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THE FUTURE OF HOUSING FINANCE: 

A PROGRESS UPDATE ON THE GSEs 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 15, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–153 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 15, 2010 .......................................................................................... 1 

Appendix: 

September 15, 2010 .......................................................................................... 45 

WITNESSES 

WEDNESDAY, SEPTEMBER 15, 2010 

Barr, Hon. Michael S., Assistant Secretary for Financial Institutions, U.S. 

Department of the Treasury ................................................................................ 12 

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

(FHFA) .................................................................................................................. 13 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 46 

Bachus, Hon. Spencer ...................................................................................... 48 

Barr, Hon. Michael S. ...................................................................................... 49 

DeMarco, Edward J. ......................................................................................... 56 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Written responses to questions submitted to Edward J. DeMarco .............. 67 

Garrett, Hon. Scott: 

Letter to President George W. Bush from various undersigned Members 

of Congress, dated June 28, 2004 ................................................................ 71 

Sherman, Hon. Brad: 

Article from the Financial Times entitled, ‘‘Oxley hits back at ideologues,’’ 

dated September 9, 2008 .............................................................................. 76 

Article from The New York Times entitled, ‘‘Resale Fees That Only 

Developers Could Love,’’ dated September 11, 2010 .................................. 77 

(1) 

THE FUTURE OF HOUSING FINANCE: 

A PROGRESS UPDATE ON THE GSEs 

Wednesday, September 15, 2010 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

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

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Sherman, Baca, 

Lynch, Miller of North Carolina, Scott, Carson, Foster, Kosmas, 

Himes; Garrett, Manzullo, Royce, Biggert, Hensarling, Campbell, 

Neugebauer, and Jenkins. 

Ex officio present: Representatives Frank and Bachus. 

Also present: Representatives Waters and Moore of Kansas. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. Without objection, all members’ opening statements will be made a part of the record. 

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

made a part of the record. 

I yield myself 5 minutes. Good morning. We meet today to focus 

on the many strategies that Fannie Mae, Freddie Mac, and the 

Federal Housing Finance Agency and the Treasury Department 

have employed to limit capital infusions into the two housing Enterprises. This hearing is also the 6th in a series that we have so 

far convened this Congress to examine the future of housing finance. 

Two years have now passed since the Federal Housing Finance 

Agency placed Fannie Mae and Freddie Mac into conservatorship 

under procedures of the Housing and Economic Recovery Act of 

2008. At the request of then-Treasury Secretary Henry Paulson, 

this law also provided the Treasury Department with emergency liquidity powers to support the Enterprises. To stabilize the United 

States housing markets, the Treasury Department has to date purchased or announced plans to buy just under $150 billion in the 

senior preferred stock of the Enterprises combined. Moreover, according to a June report issued by the Federal Housing Finance 

Agency, the Treasury Department and the Federal Reserve have 

2 

together purchased $1.36 trillion in mortgage-backed securities of 

the two institutions. 

At this hearing, we will explore the many approaches used to 

protect taxpayers and limit the losses of Fannie Mae and Freddie 

Mac. For example, in July, the Federal Housing Finance Agency 

issued 64 subpoenas seeking documents related to private label securities in which the two Enterprises invested to determine if 

issuers of these securities are liable for Enterprise losses. Fannie 

Mae and Freddie Mac have also begun forcing underwriters of delinquent mortgages purchased or guaranteed by the Enterprises to 

buy back the faulty loans if the loans violated the representations 

and warrants provided at the time of sale. As a result, the four 

largest commercial banks have already incurred losses of $9.8 billion on the loans they have repurchased or expect to repurchase 

from Fannie Mae and Freddie Mac. 

During the height of the housing bubble, many players in our financial markets trusted what they bought, but they did not verify 

that the loans lived up to the promises contained in representations and warrants. During the height of the Cold War, however, 

Ronald Reagan taught us better. For the housing finance system to 

regain its footing, we need the players in the market not only to 

trust but also to verify. Any new housing finance system must do 

both. 

While the Enterprises, their regulators, and the Treasury Department have acted to limit the losses of Fannie Mae and Freddie 

Mac in the aforementioned ways and through several other methods, we must also consider what more can and should be done to 

protect taxpayers both now and going forward. In particular, we 

must begin to think about approaches for recouping the taxpayers’ 

money in the long run. We found a way to pay for the savings and 

loan crisis, and we can surely find a way to recover the costs associated with this crisis. 

Some of my colleagues may try to use today’s hearing as an opportunity for political grandstanding. They, however, need to remember that people who live in glass houses should not throw 

stones. Under the leadership of former Chairman Mike Oxley, we 

tried for several years to enact bipartisan legislation to improve the 

regulation and activities of Fannie Mae and Freddie Mac. Unfortunately, many Republicans in Congress and officials in the Bush Administration blocked these efforts. Their delays allowed the housing 

crisis to fester into an ulcer. 

As we now consider the future of housing finance, we have a 

chance to proceed differently. The Dodd-Frank Wall Street Reform 

and Consumer Protection Act has already laid the foundation for 

change by adjusting securitization rules, better regulating rating 

agencies, modifying appraisal practices, and standardizing mortgage underwriting. The adoption of these process reforms should 

simplify the debates about altering the housing finance system. 

In sum, today’s hearing brings us one step closer to figuring out 

what needs to be done to improve our housing finance system. As 

I have previously said, my goals in these debates are to limit taxpayers’ risk and establish a more stable, long-term funding source 

to help hardworking, responsible, middle-class American families to 

buy a home with an affordable mortgage. 

3 

I look forward to hearing the perspectives of our distinguished 

witnesses on these matters. 

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

4 minutes for his opening statement. Mr. Garrett. 

Mr. GARRETT. Thank you. Thank you, Chairman Kanjorski, for 

holding this very important hearing. When you review all the material that is before us in preparation for the hearing, you could 

probably hold a GSE oversight hearing just about once a month 

and still have enough important issues to deal with. I am sure the 

Director would agree with that. The current state and future of 

mortgage finance has really been a hot topic and continues to be 

a hot topic with the Financial Services Committee, and we are 

holding several hearings over the next several weeks to look at the 

current state of the housing finance situation and discuss ideas on 

how to structure the market in the future and think about it. Unfortunately, I believe this focus is happening much later than it 

really should; it really should have been happening, what, about 2 

years ago, since Fannie and Freddie were put into conservatorship. 

We are finally beginning to formally and seriously look at the way 

to reshape that market. 

Throughout the financial regulatory reform debate, my Republican colleagues and I continuously looked for opportunities to end 

the bailouts of Fannie and Freddie, wind down the businesses and 

accurately account for their losses to the American taxpayer. But 

at each turn, if you remember when we did those amendments and 

such, the majority party and the White House have prevented 

those efforts from moving forward. 

So to my colleagues, including Chairman Frank, who has said 

specifically, ‘‘There is no urgency. We have already abolished 

Fannie and Freddie.’’ May I remind him that just because you say 

something enough times doesn’t actually mean that it is true. Just 

because Fannie and Freddie have been put into conservatorship, 

that doesn’t mean that they have been reformed. Fannie and 

Freddie are continuing to hemorrhage billions of dollars each and 

every quarter. With the possibility now of a double-dip recession 

and further value decline in homes, really, there is no end in sight. 

So Fannie and Freddie have not been reformed. Rather, they are 

being used essentially as an experimental guinea pig, if you will, 

for the Administration’s home modification programs. 

Also, I have seen a quote by Chairman Frank where he said, 

‘‘The money is not being lost by anything that we are doing right 

now.’’ In 2004 and 2005 when this committee was pushing ahead 

to institute new regulatory oversight over these companies, supporters of these entities, including Chairman Frank, said, well this 

was unnecessary then because they were in such terrific shape. We 

see where that led us. 

So to say that Fannie and Freddie have already been reformed 

and everything is fine now is really just making the same excuses 

that have been made before and the same mistakes as well. 

As any expert in the mortgage business will tell you, mortgage 

loans typically hit their peak default rates when? At 5 to 7 years. 

The loans underwritten by Fannie and Freddie during 2009 and 

this year are only 1 or 2 years old. We have no idea what the market will be like 3, 4 or 5 years from now, so we need to take conVerDate Nov 24 2008 15:12 Jan 04, 2011 Jkt 062678 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\62678.TXT TERRIE
4 

crete steps right now to reduce the ongoing financial risk that 

Fannie and Freddie pose to the American taxpayer. 

One of these steps is to more rapidly increase the wind-down of 

these entities’ retained portfolio. Fannie and Freddie’s combined 

portfolio is $1.6 trillion. With the current market demand for GSEs’ 

MBSs, there is absolutely no plausible reason they have to be this 

size. If they are so large, there is a significant amount of interest 

rate risk that continuously has to be hedged. As interest rates 

sometimes rise in the future, the hedging of these assets will get 

even more complicated and volatile and harder to manage. So with 

the current market situation and the appetite for GSEs’ MBSs, we 

should be requiring the entities right now to reduce their portfolio 

size and do it soon to reduce the risk before interest rates inevitably will rise and when the conservator can actually make more 

money back for the taxpayer. 

One closing note to the Director, I thought it was a thoughtful 

decision that you made to shut down the PACE program during the 

summer. This was a scheme that was putting taxpayers at further 

risk while really only benefiting a few tax security firms that were 

offering these products. Now we must need to make more hard decisions, as you did then, to protect the taxpayers and wind down 

the entities’ portfolios in a more responsible manner and finally 

abolish these two companies. 

Thank you. 

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

from the chairman of the full committee, the gentleman from Massachusetts, Mr. Frank, for 5 minutes. 

The CHAIRMAN. Mr. Chairman, I regret the fact that the ranking 

member has decided to continue a political debate. But if he was 

going to do it, I wish it had been done more fully. Obviously, we 

have a problem here, because Fannie and Freddie bought loans 

that shouldn’t have been made in the first place. The point though 

is that beginning in the period that the gentleman from New Jersey alluded to in part, members of this committee, led by the gentleman from North Carolina, Mr. Miller, and the gentleman from 

North Carolina, Mr. Watt, tried to outlaw those loans. Congress 

had, in fact, previously asked the Federal Reserve to do that. They 

hadn’t done it. 

So in 2007, which was the first year in which we were in the majority, we did pass a bill in that year to prevent the kind of predatory loans from being made that Fannie and Freddie were buying. 

And here is what the gentleman from New Jersey, Mr. Garrett, 

had to say in the committee vote on that bill to ban predatory 

loans: ‘‘The increasing availability and affordability of subprime 

mortgage credit is and has been an important factor leading to the 

increase in homeownership in recent years. This bill—the bill that 

restricts predatory lending—may well limit now the products available to subprime borrowers, particularly minority borrowers and 

will deprive many of those consumers from owning or maintaining 

a home. What we need to do is to ensure that it does absolutely 

nothing to homeownership, particularly among minority communities who have benefited from the innovations that have occurred 

in the marketplace.’’ 

5 

That is a song of praise to predatory loans which we tried to 

stop, and had the loans not been made they could not have been 

bought. 

In fact, the gentleman was also incorrect when he said in 2004 

and 2005, when Republicans were trying to restrain Fannie Mae 

and Freddie Mac, some of us were on the other side. No, exactly 

the opposite is the case. In 2003, I said I didn’t think Fannie Mae 

and Freddie Mac were in trouble. In 2004, when President Bush 

ordered them to go beyond 50 percent in the number of loans that 

they bought from people below median income, the kind of loans 

the gentleman from New Jersey was defending when we tried to 

outlaw them, I changed my opinion. I thought this was dangerous. 

In 2005, Michael Oxley, who was the Republican chairman of the 

committee, put a bill through this committee to restrain Fannie 

Mae and Freddie Mac. I actually voted for it in committee. A couple 

of my Republican colleagues voted against it. I later found problems with an unrelated aspect of housing. But the fact is that Mr. 

Oxley passed a bill through the House which he thought would restrain Fannie Mae and Freddie Mac. And the Republicans in the 

Senate and the Bush Administration and some in this committee 

didn’t like the bill. 

So I have never heard a more inaccurate characterization than 

when the gentleman from New Jersey said, when Republicans were 

trying to get something through, we opposed it. No, the Republican 

majority of this committee and the Republican majority of this 

House, the gentleman from Texas, Mr. Neugebauer, supported it. 

The gentleman from Alabama, Mr. Bachus, supported it. They put 

through the bill. We didn’t stop them. They had a lot of cooperation. The gentleman from New Jersey didn’t like the bill. But the 

argument that the Democrats stopped it is just absolutely the opposite of the truth in 2004 and 2005. That broke down. 

As Secretary of the Treasury Paulson points out in his book, he 

became Secretary of the Treasury in 2006. Some in the Bush Administration had given up on trying to reform Fannie and Freddie 

politically. He said, no, he wanted to work with us. He approached 

me. And as he says in the book, we worked together. And when in 

the year 2006 the majority switched and 2007 came, this majority 

passed a tougher Fannie and Freddie regulatory bill in 2007 than 

the Republicans had passed in 2005. Things had moved beyond 

that. And then in 2008, when the Senate caught up to us, which 

they sometimes do, Secretary Paulson put them in a conservatorship. 

So yes, we have changed Fannie and Freddie. The Fannie and 

Freddie that have existed since Hank Paulson used the authority, 

a Democratic authority gave him at his request, to put them into 

conservatorship has been very different. And yes, the PACE loans 

have been a source of controversy, and many people—the Governor 

of California, the Republican Governor of California, the Democratic attorney general from California are suing Fannie and 

Freddie because they are being too tough. Joe Nocera of The New 

York Times had a column criticizing Fannie and Freddie because 

they are insisting on too high a level of credit score before they give 

loans. The fact is undeniable. Fannie and Freddie, once they were 

put into conservatorship, are very different, and that is why I say 

6 

there is no urgency. There is no urgency because the pattern of 

abuse that they had been engaged in has changed. 

It is also the case that over the objection of the gentleman from 

New Jersey and others, we outlawed finally in 2010, the financial 

reform bill, the kind of predatory loans that were getting people in 

trouble, which the gentleman from New Jersey was so fond of and 

a few others on his side. And The Wall Street Journal, when we 

did finally pass the bill in the House to restrict subprime predatory 

loans, calls it a Sarbanes-Oxley for housing. And Sarbanes-Oxley is 

of course as nasty a set of words as you can get from The Wall 

Street Journal. 

So let’s get back to where we are. Fannie and Freddie are behaving differently and are causing far less problems, thanks to the action of the Democratic majority in Congress that gave the Republican Administration the power to do conservatorship. There was 

bipartisanship there and let’s continue it. 

Chairman KANJORSKI. Thank you, Mr. Frank. And now we will 

hear from the gentleman from Alabama, Mr. Bachus. 

Mr. GARRETT. I think we want to yield first to Mr. Neugebauer. 

Chairman KANJORSKI. Okay. We have a passover here to Mr. 

Neugebauer for 2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. And I will yield a 

few minutes to the distinguished ranking member. 

Mr. GARRETT. If the gentleman will just yield 10 seconds for me 

to respond to the chairman. It is odd that I am now put in the position, as I often am, to actually be the member to defend minority 

interests. And that is exactly what that quote was doing, as you 

said, quoting from me in 2004 and 2005. I was defending the rights 

of minorities and the minority housing interests. 

I would like to enter into the record a letter of June 28, 2004, 

signed by 70 Republicans addressing that issue, signed by 70 

Democrats, written to President George W. Bush which would have 

weakened those same sort of regulations that the chairman was 

talking about. Those regulations would have weakened the affordable housing standards that the chairman was talking about, that 

they were trying to do at that period of time. Any objection? 

Chairman KANJORSKI. Without objection, it is so ordered. Mr. 

Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Two years and $148 billion later, we still have Freddie and Fannie basically operating like they were before, maybe with a little bit better underwriting and that is a good thing. But the bottom line is that the 

taxpayers are still on the hook for these mortgages that are being 

originated today. And quite honestly, one of the problems with that 

is that as long as we continue with Freddie and Fannie operating 

where they are the primary guaranteeing these single family mortgages—which, by the way, accounts for about 75 percent of the 

losses that they have sustained, this particular book of business— 

we really are not going to see any private activity in the mortgage 

market at all. And so I think what many of us feel like is 2 years, 

it is time to begin to do a model to wind this activity down, to get 

the taxpayers off the hook, and to move in the direction that we 

will be able to encourage private activity in the mortgage market. 

But quite honestly, as long as Freddie and Fannie are the majority 

7 

of the originations and the taxpayers pick up the tab, there is really no incentive for us to do that. 

And Mr. Chairman and ranking member, I think it is time for 

this committee and this Congress to get the taxpayers off the hook 

and to get a robust, sustainable mortgage market that doesn’t depend on the taxpayers to bail them out. 

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

Now we will hear for 3 minutes from the gentleman from Alabama, 

Mr. Bachus. 

Mr. BACHUS. Thank you, Mr. Chairman. Mr. Chairman, I say to 

you and to Chairman Frank, I think it is time for President Obama 

to quit blaming President Bush for all the problems that are confronting us today. And I really think it is time that Chairman 

Frank, for you and the Democrats, to quit saying that some Republicans went along with you in watering down these affordable housing and underwriting standards. 

The American people aren’t concerned with the history of how 

this happened. They are concerned with taking action now to see 

that it doesn’t happen again. And for 2 years now, Fannie and 

Freddie have been controlled by the Federal Government. They 

own 79.9 percent of those corporations. The only reason they don’t 

own 80 percent is, if they owned 80 percent, or 0.1 of 1 percent 

more, they would have to be put on the books of the Federal Government. So they are just 0.1 of 1 percent from there. 

We have released detailed proposals on what we want to do with 

Fannie and Freddie, and that is put them in receivership. They 

shouldn’t be in conservatorship. No other corporation would be. 

They are failed corporations. We don’t need to—they are not ‘‘toobig-to-fail.’’ There ought to be an orderly wind-down. They ought to 

be in receivership. That would solve a lot of the uncertainty. The 

mortgage bankers have urged the Administration to resolve that 

uncertainty, and the housing market needs it. 

We, in the Dodd-Frank bill, pushed for something very reasonable and that was for downpayments for loans. That is not a very 

outrageous proposal, that simply Fannie and Freddie quit approving or buying mortgages without a downpayment and without good 

credit history. Not only did the majority party reject our attempts 

to simply say in Dodd-Frank that you have to have a downpayment 

and you have to have good credit history, they went beyond that 

and the Administration and Fannie and Freddie have actually now 

started this Affordable Advantage program, mortgage program, 

that actually doesn’t require a downpayment and you don’t have to 

have a good credit history. So we are laying the seeds for the next 

bubble. We are laying the seeds for the next failure. 

Assistant Secretary, with all respect, you have really done nothing but plan to do things. There are no proposals on the table. You 

have done nothing. You seem to be content in the Administration 

with doing nothing except having progress hearings. There has not 

been any progress. There have been planning sessions, but there 

has been no action taken. And you have 10 percent unemployment, 

you have 30 percent home price depreciation, and you have these 

bailouts. What probably bothers me worse than anything—and I 

think bothers the American people—is that we continue to make 

guarantees presently that the taxpayers will have to meet in the 

8 

future, and it is time that we quit the slow walking and we started 

doing things. This should be a legislative hearing, not another 

planning session. 

I would ask permission that my full statement be included in the 

record. 

Chairman KANJORSKI. The gentleman’s full statement will be included in the record. The gentleman from California, Mr. Sherman, 

is recognized for 3 minutes. 

Mr. SHERMAN. Thank you, Mr. Chairman. Three points. First, we 

need to stabilize home prices and make sure they are stable. If we 

see another precipitous drop in home prices, even in some key markets, that could create a double-dip recession. The key to that is 

extending the $729,750 limit in the roughly one dozen most expensive housing markets in the country. If we allow this to expire at 

the end of the year, it will be impossible to finance homes in most 

parts of Los Angeles and certain other major cities. And even in 

areas where homes sell for less, if in the middle-class neighborhoods, the price drops precipitously, then in the working-class 

neighborhoods prices will drop precipitously as well and we will see 

a double-dip recession. I hope that we get even more than the 74 

cosponsors we have for H.R. 2483, which I introduced along with 

Gary Miller, a fine Republican Member from California. 

Second, I want to commend Mr. DeMarco for his agency’s efforts 

against these Wall Street transfer fees. These provisions in deeds 

say that every time the property is transferred, somebody on Wall 

Street gets 1 percent of the gross purchase price. That undercuts 

the security of the lender; it disadvantages the home buyer; it complicates the transaction; and it lowers comps for the entire neighborhood, thus impairing the value of the substantial investment 

that the Federal Government has in home prices nationwide. 

Finally, to set the record straight, I think the chairman was eloquent in talking about H.R. 1461, which we passed in 2005. But 

the former chairman of this committee might have been even more 

eloquent in his article, which I would like to put in the record without objection— 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. SHERMAN. —of September 9th in the Financial Times. He 

was quoted as describing that bill, which we passed in May 2005, 

which would have prevented this bubble from occurring and what 

Chairman Oxley said, All the hand wringing and bed wetting is 

going on without remembering that the House stepped up. What 

did we get from the Bush White House? We got a one-finger salute. 

Mr. Oxley did not specify which finger. But he did make it clear 

that it was the Republican opposition in the Senate and the White 

House that prevented us from nipping this crisis in the bud by 

stopping it in 2005. And had we done so, in the opinion of Chairman Oxley and I believe Chairman Frank as well, we would be in 

much better shape. 

The CHAIRMAN. Would the gentleman yield? 

Mr. SHERMAN. I will yield. 

The CHAIRMAN. The chairman did make it clear that it was not 

a thumbs up. He didn’t say which finger it was, but he didn’t say 

which finger it wasn’t. 

Mr. SHERMAN. It was clearly a finger, not a thumb. I yield back. 

9 

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

Chair now recognizes the gentlelady from Illinois, Mrs. Biggert, for 

2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. Simply put, where is 

the plan? When will this Administration or Congress wind down 

and put an end to these what we would call Frankenstein-like 

mortgage giants Fannie and Freddie? Fannie and Freddie have 

edged out the private sector over a period of years. In September 

2008, these GSEs entered into conservatorship, explicitly backed by 

the taxpayers. The GSEs have received over $150 billion in taxpayer-backed funds and are a significant taxpayer liability upwards 

of $6 trillion. According to the Wall Street Journal, the GSEs were 

twice as leveraged as Bear Stearns. In addition and aside from the 

regulator, the FHFA, which runs them, Fannie and Freddie have 

no independent watchdog, no Inspector General reviewing their activities and the many questionable actions of the GSEs that are directed by FHFA. 

The Senate leadership should without further delay schedule a 

vote on approving the nomination of Steve Lennox to be the FHFA 

Inspector General. For the GSEs, we need transparency and accountability to end the bailouts and have reform. We have needed 

this for a long time. The questions remain, Why were there no substantive provisions to address the GSEs included in the DoddFrank Act? When will the GSEs be addressed? What is the plan? 

I look forward to hearing from the witnesses. I yield back. 

Chairman KANJORSKI. I thank the gentlelady from Illinois. And 

now, we will hear from the gentleman from North Carolina, Mr. 

Miller, for 2 minutes. 

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

agree we need to think about a plan. We have to reinvent our mortgage lending system. And since there is something like $12 trillion 

to $14 trillion in outstanding mortgage debt right now, that is not 

a small matter. But it would be very helpful in knowing how to fix 

what went wrong to figure out what it was that went wrong. It is 

particularly hard to take Republicans complaining about Democrats trying to place blame since all I have heard from Republicans 

for 2 years is how this was somehow the Democrats’ fault. We had 

a financial crisis that happened 7 years, 8 months into a Republican Administration because of mortgages made during 2004 to 

2006 when the Republicans were also in the majority in Congress. 

And I know that the Republican ministry of information has hit 

upon Fannie and Freddie as the culprits of all this. But when Dick 

Fuld sat at that seat in the Lehman Brothers bankruptcy—it appears to be what most immediately precipitated the crisis—I asked 

him, after having heard several Republicans somehow work 

Freddie and Fannie into the conversation, I asked him, ‘‘How in the 

world did Fannie and Freddie cause Lehman Brothers to go bankrupt?’’ And the answer of course was he could not come up with 

any role that Fannie and Freddie played at all. In fact, Fannie and 

Freddie were losing market shares throughout that period to private label securitizers, and investment banks in New York, and all 

Republican criticisms of Fannie and Freddie were parroting all the 

criticisms of their competitors who were not looking to have a more 

honest mortgage lending market. They were looking to make more 

10 

money than they were already making and they were making more 

money than God. 

Thank you. 

Chairman KANJORSKI. Thank you, Mr. Miller. We have two reservations, but I suspect that neither Mr. Royce nor Mr. Hensarling 

will be here, is that correct? Okay. 

Mr. BACHUS. How much time do we have remaining on our side? 

Chairman KANJORSKI. You have 4 minutes. 

Mr. BACHUS. I would like to claim that time. 

Chairman KANJORSKI. The gentleman from Alabama wants to 

claim 4 minutes, and we think he should be allowed to claim the 

4 minutes, so we will recognize him. 

Mr. BACHUS. Thank you. I appreciate that. 

Secretary Barr—and this is not a question, but I note that you 

say here, ‘‘Private gains will no longer be subsidized by private 

losses.’’ And that is what has happened in the past. I think you 

have acknowledged that. But if the government is going to make 

guarantees, if the government is going to buy mortgages and those 

mortgages fail, then there will be public losses. So I know your 

statement that you released last night says that. It also says, ‘‘capital and underwriting standards will be appropriate.’’ And they certainly need to be. I think that is a given. I think we would 100 percent agree with that. But I am disturbed that we have programs 

like Affordable Advantage along with the State financing authority, 

but there is no downpayment required and a good credit history is 

not required. In fact, people are getting those without any 

downpayments. 

I was on CNBC this morning and Wilbur Ross, who was a guest 

said, ‘‘When you have no downpayment because of your closing 

costs and Realtor fees, you start 6 percent underwater.’’ You can’t 

sell it, can’t turn around and sell that house for the same amount. 

So if housing prices go down—and who knows whether they will or 

not, you are actually—in my mind, you are actually creating more 

mortgages that taxpayers may one day have to pick up. And I 

think that is something I would like to hear. You say excessive 

risk-taking will be restrained. I don’t see that happening right now. 

When Republicans—and I think the Administration resisted our attempts to say that if you have mortgages you are going to have to 

have a downpayment, you need good credit history, at least if the 

government is going to stand behind them. 

And finally, I would say, there has been a debate. I noticed that 

some of the statements out of the Administration are whether or 

not there ought to be an explicit government guarantee or an implied government guarantee, whether it needs to be implied or explicit. I will say to you there is another option, and that is that taxpayers shouldn’t guarantee any of it. I think the forgotten man 

here—Roosevelt used the term forgotten man—is the taxpayer. I 

think we are all forgetting about the taxpayer. As long as Fannie 

Mae and Freddie Mac exist as government agencies, you are going 

to have the risk of taxpayer subsidies, and you are going to be subsidizing those who get those mortgages or those mortgage guarantees by people who rent, by people who don’t have a mortgage, or 

by people who have a conventional mortgage that is not backed by 

the government. And I think it is time for the government to get 

11 

out of that business. As long as the government is in the business, 

they subsidize the business, that crowds out private investment 

and private capital. We have basically eliminated the private mortgage market by having a government guarantee. The government 

can—because of that, knowing the taxpayers stand behind it, the 

cost of capital for the government will be less. And we have seen 

that Fannie and Freddie have been operated on many occasions as 

an extension of some social or public policy to allow people to own 

homes at less than what the true cost would be. 

And finally, I would say, who bails out the government? If the 

government has to bail out Fannie and Freddie, who bails out the 

government? We just can’t continue to be in the rescue business or 

the lifeguard business. That is just not something—I think the people are speaking out. In every election, they are saying, get the 

government out of my pocket. 

Chairman KANJORSKI. The gentleman’s time has expired. 

Mr. BACHUS. Thank you. 

Chairman KANJORSKI. Now we have completed everything but 

one remaining minute on our side. I recognize the gentleman from 

Georgia for 1 minute. 

Mr. SCOTT. I will take that minute, sir. Joe Friday said, ‘‘Just the 

facts, ma’am. Just the facts.’’ You remember him? The great Joe 

Friday, Dragnet series. The facts are not any questions, so we can 

get this behind us. It was Hank Paulson, Secretary of the Treasury, and he was not President Barack Obama’s Secretary of the 

Treasury. He was George Bush’s Secretary of the Treasury who 

came before this committee and laid out the dire consequences if 

we did not act. So when you measure this deal, let’s be honest. 

There is no—you have to figure out how you got into a problem before you can figure out how you got out. It is not a matter of calling 

names. It is a fact, this did not happen under President Barack 

Obama. The guy was out as a State Senator trying to become 

President. This happened under Paulson’s watch who was the 

Treasury Secretary for President Bush. 

Fact, close. Now, there is still a need out here for help and assistance with middle- and moderate-income people to be able to get 

their homes. Mr. Chairman, may I just add this one thing, I hope 

that when we pay attention here that we will to these community 

banks. Our community banks own 85 percent of the lenders who 

own stock in the GSEs. So when you start talking about dismantling and doing all of that, it isn’t just as simple as that. This is 

a complicated area, and the need is still there. 

Chairman KANJORSKI. The gentleman’s time has expired. All 

time has expired. 

We will now hear from the panel of witnesses that we have, and 

we want to thank you for appearing before the subcommittee today. 

Without objection, your written statements will be made a part of 

the record, and you will each be recognized for a 5-minute summary of your testimony. I hope you will hold to that 5 minutes better than members of the committee did. 

First, we have the Honorable Michael S. Barr, Assistant Secretary for Financial Institutions, United States Department of the 

Treasury. Assistant Secretary Barr. 

12 

STATEMENT OF THE HONORABLE MICHAEL S. BARR, ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS, U.S. DEPARTMENT OF THE TREASURY 

Mr. BARR. Thank you, Mr. Chairman. Ranking Member Garrett, 

Chairman Frank, Ranking Member Bachus, and members of the 

subcommittee, thank you for the opportunity to testify today about 

housing finance reform and the progress made since the placement 

of Fannie Mae and Freddie Mac into conservatorship in September 

of 2008. Before I talk about the conservatorship, it is important to 

remember how we got here. 

For too many years, the GSEs were allowed to operate under an 

unacceptable ‘‘heads, I win; tails, you lose’’ system. They enjoyed 

the benefits of the perception of government support. They had inadequate oversight and inadequate capital. The market did not instill appropriate discipline because the market assumed they had 

a government backstop. 

The events that led to conservatorship were symptomatic of the 

range of regulatory management and oversight failures throughout 

our financial system. As the private, unregulated mortgage market 

grew and market players began to loosen mortgage credit standards to pursue ever-riskier business in the booming market, the 

GSEs, which had initially stuck to their core business of guaranteeing well-underwritten loans, saw their market shares fall precipitously. Driven by profit motives in an effort to regain that market share, the GSEs purchased riskier mortgages without holding 

adequate capital or having appropriate risk management. These 

moves left them dangerously exposed. 

As a result of the substantial deterioration in the housing market, and Fannie and Freddie’s inability to raise necessary new capital, FHFA placed the GSEs into conservatorship under the authority granted to them by Congress under the bipartisan Housing and 

Economic Recovery Act. Since September 2008, FHFA has acted 

carefully to help ensure that Fannie Mae and Freddie Mac’s assets 

are conserved while continuing to play a critical role in making 

mortgage credit available. By facilitating the flow of credit for responsibly underwritten mortgages, the GSEs have served as a 

source of stability for the housing market and helped to enable millions of Americans to continue to have the ability to take out a new 

mortgage or to refinance. The new loans being guaranteed by the 

GSEs are not contributing in any material way to the losses the 

GSEs now face. Quite the contrary. In fact, it is the GSEs’ old book 

of loans, those acquired before conservatorship, which are the overwhelming source of losses. The credit quality and risk profile of the 

post-conservatorship book of business has dramatically improved 

compared to pre-conservatorship levels, and less than 1 percent of 

losses have come from loans originated in 2009 and 2010. 

Now some have suggested that taking time to get reform right 

will expose taxpayers to even greater losses. That is simply not the 

case. The losses that Fannie Mae and Freddie Mac face are the result of mistakes made in the years leading up to the crisis, not 

those made today. The country is unfortunately stuck with the consequences of the poor choices the GSEs made prior to conservatorship. 

13 

The GSEs today are working hard to minimize losses through 

loss mitigation, and the GSEs are continuing to promote overall 

stability in the housing finance system, which is the most important source of loss mitigation they can provide. While we continue 

to bring stability in the mortgage market, we are also hard at work 

on the business of reform. It is not tenable to leave in place the 

system that we have today. 

The Administration is committed to delivering a comprehensive 

proposal to Congress, as called for under the Dodd-Frank Act by 

January 2011. Our proposal will call for a fundamental change. 

Congress began the process of reform with the passage of HERA 

in 2008 and FHFA continued the path when they placed Fannie 

Mae and Freddie Mac into conservatorship. The next stage of reform came with the passage of the Dodd-Frank Act, which includes 

fundamental reform of mortgage market rules, including important 

ability-to-pay requirements and risk retention standards for mortgages. This Act will help to ensure that homeowners are not sold 

products that they cannot afford and that originators retain ‘‘skin 

in the game’’ when they originate risky mortgages. 

As we move forward together towards responsible reform of our 

Nation’s housing finance system, we are committed to ensuring 

that the transition to a new system occurs in an orderly fashion 

that is minimally disruptive to the market. In designing a new system for housing finance, we must ensure that the system is more 

stable, consumers are protected, sustainable credit is widely accessible, and low- and moderate-income families have access to affordable housing. 

After reform, the GSEs will not exist in the same form as they 

did in the past: private gains will no longer be subsidized by public 

losses; capital and underwriting standards will be appropriate; consumer protection will be strengthened; and excessive risk-taking 

will be restrained. 

Thank you. 

[The prepared statement of Assistant Secretary Barr can be 

found on page 49 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Barr. We will 

now hear from Dr. Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency. Mr. DeMarco? 

STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, 

FEDERAL HOUSING FINANCE AGENCY (FHFA) 

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

Ranking Member Bachus, and members of the subcommittee, 

thank you for inviting me here today. My written testimony covers 

four topics: the status of the conservatorships; the current condition of the Enterprises; projected losses by the Enterprises; and 

considerations for the future of the housing finance system. I will 

briefly summarize several key points from my written statement. 

The Enterprises have been operating in conservatorships for 2 

years now, since September 2008. A principal focus of the 

conservatorships is to maintain the Enterprises’ secondary mortgage market role until legislation produces a resolution of their future. FHFA’s oversight is also directed toward minimizing losses, 

limiting risk exposure, and ensuring the Enterprises price their 

14 

services to adequately address their costs and risk. FHFA recognizes that losses by the Enterprises translate into costs for the taxpayers, and we are doing everything in our power to minimize future losses. 

Examples of these loss mitigation activities include loan modifications both through the Administration’s HAMP program and 

through each Enterprise’s proprietary modification programs, repayment plans and forbearance plans, and short sales and deeds in 

lieu of foreclosure. The foreclosure alternatives pursued by the Enterprises not only serve the conservatorship goal of minimizing 

losses but also fulfill FHFA statutory mandate in EESA to maximize assistance to homeowners while minimizing losses to the Enterprises. 

FHFA reports every month to Congress on the full range of Enterprise foreclosure prevention activities through our Federal Property Manager’s report. Since the first full quarter of the conservatorship, the Enterprises have completed more than 1 million 

foreclosure alternative transactions with borrowers. 

As conservator, FHFA has also been clear that the Enterprises 

should actively enforce lender compliance with their contractual obligations, which includes pursuing repurchases from those institutions whose loans did not meet the Enterprises’ underwriting and 

eligibility guidelines. 

Separately, in July, FHFA issued 64 subpoenas as part of an effort to determine whether other firms have legal responsibility for 

some of the Enterprises’ losses on private label mortgage-backed 

securities which to date have been borne by the Enterprises and 

taxpayers. In February, I communicated to Congress my position 

that in conservatorship, the Enterprises will be limited to continuing their existing core business activities in taking actions necessary to advance the goals of conservatorship. We continue on that 

course today. 

When I appeared before you in late May, I pledged that FHFA 

would expand its reporting on the Enterprises in conservatorship. 

In fulfillment of that pledge, last month FHFA published the first 

of what will be a quarterly conservator’s report on the Enterprises’ 

financial condition. Two of the findings presented in the report are: 

At the end of 2007, the Enterprises had $71 billion of combined 

capital. From the end of 2007 through the second quarter of 2010, 

charges against capital totaled $226 billion. The largest contributor 

to these charges against capital has been the single family credit 

guarantee segment, accounting for $166 billion, or 73 percent of 

combined capital reductions over that period. During conservatorship, the Enterprises have made significant progress in improving 

the quality of new mortgages purchased. New Enterprise mortgage 

guarantees have been for borrowers with higher credit scores and 

loans with lower loan-to-value ratios, two factors that affect expected default rates. 

Also when I appeared here in May, I was asked how much more 

money the Enterprises may draw under the preferred stock purchase agreements. I said that even across most severe stress scenarios modeled by the Enterprises, combined Treasury draws appear to be less than $400 billion. Based on the analysis available 

to me, that remains my view today. But to provide Congress and 

15 

the public with a more defined sense of the Enterprises’ potential 

future Treasury draws, FHFA is working with the Enterprises to 

develop forward-looking financial projections for public release. 

Similar to the Supervisory Capital Assessment Program (SCAP) 

conducted by the Federal banking agencies last year, the results of 

this exercise will not be forecasts or expected outcomes but rather 

modeled projections in response to what-if exercises that utilize 

various scenarios. 

As we prepare for the future, legislation is needed to restructure 

and strengthen our housing finance system and resolve the 

conservatorships. Ensuring an orderly transition will be essential. 

The role of the government in housing finance going forward is a 

key decision point. 

In my written statement, I offer some issues for consideration regarding government guarantees. We look forward to working with 

the Administration and Congress in this endeavor. 

[The prepared statement of Acting Director DeMarco can be 

found on page 56 of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. DeMarco. And now we 

will move on to questioning by the committee members. Let me 

take the first crack at it. Not that I apologize, but I think that in 

some of the opening statements, we have had a little bit of revisionism of history, if we might. And that tends to confuse the problem. Let me try to move with what I see the problem as being. 

We are trying to get back to an active, responsible real estate 

market and mortgage market in this country. In order to accomplish that at the level that the country needs, it seems to me we 

need a methodology of having a secondary market that brings in 

and attracts more capital to the American market, not maybe to 

the exact level of the pre-crisis state but certainly a great deal 

higher than today. 

Have either of you given a great deal of thought to whether or 

not just having two institutions like Fannie and Freddie, that obviously didn’t compete very well to get the best price and both 

seemed to rely on the same conditions and failed in the same way? 

What if we broke up the mortgage market into 10 GSEs and carry 

it a little further and say, we offer the license to be purchased as 

we do airtime in the communications field and let the private sector get in? But if we had 10 GSEs, if any one of them failed, we 

would be able to allow the bankruptcy process to weed that out and 

clean it out and continue on. We wouldn’t insulate, however, 

against deflation. If across-the-board deflation occurs, I don’t know 

how we can create any situation that is going to take that into consideration and protect against it. But what are your thoughts? And 

instead of having just the two GSEs that have handled this problem, that we spread it over the 10 or even 15, if you will. And is 

there a given number that makes it so inefficient that it is not 

worth doing it in those small proportions? 

Mr. Barr? 

Mr. BARR. Mr. Chairman, I think that the question of how many 

entities are involved in the system of housing finance and the secondary market is only one set of factors in the development of a 

new housing finance system. And I think bringing it back to the 

fundamental level, what is the shape of that housing finance sysVerDate Nov 24 2008 15:12 Jan 04, 2011 Jkt 062678 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\62678.TXT TERRIE
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tem, what do we want it to look like, how will it deliver widely 

available credit for sustainable mortgages, how will it deliver on financial stability goals, how will it deliver on affordability, I think 

those broader and deeper sets of questions come into play in a 

sense first. But the question of whether you want one entity or 

multiple entities; if you want multiple entities, how many to have 

relate to those broader sets of concerns. And as you are thinking 

about the numbers of entities in the system involve a number of 

tradeoffs and you have identified some of those, the question of 

what part of the system is inside the new housing finance system 

we have created and what part is out? How do we ensure a level 

playing field for different kinds of approaches to financial intermediation? How do we prevent races to the bottom in that sector? 

If we have multiple entities involved, does it deal with the basic 

question of correlation of risk in the system or just add to that? 

And I think those are the kinds of fundamental questions we are 

going to need to address in the reform plan. 

Chairman KANJORSKI. When do you anticipate the Treasury’s reform plan to be available so it can start to be considered? And I 

ask this honestly. Because I hear sometimes the beating of the 

chest up here on the Hill at a point that it is going to take time, 

but we ought to get some timeframe that we are looking at so we 

can inform the American people that this is not going to go on interminably but in fact we have some constraints on time. When do 

you anticipate that? 

Mr. BARR. As required under the Dodd-Frank Act, we will be 

submitting a plan no later than January of 2011. So that is the 

timeframe. I think it will give Congress the opportunity to take up 

legislation in earnest in the next year. And we would anticipate 

working very hard to get that done at that time. 

Chairman KANJORSKI. What are your thoughts on this, Mr. 

DeMarco? 

Mr. DEMARCO. Mr. Chairman, I would add two things to what 

Secretary Barr said. First, with regard to the system we had, we 

were limited to two because of the way the Enterprises were structured. That model envisioned that there would be only two companies. They were given a number of advantages not otherwise available in the marketplace, and so we did not have freedom of entry 

and exit. In terms of how many firms there might be in the future, 

if we are looking for a market model, I would think it is the market 

that should determine that, not a regulator or the government generally. So I would look for a market model in which there was licensing of firms to do certain things if they met certain requirements. But other than that, we should be having a model that lets 

the market determine that through entry and exit and that would 

help to spread and diversify risk. 

Chairman KANJORSKI. Thank you very much. My time has obviously expired. We will now recognize the gentleman from Alabama, 

Mr. Bachus. 

Mr. BACHUS. Thank you. And let me say this, the subcommittee 

chairman asked, ‘‘How do we keep the housing market going?’’ And 

I think that is what people are asking. I am not sure that ought 

to be the question. I think the question should be, should the government keep the housing market going? Is it up to the governVerDate Nov 24 2008 15:12 Jan 04, 2011 Jkt 062678 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\62678.TXT TERRIE
17 

ment through subsidies and guarantees to do that? Or is that the 

proper role of government? 

Secretary Barr, you have said the government is committed to 

ensuring that the GSEs have sufficient capital to perform under 

any guarantees issued now or in the future. So you obviously envisioned Fannie and Freddie continuing to make guarantees, I suppose. Is that correct? 

Mr. BARR. The basic goal of the provisions that the prior Administration put into place and that we have continued under the preferred stock purchase agreements is to ensure that the GSEs can 

meet their obligations now and into the future until such time as 

the Congress enacts reform. And when Congress enacts reform, the 

future state of the system will decide after that point, do we have 

guarantees, do we not have guarantees, do we have GSEs, do we 

not have GSEs. But in terms of obligations that are being issued 

today, absolutely, standing behind those is essential to market stability, to the continued ability of our housing finance system to 

function, and to not creating an environment of great instability 

that will harm taxpayers. 

Mr. BACHUS. Let me ask this, and then I will ask Mr. DeMarco. 

This idea of the government guaranteeing—in the future, not the 

past but the future guarantees—you have said that—and this is an 

answer to some, particularly some on the other side, who have 

called for an explicit government guarantee for home mortgages is 

one option. You said, ‘‘Replacing the Enterprises’ implicit guarantee 

with an explicit one does not resolve all the shortcomings and inherent conflicts in that model and it can produce its own problems.’’ That was your statement. I read it on your Web site yesterday. 

Mr. DEMARCO. Yes, sir. 

Mr. BACHUS. What are some of the shortcomings with a government guarantee? And what are some of the possible consequences 

for taxpayers? 

Mr. DEMARCO. I think, Congressman, that what I tried to articulate there was that while there are a number of industry representatives and others who have been advancing the cause of having explicit government guarantees backing a wide array of mortgages in 

the future housing finance system, my testimony says that I think 

that there are definitely some positives to that, but that some of 

the negatives have not been fully explored. So I have tried to identify several matters that I would think lawmakers would want to 

consider in determining whether and the extent to which to provide 

explicit government guarantees in the future housing finance system. And that goes to the ability and capacity of the government 

to be able to adequately price the risk that is there. It goes to the 

question of to the extent that there is government support for an 

activity that provides a subsidy, you get more of that activity. And 

that comes as an opportunity cost of funds not going elsewhere. It 

is a matter for lawmakers to weigh. And I believe that if the government is involved in providing guarantees on a broad portion of 

the mortgage market, that it seems likely—and past experience 

would suggest the government would want a say, to some degree, 

in how the mortgage market is working, pricing, what segments 

are being served, and how that gets done, and how that might afVerDate Nov 24 2008 15:12 Jan 04, 2011 Jkt 062678 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\62678.TXT TERRIE
18 

fect the proper pricing of mortgage credit risk or challenges that 

would need to be considered in a model that is relying upon government guarantees. 

Mr. BACHUS. Let me say, I read part of what you said, and I 

would agree with it. You said, ‘‘The premise for an explicit guarantee is that the private markets are not able to price the risk of 

the mortgage default at reasonable levels. But we must ask—and 

I agree with you—whether the government can do a better job.’’ I 

think the whole debate here is whether the private market or the 

government can do a better job. And I think most of my colleagues 

on this side say the private market can. You go on to say, ‘‘If a government backstop is underpriced—in other words, if the government underprices the risk—taxpayers may eventually foot the bill 

again.’’ And we—I know the minority party—at any and all costs 

wants to see that the taxpayers don’t foot that bill. 

Mr. DEMARCO. May I respond? 

One other thing to note here, though, is that it is for you all to 

decide what sort of multiplicity of guarantees there are. We still 

have, and I would expect would continue to have, the FHA program. That is a government guarantee program. It is one that is 

targeted. It is one that has certain transparencies about it. 

I am getting to the larger question of going to the full, what we 

know today as the conventional market, to what degree is the government going to get involved there? But there may well be a role, 

and it is for the public benefits of that to be weighed by lawmakers. 

Mr. BACHUS. Okay, thank you. 

Chairman KANJORSKI. Thank you very much. 

Now we will hear from the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. First, as to conforming loan limits for the highcost areas, the Federal Housing Finance Agency has determined 

that the loans originated since the temporary loan limit went into 

effect have consistently outperformed the smaller conforming loans, 

at least that is what I have been told, and have dramatically lower 

delinquency rates. One issue that comes up is will Congress, even 

if we do extend the 729, do it late in December? 

Mr. DeMarco, if Congress waits until the very end of the year to 

extend the current increased conforming loan limits, what do you 

think will be the impact of not doing it earlier? Will homes be able 

to open escrow in November and December without the borrower 

knowing whether he can get a conforming loan or she can get a 

conforming loan during that escrow period, and Congress perhaps 

not extending? How important is it for Congress to act expeditiously? 

Mr. DEMARCO. Congressman, if you say, just to give this rough 

justice, there are 90 days from purchase to closing on a mortgage, 

then you would expect that for mortgages, for home purchases that 

begin in October, that certainty for both potential borrowers as well 

as lenders would be helpful in that regard. 

Mr. SHERMAN. So if we don’t act before we adjourn for the election, or for October, then people won’t be able to open an escrow 

in November because they don’t know whether they can close in 

January? 

19 

Mr. DEMARCO. Congressman, ‘‘won’t be able to’’ is a much higher 

hurdle. The jumbo market is in fact performing, and it is actually 

coming back. The spreads on mortgages above 729, relative to those 

below, has been coming down, and so there would be mortgage 

credit presumably available. So I wouldn’t say— 

Mr. SHERMAN. I would hope you would go back and look at statistics. What I see in the Los Angeles area is, yes, the jumbo market is working well for the homes in Malibu. Anybody buying a 

home in Malibu has a banker on speed dial, probably the CEO. 

But for those homes selling for $600,000; $700,000; $800,000, 99 

percent of them are FHA, Fannie or Freddie, and the idea that the 

private market could step in, I certainly don’t see it. 

I look forward to working with you to see what the statistics are, 

not in the most expensive home markets, but places where the 417 

level applies, to see whether and under what circumstances people 

can get loans in the $700,000 or $600,000 range. 

Let’s move to these private resale fees. Last month, your agency 

proposed guidance for Fannie and Freddie and the Federal Home 

Loan Banks that they should not deal in mortgages on properties 

encumbered by these private transfer fees. I want to commend you 

for moving in that direction. 

We discussed these fees last time you appeared before this committee, and, as you know, they typically involve a circumstance 

where hidden in the documents is a statement that when the home 

buyer sells, 1 percent of the purchase price goes to a designee, usually an investor on Wall Street. In The New York Times expose, 

which I would like to add to the record without objection— 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. SHERMAN. —dated September 11, 2010, it details a case 

where this fee is in a separate document that wasn’t even included 

in the documents for signature at closing. 

Do you expect that this proposed guidance will become guidance, 

and do you expect it to become adhered to by the relevant lenders? 

Mr. DEMARCO. I expect that we will finalize the guidance in 

some fashion, Congressman. It is currently in a public comment period, and we are looking forward to receiving public comment on 

this. 

We cast a wide net in this proposed guidance, and I think it is 

very important for us to take the time to get public comment on 

this and to consider it so that we make sure whatever we come out 

with in final form is fashioned appropriately. 

Mr. SHERMAN. I would hope you would take this as an additional 

public comment, especially as it affects the lender and the prudential standards applied—when I say the lender, the lender or guarantor of these loans. 

Mr. DEMARCO. Yes, sir. Thank you. 

Chairman KANJORSKI. The gentleman’s time has expired. 

The gentleman from California, Mr. Royce, is recognized for 5 

minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. I am going to ask Mr. 

DeMarco a question. 

Would you agree with this notion that the goals, at least in part, 

led the GSEs into the junk loan market? 

20 

Mr. DEMARCO. I believe that the Enterprises began acquiring 

subprime and Alt-A loans and lowered their own credit standards 

for three reasons, Congressman: they did it to make money; they 

did it so they would stem their growing loss of market share; and 

they did it because of housing goals. 

Mr. ROYCE. Okay, one of the three goals. And, certainly, for me 

at the time, in 2005, I remember discussions I had and we had 

with the Federal Reserve Chairman where he told us where these 

goals would lead and, in particular, with the fact that unless Congress allowed the regulators to deleverage the portfolios—over the 

years, we watched those portfolios grow to $1.5 trillion. We 

watched about $11 trillion, I think, in subprime loans go through 

securitization or end up in those portfolios, and the Federal Reserve actually became frantic. 

And their worry was we created kind of a political beast here 

that was half politics and half private. And it became the most influential lobby here, at least in Financial Services, on the Hill. It 

was very hard for Congressmen to stand up against it. 

President Clinton did. I remember one of the quotes he made. He 

said, ‘‘I think the responsibility that the Democrats have may rest 

more in resisting any efforts by Republicans in the Congress, or by 

me when I was President, to put some standards and tighten up 

a little on Fannie Mae and Freddie Mac.’’ 

That was the fact. In the Senate, we had a good bill. In the 

House, we had the congressional bill. The congressional bill would 

have made the problem worse, and that is why it was opposed by 

economists and by the Treasury and by the Fed, because, frankly, 

it would not have allowed the regulators to step in and regulate 

and deleverage those huge portfolios. 

But here is the concern I have: Having watched in the past exactly what the Fed warned about, the systemic risk and how we 

were going to create this political beast that would eventually bring 

down the housing market and then, on top of it, the financial services sector, we are talking about reconstituting them. And at the 

same time, we have these further goals that your office has put out 

that will lead, at least economists who look at this tell us, it is 

going to lead to these new minimum downpayment standards— 

that there is going to be sort of again this road towards lower 

downpayments, at least that is one interpretation under this; that 

there is going to be a purchase of high LTV loans, junk loans, to 

meet those goals, potentially, again. 

My worry is, how do we—if we end up reconstituting this institution, how do we constrain it? Because I guarantee you, they are not 

regulated by market discipline. They become an instant monopoly 

because they knock their competition out of business because of the 

government backstop that they have behind them. And at the same 

time, with the way in which they influence Members of Congress, 

they basically dictated terms and said they will not be regulated 

by the regulators. 

So why would we go down this quasi-socialist road again of reconstituting these institutions? Couldn’t we eventually phase back 

towards sort of a private market? I know it will take time to do. 

But wouldn’t that be the wiser course, in your opinion, rather than 

the kind of involvement we have seen Congress put into this with 

21 

the goals in 1992 with the act that Congress passed, with the leverage on trying to get to zero downpayment loans and all the rest of 

it; wouldn’t we be smarter in the long term, rather than this boombust cycle in housing we seem to contribute to? 

Mr. DEMARCO. Congressman, I think that there is widespread 

agreement that reconstituting the GSEs as they were would be a 

very bad idea, and I would agree that one of the quite possible outcomes, one of the options that is available to Congress, is one that 

is far more market-based. 

Mr. ROYCE. Thank you, Mr. DeMarco. I appreciate it. 

Chairman KANJORSKI. The gentleman from Massachusetts, Mr. 

Lynch, for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

First of all, I want to thank Mr. Barr and Mr. DeMarco for your 

willingness to come before the committee and help us with your 

work. 

Mr. Barr, you mentioned in your opening testimony that only 1 

percent of the losses that we are seeing are related to the post-conservatorship book of loans, and that, I assume, the rest is from the, 

as you call it, the old book of loans. 

Now, just before the break, the August break, I know, Mr. 

DeMarco, your office issued 64 subpoenas in connection with private label mortgage-backed securities that were sold to Fannie and 

Freddie. 

Mr. DEMARCO. Yes, sir. 

Mr. LYNCH. So I know that was just before the break, maybe 

mid-July, that you sent those subpoenas out. Can I ask you, where 

are we now? I know that there were some questions about the valuation of those securities, whether some misrepresentations were 

made. I know you asked for a lot of documents. I didn’t go through 

all of the subpoenas, but I went through some of them. 

Where are we now with that whole process? 

Mr. DEMARCO. Sir, the information we have requested is in the 

process of coming in, and we are initiating our process of reviewing 

those documents for the purposes of doing a financial review. 

The purpose here is to review the records, the mortgages underlying these securities, to make a determination as to whether there 

is a breach of warranty or some other misrepresentation that 

would suggest that the losses the Enterprises have incurred are the 

legal obligation of someone else. That process is going to take some 

time, Congressman, but we are hard at work at it now, and the 

records are beginning to come in. 

Mr. LYNCH. Do you have a timeframe, Mr. DeMarco? 

Mr. DEMARCO. I am afraid not, sir. 

Mr. LYNCH. So it is open-ended? 

Mr. DEMARCO. Not open-ended in terms of responding to the subpoenas, but the timeframe to go through all of these records and 

so forth is very hard to say. 

Mr. LYNCH. Is there any opportunity that you might share with 

Congress, with this Committee on Financial Services, your progress 

or lack thereof? 

Mr. DEMARCO. Congressman, I would be happy to try to find an 

appropriate method to periodically update the committee on the 

progress we are making here, recognizing sort of some of the priVerDate Nov 24 2008 15:12 Jan 04, 2011 Jkt 062678 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\62678.TXT TERRIE
22 

vacy and legal sensibilities that need to be respected. I would be 

pleased to find a way of providing periodic updates. 

Mr. LYNCH. I would really like that. I think that, just as some 

of these mortgage-backed securities were foisted on others, I think 

that Fannie and Freddie for various reasons bought into these as 

well and that misrepresentation resulted in major losses for the 

taxpayer. 

Let me ask you another angle on this. While you are going after 

some of these private label issuers and trying to hold them accountable for selling bad products, mortgage-backed securities to 

Fannie and Freddie, Treasury and the Fed are pumping in at last 

count $1.36 trillion into some of these same companies by purchasing their securities. 

Mr. DEMARCO. Congressman, I would correct that just a bit. Two 

things, just to clarify. 

First, we are not yet pursuing anyone. We are just gathering information. We have made no determination that there have been 

misrepresentations or breaches of warranty. We are gathering information through the subpoenas to see if that is in fact the case. 

Second, with respect to what the Federal Reserve and the Treasury have been purchasing, their purchases of mortgage-backed securities are those securities that have been issued by Fannie Mae, 

Freddie Mac, and Ginnie Mae. They are not— 

Mr. LYNCH. I realize that. But I am just looking at the numbers 

here, what we are looking at as losses, the valuations on these 

things since they were sold to Fannie and Freddie. They just went 

in the toilet in a very brief period of time. So, at one point, they 

were AAA, and then the next thing we know, they are worth nothing. 

So I am just looking at the losses you have here, one quarter, 

$266 billion. It is just a whole litany of losses here. You are hemorrhaging value. So I am just making a deduction that we have 

made everywhere else in the industry with their mortgage-backed 

securities that there were misrepresentations made here to some 

degree. Whether it is malfeasance or nonfeasance, I am not going 

to go there. 

Mr. DEMARCO. We are going to find out. I think this is important 

for the American taxpayer. The American taxpayer is now backing 

Fannie and Freddie so that the mortgage market in this country 

can continue. The losses are extraordinary, and I think that we 

owe it to the American taxpayer to find out as part of our responsibility to conserve assets, to see where these losses are coming from 

and whether they are the legal responsibility of others, and we will 

do that. 

Mr. LYNCH. You sure do. 

In closing, Mr. Chairman, all I am saying is that it is counterintuitive, that we are going to hold them accountable, but we are 

also going to pump them full of money to try to prop up the values 

here. That is all I am saying. 

I yield back. Thank you, Mr. Chairman. 

Chairman KANJORSKI. The gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. Thank you. 

23 

So, Director, my colleague Mr. Campbell and I sent a letter to 

you, actually with 40 other Members of Congress, back during the 

summer, and it came about actually because it was on media reports, as a lot of these things are driven as far as coming out with 

information, that mortgage bonds had reached an all-time high 

price of 106.3 cents on the dollar, which, as an aside, is, if you 

think about it, really an incredible number for purchase of a bond 

and for an investment purpose. Nonetheless, that is where it was 

or is. 

The media reports indicated that Fannie and Freddie didn’t want 

to sell a larger percentage of their securities, even though they 

could, and they could do so and obviously get a good value for 

them, a great value for them. 

It also said that the GSEs didn’t want to sell more because it 

would more rapidly shrink their portfolios, and then, with a smaller portfolio, it would be more difficult to eventually free those entities from conservatorship and even then potentially put them back 

the way they were and loose on the capital markets. 

So you sent a formal response, and honestly, I just got it late yesterday for the first time, and you say, ‘‘Enterprises hedge their 

portfolios so gains in asset prices may be offset by losses on derivatives.’’ That is true. 

If that is the case, then couldn’t you actually lose less money or 

no money if you sold off those assets now, because then they 

wouldn’t have to be hedged in any other way; they would be off 

your books? 

In your letter, then, you go on to talk about how you are living 

up to your commitment to their current agreements with Treasury, 

and everything is on schedule. 

So we have had discussions and what have you, and every time 

you come here to testify, you state that you are trying to fulfill your 

mission, and I know you are, of maintaining values of the entities 

and reducing losses to the taxpayers. 

But if you are really trying to do that, preserve that value and 

get money back to the taxpayers, shouldn’t we be selling them 

today when they are at these prices and not have to deal with the 

hedging of the risk down the road a year or two, or whenever that 

may be, when inflation kicks in and then that problem of hedging 

that would be just be astronomically harder than it is today? 

Mr. DEMARCO. This is a challenge question, Congressman, and 

I would point out that there is more to this than just the hedging. 

So the Enterprises are funding long-term assets by issuing longterm liabilities. If we start rapidly shrinking the assets out of the 

balance sheet, I am left with long-term liabilities that need to be 

funding something. So it has more to do than just hedging. 

I would also say that they are substantial holders— 

Mr. GARRETT. If I could stop you there, so I understand what you 

are saying. But can’t you take care of that better today? If you can 

tell them at 106 today, who knows what they would be worth, say, 

5 years from now if the interest rates go up and what have you. 

So you can take care of those other underfunded assets that are on 

your books if you basically sell them and put that money aside to 

take care of that? 

24 

Mr. DEMARCO. So managing $1.5 trillion worth of retained portfolio has lots of complexities to it. 

Let me just simply say that part of that is that is, it is so large 

that is substantial relative to what is trading in the marketplace, 

and I think that the Enterprises also have a responsibility to market stability, that their sales and the unwinding of their portfolio 

be done in a stable and predictable way in order to ensure greater 

market stability. 

With that said, my letter to you also pointed out that, as a result 

of these market movements this summer, we have been in discussions with Treasury, as required by the senior preferred agreement, and we are making some adjustments to how we approach 

the question of disposition of assets in normal business order in 

order to take greater advantage of market prices. 

But I think we have a responsibility to do so in a way that does 

not invoke market instability and also is cognizant of the fact that 

there is hedging and long-term funding here as well. 

But we do want to—the basic point, Congressman, I do agree; we 

want these portfolios to be run down, and we are working very 

much to that end. 

Mr. GARRETT. My time is moving quicker than I would like. 

Secretary Barr, you made in your opening comment, I think it 

was in your opening comment, with regard to the purchase by 

Treasury of the GSEs, of the mortgage-backed securities, and I 

wanted to go into more detail, but in 30 seconds here. So I asked 

the same question to Chairman Bernanke. 

When you are purchasing these things today, up until—they are 

guaranteed by the good faith and credit effectively of the taxpayer 

until, when, 2012, right? After that, that guarantee, in essence, is 

no longer there. So what actually are you purchasing, and what is 

the value of those securities that you are purchasing today after 

2012 if there is not the backing and the funding by the Treasury 

for the GSEs’ operations going forward? 

Mr. BARR. There is not a sharp distinction between the activities 

before and after 2012. The preferred stock purchase agreements 

that backstop the Treasury’s support for Fannie and Freddie continue into force after that date with respect to the obligations of the 

GSEs and with respect to the mortgage-backed securities. 

The mortgage-backed securities that the Federal Reserve purchased and that in smaller part the Treasury purchased have the 

value that they have intrinsic to the asset, and that also continues 

after 2012. So there is not a sharp break. Those obligations are obligations that will be supported in either event. 

Mr. GARRETT. And that is actually where I wanted my question 

to go, is that, from reading the Treasury’s agreement with Fannie 

and Freddie, it seems that there is no deadline on that, and it can 

go on ad infinitum. Is there any deadline? 

Mr. BARR. May I just briefly answer, Mr. Chairman? 

Under the preferred stock purchase agreement, those are designed to put in place support for Fannie Mae and Freddie Mac 

such that the obligations that they are incurring today or have incurred in the past are supported. And the obligations are designed 

so that, as the Congress considers reform of the housing finance 

25 

system, it is not driven to instability in the housing finance system 

during the transition. 

So whatever Congress decides about the future in Fannie Mae 

and Freddie Mac can be done on the basis of sound policy and good 

choices, whether one wants a guarantee or doesn’t want a guarantee, whether the size and the shape of the government’s role in 

the market, can all be made independently of disturbing any existing arrangements. So they are designed really to free the Congress 

to develop a plan that is good for the country going forward in the 

future. 

Chairman KANJORSKI. The gentleman’s time has expired. 

The gentleman from Massachusetts, the chairman of the committee, Mr. Frank, is recognized for 5 minutes. 

The CHAIRMAN. Thank you, Mr. Chairman. 

I would hope we could focus on going forward, but my Republican 

colleagues seem to open a somewhat lamentable discussion of history, while others engage in distorted versions of that history. 

The gentleman from California, Mr. Royce, continues to misstate 

what has happened. He talks about a congressional bill in 2005. He 

meant the bill passed by the House Republicans. The House Republicans brought that bill up. That was the bill Mr. Oxley brought 

forward that most of the Republican members of the committee 

voted for. 

The gentleman from California, as he has pointed out, didn’t like 

the bill. He offered amendments both on the Floor and in committee. No amendment was even close to supported by a majority 

of Republicans. They all lost. 

He mentioned that President Clinton said, well, the Democrats 

fought this. President Clinton is a great guy. He is not infallible. 

From the time President Clinton said that, the Republicans controlled Congress. It is extraordinary. 

The Republicans controlled Congress from 1995 to December of 

2006 and did nothing, nothing legislatively. We took office in 2007 

and worked with Hank Paulson and put it into conservatorship. 

Those are the clear facts. 

We also tried to block the subprime lending, and that was somewhat controversial. 

I will note, the gentleman from Alabama, to his credit in my 

mind, in 2007, joined the Democratic majority in supporting a 

subprime lending restriction bill and almost lost his ranking membership. That was widely reported in the press. Other members of 

this committee said, oh, no, you can’t do that. 

So the Republicans for 12 years did nothing to regulate Fannie 

and Freddie. We did it when we took the majority, working with 

Mr. Paulson, and that is why they are now in conservatorship. 

Secondly, the Republicans have consistently and still opposed 

any effort to stop the predatory lending, because as the gentleman 

from North Carolina pointed out, it wasn’t simply Fannie and 

Freddie buying those loans; it was others. And those are the facts. 

Now, Mr. DeMarco, I just want to be very clear. You were appointed originally when President Bush was President, correct, into 

the FHFA? 

Mr. DEMARCO. I was not appointed, Mr. Chairman. I am a career 

civil servant. I was hired by OFHEO. 

26 

The CHAIRMAN. You were there, and when Mr. Lockhart last 

year took over—I don’t mean to total impute you; just to show you 

are totally nonpartisan in this. 

Mr. DEMARCO. Yes, sir. 

The CHAIRMAN. An argument has been made that Fannie and 

Freddie are still terrible problems and a source of losses. The view 

I got, and I will say, by the way, from the standpoint of Fannie and 

Freddie, Mr. Paulson points out in his book that when he got ready 

to put them into conservatorship, knowing what a drastic change 

that would mean for them, he was afraid they would appeal to 

Congress to block him. And he called myself and Senator Dodd, 

and we said, please, go ahead. 

I have to ask you, did putting them into conservatorship make 

a significant difference in the way in which they operate? Are 

Fannie and Freddie as they have operated since the conservatorship operating essentially similarly to the way they were before, or 

have there been improvements from the taxpayers’ standpoint? 

Mr. DEMARCO. There have been many changes and improvements since conservatorship began. 

The CHAIRMAN. Would you elaborate on that? 

Mr. DEMARCO. Certainly. They have limited their activities to 

their existing core business activities. Their underwriting standards have improved substantially. And without having gone into 

conservatorship and having the backstop of the U.S. Treasury Department, they would have been rapidly receding from the marketplace, which would have meant we would have lost our secondary 

market and the housing finance crisis would have been much more 

severe. 

The CHAIRMAN. Mr. DeMarco, I appreciate that. 

Let me ask you, because we are concerned about the losses, is 

it correct—if not, I have full confidence in your bipartisan approach 

to this—is it correct that the great bulk of the losses predate the 

conservatorship and that since the conservatorship, losses, if any, 

that we can expect are severely curtailed? 

Mr. DEMARCO. Yes, sir. 

The CHAIRMAN. Thank you for that, because I think that ought 

to be clear. 

Now the question is, where do we go from there? And that is why 

I said there was an urgency. Because we acted, the Democratic 

Congress, when the Republican Congress wouldn’t, and put them 

into conservatorship, or allowed Mr. Paulson to do that, we have 

made drastic changes. And as you say, we would lose the secondary 

market. 

I tend to agree more with Mr. DeMarco than some in the Administration. I want it to be more purely private, but you simply can’t 

go from A to Z without making sure you have done it right. 

Mr. DeMarco, you are going to hear, I think, from some of my 

Florida colleagues. They are concerned that what has gone on in 

Florida has, Gretchen Morgenson documented this in The New 

York Times, a kind of a foreclosure mill without any true notice to 

the people being foreclosed, and there is concern that Fannie Mae 

in particular has not been as helpful as it could be in protecting 

people’s rights. 

27 

We have written you before. I hope you have read that article. 

I believe there is a role for you through Fannie Mae, and I think 

you may hear about this from Mr. Klein. I will be joining that. 

Finally, let me just say, I appreciated your comment about the 

Federal Home Loan Banks. One of the best things we did in the 

financial reform bill was not bother the Federal Home Loan Banks 

model and leave them essentially as they were. 

When they no longer have to pay off the pay off the REFCORP, which is $300 million, however much it is a year, I saw your comments that you think they should not have to continue to send that 

into the Treasury, but it should be used to enhance the mission of 

those agencies. I appreciate that, and I hope we can work together 

to do that. 

Mr. DEMARCO. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Chairman. 

And now we will hear from the gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Gentlemen, forgive me, I missed part of this hearing, so we may 

be plowing a little bit of old ground here. 

Secretary Barr, in your testimony, you speak about the events 

leading up to conservatorship. And I read your testimony; I didn’t 

hear it. Assuming that it was the same testimony, I didn’t see any 

mention of Fannie and Freddie’s affordable housing goals, which, 

as you well know, the low- and moderate-income housing goals 

ratcheted up from 42 percent in 2000 to 56 percent in 2008; underserved areas, from 24 percent in 2000 to 39 percent in 2008; special 

affordable, from 14 percent in 2000 to 27 percent in 2008. 

We have had testimony before in this committee about Fannie 

and Freddie having to take on a lower quality of loans that were 

connected to these affordable housing goals. Again, I saw no mention in your testimony. Should I conclude that you believe there is 

no nexus? 

Mr. BARR. Mr. Hensarling, I think that, primarily, if you look at 

what happened in the leadup to the financial crisis and the conservatorship, primarily what happened was that Fannie Mae and 

Freddie Mac were chasing the private market. The private market 

in the boom went out and did, frankly— 

Mr. HENSARLING. I understand that, Mr. Secretary. But do you 

believe there is a nexus or not a nexus? 

Mr. BARR. I think, primarily, the cause of the conservatorship 

and the cause of the failure of the two GSEs is fundamentally driven by profit motive and a desire to regain some market share. 

Mr. HENSARLING. Does that mean there is a nexus or not a significant nexus? 

Mr. BARR. I think the argument with respect to the goals, if they 

contributed, it was rather minor in relation to those two other factors, which is why I would not put it at the top of the set of problems. 

I should say, going forward, that I think that if Congress is considering affordability going forward, that it ought to have a clear 

delineation between that objective and other objectives in the housing finance system. 

28 

Mr. HENSARLING. I see the chairman of the full committee is 

here. Throughout most of his career, he encouraged Fannie and 

Freddie to get more deeply involved in affordable housing and encouraged them to do more in affordable housing. 

On December 11th, Chairman Frank went to the House Floor 

and said, ‘‘In 2004, President Bush and, yes, the affordable goals 

came in 1992, President Bush raised them from 42 to 54 percent 

over my objection. I thought it was imprudent and said so at the 

time.’’ 

You don’t want to take the opportunity and try to blame President Bush for one more problem here? 

Mr. BARR. Sir, I don’t think it really helps to blame one or another party or Member with respect to any activity. I think what 

we want to do is look at the basic problems in the housing finance 

system. 

We had a race to the bottom in mortgage standards. We had a 

lack of uniform level playing field in the system. We had a system 

in which there was an implicit government backing for these GSEs, 

and we let the private sector benefit and the public sector take the 

losses. 

Mr. HENSARLING. Mr. Secretary, we will move on to a new question then. 

In your testimony, you list four objectives and goals for housing 

finance and reform, I believe on pages 4 and 5 of your testimony. 

I did not see any mention whatsoever of taxpayer protection. As 

you well know, we already have $150 billion of taxpayer loss in 

Fannie and Freddie. We have, as you well know, taxpayers on the 

hook, the Fed, their NBS over $1 trillion. 

I assume that was not an accident that you did not consider, that 

the Administration did not consider taxpayer protection among the 

lead objectives and goals for housing finance reform. Is that a fair 

assumption? 

Mr. BARR. I think taxpayer protection is absolutely critical, and 

that is why I talked about not having private gains and public 

losses. Perhaps the colloquialism did not translate effectively, but 

it is absolutely designed to protect the taxpayers. 

I don’t think we can have a system in the future in which we 

have these private gains that are subsidized by the taxpayer, which 

the taxpayer is on the hook for and which shareholders of private 

entities get the upside and taxpayers get the downside. We can’t 

have that in the future. 

Mr. HENSARLING. I think you have mentioned in your testimony 

that part of the lack of desire to achieve reform today, as I believe 

you testified, that most of the losses have resulted from the 

underwritings of 2005, 2006, and 2007. But isn’t it true that the 

loans that are being underwritten today, albeit with a new underwriting standard, one, we have a limited track record as opposed 

to the longer track record; also, do we know how these loans would 

perform if they became underwater; and isn’t the bottom line the 

taxpayer is still on the hook? 

Mr. BARR. With respect to the losses that are being incurred 

today, there is a shortened time period, you are absolutely correct. 

On an age-adjusted basis, those loans are performing significantly 

better than they would on an age-adjusted basis to the old book of 

29 

loans. So we do have an apples-to-apples comparison in the conservators’ report from August. 

With respect to reform, we are strongly in favor of reform. I do 

believe the Congress took the important first step in passing here 

in 2008; the important second step of placing these entities into 

conservatorship; the important third step of passing the DoddFrank Act, which fundamentally transforms the regulation of the 

mortgage market, creates a level playing field, has ability-to-pay 

requirements, has risk retention with respect to risky mortgages, 

has a whole set of reforms that are designed to prevent the market 

from blowing up the way it did in the past. 

Now we need to take the last step in that process, which is the 

housing finance sets of reform that I think the Congress should 

take up in this coming year. 

Mr. HENSARLING. Thank you. 

Chairman KANJORSKI. The gentleman’s time has expired. 

We will now hear from the gentleman from California, Mr. Baca, 

for 5 minutes. 

The CHAIRMAN. Will the gentleman yield for 15 seconds? 

Mr. BACA. Excuse me. Thank you very much for recognizing me. 

I yield the balance of my time to Chairman Frank. 

The CHAIRMAN. Thank you. I won’t take all of it. But I did want 

to say, and I appreciate the accurate quotations by the gentleman 

from Texas, seriously. 

But the one thing I should clarify, yes, I have been a strong advocate for affordable housing. I wasn’t making the distinction at 

the time—by affordable housing, I was always talking about rental 

housing. I am in fact proud—like a lot of people, I missed a lot of 

this. But I have always been critical of what I thought was an excessive push into homeownership. 

And when I talked about the affordable housing goals, I was focusing on the multi-housing housing, which in fact did not cause 

nearly as many problems. And I believe what we should be doing 

is affordable rental housing. I was and continue to be skeptical of 

the notion that we do people a favor when we push them into 

homeownership beyond what they can sustain. 

I would just take further to elaborate a little bit more, Mr. 

DeMarco, on that Florida situation. It was troubling to me. I had 

heard some complaints, and then, frankly, the article by Gretchen 

Morgenson was really quite troubling about decisions being made 

in Florida where people were getting foreclosed without notice, etc. 

And Fannie could play a role in that. 

And we have been asking Fannie, to the extent that they are involved in that process, even the court system hasn’t been doing it, 

Fannie could take steps to make sure that notice is given to people, 

and we have learned that there are problems with the papers. 

So we had written you before. We are going to renew that. I 

would ask you to look at that and work with us to make sure that, 

to the extent that there is a Federal conservatorship there, Fannie 

in particular but maybe Freddie, that we do everything to protect 

the rights of the people who are there. 

I thank you, and I thank the gentleman. I yield back. 

30 

Mr. BACA. Thank you very much. Along the same lines, I guess 

we are all very much concerned with what is going on right now 

with a lot of the foreclosures that are pending before us. 

It seems like the institutions, though, and either one of you can 

answer it, a lot of the institutions right now are foreclosing, and 

there seems to be a lot of problems in the documentation and losing 

of the documentation within the banking industry, too, as well. 

I don’t know if the Treasury or others can be involved in part of 

that process, because the consumer who is being foreclosed right 

now gets a notice and in that process, they fill out the documents, 

and then they don’t tell them specifically what those documents 

should be. And then what happens is, during that whole process, 

they are losing their homes because they are not complying. 

It seems like now it is another gimmick that is being used by 

some of the banking institutes to foreclose on individuals. What 

can be done in that area, or how are we addressing that? 

Mr. BARR. Let me try and address a bit of that. I do think there 

were serious problems in the documentation process, in the foreclosure process. Treasury, through the lever of our Home Affordable Mortgage Program, has been putting pressure on services to 

do a better job in that. I think they have made significant progress 

over the last number of months in reducing documentation problems. 

We have engaged both with Fannie Mae and Freddie Mac as 

compliance agents and directly with the servicers to deal with the 

lost documentation process and require additional reviews. I still 

think there are problems out there in the market and homeowners 

are having difficulty in that way, and I think that we need to continue to focus on making better improvement. 

Mr. BACA. Right. Because they are still being penalized, and they 

are being foreclosed, and they shouldn’t be, because of the deadline 

that they said, yet they are the ones who are late to respond back. 

Yet the homeowner is the one who ends up being penalized. 

The CHAIRMAN. There is one other point I wanted to make in 

support of my colleague from California, Mr. Sherman, although he 

is echoed here, not echoed, but joined by the gentleman from California, Mr. Miller, on the other side, and that is on the conforming 

loan limit being raised. 

Two points that are relevant. First, we had a vote on that in the 

House. We had some language in there in the FHA bill, and I 

thought it was best. My argument to the Rules Committee was, 

let’s have votes. 

The vote on that was more than 300 Members of the House, 

three-quarters of the House voted in favor of the higher loan limits, 

not just those of us in the affected area. 

Secondly, I did note that in a very good paper written by Alan 

Blinder and Mark Zandi, kind of bipartisan, about how we ended 

the great recession, they specifically credited the increase in the 

conforming loan limit as one of the factors that had helped the private market in a good way. So I would just add to what the gentleman from California said, and I hope we do do it before we adjourn. 

I thank the gentleman from California. 

Mr. BACA. I yield back the balance of my time. 

31 

Chairman KANJORSKI. The time has expired. 

We will now hear from the gentlelady from Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Mr. DeMarco, on page 8 of your testimony, you talk about how 

work is under way to develop projections that are comparable between the Enterprises and therein say that there are some differences between the Enterprise-generated results and results from 

FHFA-directed exercises. But you say that is consistent with what 

you said in the past; even under severe stress scenarios, that 

Treasury draws remain under $400 billion. 

Would you support legislation to set a cap for Fannie and Freddie at $400 billion so that they can’t borrow any more from the 

taxpayers? I know that cap was taken off around Christmas at 

some point. 

Mr. DEMARCO. Congresswoman Biggert, I believe we owe investors in these securities and we owe the financial system clarity and 

certainty with regard to what the government is doing here with 

respect to Fannie and Freddie, and we have been clear about the 

securities that they are issuing today so that our mortgage market 

continues to function and will have the backing of the Treasury Department under the terms of the senior preferred agreement. Those 

terms are public. People are trading billions of dollars of securities 

based on that. I don’t think that we should come back in and alter 

the terms of that at this time. 

Mrs. BIGGERT. Okay. I am hearing from constituents about the 

fact, they are saying that Fannie and Freddie through the States 

are providing mortgages, just as in the past, where there is no 

downpayment. 

Mr. DEMARCO. Yes, I would very much like to respond to that, 

if I may, because Congressman Bachus raised it as well. There 

have been some news reports recently about a so-called affordable 

advantage program. I would like to explain this and provide some 

clarity around this. 

This program is an agreement between Fannie Mae and several 

State housing finance agencies. It is a limited term agreement. 

Think of it as an addendum to an ongoing purchase agreement that 

Fannie has with the HFAs. 

Under the terms of this with the several HFAs, apparently 

Fannie has agreed to buy certain mortgages with little or no money 

down that it involves recourse back to the HFA and that has a 

great deal of underwriting and review by the HFA. 

I have had great communication with both Fannie Mae and 

Freddie Mac during the period of this conservatorship, and any significant actions that have been taken by these companies have 

been reviewed and approved by the conservator. This one got away 

from us. There was a miscommunication, and this agreement with 

these HFAs was signed without my knowledge. 

When I learned about it after the fact, I reviewed what had been 

done. I saw that there was now a legal contract with the HFAs, 

and I made clear to Fannie Mae a couple of things: one, we were 

going to honor and respect that contract for its duration, it ends 

next March; and two, we were not doing this in the future. 

There were several other requests that had come into Fannie 

Mae from other parties for similar no-down-payment or very little 

32 

downpayment mortgages, and I said, absolutely not. So we have 

had nothing further on this, and when this particular program 

with these HFAs expires, it will not be renewed. 

Mrs. BIGGERT. But how much is the value of them? 

Mr. DEMARCO. The amount of loans that have been made under 

this program I believe is less than $10 million. 

Mrs. BIGGERT. It seems pretty risky, going back to where we 

were before. 

Mr. DEMARCO. Congresswoman, I agree. 

The basic premise here is I believe borrowers should have a 

downpayment if they are going to purchase a house, and I found 

that the terms of this program did not fit with what we are trying 

to accomplish here in conservatorship, and that is why you won’t 

be hearing about additional programs such as this. 

Mrs. BIGGERT. I am not sure that—I don’t think you answered 

my previous question. Would you support legislation for a cap on 

the amount of money at $400 billion? 

Mr. DEMARCO. Congressman Biggert, as I understand the way 

you have represented it, I would not, because I believe that would 

change the terms of the agreement under which investors today are 

purchasing securities issued by Fannie Mae and Freddie Mac. 

Mrs. BIGGERT. Thank you. 

I yield the remainder of my time to Mr. Royce from California. 

Mr. ROYCE. I appreciate the gentlelady for yielding. 

In point of fact, Chairman Frank said in September of 2003, I 

do think I do not want the same kind of focus on safety and soundness that we have in OCC and OTS. I want to roll the dice a little 

bit more in this situation towards subsidizing housing. 

Now, that is, frankly, the fact. And I do think that President 

Clinton was right in terms of his observation that the responsibility 

that the Democrats may have rests more in resisting any efforts by 

Republicans in the Congress or by me when I was President to put 

some standards and tighten up a little bit on Fannie Mae and 

Freddie Mac. 

For those of us who were involved in trying to put those standards on and watching the Senate Republicans succeed in putting 

a bill out to deleverage those portfolios, it is a rewrite of history 

today not to acknowledge that we might be going down the same 

road again. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. The gentleman’s time has expired. 

We will now hear from the gentleman from North Carolina, Mr. 

Miller. 

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

I joined this committee in 2003, and it was like walking into 

Harlan, Kentucky, and I didn’t know the Hatfields, and I didn’t 

know the McCoys, but I did know they didn’t get along with each 

other. 

What Republicans on this committee now remember, apparently 

remember, was that they were voices in the wilderness years ago 

saying that subprime lending was the road to ruin, and Fannie and 

Freddie were hugely responsible, and they warned us about Fannie 

and Freddie. 

And that is not what I remember at all. 

33 

Fortunately, these meetings are transcribed, and they live on in 

videotape. I have gone back and checked, and that is not what they 

said at all, just as I remembered. In fact, they praised subprime 

lending as being just the type of the kind of innovation that can 

come from unfettered capitalism; it was leading to this huge spike 

in homeownership by people who never would have qualified for 

mortgages under some stultifying set of regulations like what 

Democrats might propose. 

And they did criticize Fannie and Freddie, but their criticisms of 

Fannie and Freddie were almost entirely repeating the talking 

points of Fannie and Freddie’s bitter rivals, the companies that 

were almost entirely without government regulation, the private 

label securitizers, such worthy companies as Goldman Sachs, Merrill Lynch, Bear Stearns, Lehman Brothers, and AIG, which was in 

competition with Fannie and Freddie, as well, because you all essentially insure your own securities. 

The criticism was that those private label securitizers, those unregulated companies, were running rings around Fannie and 

Freddie in affordable housing and that Fannie and Freddie were 

not doing nearly enough for affordable housing. 

And the Bush Administration kept raising the affordable housing 

goals, but then said that Fannie and Freddie could meet that goal, 

when Fannie and Freddie were saying, we don’t buy mortgages like 

the mortgages they are buying. 

HUD, under the Bush Administration, said that Fannie and 

Freddie could meet that goal by buying the private label mortgagebacked securities, what we now call toxic assets, from those companies. 

Mr. DeMarco, to what extent did the $255 billion in private label 

subprime mortgage-backed securities, how much of the losses are 

as a result of those securities? 

Mr. DEMARCO. If I may pause for just a minute, Congressman. 

It is less than 10 percent of the total, Congressman. I will get 

the exact number for you. 

Mr. MILLER OF NORTH CAROLINA. Okay. You said most of it has 

come from nontraditional mortgages that Fannie and Freddie did 

begin to buy in the last decade. ‘‘Nontraditional’’ covers a lot of 

ground. 

Mr. DEMARCO. It is nontraditional and traditional. They have 

taken a huge hit on their credit guaranteed book. 

Mr. MILLER OF NORTH CAROLINA. But I assume that the nontraditional led, and then traditionals have more recently become— 

Mr. DEMARCO. Yes. 

Mr. MILLER OF NORTH CAROLINA. It is only when the housing crisis really hit that the traditional became a problem; is that correct? 

Mr. DEMARCO. I suppose so. Certainly, as house prices and unemployment have risen, it has affected quite a broad range of home 

buyers. 

Mr. MILLER OF NORTH CAROLINA. Okay. Of the nontraditional, 

how much of that was Alt-A, which did not really include predatory 

terms, but certainly with benefits of hindsight and certainly at the 

time should have appeared foolish, poorly underwritten loans, 

loans that required little documentation, stated income. But the 

34 

terms were not—the interest rate may have been higher, but the 

terms were not terrible different from prime loans. 

How much were Alt-A, and how much did Fannie and Freddie 

buy any of the kind of 2/28s, 3/27s with a 30 to 50 percent increase 

in monthly mortgage payment and a 3 percent prepayment penalty, the kind of subprime mortgage lending in the last decade that 

I consider predatory? 

Mr. DEMARCO. I am sorry, Congressman, there are a lot of different questions rolled up into that. If you would indulge me, I 

would prefer to be able to prepare that in an orderly fashion for 

you in writing so I can give accurate answers. 

Mr. MILLER OF NORTH CAROLINA. If you could provide that for 

me, that would be fine. 

And Mr. DeMarco, I think you probably know that I have praised 

you for beginning to pursue claims against the mortgage-backed 

securitizers that sold Fannie and Freddie $255 billion in subprime 

mortgage-backed securities, in issuing subpoenas in July. I don’t 

think it should be the Federal Government’s role to take sides in 

private litigation, but your claims are almost identical to those of 

many private litigants, pension funds, that feel cheated in the very 

same way, who have been stymied so far in their litigation. It is 

not uncommon for litigants with similar claims to sort of compare 

notes, share information. 

Are you in contact with those private litigants, the pension funds 

and insurance companies that bought the same kind of securities 

you bought? 

Mr. DEMARCO. Congressman, no. We have issued the subpoenas. 

We are gathering this information. At this point, we are simply 

gathering the information and determining what it tells us. Whatever our path is from there is yet to be determined, and I will certainly rely upon the advice of counsel in that process. 

Chairman KANJORSKI. The gentleman’s time has expired. 

I now recognize the gentleman from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you. 

I apologize that I haven’t been able to stay for the whole hearing. 

But I think one of the fundamental questions I have been asking 

and been talking to a lot of folks about, and Mr. DeMarco, you and 

I have actually had this discussion as well, is, Congress is considering GSE reform and the fate of Freddie and Fannie. 

At one time, we had a functioning private market in this country, 

and there are other countries that have mortgage financing that 

doesn’t necessarily have government backing. Can you see in the 

future the ability for, if Congress decides to get the taxpayers out 

of the bailout business, of having a functioning private mortgage 

market where the government is not on the hook? 

Mr. DEMARCO. Yes, sir, I can envision such an environment. I 

believe this country has, despite the incredible difficulties it has 

had the last few years and the losses suffered, we have a strong 

and robust financial system. It is getting stronger every day. Congress took a lot of action this summer to enhance regulatory oversight. That will contribute to it. I can envision a market system for 

a good chunk of the U.S. mortgage market. Yes, sir. 

Mr. NEUGEBAUER. Mr. Barr? 

35 

Mr. BARR. I would agree with Director DeMarco that we have a 

long history of a vibrant and innovative financial sector that has 

played a strong role in housing finance and business finance and 

commercial finance all across the market. We do need to attract 

private capital back into the market. 

I think that, as Congress considers the future shape of reform, 

as I said just a few moments ago, I do think it is important that 

we not go back to the system that we had in the past where there 

were basically private gains and public losses. We can’t have that 

kind of system in the future. 

I do think there is a question as to what extent there should be 

a government guarantee in the mix of ways that we are approaching, revitalizing and having a strong and robust housing system; 

what the role of that guarantee should be, when it should come 

into play if it exists, and how it is priced, I think are important 

questions for the Congress. 

As Director DeMarco suggested, it is hard to imagine not having 

some kind of role similar to the role FHA plays, for example. So 

I do think that there needs to be a mix of strategies used to bring 

the private capital back into the system and ensure we have a 

strong and vibrant system into the future. 

Mr. NEUGEBAUER. Are you familiar with the Canadian system? 

Mr. BARR. I am. I am not an exert on Canada, but I am familiar 

with their approach. 

Mr. NEUGEBAUER. I don’t think that they have a guarantee on 

those mortgages, do think? 

Mr. BARR. The Canadian system is quite different from ours. In 

part, they have a quite tightly regulated but also highly concentrated banking system. They rely not on a 30-year fixed-rate 

mortgage, but on a shorter term, adjustable-rate mortgage. It is 

possible to create a system similar to that. Other countries have 

used the covered bond market as an approach. 

I think, in each instance, when you look at the international examples, it is important to look not just at what is on the books, but 

what may also be implicitly there. A number of countries with concentrated banking sectors where there doesn’t appear to be a government guarantee involved, there is an implicit backing for the financial institutions, which I think we don’t want to recreate, 

So I do think international examples can help, but we have to 

go a couple of layers deeper to know whether that is the kind of 

system we want or not. 

Mr. NEUGEBAUER. So the question I have is, is there any incentive for the private market to get back into this market, given the 

fact that Freddie and Fannie are in existence and we are continuing this—I don’t know what this is called, but this freeze in 

time where we just are continuing to let Freddie and Fannie do 

what they were doing before the crisis? 

Mr. BARR. Let me just echo a little of what Director DeMarco 

said before, which is that Fannie and Freddie are not doing what 

they did before the conservatorship. That is, they have fundamentally changed the nature of their underwriting. They are still operating under the strictures of the conservatorship. Their underwriting standards have changed. They are not involved, for examVerDate Nov 24 2008 15:12 Jan 04, 2011 Jkt 062678 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\62678.TXT TERRIE
36 

ple, in purchasing Alt-A loans as they were so significantly in 2006 

and 2007. 

I do think that Congress now needs to turn to the task of reforming the housing finance system, including Fannie Mae and Freddie 

Mac, and deciding what kind of system we want to have in the future. I think very strongly, I know that Treasury believes, we 

should not return to the system we had in the past. We can’t recreate these entities the way they were. 

Mr. NEUGEBAUER. But hasn’t the Administration, you just basically said whatever capital this company needs, that we are going 

to keep putting it into it. So why would the private sector securitize 

outside of Fannie and Freddie as long as Freddie and Fannie are 

still there and as long as you all are committed to keep just throwing money at that company? 

Mr. BARR. I think I would like to separate out the steps that we 

took and that the prior Administration took to bring stability to the 

housing finance system. I think those are absolutely critical as the 

Congress decides what the future system should look like. It is not 

a statement that the future system should look like the past. 

Quite the opposite. It is a statement that says, as we figure out 

what the new system should look like, we can’t disrupt the market, 

we can’t disrupt the ability of homeowners to get mortgages, and 

that is absolutely critical to maintain so that Congress can decide 

what the right system is for the future. 

Chairman KANJORSKI. The gentleman’s time has expired. 

Now the gentleman from Indiana, Mr. Carson, for 5 minutes. 

Mr. CARSON. Thank you, Mr. Chairman. 

And thank you, Congressman Moore. 

The Basel III rule agreed to on September 12th includes a liquidity requirement for banks that will encourage them effectively to 

buy the debt of Fannie and Freddie as well as mortgage-backed securities they back. Specifically, those banks will be required to 

enough high-quality liquid assets, and Fannie and Freddie counts 

as a high-quality debt. How will you ensure that Fannie and 

Freddie will not inadvertently take on more risk than they can effectively handle? 

Mr. BARR. Let me just say a little bit about the capital rules and 

then maybe turn it over to Director DeMarco. 

I think the capital rules are an important step in bringing greater stability now and in the future to our financial system. It will 

significantly increase the financial requirements for our firms as 

well as will improve their ability to withstand liquidity crises. 

I do think, as Congress takes up the question in the future of 

Fannie Mae and Freddie Mac, we are going to need to address the 

way in which other participants in the financial system interact 

with those institutions if they continue into the future; or if they 

don’t continue into the future, what the role of financial intermediation is with respect to the link between the housing finance entities and the rest of our financial sector, so that we are not increasing systemic risk, but rather reducing it. 

Mr. DEMARCO. In terms of what was done just a few days ago 

among the international bank regulators, I am sorry, Congressman, 

I am not familiar with what exactly it might say, so I would be 

happy to take a look at that. 

37 

But I would note that, obviously, the debt and mortgage-backed 

securities being issued by Fannie and Freddie today are both 

issued with the backstop of the senior preferred agreement with 

the Treasury Department, and in fact, the Federal Reserve and the 

Treasury Department hold those securities in large volume. 

Mr. CARSON. Thank you, Mr. Chairman. I yield back. 

Chairman KANJORSKI. The gentleman from Illinois, Mr. Manzullo, is recognized for 5 minutes. 

Mr. MANZULLO. Thank you, Mr. Chairman. The frustration level 

of the American people has exceeded to be the boiling point. And 

I am not saying that the two of you here are responsible for that. 

I just want to share that with you. And here is the whole point, 

now that I have made that caveat. 

Mr. BARR. We appreciate that, thank you. 

Mr. MANZULLO. I just got another e-mail from a world-class manufacturer in my congressional district. He has orders. The Institute 

for Supply Management is up I think 9 or 10 months in a row. He 

has orders—O–R–D–E–R–S—to manufacture. He has people he 

wants to hire. He has gone to eight banks. Every one says the 

same thing. The banks say, it is the examiners. The examiners say 

it is the regulators. The regulators are saying, we have changed 

nothing. And so we can recover right now, but the Federal Government is stopping the recovery in manufacturing. I have 25 percent 

unemployment back home. One out of four people works in manufacturing. Effectively, it is at 25 percent, if not more. For every 10 

applications that go to a bank, nine are turned down, nine. And of 

those nine, four to five normally would be given. And many of those 

are on the stuff that you have on your hands, what is in foreclosure 

and short sales. 

So here we are now. Even in Rockford, Illinois, a city with that 

amount of unemployment, people are ready to buy. They are ready 

to move this stuff. They are ready to restart the supply chains of 

manufacturing not only in traditional manufacturing but in the 

housing market, and the clog to the entire recovery for this recession is here with the regulators. I have talked to them; and they 

have said, ‘‘We have changed nothing.’’ I want to know what you, 

Mr. DeMarco, can do or anybody else to unplug that clog. The recovery is here. Washington is stopping it. 

Mr. DEMARCO. So, Congressman, I appreciate the challenge and 

the frustration and the real impact this has on individual families 

and communities. I regulate, as you know, the entities involved in 

the secondary market for mortgages. In fact, I would not, as a regulator, say nothing has changed. I think a lot has changed with respect to mortgages. It is a change that needed to happen. It is a 

change that is still under way. We needed to improve the underwriting standards in the extension— 

Mr. MANZULLO. But the standards are being met by the people 

who are applying. 

Mr. DEMARCO. If I may, Congressman, yes, I think that those 

changes have been made. But I think that with the Enterprises operating in conservatorship, awaiting congressional action on housing finance reform, we have a function in the secondary mortgage 

market. So there is a secondary mortgage market outlet for creditworthy borrowers seeking a mortgage. So I can’t explain what 

38 

might be a particular problem for a particular constituent of yours, 

but we have a functioning mortgage market right now. 

Mr. MANZULLO. This is not a particular constituent. I am talking 

about the hundreds of thousands of people across America. 

Mr. DEMARCO. Forgive me for saying it that way, Congressman. 

But yes. But all I can tell you is that the secondary mortgage market is open and operating to purchase these mortgages. 

Mr. MANZULLO. No. I understand that—and obviously that 80 or 

90 percent of the homes financed today are going through Fannie 

Mae or Freddie Mac. This has to be resolved. It is not an issue of 

dishonest people or incompetent people in the different areas that 

I mentioned. But the problem is we could have all the mortgage 

foreclosure help, all the programs we want, and nothing is going 

to happen. We can’t buy our way out of this recession. We have to 

work or manufacture our way out of it. But now people want to buy 

homes. Arbitrarily, even coming in with the whole deal on the appraisals again, at the last minute, we need another appraisal. Another closing was stopped because somebody couldn’t explain a $17 

charge on their credit report. This is a real problem. We are there, 

Mr. DeMarco. We are there, and there was a summit in this city, 

what, 2 weeks ago dealing with the lack of credit and with foreclosures in the home market. But there is nothing more the government can do except to unfreeze this credit and make sure that people who deserve the credit get it. 

Mr. BARR. Can I just add to the comment before? With respect 

to business credit, I do think that there has been an excessive 

tightening. It is common in any downturn. It has been much more 

pronounced in this downturn. It has been I know frustrating to 

businesses around the country. It is frustrating to us. I do think 

there are steps that we can take to help on a regulatory front but 

also with the pending small business and jobs bill. 

Mr. MANZULLO. But that bill is not going to do it because it 

doesn’t change the underlying standards for lending the money. 

Banks have money. The community banks have money. They don’t 

need more money from the Federal Government. They don’t need 

another program. They are not lending the money out because they 

are being hammered by the regulators because the examiners will 

come in and just arbitrarily classify a loan. Don’t talk to me about 

another Federal program. 

Mr. BARR. I do think that with respect to examinations, you do 

find, again, on any downturn a tightening and an excessive tightening that is in a sense the mirror image of— 

Mr. MANZULLO. What are you going to do to stop extensive tightening? 

Mr. BARR. We obviously don’t have regulatory authority ourselves over this sector, but we do have the ability to talk to other 

regulators, which we do on a regular basis. Treasury has. 

Chairman KANJORSKI. The gentleman’s time has expired. 

Mr. MANZULLO. Thank you. 

Chairman KANJORSKI. We have the gentleman from Kansas waiting anxiously. We recognize Mr. Moore for 5 minutes. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. Mr. Barr and 

Mr. DeMarco, thank you for your service. Mr. Barr, I understand 

that Treasury has been collecting comments from all stakeholders 

39 

on what the government should do to replace Fannie Mae and 

Freddie Mac and create a stronger housing finance system. I have 

heard one suggestion that concerns me and that is simply to end 

Freddie and Fannie and privatize the entire housing finance system. Is Treasury receiving comments from private industry stakeholders that full privatization would be a good idea? And is it a 

good idea? 

Mr. BARR. Representative Moore, we have received a range of 

public comments on privatization, on nationalization, on a wide variety of different strategies looking at the housing finance system 

in the future. As with any topic this complex, there are conflicting 

views on each of the suggested approaches. The potential 

downsides of having a system in which there is no government involvement include the lack of standardization, a potential lack of 

consumer protection, a potential lack of key products that the country has become reliant on, such as the 30-year fixed-rate mortgage 

with a to-be-announced market, and the potential for a lack of 

standardization and liquidity. 

The potential upsides of having a full privatization include removing some element of direct taxpayer risk, increasing the ability 

for private sector capital to flow into the market, potentially reducing the relative amount of capital flowing into housing vis-a-vis 

business to the extent that there is a mismatch in subsidy rates. 

And we are looking at those tradeoffs. Again, as with any area this 

complex, choosing an approach that sounds pure in advance is usually less satisfying once one gets into the details of it. 

Mr. MOORE OF KANSAS. Thank you, sir. Mr. DeMarco, the other 

side has raised several concerns that the GSEs are taking a lot of 

risk with respect to low downpayment loans. Is that really the 

case? And how many home purchase loans have Fannie and 

Freddie bought in the past 12 months in which the downpayment 

was below 5 percent and below 10 percent respectively? If you don’t 

have the exact numbers, could you please give us those numbers 

in writing as soon as you can? And can you at least give us a general sense whether the value is high or low, sir? 

Mr. DEMARCO. I will certainly provide the precise numbers to 

you and to the committee, but I can assure you that the numbers 

are quite low. Particularly with respect to less than 5 percent 

down, it is very little. It is almost virtually nonexistent. 

Mr. MOORE OF KANSAS. Thank you. 

Mr. DEMARCO. Actually, can I clarify one thing? I don’t want 

there to be a misunderstanding here. The one exception to this is 

that we do have a refinance program operating, the Home Affordable Refinance Program, or HARP. So there are refinances going on 

in the HARP program where we have allowed for refinances of existing mortgages that Fannie and Freddie own up to a current loan 

to value of 125 percent. And the purpose of doing that is that it 

benefits the homeowner, enabling them to take advantage of lower 

mortgage rates. But it also benefits the credit risk of Freddie and 

Fannie by having improved pricing on that mortgage and a homeowner with an improved balance sheet, so it reduces the credit risk. 

Whenever we go over this data, I have to be careful about carving 

out that exemption for the HARP program. 

40 

Mr. MOORE OF KANSAS. Okay. Mr. DeMarco, at a Capital Markets Subcommittee hearing in July, John Taylor from the National 

Community Reinvestment Coalition indicated his strong concerns 

about fees being charged by Fannie and Freddie. His response to 

why he was concerned, ‘‘Because we think it is unfair. The notion 

that because somebody lives in a declining market that somehow 

they have to pay a premium seems fairly anti-American to me. You 

ought to be able to judge the person on their capabilities, their individual financial status, their creditworthiness, and so on, not by 

the neighborhood they necessarily live in.’’ 

These fees that are charged in lieu of adequate private mortgage 

insurance seem to be driving mortgages away from the GSEs into 

FHA. This seems to be in large part because these fees can’t be financed. Mr. DeMarco, is that true? And if so, what are these fees 

being used for? 

Mr. DEMARCO. The pricing on mortgages prior to this housing finance debacle we have had, we clearly were underpricing credit 

risk. I believe the typical conversation about Fannie and Freddie 

pricing today is regarding what are called loan-level price adjustments. But I think the Congress needs to understand that Fannie 

and Freddie have base guarantee fees that they apply; and then 

the loan-level price adjustment is essentially the risk-based pricing 

that gets placed on a mortgage that allows for pricing for the particular risk characteristics provided by that mortgage. I have a responsibility as conservator, and I have certainly heard it in the last 

few hours in front of this committee, that we are supposed to be 

operating these conservatorships so that we are pricing to the risk 

that mortgages have. So I think with respect to the pricing that is 

going on today, that is what I would say we are doing. The Enterprises are pricing their guarantee fees to cover expected losses, operating expenses, and to be able to have a measured rate of return 

that is certainly reflective of their responsibility to make dividend 

payments to the Treasury Department on a senior preferred. 

Mr. MOORE OF KANSAS. I thank the gentleman. I yield back, Mr. 

Chairman. 

Mr. DEMARCO. It is not a question of fairness, Congressman. It 

is a question of being economic and risk-based pricing in the business that we are doing today in conservatorship. 

Chairman KANJORSKI. Thank you. We are going to wind this 

hearing up by hearing from our two members from Kansas. And I 

will now recognize the gentlelady from Kansas, Ms. Jenkins. 

Ms. JENKINS. Thank you, Mr. Chairman. I would like to yield my 

time to the gentleman from California, Mr. Royce. 

Mr. ROYCE. I thank the gentlelady. Mr. Chairman, the talking 

points did not come from Fannie and Freddie’s competitors in 2005. 

It came from the Federal Reserve; the Chairman of the Federal Reserve came down here and spoke to us. And I just pulled out the 

quote he gave us in 2005 as a warning in terms of the pending 

problem if we did not address this problem with Fannie and 

Freddie. He said, ‘‘If legislation does not limit GSE portfolios, we 

run the risk of solidifying investors’ perceptions that the GSEs are 

instruments of the government, that their debt is equivalent to government debt. GSEs will continue to grow faster than the overall 

home mortgage market. They can grow virtually without limit and 

41 

without restrictions on the size of the GSE balance sheets. We put 

at risk our ability to preserve safe and sound financial markets in 

the United States.’’ 

Now this is what caught Jim Leach’s attention and, frankly, the 

attention of Richard Baker, myself, Mr. Garrett, Mr. Hensarling, 

Chris Shays, and others on this committee who took the Fed seriously and took the Treasury Department—both under the Clinton 

Administration and under the Bush Administration—seriously 

when they looked at what we had done in the 1992 passage of the 

GSE Act to set up this house of cards that would eventually lead 

to two-thirds of the mortgage market, the subprime mortgage market, being handled by Fannie and Freddie and FHA—65 percent in 

2001, 68 in 2002, 67 in 2003. These were making the purchases of 

the junk put out by Countrywide, right? And convincing the rest 

of the market that they should get into this line of business as 

well. 

Now the testimony that Mr. DeMarco gave I thought was a very 

strong case, and the question I would ask him is, do you believe 

that the private market eventually can handle the vast majority of 

this market down the road if we properly handle the phase-in? Because right now we have a real problem in terms of how we sustain 

this. But in the long term, I would like to see us get away from 

a situation where there is so much political pull replacing market 

discipline and where the biggest lobby on the Hill is a GSE. 

I would make one other quick observation, and that goes to the 

issue made by Mr. Ed Pinto, the former Chief Credit Officer of 

Fannie Mae. He said, ‘‘The new goals put out on September 2nd 

are likely to prove more risky than those that led to Fannie and 

Freddie’s taxpayer bailout. Meeting these goals will necessitate a 

return to dangerous minimal downpayment lending along with 

other imprudent lending standards. So to what extent will the 

GSEs be allowed to purchase again high LTV loans and junk loans 

to meet these goals?’’ 

That is my second concern. But let me go to my first question 

to you. Long term, do you think we can get back to a private market here? 

Mr. DEMARCO. With respect to the first question, Congressman, 

I believe that if Congress decides that it would like to see the bulk 

of the conventional mortgage marketing be handled in purely private hands, I believe that is achievable. It is not the only option. 

I believe it is achievable. 

With respect to the second question regarding housing goals, I 

am not familiar with the full extent of that quote. I will say that 

FHFA did issue final housing goals for Fannie and Freddie for 

2010 and 2011. We are required to by statute. And I believe that 

continuing the housing goal regime is important because one of the 

things we are doing in conservatorship is to assure that they meet 

their existing core mission responsibilities under the statute. And 

I believe that the housing goals are one reflection—one set of 

metrics as to whether they are accomplishing that congressional 

mandate or not. We have substantially changed the goals. Congress 

did in HERA, and so this rule that we just finalized is a substantially different set of housing goals than had existed prior. And we 

also, in setting the final goal levels for Fannie and Freddie, have 

42 

tied them to what the primary market is actually producing. And 

to put it simply, the goals are that Fannie and Freddie keep up 

with, be proportionate to what the primary market produces, not 

to have to exceed it. 

Mr. ROYCE. I understand that. But I remember also in the 1992 

Act—and I think the 1992 Act was a disaster—but there was a provision in there on the need to maintain the sound financial condition of the Enterprises. And what the former Chief Credit Officer 

of Fannie Mae is now saying is that you are actually likely to put 

at risk sort of this going concern concept for the GSEs, given the 

fact that you are headed down that road again towards minimal 

downpayment lending, and so forth. And I think that has to be considered because we know that Congress is reluctant to address this 

issue. 

Mr. DEMARCO. We will take that under consideration, Congressman. And I have tried to be clear to the committee in response to 

the question from Congresswoman Biggert that I am not looking 

for the Enterprises to engage in very low or no downpayment lending. And I also, as part of the final rule, made absolutely clear that 

we expect them to not undertake bad mortgages or to have loss 

leaders or anything of the sort with regard to satisfying the housing goals. 

Mr. ROYCE. Thank you, Mr. DeMarco. Thank you, Mr. Barr. 

Chairman KANJORSKI. The gentleman’s time has expired. 

Mr. DeMarco, before we close, I will just ask one thing to follow 

up on Mr. Manzullo’s question. I am acutely aware—and you responded to my letter on Friday about the inadequate Federal Home 

Loan Bank system responding to commercial loans and encouraging and priming that market. Is there anything you can do to get 

out there and start encouraging the Federal Home Loan Banks to 

get involved in commercial loan activity in the country? And are 

you intending to do so? 

Mr. DEMARCO. Mr. Chairman, only with respect to what is authorized in the statute. I believe with any government sponsored 

enterprise, their activity should be limited to the specific areas that 

Congress has targeted for them. So generous support of commercial 

lending is not part of the charter of the Federal Home Loan Bank 

system. But there are provisions—and you have certainly been a 

proponent of it, I am well aware of that, sir—with regard to certain 

of the programs they have, the community investment program for 

community financial institution members. There is a broadened set 

of eligible collateral because it has been clearly stated the intent 

of Congress is that for community financial institutions, they be 

able to take down advances for a broader set of community development purposes, and there is a broader set of eligible collateral for 

that. 

The letter that I sent you on Friday made clear, I reiterated my 

commitment that I made in the comment letter to the GAO in response to their study this summer that we were going to back and 

look at how they were examining each of the Home Loan Banks 

with respect to their implementation of these authorities under the 

statute. So we will do so, but we will do so consistent with what 

the statutory mandate and limits are. Yes, sir. 

43 

Chairman KANJORSKI. I appreciate that, Mr. DeMarco. I think I 

heard an undertone from the whole committee in terms of commercial lending and business activity that after every one of these 

events, as Mr. Barr well pointed out, there seems to be a slow response to the banking community, and the regulators get hesitant 

of what they will approve, and I can see that happening. I am hearing from community banks, from regional banks. I am hearing from 

a cross section of lenders and they would like to do more but they 

are being constrained by their regulators. Maybe you all can have 

a couple of summit meetings yourselves down here and get together and make sure it is not only your decision here in Washington but you send that out into the field. I know in one of our 

past recessions, the Washington regulators actually went out and 

convened meetings in the regions to encourage it. Maybe it is time 

we start doing that, because I agree with Mr. Manzullo. There are 

a lot of jobs out there that can be and will be created. But there 

is a need for money, operating capital. 

Mr. DEMARCO. Mr. Chairman, if I may, because I think that is 

an excellent suggestion, I would like to point out something that 

FHFA is in fact doing. Congress, in establishing FHFA, said we 

should all have a division of housing mission and goals, and we 

have such a division, sir. And in fact, the team in that division that 

works on these matters is, in fact, going out into the field and is 

holding field hearings, is meeting with community development 

participants out in the field. They are going around the country 

and actually seeing what is going on and trying to hear in local 

markets what are the needs, what are the concerns. And with respect to the Federal Home Loan Bank system, we are trying to better understand how the programs available through the bank system are working or are not working, how they could be improved. 

And we are in the process of refreshing the regulatory framework 

we inherited from the Federal Housing Finance Board regarding 

those programs. We are in the process of refreshing them to make 

them more responsive to the needs of local communities. But an 

important input of that has been sending my staff out across the 

country to gather this input. 

Chairman KANJORSKI. I appreciate that. We want to thank you, 

Mr. DeMarco, for your activities and certainly that new initiative 

that you are talking about. And Mr. Barr, I want to thank you for 

your participation in the hearing. I think it has been informative. 

We have rewritten history to some extent, but that is always the 

case when you are 7 weeks out from an election. We hope that ultimately history will be written in the years ahead and have a little 

more truth to it on both sides, if I may say. 

44 

That being the case, and no further activity before the committee, the Chair notes that some members may have additional 

questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. And without objection, all other 

things having been handled, the panel is dismissed, and this hearing is adjourned. 

Mr. BARR. Thank you, Mr. Chairman 

Mr. DEMARCO. Thank you, Mr. Chairman. 

[Whereupon, at 12:00 p.m., the hearing was adjourned.] 

(45) 

A P P E N D I X 

September 15, 2010 

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