evaluation, and Survey Plan reflects 
continuous feedback from FHFA-OIG's reviews of current events and 
comments from FHFA officials, members of Congress, and others. Broadly, 
FHFA-OIG's audit and evaluation strategies include reviews of the 
following FHFA activities:

    Regulatory efforts and its management of the Enterprise 
        conservatorships. This is a particularly high-risk area because 
        Treasury has to date invested $183 billion of taxpayer funds in 
        the Enterprises. As conservator, FHFA must regulate and oversee 
        the Enterprises in an efficient, effective, and transparent 
        manner so as to minimize taxpayer costs, conserve Enterprise 
        resources, and meet all statutory mandates.

    Oversight of the Federal Home Loan Banks and their 
        associated risks, including investment portfolio management and 
        concentrations, credit underwriting, and administration.

    Internal operations, such as privacy and allegations of 
        fraud, waste, or abuse.

    The Audit, Evaluation, and Survey Plan identifies a number of other 
ongoing and planned reviews of specific FHFA programs.
    Given the Committee's interest, I want to highlight two projects 
currently underway. First, we are assessing whether FHFA has an 
effective supervisory control structure and sufficient examination 
coverage to adequately and timely identify and mitigate mortgage 
servicing risks. We are also assessing FHFA's oversight of Enterprise 
controls over real estate owned (REO) operations, including management 
and sales activities and contractor performance. Given the breadth and 
importance of issues relating to servicing and REO, no doubt we will 
continue to examine them from various angles for some time to come. We 
look forward to working with you on these matters and reporting our 
findings and recommendations to the Committee.
Investigations
    As a further part of our mission to combat fraud, waste, and abuse, 
FHFA-OIG operates an active Office of Investigations that has made 
significant contributions to a range of mortgage-related 
investigations. While many remain confidential, FHFA-OIG and its law 
enforcement partners, which include Federal agencies, U.S. Attorneys' 
Offices, and State and local agencies nationwide, have released details 
about several high-profile mortgage fraud investigations involving 
Colonial Bank and Taylor, Bean & Whitaker Mortgage Corporation, 
Marshall Home and Margaret Broderick, and Home Owners Protection 
Economics, Inc.
    FHFA-OIG's Office of Investigations currently has numerous open 
criminal and civil investigations involving a wide variety of 
allegations of wrongdoing. The Office of Investigations focuses on FHFA 
and the GSEs, both internally and externally, concentrating on those 
individuals and organizations that have victimized either FHFA or the 
GSEs or borrowers with GSE loans. While I cannot comment on specific 
open cases, I can describe the trends we are seeing in fraud. The types 
of cases that we are actively investigating generally fall into the 
following six categories:

    Fraud involving mortgage-backed securities

    Mortgage origination related frauds

    Short sale and other mortgage modification frauds

    Fraud involving REO transactions

    Fraud involving mortgage servicing

    FHFA or GSE employee misconduct

    Fraud Involving Mortgage-Backed Securities is a key area of focus. 
During the precrisis housing boom, the GSEs purchased and guaranteed 
hundreds of billions of dollars of residential mortgage-backed 
securities that have since declined precipitously in value due to the 
sharp deterioration in the value of those assets. The GSEs may have 
been victims of fraud in instances where the quality and value of the 
underlying assets they purchased or guaranteed was misrepresented to 
them.
    Mortgage Origination related frauds include cases where the GSEs 
have been defrauded as the loan was being underwritten and sold to a 
GSE. These are the most commonly known frauds and could include schemes 
such as loan officers funding mortgages for otherwise ineligible 
borrowers. For example, one recent allegation reviewed by my office 
involved a borrower whose loan was funded despite the fact that the 
borrower was deceased. We have also seen schemes involving appraisers 
inflating the value of the property and straw buyers.
    Short Sale frauds can include allegations of a non-arm's length 
transaction in which financial institutions are deceived into allowing 
a short sale through a straw buyer for a significantly lower price. 
Once the price decline is captured, the property is sold at the lower 
price to a relative or friend of the seller, with the owners ultimately 
staying in the property at a considerable loss to the GSE. In one of 
our cases, the average transaction loss to the GSE was approximately 
$150,000.
    Mortgage Modification frauds are a particularly insidious fraud. 
This type of fraud targets financially distressed homeowners who are 
underwater or have fallen behind on their mortgage payments. Some 
frauds involve advance fee schemes that require the homeowner to pay a 
fee for participating in supposedly ``official'' programs that are in 
fact completely fictitious or improperly imply participation in a U.S. 
Government housing relief program. Besides scamming vulnerable 
homeowners out of money they can ill afford to lose, these schemes are 
particularly harmful because by the time borrowers recognize the scam, 
they may have been foreclosed upon and have little recourse. Other 
scams are designed to force a distressed homeowner into default sooner 
than would otherwise be the case.
    REO Related frauds may involve individuals connected to the 
foreclosure and subsequent resale of a property. This situation 
provides multiple opportunities for fraud. For example, the GSEs 
contract with so-called asset managers to maintain and prepare the 
property for sale. These asset managers may subcontract work to 
gardening companies to cut the grass, but the grass isn't cut; or they 
may contract with electricians for ``required'' maintenance that was 
neither required nor done, but still subsequently billed to a GSE. REO 
fraud can also involve realtors who collude with investors or other 
realtors and appraisers to drive down the price of properties they are 
selling on behalf of the GSEs. Over the past year, the Department of 
Justice's Anti-Trust Division has announced a number of convictions of 
real estate investors involved in such bid-rigging schemes designed to 
deflate property auction prices.
    Fraud Involving Mortgage Servicing can include allegations that the 
mortgage servicer is not acting in the best interest of the GSE or the 
investor. For example, a mortgage servicer may make decisions regarding 
modifications or loan foreclosures with its own personal benefit in 
mind and contrary to GSE guidelines.
    FHFA or GSE Employee Misconduct is another type of fraud. These are 
cases in which specific allegations are made involving administrative 
or criminal misconduct by FHFA or GSE employees or contractors.
    Finally, I want to mention that the Office of Investigations 
operates the FHFA-OIG Hotline, which allows concerned parties to report 
information directly and in confidence regarding possible fraud, waste, 
or abuse related to FHFA or the GSEs. In the past year it has handled 
many allegations of wrongdoing or fraud. FHFA-OIG honors all applicable 
whistleblower protections. Should you or your constituents wish to 
report any allegations of fraud, waste, or abuse, the Hotline can be 
reached at 1-800-793-7724, by fax at 202-408-2972, or through our Web 
site at www.fhfaoig.gov.
    My staff and I look forward to continuing to work with the Banking 
Committee to provide independent, relevant, and objective assessments 
of FHFA's operations and programs. The continuing fragility of our 
Nation's housing market remains a significant source of ongoing 
concern. Further, Fannie Mae, Freddie Mac, and the Federal Home Loan 
Banks continue to be key market participants, and FHFA continues to 
face significant challenges. We are hopeful that our work will be of 
assistance in meeting those challenges.
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