THE FUTURE OF HOUSING FINANCE—A 

REVIEW OF PROPOSALS TO ADDRESS 

MARKET STRUCTURE AND TRANSITION 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 29, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–164 

( 

THE FUTURE OF HOUSING FINANCE—A REVIEW OF PROPOSALS TO ADDRESS MARKET 

STRUCTURE AND TRANSITION 

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

62–689 PDF 2011

THE FUTURE OF HOUSING FINANCE—A 

REVIEW OF PROPOSALS TO ADDRESS 

MARKET STRUCTURE AND TRANSITION 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 29, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–164 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

September 29, 2010 .......................................................................................... 1 

Appendix: 

September 29, 2010 .......................................................................................... 41 

WITNESSES 

WEDNESDAY, SEPTEMBER 29, 2010 

Bentsen, Hon. Kenneth E., Jr., Executive Vice President, Public Policy and 

Advocacy, Securities Industry and Financial Markets Association (SIFMA) . 10 

Bodaken, Michael, President, National Housing Trust ........................................ 14 

Deutsch, Tom, Executive Director, American Securitization Forum ................... 22 

Farrell, Michael A.J., Chairman, CEO, and President, Annaly Capital Management, Inc., on behalf of Annaly Capital Management and the National 

Association of Real Estate Investment Trusts’ Mortgage REIT Council ......... 16 

Heid, Michael J., Co-President, Wells Fargo Home Mortgage, and Chairman, 

Housing Policy Council, the Financial Services Roundtable ............................ 8 

Papagianis, Christopher, Managing Director & Policy Director, Economics21 .. 15 

Pinto, Edward J., Real Estate Financial Services Consultant ............................. 20 

Swagel, Hon. Phillip L., McDonough School of Business, Georgetown University ......................................................................................................................... 12 

Wachter, Hon. Susan M., Richard B. Worley Professor of Financial Management, The Wharton School, University of Pennsylvania .................................. 18 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 42 

Moore, Hon. Gwen ............................................................................................ 43 

Bentsen, Hon. Kenneth E., Jr. ........................................................................ 45 

Bodaken, Michael ............................................................................................. 74 

Deutsch, Tom .................................................................................................... 82 

Farrell, Michael A.J. ........................................................................................ 108 

Heid, Michael J. ................................................................................................ 125 

Papagianis, Christopher ................................................................................... 141 

Pinto, Edward J. ............................................................................................... 153 

Swagel, Hon. Phillip L. .................................................................................... 163 

Wachter, Hon. Susan M. .................................................................................. 170 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Written statement of Essent Guaranty, Inc. .................................................. 176 

Written statement of Ranieri Partners ........................................................... 183 

‘‘Subprime Lending and House Price Volatility’’ by Andrey Pavlov and 

Susan M. Wachter ......................................................................................... 185 

‘‘Explaining the Housing Bubble’’ by Adam J. Levitin and Susan M. 

Wachter .......................................................................................................... 214 

Bachus, Hon. Spencer: 

‘‘Government Housing Policies in the Lead-up to the Financial Crisis: 

A Forensic Study’’ by Edward J. Pinto ........................................................ 295 

(1) 

THE FUTURE OF HOUSING FINANCE—A 

REVIEW OF PROPOSALS TO ADDRESS 

MARKET STRUCTURE AND TRANSITION 

Wednesday, September 29, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:01 a.m., in room 

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

Members present: Representatives Frank, Kanjorski, Waters, 

Watt, Sherman, Moore of Kansas, Baca, Miller of North Carolina, 

Scott, Green, Cleaver, Ellison, Foster, Carson, Speier; Bachus, Castle, Royce, Capito, Garrett, Neugebauer, Posey, Jenkins, Paulsen, 

and Lance. 

The CHAIRMAN. The hearing will come to order. I will begin with 

some explanation, where we’re not going to be able to do some of 

the things we thought. When we scheduled this hearing in consultation, both sides, we had assumed that we would have 7 days 

of legislating left after today. 

That is, the original schedule was that we would meet until the 

7th or 8th of October. It now looks as if today will be the last day 

of this session, although there will be a reconvening in November. 

That probably depends on the negotiations with the Senate on the 

CR. 

Given that I had said that, I had hoped we would be actually 

dealing with a piece of legislation, but there’s no point in rushing 

that pace. So we’re 7 days shorter than we were. I do think it is 

important for there to be pieces of legislation embodying somewhat 

different views, although there’s a common core of agreement in 

some areas. But that’s not going to be possible, I note, until November, when we come back, because we lost the 7 days. 

I will also apologize to the witnesses, and I am very pleased that 

we have a very broad-ranging group. We will be voting a lot today, 

but we do have at least a couple of hours to get started, so we’re 

going to get into it as quickly as we can. We have 20 minutes of 

opening statements, and then we will hear your statements. 

And, as I said, originally this was going to be a fairly calm day 

with 2 more days this week and 5 days next week. It is now the 

helter and skelter last day, and I apologize, but that’s the best we 

can do. And with that, I will now begin, and I’m going to recognize 

the chairman of the Capital Markets Subcommittee, the gentleman 

from Pennsylvania, Mr. Kanjorski, for 3 minutes. 

2 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

Mr. Chairman, at the most recent Capital Markets hearing on 

the future of our Nation’s housing finance system, we explored taxpayer protection issues. We need to continue working to minimize 

the Treasury Department’s purchases of more senior preferred 

stock at Fannie Mae and Freddie Mac, and the Administration 

must work to hold accountable those entities that contributed to or 

exacerbated the housing crisis. 

We must also focus more and more on what the new architecture 

for housing finance should look like and consider how we should 

transition to this new system. We must additionally work carefully 

to avoid repeating past mistakes and doing harm. Today’s conversations will assist us in these important endeavors. 

Some of the pending reform proposals suggest completely 

privatizing the housing and finance market, while others suggest 

imposing some form of explicit government guarantee. Regardless 

of one’s views, we can all agree that we must do something to 

change the status quo in reestablishing a healthy, stable housing 

finance system. We need a thoughtful and deliberative discussion 

about what we ought to do. We should also have some goals. We 

need to limit taxpayer costs and risks. 

We additionally need to ensure that the credit unions and community banks continue to have the ability to compete and offer affordable mortgages. We should further have sufficient players in 

the marketplace in order to protect against ‘‘too-big-to-fail’’ scenarios. 

The Dodd-Frank Wall Street Reform and Consumer Protection 

Act has already helped to advance the debate on the future of housing finance by changing the rules for mortgage organizations, risk 

retention, appraisal practices, and credit ratings. With these process reforms in place, we have laid a strong foundation upon which 

to determine what to do with the institutions that securitize the 

mortgages of responsible, creditworthy, middle class American families. 

As we consider transition issues today, we also need to remember 

that Fannie Mae and Freddie Mac now help to support just over 

70 percent of their mortgages. A prudent evolution to a new housing finance system was therefore aimed to proceed smoothly and 

avoid unnecessary market disruptions. Moreover, we cannot replace something with nothing, as several of my colleagues on the 

other side of the aisle have proposed. 

In studying transition issues, we should further look to past 

precedents, like Sallie Mae’s graduation from government sponsorship more than a decade ago. We can use the lessons learned, both 

good and bad, from our work on Sallie Mae’s privatization to help 

guide us as we take on the difficult task of reconstructing a new 

housing finance system. In sum, Mr. Chairman, I appreciate your 

efforts in convening this hearing and I look forward to discussing 

the proposals offered by our witnesses. 

The CHAIRMAN. The gentleman from Texas is recognized for 1 

minute. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

I appreciate the proposals that the witnesses have prepared for 

us today and I look forward to our discussion. The question of 

3 

whether we can have a robust, private, mortgage-financed 

securitization without the Federal Government backing it, I think, 

is the real question that is before this group today. 

It’s important that we have a very robust financing mechanism 

in place, but it’s also important that we not have one that’s depending on the American taxpayers to bail it out in case it fails. So I 

look at other ways we finance and other kinds of financing that are 

done, for example, automobile financing and others out there. And 

we don’t put the taxpayers on the hook for that kind of financing. 

We had a mechanism in place where the taxpayers weren’t on 

the hook, we thought, but in many cases that didn’t work out. So 

as we move forward, I think it’s important that we make sure that 

we have a system in place that works, the housing industry and 

the industries that the mortgage finance business helps finance to 

provide the capital for is very important to our country, very important to our economy. 

But it’s also important that we not have one that’s reliant on the 

taxpayers in an eventual bailout for that activity. With that, Mr. 

Chairman, I look forward to our discussion today. 

The CHAIRMAN. The gentleman from Kansas, the chairman of the 

Oversight Subcommittee, for 11⁄2 minutes. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

Just like most issues in Congress, reforming Fannie Mae and 

Freddie Mac should not be about Republicans and Democrats. It 

ought to be about doing the right thing for our constituents and our 

country. I am disappointed that our friends across the aisle forgot 

that when they controlled Congress for 12 years, and they did not 

enact meaningful reform with Fannie and Freddie. 

In 2008, the former chairman of this committee, Mike Oxley, 

said, ‘‘We missed a golden opportunity that would have avoided a 

lot of problems we’re facing now, if we hadn’t had such a firm, ideological position at the White House and the Treasury and the Fed.’’ 

Last year, I was disappointed to learn of large salaries for Fannie 

and Freddie executives. I wrote their CEOs about this last March, 

and after receiving an unsatisfactory response from FHFA, I joined 

Chairman Frank and others to vote for H.R. 1664 to stop those unfair pay practices at Fannie and Freddie. 

Protecting taxpayers should not be a partisan issue. So I was disappointed that some of our friends didn’t join us to support that 

commonsense measure. I sincerely hope we can come together this 

time, Republicans and Democrats, to explore good policy options to 

deal with Fannie and Freddie, and create a stronger, safer, housing 

finance system next year. 

I yield back, Mr. Chairman. Thank you. 

The CHAIRMAN. The gentlewoman from West Virginia for 2 minutes. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

I would like to thank you for holding this hearing today, and it 

is my hope that we will move forward in this debate on the future 

of the GSEs, Fannie and Freddie. I was disappointed that the 

Dodd-Frank reform bill failed to address the reform of the GSEs. 

I think we have made that point pretty repeatedly in the conference, considering their large role in the financial downturn. 

4 

As we hear the testimony from experts today on how best to restructure the housing finance system, we must consider solutions 

to this challenge in a way that does not further subject the American taxpayer to undue risk or cost. The previous business model 

of private gains and public losses was an injustice to the American 

taxpayers and allowed the GSEs to take on far too much risk, resulting in a government rescue at the taxpayer’s expense. 

It is my hope that we could find a road back to private markets 

as quickly as possible where mortgages can be priced according to 

risk, and do away, once and for all, with the GSEs as they currently exist today. I look forward to hearing from our panel of experts on how we can wind down the GSEs in order to prevent the 

taxpayers from further losses and future bailouts, how we promote 

a healthy and sustainable private sector, mortgage finance system, 

and how we address the lax underwriting standards that helped 

cause the collapse of the housing market. 

Again, I thank you for the hearing and I yield back. 

The CHAIRMAN. The gentleman from North Carolina, Mr. Miller, 

for 3 minutes. 

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

This hearing is about the future of housing finance, which is an 

enormous issues facing all of us, but I suspect we will have another 

installment of the revisionist history of the financial crisis from the 

Republican Ministry of Information. They now remember that they 

warned us all along that subprime mortgage lending was the road 

to ruin. I was here. 

I know who said what, and when they said it. Republicans at the 

time celebrated subprime lending as the triumph of the innovation 

that comes from unfettered capitalism, and homeownership was becoming possible now for people who never would have had it under 

the stultifying rules of traditional mortgage lending. It was all outside of government regulation; and, in fact, government hardly 

even breathed on it. 

There were mortgage brokers who were almost entirely unregulated, who originated loans for mortgage lenders that were not depository institutions, were almost entirely outside of government 

regulations. It sold the mortgages to investment banks that were 

almost entirely outside of government regulation. 

They created securities that had none of the disclosure required 

for equity securities and risk assessment, and that were entirely 

outside of government regulation. Risk assessment was done by 

rating agencies that were almost entirely outside of government 

regulation. And this triumph of unfettered capitalism was causing 

us to have homeownership at the highest levels ever, and it was 

something that should be celebrated. And in fact, it showed the 

complete uselessness of government policy. 

The Cato Institute, one of the organs of the Republican Ministry 

of Information, published an article that said the Community Reinvestment Act, the CRA, should stand for the ‘‘Community Redundancy Act,’’ because it had nothing to do with subprime lending. 

And there were criticisms from Republicans at Fannie and Freddie, 

but their criticisms were that they weren’t doing nearly enough to 

make homeownership available, to make affordable homeownership 

5 

available, that the private system that I just described was running 

rings around Fannie and Freddie. 

And that was their criticism of Fannie and Freddie, not that they 

were making loans or somehow making lenders make loans that 

made no sense, that could not be paid back. We do need to reinvent 

our housing finance system, but what we do not need to conclude 

from the last decade and all the mischief, all the foolishness of the 

last decade, is that homeownership for working and middle-class 

families should not be a goal. It is a wholesome goal. 

It is a good thing for working and middle-class families. It allows 

them to build worth. It makes neighborhoods more secure, more 

stable. That should not be the lesson we draw from the last decade. 

I yield back. 

The CHAIRMAN. The gentleman from New Jersey for 2 minutes. 

Mr. GARRETT. I thank the chairman, the ranking member, and 

all the members of the panel. 

It has been over 2 years now since the collapse of the housing 

market and Fannie and Freddie were placed into conservatorship. 

Now it has been hundreds of billions of dollars later. This committee is finally becoming serious and starting to debate and consider new structure of our housing finance system. 

One thing I continue to hear from all the interested parties and 

everyone across the political spectrum was the desire to get more 

private capital back in the market. Fortunately, based on many of 

the actions I have seen so far, I think it’s all a lot of lip service 

from some folks, because today, as part of the continuing resolution 

that we’ll have, Congress is extending the higher loan limits on the 

GSEs and FHA for yet another year. To be able to afford a 

$729,000 house with its higher loan limits, a borrower must make 

roughly a quarter of a million dollars. 

These are the same people that our Administration says that a 

majority of Democrats say are rich and they want to raise taxes on, 

so I’m having a little bit of trouble understanding why you want 

to raise taxes on them and then we want the taxpayers then to 

turn around and help the so-called rich buy rich houses. Why don’t 

we just not raise their taxes on them in the first place? 

One of the most fundamental questions we have to ask ourselves 

is how much government subsidy wound up in our housing market, 

especially if much of that subsidy doesn’t go to the borrower in the 

form of lowered cost, and when much of that past subsidy in government policies led to the creation of the housing bubble and the 

collapse of the economy. 

Some are already attempting to score political points and say 

that without a U.S. Government subsidy or rep, borrowers won’t be 

able to have attained a 30-year fixed-rate mortgage, but I’m skeptical of that too, and such statements, considering borrowers can 

get 30-year fixed-rate mortgages on jumbo loans, and they have 

been able to throughout the crisis. Also, numerous studies exist 

that indicate that the more the government subsidizes housing, the 

more unaffordable and expensive that housing becomes. 

Mr. Chairman, this debate we are finally having over this issue 

is truly, extremely important, and one that we really must get 

right. And so I do appreciate this whole list of witnesses for apVerDate Nov 24 2008 17:23 Jan 13, 2011 Jkt 062689 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\62689.TXT TERRIE
6 

pearing today, and I look forward to each and every one of your 

testimony. 

The CHAIRMAN. To even out the time, the gentleman from California, Mr. Royce, for 2 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

The Federal Government spends roughly $300 billion on subsidizing homeownership every year here in the United States, and 

we are the only developed nation in the world that provides government-backed mortgage insurance, provides government-backed 

mortgage insurance guarantees, and has Government-Sponsored 

Enterprises. 

We have all three in this country, and this level of government 

involvement in the mortgage sector paired with the negative, real 

interest rates from the Fed between 2002 and 2006 facilitated the 

housing bubble here in the United States. While we have not heard 

much from the Administration on the subject, I think they would 

be well-served to listen to some of the warnings issued by FHFA 

Director DeMarco on some of the proposals that have surfaced. And 

a week or so ago, Mr. DeMarco shared these thoughts with us. 

Replacing the GSE’s implicit guarantee with an explicit one, he 

says, does not resolve the problems and inherent conflicts in the 

model. He said that it will produce its own problems, maybe make 

the situation worse. He says if the government continues to provide 

a guarantee for the vast majority of mortgages in this country, policymakers will yet again want to say as to the allocation and pricing of mortgage credit for particular groups in geographic areas, 

and that is problematic in terms of what this will lead to. 

The mortgage finance system of tomorrow should be based, the 

lion’s share of it for the most part of it—on private capital, on private investment. And considering the current state of the economy 

and the mortgage market, I think it’s understood that it will take 

time, quite some considerable time, to get to that point, but that 

should be our end goal, to try to evolve the market back into a position. This was not the first housing bubble to develop in our Nation’s history, and if we repeat the mistakes of the past, it certainly 

won’t be the last. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from North Carolina, Mr. Watt, 

for 21⁄2 minutes. 

Mr. WATT. Thank you, Mr. Chairman and members. 

If you detect a little edge in the comments of Representative Miller and I, it’s because we have been working on the problem of 

predatory lending since 2004 when we introduced our first bill. And 

there’s a little uneasiness on our part when we hear stories about 

how we are somehow responsible for the meltdown in this industry. 

So I want to remind folks that the Republicans controlled the 

House, the Senate, and the White House from January 2001 to 

January 2007, during which time the subprime lending exploded 

and the housing bubble became fully inflated. And while we were 

introducing our anti-predatory lending bill in 2002, President 

George Bush announced a new initiative to create 5.5 million new 

homeowners by 2010, said that anybody who wants to own a home 

has a shot at doing so. 

7 

We ought to break down these barriers to homeownership, and 

while we were fighting to stop predatory lending, he went on in 

2004 to continue efforts to increase the U.S. homeownership rate 

and FHA announced a new proposal all for subzero downpayment 

mortgages. And while we were still introducing our anti-predatory 

lending bill, some of the members of this committee, who now claim 

that we are responsible, didn’t know anything about what was 

going on in the market. 

They were still saying it was the private market that should be 

controlling this and we ought to get out of the way. Our own colleague from Texas, Mr. Neugebauer, said we have a very efficient 

mortgage system today. It’s the envy of the world. It has brought 

record homeownership. A lot of people have benefitted from our 

mortgage industry and the sophistication and creativity that has 

come from it. 

And Mr. Garrett said to build this anti-predatory lending bill 

that Mr. Miller and I were pushing, bill may well limit the products available to subprime borrowers, particularly minority borrowers and will deprive many of those consumers from owning or 

maintaining the home, as if he was— 

Mr. GARRETT. Mr. Chairman, does the gentleman yield, since he 

mentioned my name? 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. GARRETT. Unanimous consent for another 15 seconds or 20 

seconds, just to respond? 

The CHAIRMAN. Unanimous consent for 15 seconds, and will the 

gentleman from North Carolina yield to the gentleman from New 

Jersey? 

Mr. WATT. No. I won’t yield, but I’ll use the 15 seconds if he 

wants me to finish my sentence and tell him how it was him who— 

Mr. GARRETT. No, I was just asking for your time. 

Mr. WATT. Okay. 

The CHAIRMAN. We have, I guess, unanimous consent. I apologize 

to you both and we’ll continue this later. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. Mr. Chairman, members 

of the committee, as you all know, I offered a subprime bill in 2005, 

which was the North Carolina bill with the New Jersey 

securitization. But I don’t think it’s very helpful to play the blame 

game, because the American people really don’t care, at this point, 

whether it was Democrats or Republicans—what I would like to 

say is that all of us were guilty. 

The Administrations were guilty. The regulators were guilty. The 

Congress was guilty. I at least admit that and think we all ought 

to come to our senses and admit that and admit where the mistake 

was. And part of that mistake was that we tried to take economics 

and turn it into social policy, and we tried to promote affordable 

housing to the point where we required no downpayment. 

We had high loan-to-value mortgages and we gave loans to people with questionable credit. Any time you do that, you’re going to 

have losses, whether you’re the government or whether you’re a 

private enterprises. But the point now, I think, has gotten down to 

whether we’re going to continue to have a government role or 

8 

whether we’re going to go to, as Mr. Miller says, capitalism. I view 

capitalism a little more favorably than he does. 

I see our panel. We have eight panelists. Six of them want a government guarantee, and two of them don’t. And I think that the 

thing we all ought to admit to ourselves is if you have a government guarantee, you may have the taxpayers liable. And there is 

a subsidy. There is a subsidy there, and whether it’s worth it or 

not is what this Congress has to decide, whether we’re going to obligate the taxpayers. 

Paul Volcker said, and I agree with him, and I saw Mr. Pinto— 

I stole this from your opening statement, but I think it’s very appropriate. Some have argued that Federal intervention and guarantees are inevitable. I think most of my colleagues in the Majority 

have said that. Beware of such advice. The failures caused by past 

interventions are evidence that such interventions do not work. 

They will say, but this time will be different. It will not be. As 

he said, Chairman Volcker said, any explicit government guarantee 

of private mortgages will once again privatize profits and socialize 

the inevitable losses. So, let me conclude by saying this. I know the 

industry is here, and they’re saying we need a government guaranty. 

Let me tell you this. If I were in the industry, I would be doing 

the same thing, because I would love to make loans. And if they 

fail, let the taxpayers pick up the loss. That’s a pretty sweet deal, 

but Americans all throughout this country have started saying 

‘‘Don’t obligate us.’’ 

THE CHAIRMAN.Now, we will begin the testimony. Before that, I 

ask unanimous consent to insert into the record a statement from 

Louis Ranieri, Ranieri Partners, on his rent-to-own approach, and 

a statement from the vice chairman of Essent Guaranty, Adolfo 

Marzol. If there is no objection, they will be put into the record. 

As to the witnesses, we will listen to your oral testimony and 

anything you want to insert in the record in addition to that. Without objection, you have consented to it, so you won’t have to ask 

for permission to do it. Just feel free to supplement your oral testimony with any documentation you would like, including further 

parts of the statement. 

And with that, I’m going to begin. I never know who decides this 

order. I’m just handing it by someone from on-high, and we’ll begin 

with Michael Heid, who is the co-president of Wells Fargo Home 

Mortgage and chairman of the Housing Policy Council of the Financial Services Roundtable. 

STATEMENT OF MICHAEL J. HEID, CO-PRESIDENT, WELLS 

FARGO HOME MORTGAGE, AND CHAIRMAN, HOUSING POLICY COUNCIL OF THE FINANCIAL SERVICES ROUNDTABLE 

Mr. HEID. Chairman Frank, Ranking Member Bachus, and members of the committee, thank you for inviting me here today. 

I am Mike Heid, co-president of Wells Fargo Home Mortgage and 

the current chair of the Housing Policy Council of the Financial 

Services Roundtable. In considering housing finance reform, we 

need a solution that works for every part of the housing market, 

and that has the ability to attract the necessary capital to provide 

affordable mortgage financing. 

9 

The Dodd-Frank Act already has laid much of the necessary 

groundwork for GSE reform by aligning the interests of consumers, 

lenders, and investors. It has set the stage for the maintenance of 

sound and prudent lending practices. If properly implemented with 

consistent regulation and consistent enforcement for all mortgage 

market participants, many of the underlying problems in the market itself will have been addressed. 

However, even with financial reform, history has shown that capital markets are inevitably subject to periodic shocks. It has also 

shown that a government guarantee carefully constructed and 

strictly limited is required to ensure a reliable and sustainable system of housing finance to help shield the broader economy from the 

effects of these temporary disruptions. 

One of the major challenges we face in GSE reform is how to deliver a guarantee in a way that maximizes the use of private capital, minimizes moral hazard, encourages competition and innovation, and ensures that no institution is ‘‘too-big-to-fail.’’ The Housing Policy Council has suggested an approach that I believe will 

meet these basic objectives and capitalizes on the industry’s existing infrastructure. It involves privately capitalized competing conduits, a Federal wrap guarantee on the mortgage-backed securities 

but not on the conduit’s debt, an FDIC-like insurance fund, and the 

adoption of a common security. 

To be clear, we do not see this as a request for government subsidy. Rather, the conduits would pay a guarantee fee that would be 

properly priced to reflect the underlying risk to the Federal Government and protect taxpayers from potential loss. Unlike the old 

GSE model, the guarantee would not be used to subsidize the conduits or their shareholders. 

Some have proposed that the GSE’s bureau placed with the government agency or merged with FHA and Ginnie Mae; however, 

even ignoring the resulting impact on the Federal budget, we believe that nationalization of the GSEs is not the solution. Others 

have called for the creation of a single utility or industry cooperative. While these proposals have some merit, we question whether 

either structure would produce the innovation required to support 

a variety of financing needs, including those of non-traditional borrowers or the cost-effectiveness required to provide financing to 

qualified borrowers at the lowest possible cost. 

A single utility or industry co-op also would inevitably produce 

an institution that is by its very design ‘‘too-big-to-fail.’’ As a result, 

we have proposed creating a number of federally chartered, privately capitalized conduits that would compete with one another on 

a level playing field. To reduce barriers to entry, we also have 

called for the creation of a single, standardized form of security, 

similar in concept to Ginnie Mae, that would have a single, legal 

framework, uniform loan eligibility standards, and consistent Administration practices. This security would serve a number of important purposes. 

First, it will enable newly formed mortgage conduits to compete 

against the exiting GSEs. Without a single security, start-ups 

would find it difficult, if not impossible, to match the liquidity of 

the Fannie Mae and Freddie Mac MBS, and one would be left with 

an altered version of today’s status quo. 

10 

Second, a single security will reduce the moral hazard that would 

otherwise be associated with access to a government guarantee. 

Since the security would not be issued in the conduit’s name, the 

conduit would be allowed to fail without jeopardizing the market 

value of the security, just as it is for Ginnie Mae issuers today. 

And, third, a single security will lead to a more efficient secondary mortgage market and will provide the broadest liquidity at 

the lowest possible cost for the American consumer. 

Finally, we recommend replacing the GSE’s affordable housing 

goals with a fee on future MBS issuances. Research has shown 

these goals have been largely ineffective, and many believe they 

contributed to the GSE’s eventual downfall. The revenue stream 

that would result from the fee, which could be administered by a 

housing trust fund or redirected to State and local housing agencies, would make a significant and lasting contribution to affordable housing. 

We believe this overall approach provides the cornerstone for 

meaningful reform. While some customization would likely be required, we believe these concepts could apply to both residential 

and multi-family housing. As such, the needs of homeowners and 

renters would be addressed, resulting in an approach that preserves what is good about our current system and fixes what is not. 

Thank you for the opportunity to share our views today. I look 

forward to the discussion that follows. 

[The prepared statement of Mr. Heid can be found on page 125 

of the appendix.] 

The CHAIRMAN. Thank you. And I note this is to some extent a 

former Member’s day, since Mr. Heid was testifying on behalf of an 

organization whose executive is a former member of this committee 

from Texas. And now we have another Texas former member of the 

committee, Mr. Bentsen, and he and I were talking. 

I think had he made different career choices, he might have been 

sitting next to Mr. Watt. So Mr. Bentsen was a very valued member of the committee and we’re glad to have him testify in his capacity as executive vice president for public policy and advocacy for 

SIFMA. 

STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., 

EXECUTIVE VICE PRESIDENT, PUBLIC POLICY AND ADVOCACY, SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. BENTSEN. Thank you, Mr. Chairman, Ranking Member 

Bachus, and members of the committee. 

On reform of the housing finance system, and related provisions 

in the Dodd-Frank Act, in late 2009, SIFMA formed a GSE reform 

task force, comprised of members involved in all aspects of mortgage finance from originators to investors, and the market makers 

that create liquidity between them to develop views on what are 

the most critical aspects of GSE and housing finance reform. 

The Dodd-Frank Act contains a number of provisions that will 

impact the securitization process. The most commonly cited provision of the Dodd-Frank Act relates to the risk retention for assetbacked securities. Dodd-Frank appropriately calls for regulators to 

apply retention in a tailored manner with levels and forms of reVerDate Nov 24 2008 17:23 Jan 13, 2011 Jkt 062689 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\62689.TXT TERRIE
11 

tention designed specifically for the distinct risk profiles of different asset classes. 

While the 5 percent threshold is established in law, it is important that regulators conduct meaningful econometric analysis of 

the appropriate level and form of retention required in a given situation. Furthermore, the Dodd-Frank Act creates a carve-out for certain types of low credit risk mortgages or qualified mortgages, 

which may be accepted from risk retention provisions due to the 

limited credit risk they are likely to present. 

Congress appropriately directed regulators to work jointly to implement the provisions of risk retention. This is to ensure that all 

securitizers, regardless of their corporate form or regulator, will 

face the same rules. SIFMA is concerned, however, that actions by 

regulators may inadvertently conflict with Congress’ intent, and 

regulators should consider revisions to comport with the Act. 

For instance, the FDIC recently finalized rules regarding the 

securitization safe harbor, which include risk retention provisions 

that materially differ from those under Dodd-Frank. Other requirements in Dodd-Frank, including those related to credit rating agencies, also have the potential to impact the securitization market’s 

ability to fund originations of consumer credit. 

With regard to GSEs, SIFMA believes there is no easy solution 

to the question of how to resolve the conservatorships of the GSEs 

and define the future infrastructure for mortgage finance in the 

United States. Policymakers faced with a series of difficult choices, 

each with its own costs and benefits, which will shape the future 

of housing finance and ultimately affect consumers in the general 

economy. 

Only Congress can define what the goals of national housing finance policy should be. Accordingly, policymakers need to determine what they want from the mortgage markets before they can 

address what to do with the GSEs or the broader infrastructure, 

mortgage finance. 

That said, SIFMA believes that without the benefit of some form 

of government support for the conventional mortgage market, mortgage credit would be less available, mortgage markets more volatile, and interest rates on loans higher, because fewer investors 

would be willing to absorb both the credit and interest rate risk. 

In short, investors would not support mortgage credit equivalent to 

the historic norms, thus affecting the supplied stability of such 

credit. 

The issues for policymakers to consider are how liquid secondary 

markets for loans and mortgage-backed securities should be about 

the products that would be offered to consumers, the capacity of 

lenders to extend credit, whether national lending markets could be 

sustained, or if regional pricing differentials would reappear, and 

ultimately the cost and affordability of credit to consumers. 

The GSEs for all their faults have conferred significant benefits 

on the U.S. mortgage markets. It is indisputable that these faults 

need to be rectified. One of the most important was fostering the 

development of a liquid forward market for mortgage-backed securities known as the To Be Announced market or TBA market, 

which allows lenders to hedge risk, attract private capital, and reduce the cost of mortgage lending. 

12 

In this time of distress, the importance of the TBA market is 

heightened, and it is difficult to exaggerate the consequences from 

a loss of confidence and liquidity in this market. Our members believe that some form of explicit government guarantee on the conventional loan, mortgage-backed security market will be required 

to maintain the liquidity of the TBA market. 

The implicit guarantee of the GSE MBS historically reduce the 

issuance costs of these bonds, because it attracted a number of important class investors and provided for the development of a large, 

extremely liquid secondary market. SIFMA believes that in the future, these investors will not accept an implicit or non-guaranteed 

MBS product at levels sufficient to support historic norms. 

SIFMA believes portfolios will be required if for nothing else but 

to facilitate securitization and standard maintenance of securities 

issuance programs, such as providing a holding facility for loans 

that are repurchased from securitized pools. Further, GSE portfolios from multi-family mortgage-backed securities provide necessary liquidity for this important market. 

If portfolio activities were restricted to serving a limited role, 

they could be capped at levels significantly lower than their current 

size. The resolution of conservatorships of the current GSEs will 

clearly be a challenge. SIFMA believes that the government must 

clearly state intentions with respect to legacy GSE issues. Bifurcation of markets into pre- and post-reform markets should be avoided. The alternative, essentially abandoning an existing market, 

would have serious and long-term consequences for the global flow 

of capital in the United States. 

We appreciate the opportunity to testify and look forward to continuing to work with the committee on these important issues, and 

we would be pleased to answer any questions the committee members have. 

[The prepared statement of Mr. Bentsen can be found on page 45 

of the appendix.] 

The CHAIRMAN. Next, is Phillip Swagel from the McDonough 

School of Business at Georgetown. 

STATEMENT OF THE HONORABLE PHILLIP L. SWAGEL, 

MCDONOUGH SCHOOL OF BUSINESS, GEORGETOWN UNIVERSITY 

Mr. SWAGEL. Thank you, Chairman Frank, Ranking Member 

Bachus, and members of the committee. Thank you for the opportunity to testify today. 

I’m now a professor at Georgetown, but I was previously the Assistant Secretary for Economic Policy at the Treasury from December of 2006 to January 2009, so chief economist during the financial crisis. 

My testimony discusses a proposal for GSE reform I put forward 

with Donald Marron, Jr., and I will very briefly summarize this. I 

start from the observation that in the next financial crisis, whenever that occurs, the government will step in to ensure that mortgages are available. Market participants will expect a government 

backstop and act like it. 

I see this not as a problem that can be solved, but unfortunately 

as a fact of life. So, given that, it would be better to make the 

13 

terms of the government support limited and transparent, but explicit and priced rather than implicit and free. So our proposal 

starts here. It centers on competition and this limited role for the 

government. 

The Federal Government would sell a secondary guarantee to 

firms that securitize mortgage-backed securities made up of highquality conforming loans. Fannie and Freddie would be privatized 

and focus on securitization, but would compete with other private 

firms that are allowed to also securitize conforming loans. There 

would be no more GSE bailouts. There would be no retained portfolios, no bondholders requiring a bailout, and shareholders would 

be wiped out before the government pays anything. 

Allowing new firms to compete is crucial. The history of government insurance is that the premiums are inevitably underpriced, 

and this gives rise to a subsidy. So taxpayers will be subsidizing 

housing, and the question is, who gets the subsidy? Competition 

will drive the subsidy to families rather than having it accrue to 

shareholders and management as in the old GSE system. 

With competition, a GSE could fail without it being a catastrophic event. Our plan, described in detail in my written statement, maintains beneficial features of the current system, notably 

the TBA structure in securitization. This proposal, any proposal 

with a guarantee, puts a lot of stress on the definition of a conforming loan, since firms will naturally look to put their riskiest 

loans into government insurance. 

At least regulators will be aware of this and can shine a spotlight 

on conforming loans. Regulators must also ensure that firms purchasing this backstop guarantee maintain considerable private capital to take losses in front of taxpayers. Part of the insurance premiums collected by the government would support affordable housing activities, but the GSEs and other firms purchasing the government backstop should not have affordable housing goals that distort the market and are not effective ways to support the very important functions and purposes of affordable housing. These are activities that should be done by the government, and I start from 

the observation that Congress should vote on all uses of public resources. 

Part of the hard work in moving toward a new structure for 

housing reform will be to limit government involvement and to 

focus official support on American families most in need. I would 

say a place to start is to allow the conforming loan limit to return 

to a level that’s consonant with support for American families most 

in need, rather than dissipating public resources and fostering continued reliance of the housing market on government assistance. 

GSE reform will require choices. It seems to me that the conforming loan limit is a good place to start. 

Chairman Frank and Ranking Member Bachus, thank you again 

for the opportunity to testify today. I will be pleased to answer any 

questions. 

[The prepared statement of Mr. Swagel can be found on page 163 

of the appendix.] 

The CHAIRMAN. The next witness is Michael Bodaken, who is the 

president of the National Housing Trust. 

14 

STATEMENT OF MICHAEL BODAKEN, PRESIDENT, NATIONAL 

HOUSING TRUST 

Mr. BODAKEN. Thank you, Chairman Frank, Ranking Member 

Bachus, and members of the committee. 

I am Michael Bodaken. I am with the National Housing Trust 

and I am more or less the odd man out today. I am representing 

America’s renters and their role in the housing finance system. 

Often in these discussions, we think about homeownership as the 

housing finance system, but one-third of us actually rent in this 

country, and the robust housing finance system must take into account both homeownership and rental housing. And I hope to demonstrate today the importance of the housing finance system for 

America’s renters. 

According to the joint center at Harvard, 45 percent of America’s 

renters now pay more than 50 percent of their income for housing, 

and any solution to the housing finance system must take these 

people into account. It’s fair to say that renters constitute policemen, janitors, service workers, people on our economy, and we need 

to figure out a solution that embraces both homeownership and 

rental housing. 

There are three simple things that can be done for rental housing that should be part and parcel of your consideration. The first 

is a well-functioning, liquid, secondary mortgage market that will 

be able to function in times of crisis. While it’s tempting to think 

about housing crises as affecting all housing, the fact of the matter 

is that the GSE’s underwriting of rental housing performed remarkably well during the past crisis. 

If one compares the single family underwriting of the GSEs between 2006 and 2009, you’ll see a rise in delinquencies from 3 to 

11.5 percent. During that same timeframe, the delinquencies in the 

family market of all the GSEs remained under 1 percent. It remains under 1 percent today. 

The second is a government-supported secondary market that 

will provide liquidity and countercyclicality in times of crisis. During the 2006 and 2009 timeframe, and especially in 2008 and 2009, 

private lenders suffered significant losses in the multi-family mortgage market; not so with the GSEs. Again, taking a look at the 

mortgage lending and the GSEs in multi-family housing alone, they 

occupied 84 percent of rental housing mortgages during that timeframe, effectively acting as liquidity, as countercyclicality during a 

time of crisis in our Nation’s mortgage finance system. 

And, finally, a majority of these loans can and should be made 

to low-income households renting in the market. People think that 

the GSEs are only renting to people who are well off. The fact of 

the matter in the multi-family space, 62 percent of the GSE’s loans 

served households who are learning less than 80 percent of median 

income. I’ll repeat that: 62 percent over a 4-year timeframe were 

serving households earning less than 80 percent of median income. 

And so in the rental housing finance market—and this was profitable by the way—this was not unprofitable. It was not a bailout. 

The bailout that was provided was not for the multi-family housing finance system. We need to find some way to make sure that 

they don’t throw the baby out with the bathwater when considering 

how to deal with mortgage finance for rental housing. 

15 

There is a consonant, something happening right now in the 

market with respect to HUD-financed housing, Section 8 contracts—800,000 of those apartments will expire during the next 5 

years, and in my prepared remarks I suggest a number of ways in 

which the GSEs or whatever is coming to the GSEs can help Congress deal with this oncoming expiration of very low-income housing. 

Time doesn’t allow me to provide all the recommendations, but 

suffice it to say that there is a way for you to solve both problems 

without putting the taxpayer at risk. Again, the taxpayer was not 

put at risk in the last crisis under rental housing. Fixing the existing housing finance system is a complicated endeavor, one that requires careful consideration of taxpayer loss and the importance of 

housing to our national economy. 

We know that the performance of the present GSEs in multi-family housing was prudent. It was profitable, and it served households at less than 80 percent of median income. These Enterprises 

provided the essential countercyclicality for multi-family housing 

that was required during times of stress. These are a good basis 

upon which to build whatever we decide to do with the next generation of housing finance intermediaries. 

I’ll be happy to answer questions at the conclusion of the panel. 

Thank you. 

[The prepared statement of Mr. Bodaken can be found on page 

74 of the appendix.] 

The CHAIRMAN. Now, Mr. Christopher Papagianis, who is the 

managing director of Economics 21. 

STATEMENT OF CHRISTOPHER PAPAGIANIS, MANAGING 

DIRECTOR & POLICY DIRECTOR, ECONOMICS21 

Mr. PAPAGIANIS. Chairman Frank, Ranking Member Bachus, and 

members of the committee, thank you for the opportunity to testify. 

I am the managing director of the nonprofit think tank E21, economic policies for the 21st Century. Drawing on the expertise of 

practitioners and academics, our mission at Economics21 is to foster a spirited debate about the way forward on issues like housing 

finance. 

Over the past year, a consensus has emerged that the main goal 

in addressing housing finance reform is to promote the efficient allocation of credit to finance single-family and multi-family housing. 

Fundamental to this objective is the restructuring of our system, 

which includes not only resolving the GSE conservatorships, but 

also rationalizing all the other ways the government subsidizes 

housing. 

Until recently, the largest Federal subsidy for homeownership 

was through tax expenditures, in other words, by lowering a homeowner’s tax liability. Over the next 5 years, tax expenditures are 

projected to reduce Federal revenues by roughly $1 trillion. One of 

the underappreciated consequences of all the recent actions to 

backstop housing is that the government now provides roughly the 

same amount of support for homeownership through spending programs. 

A bipartisan goal moving forward should be to ensure that the 

dozens of spending programs have discrete objectives and are clearVerDate Nov 24 2008 17:23 Jan 13, 2011 Jkt 062689 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\62689.TXT TERRIE
16 

ly and accurately accounted for in the budget. Unlike fairly 

straightforward tax accounting, it is difficult to compare the cost effectiveness of spending programs, especially loan guarantees or 

contingent liabilities. 

Fannie and Freddie are unfortunate examples of this principle. CBO estimates that Fannie and Freddie cost taxpayers $291 billion 

last year, and will cost an additional $90 billion over the next 5 

years. At the end of the day, the GSEs will likely be this crisis’ 

most expensive bailouts, many times larger than AIG or Citi 

Group, or even the entire and much maligned TARP. 

As policymakers consider new alternatives, they must be careful 

to make clear the risks and costs of subsidizing housing investment. Government loan guarantees can appear to be low cost initially, since they pay out only if a borrower defaults in the future. 

But we have learned that such guarantees are contingent on an accurate assessment of all the various risks, and the guarantees can 

be extremely expensive if the original assessments are wrong, or if 

the defaults all happen to occur at the same time. 

It is also important for policymakers to recognize that bailouts in 

the housing sector are inevitable regardless of the system’s structure if the key institutions involved do not set aside sufficient capital. By most accounts, we are still in the early innings of this reform debate, and I applaud this committee for investigating bold 

new plans. 

In my view, policymakers should pay particular attention to 

those that would more directly deliver subsidies to their targeted 

beneficiaries, individuals and families. In the end, the overarching 

goal should be to make taxpayers—and by that I mean current 

homeowners, prospective homeowners and renters too—better off 

through more efficient subsidy delivery and budgetary transparency. 

Thank you. 

[The prepared statement of Mr. Papagianis can be found on page 

141 of the appendix.] 

The CHAIRMAN. The next witness is Mr. Michael Farrell, who is 

the chairman and chief executive officer and president of Annaly 

Capital Management. He is here on behalf of the National Association of Real Estate Investment Trusts. 

STATEMENT OF MICHAEL A.J. FARRELL, CHAIRMAN, CEO, AND 

PRESIDENT, ANNALY CAPITAL MANAGEMENT, INC., ON BEHALF OF ANNALY CAPITAL MANAGEMENT AND THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT 

TRUSTS’ MORTGAGE REIT COUNCIL 

Mr. FARRELL. Chairman Frank, Ranking Member Bachus, and 

members of the committee, thank you for the opportunity to speak 

today on the future of housing finance, a subject that virtually affects every American and not just homeowners. 

My name is Mike Farrell, and I run Annaly Capital Management. Annaly is the largest listed residential mortgage REIT on 

the New York Stock Exchange with a capitalization of over $11 billion. 

Annaly, together with our subsidiaries and affiliates, owns or manages over $90 billion of primarily agency and private label 

17 

mortgage-backed securities. Additionally, we are deeply involved in 

mortgage markets through our securitization structuring, financing, pricing and advisory activities. 

I am here today representing the secondary market investors 

who have historically provided the majority of the capital to the 

$11 trillion mortgage market, and my remarks are focused from 

that perspective. 

Debate over housing finance reform has largely been about the 

government’s role in it, and rightly so, given that Fannie and 

Freddie’s government-sponsored hybrid charter was ultimately disastrous for taxpayers. 

However, there are certain activities that these agencies performed that are important to the pricing and liquidity of the housing and mortgage market. 

The current housing financing system, certainly the one that prevailed until housing standards started to slip around 2004, is the 

most efficient credit delivery system the world has ever seen. 

There are important elements of the existing system that are 

worth keeping. First, securitization, where fully documented borrowers with similar creditworthiness using similar mortgage products are pooled and receive the benefits of scale and pricing. 

Second, the government guarantee to make timely payments of 

interest and principal MBS that scales the process even further by 

making the securities more homogenous. 

Third, the TBA market, which is what Fannie, Freddie, and 

Ginnie facilitated. It is through the TBA market that most residential mortgages are pooled and sold and enables originators and investors to hedge themselves. 

I believe that the market will adapt to whatever changes occur 

in these new items in the housing finance system. However, the 

market will adapt to the new structure by re-pricing it. 

If the new system has significantly different risks, uncertainty 

and friction than the housing finance system we have now, the consequences may be that our housing finance system is smaller with 

lower housing values and less flexibility and reduced mobility for 

borrowers. 

This can have an ongoing and broad consequence for economic 

growth. 

If mortgage rates and house prices were not an issue, the government would not have been involved in housing finance. These are 

important issues. Therefore, I believe the housing finance system 

that utilizes a government guarantee on well-underwritten mortgage securities would maintain the significant size and liquidity of 

the market as well as continue to provide for relatively lower costs 

to the borrower. 

Going forward, however, the portfolio activities of Fannie and 

Freddie should be eliminated. The private market would expand its 

investment activity to fill this role, much like Annaly and its brethren and competitors do now. 

It is important for the committee to understand that the majority 

of agency MBS investors finance their positions using financing 

that is available and priced where it is because of the government 

guarantee on the assets. 

18 

Fannie and Freddie financed their portfolio purchases through 

the capital provided by the debt markets. This is an essential component of housing finance. 

In any transition, Congress must consider the potential size of 

the market in the system to which we are transitioning because 

about $8 trillion of the $11 trillion in home mortgage debt is funded by investors in both agency and private label mortgage-backed 

securities. Of that $8 trillion, some 70 percent is held by investors 

in rate sensitive agency mortgage-backed securities with the balance in credit sensitive private label MBS. 

There is not enough capital in the universe of credit sensitive 

private label MBS investors to supplant the installed base of rates 

buyers, at least not at the current price. 

Without the support of mortgage values and home prices that are provided by the government guarantee, the funding goal of $8 trillion will get smaller only by shrinking the value of the housing collateral and the mortgages needed to finance them. 

At its essence, any transition to a new housing finance system 

has to factor in the speed at which these values will change. 

In conclusion, I believe that Fannie and Freddie should continue 

to operate in conservatorship with the goal of winding down their 

retained portfolio’s over a set period of time and honoring the guarantees of the agencies. 

For simplicity sake and for the markets’ certainty and simplicity, 

going forward, Congress should consider delivering explicit government guarantees on MBS in a manner similar to Ginnie Mae. 

This would enable it to continue to serve as the portal between 

the borrower and the secondary market through securitization and 

the TBA mechanism, but most importantly enforce underwriting 

standards for mortgages carrying the government guarantee. 

I thank you again for the opportunity to testify today, and I look 

forward to answering your questions. 

[The prepared statement of Mr. Farrell can be found on page 108 

of the appendix.] 

The CHAIRMAN. Next, is Susan Wachter, who is the Richard B. 

Worley Professor of Financial Management at The Wharton School, 

University of Pennsylvania. 

STATEMENT OF THE HONORABLE SUSAN M. WACHTER, RICHARD B. WORLEY PROFESSOR OF FINANCIAL MANAGEMENT, 

THE WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA 

Ms. WACHTER. Chairman Frank, Ranking Member Bachus, and 

members of the committee, thank you for the invitation to testify. 

The U.S. housing finance system suffers from market failure that 

requires reform. In research with colleagues, we show that the explosive growth of private label securitization in non-standard mortgages was a market driven phenomenon. 

It was securitizers’ appetite for private label mortgage-backed securities that drove a race to the bottom in lending standards, risk 

creation, and competition for market share. This was the primary 

cause of the housing bubble. 

The proof is the declining spread of mortgage-backed securities 

over Treasuries in parallel with the rise in non-standard mortgages 

and private label securitization, even as risk grew. 

19 

If possible, I request that the papers referred to be entered into 

the record. 

The CHAIRMAN. We gave consent for that to be done. 

Ms. WACHTER. Thank you. The Dodd-Frank Act attempts to remedy some of the problems caused by the former system of 

securitization. It requires a securitizer to retain at least 5 percent 

of the default risk of the underlying assets, but it exempts qualified 

residential mortgages from this regulation. 

This is a potential loophole, but even mortgages that do not meet 

the standard put the system at risk. Five percent risk retention is 

not a panacea. Many of the most fragile banks retained far more 

than 5 percent of the default risk, but this did not stop them from 

leading the race towards the bottom. 

A sustainable solution will be to require the market to move to 

transparency and information standardization. These considerations are imperative to the transition from the current conservatorship of Fannie and Freddie to any new arrangement. 

For the time being, we must ensure that the GSEs remain in 

their conservatorship until the housing market stabilizes. They 

guarantee more than half of the mortgage market, $5 trillion, and 

they support almost all new transactions. 

Without conservatorship, housing prices would have fallen farther and faster and would be falling farther and faster now. 

However, reform of the GSEs is also imperative. It must go 

hand-in-hand with strict regulation of private label securitization. 

When the government designates qualified residential mortgages, 

investors will expect these products to be safe and will be less likely to investigate the risk profile. 

Securitization offers a benefit to securitizers. It increases liquidity and profitability of the underlying assets. Therefore, 

securitization should only be available to products whose risks can 

be analyzed. Securitization of non-standard mortgages and the 

opacity this creates increases systemic risk. 

The resulting risk is owned by the taxpayer and the taxpayer 

will bail out the system with foreclosures driving towards a recession or even depression. 

Regulators must adopt stricter standards about information that 

must accompany the issuance of private label mortgage-backed securities. 

Without government support, the long-term fixed-rate mortgage 

would not be the dominant form of housing finance in the United 

States. As the experience of other countries confirms, we must not 

lose this centerpiece. 

One solution that has been suggested today is for the government to sell an insurance wrap to licensed mortgage insurers that 

guarantees the underlying mortgage for standard mortgage-backed 

securities with private capital in the first loss position. 

Another option is to group mortgage originators into cooperatives 

that purchase and securitize the mortgages of the respective members. 

In truth, however, both these options are open to crowding out 

by poorly underwritten and growing in risk private label security 

mortgages that spelled the GSEs’ demise. 

20 

If private label securitizers can be more profitable in the short 

run generating fees and generating seemingly more ‘‘affordable’’ 

mortgages, then originators will flock to the private securitizers, 

leaving the government wrap or coop’s in the dust and making 

them fail. 

These options have great promise but they all will require significant regulation of private activity to succeed. 

Thank you. 

[The prepared statement of Professor Wachter can be found on 

page 170 of the appendix.] 

The CHAIRMAN. Mr. Ed Pinto, a real estate financial services consultant is next. 

STATEMENT OF EDWARD J. PINTO, REAL ESTATE FINANCIAL 

SERVICES CONSULTANT 

Mr. PINTO. Thank you, Mr. Chairman, and Ranking Member 

Bachus. Thank you for the opportunity to testify today. 

My purpose in testifying is to provide both words of caution and 

advice. John Adams observed 240 years ago that facts are stubborn 

things, and whatever may be our wishes or inclinations or the dictates of passion, it cannot alter the state of facts and evidence. 

Here are the stubborn facts that should demonstrate the dangers 

posed by repeating past government housing policy mistakes. 

Numerous proposals have been put forth today and over the past 

year that call for ongoing government support of private mortgages. 

Most say it is inevitable. 

You have already heard about Paul Volcker’s advice and Ed 

DeMarco’s advice. The bottom line is a government guarantee always ends up with the privatization of profits and socialization of 

losses, period. 

If you go back to 1992 when this Congress passed the Safety and 

Soundness Act that regulated Fannie Mae and Freddie Mac, what 

was the avowed purpose? It was to reduce the risk of failure by the 

GSEs and protect the taxpayers from ever having to bail them out. 

This was just a mere 3 years after the bail out of the thrift crisis. 

That was the origin of the 1992 Act. 

I would ask that again you look at what past history has shown 

and where you are going today with these requests to provide an 

ongoing government guarantee that is now explicit. 

Secondly, a housing finance system designed around flexible and 

innovative underwriting standards in the pursuit of affordable 

housing goals presents a systemic risk to all homeowners and to 

our economy. 

Consider the advice of FDIC Chairman Sheila Bair. We must recognize that the financial crisis was triggered by a reckless departure from the tried and true commonsense underwriting practices, 

traditional mortgage lending that worked so well in the past, because lenders required sizable downpayments, solid borrower credit 

histories, proper income documentation, and sufficient income to 

make regular payments. 

We had such commonsense practices in the early 1990’s. They 

were slowly destroyed as a result of the 1992 GSE Act along with 

other policy initiatives. 

21 

Third, our housing policies have been deeply flawed. Again, 

Chairman Sheila Bair described it well. For 25 years, Federal policy has been primarily focused on promoting homeownership and 

promoting the availability of credit to home buyers. 

In Appendix A, I provide a list of 16 procyclical policies that created the long and unsustainable boom in house prices and housing 

finance. No other developed nations went to such policy excesses 

and none have experienced our default levels. 

I would add that we had no countercyclical policies in place during that time, not one. 

These policies boomeranged upon the very homeowners you were 

attempting to help. 

It is now clear that this interference has been both a failure and 

unnecessary. 

How to get our housing finance system off life support. First, 

have faith in the free market. Consider how the free market provides an abundance of other necessities of life, namely food and 

clothing, like shelter, you cannot live without. 

Second, one cannot justify a continuation of flawed policies of 

government interference just because rates may go up. Rates go up 

and down all the time. Over my career, mortgage rates have gone 

from 9 percent in 1974 to 18 percent in 1981 to 4 percent today. 

This has had much less impact than the congressionally-mandated 

abandonment of underwriting standards that took place starting in 

1992. 

Without the distortions created by government intervention, the 

market will price for credit risk, adequate downpayments, and capital requirements would assure sound underwriting, and bad business decisions would not be bailed out by the taxpayers. 

Other developed countries do this without such government guarantees. 

Any return to a privatized housing finance system must be based 

on the following principles: We must withdraw the government 

from having any role in the financing of prime mortgages and return to a system based on private capital. 

It is time to end the government’s affordable housing mandates 

and to allow the private sector to return to commonsense underwriting standards. It is time to return to an emphasis on thrift, 

and it is time to return FHA to its former role of serving a lowincome market in a responsible way. 

I have outlined in my written testimony some opportunities for 

the private sector to do this. I have also addressed how Fannie and 

Freddie could be wound down, and I have also addressed how FHA 

should be returned to its original goals of serving low-income homeowners, and that be their mission and make it transparent. 

With that, I thank you for the opportunity to testify. 

[The prepared statement of Mr. Pinto can be found on page 153 

of the appendix.] 

The CHAIRMAN. Finally, Mr. Tom Deutsch, executive director, 

American Securitization Forum. 

22 

STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, 

AMERICAN SECURITIZATION FORUM 

Mr. DEUTSCH. Chairman Frank, Ranking Member Bachus, and 

distinguished members of the committee, my name is Tom 

Deutsch. 

As the executive director of the American Securitization Forum, 

I very much appreciate the opportunity to testify here on behalf of 

the 330 member institutions of the ASF who originate, structure, 

trade, and invest in a preponderance of mortgage-backed securities 

created in the United States, including those backed entirely by 

private capital, as well as those guaranteed by public entities such 

as Fannie Mae, Freddie Mac, and Ginnie Mae. 

Let me begin my remarks by stating what I believe to be a near 

unanimous or consensus position, that there is a very strong political and economic will in the United States today to decrease the 

overall level of Federal involvement in housing finance and have 

more private capital eventually replace many of the risks and rewards of that involvement. 

Given that 89 percent of mortgage loans made in America in the 

first half of 2010 were guaranteed by the GSEs and ultimately the 

U.S. taxpayer, there is not a shortage of opportunity to achieve this 

goal. 

There is one key area that I would like to emphasize in the debate regarding the transition and future architecture of the GSEs, 

and that is there should not be any underestimation of the critical 

importance of maintaining through any transition period the socalled To Be Announced or TBA market. 

Although not well understood outside the housing finance industry, the TBA market makes it possible for borrowers to have the 

peace of mind of locking in favorable mortgage rates and originators immediate and liquid sale into the capital markets. 

Ultimately, any new structure of the U.S. mortgage finance system must have a TBA style structure for plain vanilla conforming 

loans. 

Second, the role of any guarantee, if there is to be a guarantee, 

should be catastrophic or 100-year flood in nature that allows the 

maximum use of private capital to limit the government’s potential 

liability, while in the interest of investor confidence, provide a critical risk backstop for unforeseeable macroeconomic risks. 

Reducing dependence on public guarantees for new mortgage 

origination necessarily implies that private capital investment in 

mortgage originations will have to be reinvigorated, although large 

and small bank portfolios have continued to help fund some level 

of mortgage origination outside the GSE business and in the credit 

crisis, that level has not been sufficient to meet overall consumer 

demand and reinvigorate the housing market. 

As regulatory capital levels will rise through various policy initiatives such as Basel III and FAS–166 and 167, the balance sheets 

of large banks and small banks will be further constrained over 

time from extending additional mortgage credit. 

Although key bipartisan legislative initiatives such as the legislation offered by Representatives Garrett and Kanjorski may help 

create additional funding sources from the secondary market for 

banks to fund additional mortgages, there will still be outer limits 

23 

of bank risk and capital that severely constrain the availability of 

mortgage credit unless or until private capital begins flowing again 

through mortgage-backed securities. 

As debate moves forward on the elimination or transformation of 

the GSEs, I want to encourage a debate of equivalent strength on 

how to reinvigorate the private label RMBS market without overburdening that market with regulation or regulatory uncertainty. 

On Monday of this week, the FDIC unilaterally formalized broad 

revisions to the securitization safe harbor rules that would radically change the nature and structure of RMBS transactions, and 

most particularly how RMBS will be treated in the case of a bank 

issuer’s insolvency. 

ASF investor members in particular are quite concerned that 

their confidence in bank-issued private mortgage transactions will 

be significantly reduced rather than enhanced by these new rules 

because the FDIC as of January 1, 2011, will now be able to disregard the ‘‘true sale’’ nature of the securitizations and repudiate 

the underlying contracts. 

This is in direct contrast to the previous FDIC safe harbor. 

The net effect of these new FDIC powers is to create a significant 

market risk for investors in private label securitizations, for 100- 

year-flood type events. This is in direct contrast to ASF’s earlier 

recommendation and many other recommendations from this panel 

here today that investors need to be protected from the 100-yearflood event rather than be subjected to additional uncertainty in 

case of that event. 

Although the securitization market has been deeply engaged in 

its own reform efforts and in support of some of the appropriate 

legislative changes in the Dodd-Frank Act, now there are a myriad 

of proposed and enacted regulations that have created an extraordinary burden for the market to understand and comply with in a 

short period of time. 

While many of these proposed initiatives have merit in isolation, 

there does not seem to be a robust macro prudential oversight or 

rationalization for the potential cumulative consequences of these 

changes. 

As we reconcile each of these changes over time, we need to carefully consider how all these pieces moving simultaneously will ultimately impact the mortgage market. 

I thank you again for the opportunity to testify here and I am 

looking forward to any questions you may have. 

[The prepared statement of Mr. Deutsch can be found on page 82 

of the appendix.] 

The CHAIRMAN. Thank you. I appreciate the reference to the 

multi-family market, and that has been very important. I think 

sorting out multi-family and single family is an important piece of 

this. 

Let me go back to our first witness and others. One of the obvious things that is clearly acknowledged as a mistake was setting 

up what were in some ways private corporations, Fannie Mae and 

Freddie Mac, but infusing into their business decisions a social 

component, so that because of the goals, you could never be sure 

of what the basis was. 

24 

The alternative is what I think Mr. Heid was talking about, and 

it is a model that the Federal Home Loan Bank followed since 

Henry Gonzalez put through the affordable housing program, in 

which the entities involved, the private entities, made business decisions based on profitability and a certain fixed percentage decided 

by public policy of the revenue generated from that, the profit, presumably, is dedicated to subsidizing housing, and in my view, they 

should be primarily rental housing, and we would hope to find entities, housing financing entities or others, who could be trusted with 

that. 

That is essentially the model you are talking about. Let me ask 

Mr. Bodaken. Would that solve the problem or respond to the needs 

you talked about? 

Mr. BODAKEN. Yes. I think that it’s important to note that, without subsidy whatsoever, the GSEs are able to serve low-income 

households. When you get down to very low-income households, we 

have an intractable problem. Anything below 50 percent of median 

income, as I mentioned, is a problem. 

Through either some kind of a millage, or some kind of a profitability standard, you are going to need to set aside some form of 

subsidy, whatever you call it, where the private market simply 

can’t provide rental housing that is affordable to very low-income 

households. 

But the vast majority of the activities of the progenitors of whatever you’re calling the GSEs can be limited to low-income households without significant taxpayer subsidy. That’s the proof in the 

pudding of comparing the multi-family versus the— 

The CHAIRMAN. But they’re not going to be—if you’re talking 

about something—I would be opposed to any mandate to them. 

Mr. BODAKEN. Yes. 

The CHAIRMAN. They will be making a business decision, if they 

can make the money. But to the extent that we—and, for me, that 

is particularly relevant in the rental field. 

Mr. BODAKEN. And, indeed, that has been the history. They were 

profitable— 

The CHAIRMAN. We are not going to talk about history. But the 

point I would make is this. When you are talking—particularly, I 

think, when you start subsidizing homeownership, you’re getting 

into trouble. 

Mr. BODAKEN. Yes. 

The CHAIRMAN. People can’t clearly afford it, then you are imposing on them an obligation, going forward, that was shaky from the 

beginning, which you don’t have when you are talking about rental 

housing. And that’s why I would feel strongly about it. 

Mr. Papagianis, there is just one thing I noticed in your piece— 

one of the things this committee had talked about and had passed 

some legislation on was covered bonds. You expressed some skepticism about the viability. Would you expand on that? 

Mr. PAPAGIANIS. First off, let me just say that I support covered 

bonds, and I think that the committee should consider setting in 

place, working with the FDIC and others, a legal structure— 

The CHAIRMAN. We have already done that. 

Mr. PAPAGIANIS. Okay. 

25 

The CHAIRMAN. I was interested in your skepticism about their 

viability. 

Mr. PAPAGIANIS. But the viability issue is really in regards to the 

FHLBs, the Federal Home Loan Banks. The Federal Home Loan 

Banks borrow at sub-market rates. And the function of the FHLBs 

is very similar to what the covered bond market would actually do. 

And so, the question is, if you’re a bank and you’re looking for 

‘‘capital relief,’’ in essence to free up capital to do more business, 

is it—are you going to get a better price through the Federal Home 

Loan Banks, or are you going to get a better price through covered 

bonds? And I— 

The CHAIRMAN. Even if we—even having moved to set it up, they 

may just be out—undersold by the Home Loan Banks. 

Mr. PAPAGIANIS. But again, the same concern with Fannie and 

Freddie exists, where they’re able to borrow at sub-market rates, 

that obviously led to moral hazard. And I think that there is potential for moral hazard with the Federal Home Loan Banks. 

The CHAIRMAN. Thank you. That is—I just want to make one notation. I notice, actually the ranking member said it and somebody 

else—the ranking member said he was skeptical of this system 

whereby the government guarantees that loans will be paid off, and 

the private entity gets the benefit from making those loans which 

the government has guaranteed to be paid off. And I agree with 

that, and that’s why I voted for the change in student loans. 

That model that we talk about, of one entity making the loans 

but the Federal Government guaranteeing they be paid off, I think 

was a good rationale for changing that, as well. 

The gentleman from Alabama. 

Mr. BACHUS. I thank the chairman. And I think I have enjoyed 

all your testimony. I think it does move us forward. And Mr. 

Bodaken, I agree with much of what you said about the rental market, and I had noted some months ago with some amazement that 

there had not been losses there. 

We don’t need to do anything to further sort of disadvantage people who choose to rent, particularly in that I think the worst victims are people who took out mortgages that they couldn’t afford. 

Whether it was their own involvement—but obviously, the worst 

thing you can do to a family is to put them in a house they can’t 

afford, because it’s really a traumatic experience that they go 

through, both economically and, I think, emotionally. And one way 

to avoid that is renting. 

I noticed, Mr. Swagel and Mr. Farrell—or Professor Swagel—I 

would agree—I think I would agree on one thing. And I don’t commit any of my colleagues, but if we’re going to have a guarantee, 

it needs to be explicit. I think we all agree on that. This implicit 

guarantee is—you can’t be half pregnant, you know. There either 

is a guarantee or there isn’t. We didn’t know for years. But if there 

is going to be a guarantee, it needs to be explicit. 

Now, Mr. Papagianis, you mentioned on budget. Now, if you’re 

going to have an explicit guarantee—and I think one reason it was 

implicit is no one wanted to put it on budget. But do you put it 

on budget? 

And how do you calculate the tail risk—which it is, a tail risk. 

I think if there is a guarantee by—down the line, it is a tail risk. 

26 

A tail risk, by definition, is something that you don’t foresee. So 

how do you calculate that tail risk? And should it be on budget? 

I will just ask all of you. Any ideas there? 

Mr. HEID. The work we have done so far on this would say that 

there is a way to structure this in such a way that if the guarantee 

is paid for adequately, it can be held off balance sheet, not unlike 

some of the Ginnie Mae markets that exist today. 

Mr. BACHUS. But off budget? 

Mr. HEID. Off budget. And then what we would suggest is, relative to any housing subsidies, make those on budget, very explicit, 

and make it a policy choice, in terms of whether or not to provide 

true subsidization of housing as its own separate and independent 

decision. 

Mr. BACHUS. All right. Mr. Pinto? 

Mr. PINTO. I think, when you look at this tail risk question, we 

have an excellent example, and it’s called the deposit insurance. 

And we have had failures there. We had a $150 billion failure in 

the late 1980’s with the FISLC, and it’s no more. Fortunately, I 

guess, at that time there was another agency called the FDIC that 

came in. 

When we had the problem this time, there wasn’t any agency to 

take its place, so they had to come up with TARP. And TARP, effectively, bailed out the FDIC. And the FDIC, in the mid-1990’s, 

made their premium zero, effectively. They went to a fixed amount 

of a few thousand dollars, regardless of the size of the bank, because their losses were so low they just assumed there weren’t 

going to be any. 

And these are the kinds of problems you get into when you start 

having the government take on these risks. You start doing things 

because it looks like everything is going great, and it is, in fact, the 

tail risk that you can’t anticipate. And then it hits the taxpayers. 

Mr. BACHUS. Sure, and I want to recognize Professor Wachter, or 

Dr. Wachter. But before I do, some other examples are the National Flood Insurance Program, where the government is required 

to statutorily have sound actuarial premiums. Of course, we now 

find out that they’re $20 billion in debt, and taxpayers will probably have to make repayment. 

The Pension Benefit Guarantee Corporation, we now look at $168 billion worth of losses, even though it’s ‘‘self-funding,’’ which 

is the same recommendation here. The FHA mortgage insurance 

program, the FDIC-administered Deposit Insurance Fund, there 

are already people beginning to say taxpayers ultimately are going 

to have to pick up those losses if they continue. 

Professor Wachter? 

Ms. WACHTER. Thank you, Congressman. You asked the absolutely key question, which is, how do you price this risk? 

It’s one thing to price a risk with you can have idiosyncratic failures, so that if a system like the FDIC, when you have always 

some banks failing because of their individual practice. It is another thing to attempt to price systemic risk. And this is nearly impossible. As a finance theorist would tell you, this is nearly impossible. 

And, indeed, it doesn’t matter whether the systemic risk is coming from the private sector or the public sector. The private sector 

27 

generates systemic risk too. In other countries, such as the U.K., 

they stepped in to rescue a private sector failure, because the alternative would have been a depression. So we are faced with that. 

The answer has to be strict regulation and information that is realtime, so that the risk is monitored and tracked, and is not allowed 

to grow. That is not impossible. 

The CHAIRMAN. Thank you. The gentleman from Pennsylvania. 

Mr. KANJORSKI. Thank you very much, Mr. Chairman. First of 

all, let me compliment the panel. Although you have different philosophical positions, I think you have really—in a broad sense, if we 

could only put you together in a room somewhere, I think we could 

come up with a consensus of what we should do, which could be 

helpful. 

But I hear in the two extremes one group of the panel favoring 

the private sector solution—particularly you, Mr. Pinto. And I am 

sympathetic to that, except what do you do about the fact that the 

real estate market represents 15 percent of our economy, and it’s 

in the tank? 

And if we take a radical position right now to cut it free from 

any government subsidy, and allow the marketplace to give the response, we probably will take a much longer period of time to get 

out of the recession, we run the risk of getting into a depression, 

and the price to be paid on all segments of the economy could be 

horrific. What’s your response to that? 

Mr. PINTO. My response to that is what I have suggested, and 

what some others have suggested, is a very explicit wind-down of 

Fannie and Freddie over time. Their portfolios can be sold off, or 

allowed to run off, which solves one of the big problems. The losses 

are the losses. They are already there. 

And secondly, by reducing their mortgage limits on a schedule or 

by a specific plan, sunsetting them so that the market knows they 

are going to be gone in 10 years and it’s going to take an act of 

Congress to continue them, so that there is some feet to the fire, 

if you go through all of those things, you can wind—you can back 

out of this process. 

Mr. KANJORSKI. I take it, then, that you do not agree with our 

friends on the other side of the aisle with the McCain amendment 

that was offered during conference on the regulatory reform bill to 

immediately close down Fannie and Freddie. That would not be a 

rationale decision, would it? 

Mr. PINTO. Closing down Fannie and Freddie, how that’s done, 

I think we have to look at how quickly the private sector moves 

into the breach. 

The clear—I have to—I was very disappointed with Dodd-Frank, 

in the fact that the definition of ‘‘qualified residential mortgage’’ 

did not provide for prudent underwriting standards, a minimum 

downpayment, and a credit history. 

Mr. KANJORSKI. Will you— 

Mr. PINTO. The fact—if that message was given to the marketplace, and if the affordable housing was moved off the table, and 

the private sector was allowed to come back into the market, I 

think you would be amazed at how quickly it would happen. 

Mr. KANJORSKI. You believe, then—I’m trying to get you to say 

yes or no, in terms of do you agree that we can close down Fannie 

28 

and Freddie today by the action of the Congress, or do we have to 

take a longer view, attend to the portfolio that’s out there, and 

come up with an actionable or replaceable alternative for the marketplace, considering the fact that we’re dealing with 15 percent of 

the American economy? 

Mr. PINTO. My only concern about not doing it immediately—and 

there is some appeal to that—is how to hold Congress’ feet to the 

fire so they don’t backtrack. 

Mr. KANJORSKI. Okay, I— 

Mr. PINTO. That’s my only concern. If we could come up with a 

way of making sure you couldn’t backtrack, and they would actually go out of business, then I think we’re fine. If you won’t do that, 

then I think they have to be killed immediately. 

Mr. KANJORSKI. Right. So you’re saying a good, prudent decision 

would be not running ahead and closing down Fannie and Freddie 

immediately, because it could be injurious to the economy, as a 

whole. But you may concede to do that and go to pure market circumstances, because you don’t trust—as the American people obviously have a low trust—of the Congress acting responsibly. Is 

that— 

Mr. PINTO. I think that’s a fair statement. 

Mr. KANJORSKI. Okay. And it is reflective. The fact that in 2001 

we changed the responsibility of balancing a budget by cutting 

taxes—I remember, what was the cry, ‘‘It’s your money, you’re entitled to it?’’ 

It turned out it wasn’t your money, it was the Chinese money, 

and the people who were willing to fund this terrible debt that has 

taken us from $5 trillion to $12 trillion, because we could not rely 

on honest, rational sense, reasonable sense by the Congress to 

apply what was good economics. They opted for—and probably will 

in the future opt for—political consideration over good economics. 

Is that correct? 

Mr. PINTO. I didn’t follow the beginning part of that, it’s a little 

out of my area. But all I know about the Chinese is nobody held 

a gun to our head to take the money. I look at what drove that— 

Mr. KANJORSKI. We are doing that today, aren’t we? Don’t we 

have a cry in the Congress today about the tax cut, in terms of you 

should just give that tax cut, even though it cost $700 billion more 

in debt? 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. KANJORSKI. That’s a rhetorical question. 

The CHAIRMAN. The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. Mr. Pinto, I am sort of 

interested in your testimony and where we might end up. Let’s— 

if you could just extract this out, say, 10 years from now. And let’s 

say that we had done something about Fannie Mae and Freddie 

Mac and whatever dissolution or whatever has to happen there. 

What is your plan, or what is your thinking about where we would 

be and what we would have then? 

And I ask that question because you have indicated a private 

secondary market or whatever. Or is a private secondary market 

even necessary? I think that question needs to be raised. 

And I’m just curious as to where you think this might be, if we 

were to actually go through a dissolution of Fannie Mae and 

29 

Freddie Mac, and where would this country be, and where should 

we be? 

Mr. PINTO. That’s a legitimate question. And my answer would 

be, first of all, we had a working, workable underwriting structure 

in place in 1990. I have documented this in a chronology that I 

have written, which shows that the LTVs, the credit, all of the 

things—FHA was really the high-risk part of the market. 

People forget that subprime market in 1990, if you had a FICO 

score—it would be the equivalent, they didn’t have FICOs in use 

back then—below 620, you would need 25 percent down. I was listening to CNBC the other day, and they were lamenting the fact 

that today, somebody with below a 620 FICO with 15 to 20 percent 

down couldn’t get a loan. That’s the way the market was when it 

was being operated by the private sector. There was this certain responsibility, in terms of downpayment. We need to go back to that 

commonsense underwriting, which we haven’t had for a very long 

time. 

I have written publicly, or stated publicly, that it will probably 

take 10 to 15 years to get back to a system that is pretty well 

privatized and operating on a sound basis. I believe, because I believe in the free market, that the free market will come in and fill 

as the government recedes, will come in and backfill that with responsible lending, if they’re not forced to meet artificial, affordable 

housing goals, and if they’re allowed to offer a variety of instruments, including things like pre-payment penalties. 

I know people hate pre-payment penalties, but there is a marketplace for them because we can’t have a system—if you start with, 

‘‘You have to have a 30-year mortgage and no pre-payment penalty,’’ yes, you probably need to have a government guarantee, and 

FHA insuring many, many of the loans. But if you start backing 

away from that, and looking at what other countries have done, 

and how they have some variety and things, you don’t end up in 

that spot. And so, if you start with defining things a certain way, 

you’re going to get a certain answer. 

So, again, I think we need to let the government back out of this 

in a reasonable, responsible way. But it has to be very deliberate, 

and it has to hold Congress’ feet to the fire, so that they can’t undo 

it. 

Mr. CASTLE. Is it your belief—I think you stated this, I’m not certain I followed this as carefully as I should—but that there would 

end up being a private secondary market when this is all said and 

done? Or would this— 

Mr. PINTO. There would be—as I indicated in my testimony, 

there would be portfolio lenders, there would be, potentially, covered bonds. There is a Danish system out there that could be emulated. There would be private mortgage-backed securities. All of 

those things could develop to take the place of Fannie and Freddie. 

And FHA would go back to its, roughly, original role. 

I would see private mortgage insurers—which are the only entities so far in this crisis that are actually raising capital, in terms 

of the mortgage space itself—I would see them participating, as 

they have in the past. And so those are the things that I would see. 

One of the problems I think you’re facing is you have so nationalized this process—if you were running the food chain in this counVerDate Nov 24 2008 17:23 Jan 13, 2011 Jkt 062689 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\62689.TXT TERRIE
30 

try, and you ran all the supermarkets, you would be—and they all 

looked like the post office, you would be hard-pressed to figure out 

how to bring Giant and Safeway into being. But the fact of the 

matter is, Giant and Safeway came about not because the government designed them; they came about because the private sector 

designed them. We need to let the private sector get back into this 

process, and fill the vacuum as the government recedes. 

Right now—and again, I think if you look at the private sector 

and the free market, they don’t like to go up against a brick wall. 

And you have heard a lot of testimony here that 90-plus percent 

of all the financing is guaranteed by the government. That’s the 

equivalent of a brick wall for the private sector. They can’t compete 

against that. If that wall starts receding, you will start seeing the 

private sector grow into it. 

The CHAIRMAN. The gentlewoman from California. 

Ms. WATERS. Thank you very much. Mr. Bodaken, I have observed redlining when certain communities could not get a mortgage. And, literally, a line was draw around those communities. 

Mr. BODAKEN. Yes. 

Ms. WATERS. And I have observed what has happened in housing 

from that point in time to the subprime market and the 

securitization of these loans that were packaged by small banks 

and others. And I am trying to figure out, without government support— 

Mr. BODAKEN. Right. 

Ms. WATERS. —how can, say, a family of four—two adults, two children—earning about $45,000 a year, how would they be able to 

afford a home if, in fact, we remove government support? 

Perhaps there should be some changes in the way Fannie and 

Freddie works, or something else to take its place, but could you 

help me to understand what your thinking is about he we can preserve the opportunity for both rental housing and for residential 

family homes? 

Mr. BODAKEN. Yes. Very briefly, I am not an expert in singlefamily housing finance. What I know about the crisis is that the 

single-family market was the one that really brought us to the 

precipice of, and the problems that we had to bail out both Fannie 

and Freddie. 

I think one thought about government support, either in rental 

housing or homeownership, is that it has to be carefully thought 

out, as the chairman mentioned, as to how it could be both profitable, and how—there are certain targeted populations where there 

needs to be explicit subsidies to make sure that people have shelter. The private market—no one on this panel would disagree— 

cannot effectively serve people who are in less than 30 percent or 

40 percent of median income. It’s just the statistics are undeniable. 

However, for 90 percent of the American public, the governmentsupported system in the rental housing market worked very well. 

It works very well for low-income households. 

Now, in Los Angeles, where you’re from, low income might mean 

people earning up to $50,000 or $60,000, because of the high concentration of—the high cost of housing and high cost of living 

there. But it is difficult, I think, for us to deny that for people earning $45,000, a family of 4 in Los Angeles County, to get a home, 

31 

a reasonably-priced home without some amount of subsidy, I don’t 

see how that would be explicitly possible. Just going— 

Ms. WATERS. Thank you very much. If I may, I want to go to Mr. 

Heid. You are representing the Mortgage Housing Policy Council. 

I think at one time, Wells Fargo and others in this council were 

a part of FM Watch, and you were concerned about Freddie and 

Fannie and the fact that they were expanding their role in the 

housing market. 

But it seems now that, in this proposal that you are bringing us, 

you are basically saying there has to be some kind of government 

guarantees. Is that right? 

Mr. HEID. Separate issues. In the old days, the—you’re right, we 

were part of those organizations. But our primary focus there was 

making sure there was adequate oversight and adequate mission 

and adequate business model to move forward. What we have seen 

is that has not worked. 

What we are suggesting now is, going forward, the government 

guarantee is necessary, but for a reason we haven’t really spent 

much time on yet today. You think about, especially, 10 years out. 

It is likely that worldwide capital markets will always be subject 

to shocks. We saw it a few months ago with Greece’s debt crisis. 

We saw it years ago with the Russian debt crisis. In those situations, having an explicit government guarantee to ensure that 

there is adequate flows of funds all the time is very necessary. 

The Ginnie Mae market has moved forward unstopped. It’s the 

primary homeowner purchasing—or people purchasing homes 

today, Ginnie Mae is the primary source of that funding. So we are 

seeing the need for the guarantee to move through those capital 

market shocks, often times having nothing to do with housing 

itself. 

Ms. WATERS. What’s the great difference between Fannie and 

Freddie and your MSICs? 

Mr. HEID. One big difference would be parts of the FannieFreddie mission would no longer continue. For example, the explicit 

liquid support for the entire marketplace, and therefore, the need 

for significant amounts of debt would be discontinued, and the debt 

itself would not be guaranteed. Big difference between the confusion around implicit/explicit that existed in today’s world. 

The other piece that would be very different is the size of the 

portfolios would be very different than it was in the old days. 

And then, a third big difference is the only way to move forward 

with any of these proposals is to ensure that you have a very tough 

regulator with adequate powers. 

The CHAIRMAN. Let me—we are going to be going to some votes 

in a little while, and I have consulted with the Minority. We are 

going to have a set of votes, only three. So I am going to ask the 

witnesses to stay, and Members can come back. We will then be debating for another hour and 20 minutes or so, and then have another set of votes which will include a recommittal motion, which 

takes longer. 

So, it’s my sense that fairness would be we will ask you to stick 

with us through one set of votes, but not two. So we will go, we 

will get a couple more sets of questions in. We will come back and 

32 

have another hour or so, and then that will be the end of it. And 

we appreciate your accommodating us on this day. 

And I want to echo what the gentleman from Pennsylvania said. 

I am enormously grateful to you, because every one of you got to 

the point. And if you haven’t sat here year after year, you don’t 

know what a rare pleasure it is to have people get to the point that 

you want to discuss. So, thank you. 

The gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I think one of the 

things that the chairman just said I think is appropriate, I think 

we have gotten to some of the main points about where we go from 

here. And I think several of the witnesses have pointed that out. 

And basically what we’re talking about is, in this structure, what 

is the risk premium going to be, who is going to receive the risk 

premium, and who is going to take the risk. And there are a lot 

of different scenarios that have been put forth out there. 

I guess the question that I have is I go back to—and it kind of 

dates me a little bit—but in the late 1970’s and early 1980’s, I was 

in the banking business for a while, and we were making mortgage 

loans. And we were originating those. We could sell them to Fannie 

Mae, but we could actually make more money selling those loans 

to savings and loans and banks and other entities. 

And we did that without—there was no Federal guarantee, no 

Federal backstop. We had PMI insurance on the loans over—and 

that market went and behaved fairly well, until we reached a point 

where the savings and loans got in trouble, and obviously, that 

source of financing went away. 

I think that one of the things that Mr. Pinto said, and I think 

I agree with, is we have so much government intervention into 

many of these financial markets—and particularly, I think, into the 

mortgage market—that it’s really—there has been an artificial 

pricing of mortgages. And so that, then, begins to put some pressure, politically, on this body that, if we go down the road of trying 

to price a risk premium—if, in fact, the decision is made for the 

government to somehow have some intervention here—is who sets 

that risk premium? 

Mr. Heid, under your proposal then, who will set that premium 

for the government’s role? 

Mr. HEID. The way we look at this is there are several pieces to 

it. Ultimately, there would have to be some organization designated to have the skill and have the ability to actually price that 

premium itself. That, by itself, is a very difficult thing to do. And 

for that reason, we wrapped around it a broader series of concepts. 

For example, start with the Dodd-Frank requirements. It has a 

different expectation on lenders today, a consistent regulatory and 

enforcement mechanism that didn’t exist in the old days. That’s a 

positive first step. 

If you then layer in a layer of private capital in front of the government—and you see that in the form of the downpayment the 

consumer makes, we see that in the form of a layer credit enhancement like—mortgage insurance is one example. We also see it as 

the equity in the conduits themselves that has to be exposed to fail. 

And then, finally, we see the guarantee fees paid into the government as another layer of protection. 

33 

So, the way we’re looking at the total package is pricing the premium on the guarantee is a difficult activity, and that’s the reason 

you keep that as your last line of defense, and you put all of the 

steps in front of it, including private capital fully at risk, to make 

sure you’re insulating the taxpayer in whichever way possible. 

Mr. NEUGEBAUER. Yes, I just want to focus back to my question—and it was the last part of your series of proposals there, or 

layers—is who prices that premium to the government for the government’s portion? 

Mr. HEID. The agency itself that is taking the risk would be having to have the skill to do that. Ginnie Mae today has a guarantee 

fee priced for different kinds of securities. There is a designated 

agency, and it’s their obligation to get the skill, and be in a position 

where they can provide that—calculations effectively. 

Mr. NEUGEBAUER. But the Ginnie Mae concept is a little bit different, in that Ginnie Mae is basically guaranteeing mortgages that 

are backed by the Federal Government already. So I don’t know if 

that’s necessarily—pricing the risk on a mortgage that is guaranteed by the Federal Government and pricing one that’s not is—the 

risk premium for that, hopefully, is different. 

Mr. HEID. Absolutely. I’m using it as a concept, not an absolute. 

You have—this is different. There is private capital in place to take 

that credit risk. The calculations, the skills, the thinking has to be 

different. But the concept, I think, is very similar, in terms of whoever the organization is—and probably the regulator—would be the 

one actually pricing that— 

Mr. NEUGEBAUER. See, the problem I have with that is I don’t 

have a lot of good vibrations on the history of the government being 

in the reinsurance business. I think Mr. Bachus mentioned the 

flood insurance. 

I am more interested in the market pricing that risk. And it’s 

going to obviously increase the cost of mortgages for this country. 

And the reason I don’t want the government setting that premium 

is once the government sets the premium, then that basically takes 

the market off the hook for the pricing of the risk and the availability. 

And what I am afraid of is my colleagues will get a little nervous, from a political process, and will want to keep that risk premium low, and which then distorts the market. And so in some 

way—and again, not necessarily discarding your program, but that 

is one of the things that I think we are going to have to— 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from California. 

Mr. BACA. Thank you very much, Mr. Chairman. As our country 

continues to recover from the collapse—and I state the collapse— 

of 2008, our housing market continues to struggle. It is clear at 

this point that the housing market will not lead us out of our economic woes. But our recovery will not be complete until it is stabilized and shows signs of progress. 

I appreciate the fact that we’re looking at some form of solutions. 

But yet there are still a lot of problems that we have not even tackled with. And as we look at suggestions for now, Mr. Heid—and I 

would like to address this to you and Wells Fargo—how does your 

approach take into account the struggle that we are currently havVerDate Nov 24 2008 17:23 Jan 13, 2011 Jkt 062689 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\62689.TXT TERRIE
34 

ing with progress? It seems that it shouldn’t take us moving forward until the current foreclosure crisis is fixed. And we have had 

a lot of problems. 

In my district, thousands of homeowners have had problems with 

HAMP. And the response I have gotten from the servicers of— 

homeowners often receive different answers. A lot of times—I don’t 

know if you have outsourcing that is being done by those individuals who are doing a lot of the response back to them, because incomplete information, incomplete documents, they are going back 

and forth, yet the persons are still struggling in completing. And 

yet we are still trying to come up with additional ideas on how to 

handle the crisis, but yet Wells Fargo, in its process, have had a 

lot of problems in documentation, setting that information. 

How do we address that, those problems that are currently there, 

as we look at moving forward? And how should we reform Fannie 

Mae to take into account the problems that we’re having with the 

service compliance with HAMP? 

Mr. HEID. I think there are a couple of ways to answer that. 

With HAMP itself, what’s important to remember is that HAMP is 

just part of the solution. It’s one program. It’s the first program offered. In our case, it’s about 12 percent of the loan modifications 

that are getting done. For the 88 percent that are getting done outside of the program, it’s because customers don’t qualify for that 

program itself. So when you think about— 

Mr. BACA. But you’re not responding back in time to the individuals who did qualify at one point or another. And, because of the 

delays and the lack of documentations, or the lack of explaining to 

the consumer about what they needed to have completed, those 

problems exist. Because I have thousands of cases in my district, 

and the problems that we have had with Wells Fargo. 

Mr. HEID. Yes, to that point, on where we have evolved, your 

criticism is very true, especially a year ago. Things have evolved 

tremendously. Where we now are, we have added close to—we have 

over 17,000 people working on this now. 

And what we have moved to just a few months ago is a one-toone service model, so that we have a designated individual on our 

side working with the customer from start to finish, so documents 

don’t get lost, repetitive conversations don’t need to occur. There is 

a level of accountability on our side in our position now that didn’t 

exist a year back. 

Mr. BACA. That’s why we need to continue to have—Mr. Pinto indicated that we should move towards a private sector. But accountability and oversight needs to be done. If we don’t have the accountability from us, then how can then we deal with the problems 

of greed that we have had in the past? 

That’s what led us to a lot of the problems that we had, because 

there wasn’t the accountability, there wasn’t the oversight. There 

was a lot of greed. And you needed government to intervene to 

make sure that the oversight was done. 

And this is a question to all. Given that the market, in a current 

state of depress, at which point should we begin to transition whatever form GS or the Fannie Mae/Freddie Mac will take in the future? 

35 

It seems that with the unemployment at close to 10 percent and 

the housing market, we’ll have a tough time recovering, regardless 

of the structure of Fannie Mae and Freddie Mac. What economic 

signs should we look for in order to erase or ensure that it is safe 

to move forward? And this is a question for all of you. Mr. Pinto? 

Mr. PINTO. I would like to make two observations. One is, at 

least in the 20 years I have been looking at this in terms of Fannie 

and Freddie, the excuse is it’s never a good time to do it. It can 

be a boom time, it can be a bust time, it can be an in-between time, 

and it’s never a good time. 

Secondly, when you’re an alcoholic and you’re hooked on leverage, which is what this market is hooked on, and what Congress 

has been pushing for decades, ever higher levels of leverage and 

lower downpayments, there is no time like now to stop taking that 

drink. 

And so, you have to send a signal to the market that you’re serious about this. And, therefore, you have to stop keeping these 

mortgage limits that you keep rolling forward. You have to start 

backing away from this and sending a signal that you are going to 

allow the private sector to reassert itself in this market. And once 

you do that, I think you will be very pleasantly surprised by what 

happens. 

Now, I know you probably don’t have confidence in that, but 

there is a very different view of how this happened than perhaps— 

I beg to differ with you as to the view of how this happened. 

Mr. BACA. Okay, thank you— 

The CHAIRMAN. The gentleman from California— 

Mr. BACA. Yes, Ken? 

The CHAIRMAN. We don’t have time for a new question. 

Mr. BACA. He is still responding right now. Ken? 

The CHAIRMAN. Very quickly. 

Mr. BENTSEN. Yes. All I would say is I don’t know that there is 

a right time, from the terms of the economy, but I think what’s important to the market—to investors, in particular—is that there is 

clarity, and you do this as a full package. And also, you don’t ignore the transitional issues or the legacy issues in creating a new 

system. That will dramatically affect the markets going forward 

and the economy going forward. 

Mr. BACA. Okay, thank you. 

The CHAIRMAN. The gentleman from California, Mr. Royce, and 

then we’re going to go to Mr. Miller, and then we’re going to break 

for the vote. 

Mr. ROYCE. Yes. I will go to Mr. Pinto, as well, with a question. 

Because last week, as I mentioned in my opening statement, Mr. 

DeMarco, who is the GSE regulator, brought up a couple of points, 

and he said that the GSEs bought up junk mortgages to reach their 

affordable housing goals, that is what was driving that. And this 

was something that the former Fed Chairman Greenspan had said. 

He said that the GSEs did whatever was necessary to reach that 

goal that Congress had mandated on the GSEs. 

And then, even the current Treasury Secretary, when he was testifying, he said the affordable housing goals were used to justify 

the GSE’s purchases of these subprime loans. 

36 

So, I was going to ask you, because you worked at Fannie Mae— 

so being on the inside you have a real perception, in terms of what 

was going on—to what extent did these goals drive Fannie into the 

junk bond market, or in the junk market for mortgage-backed securities? 

Mr. PINTO. Yes. I left Fannie in 1989, before the goals were implemented under the 1992 Act. 

Mr. ROYCE. Yes. 

Mr. PINTO. I have researched exhaustively, and I have a paper, 

it’s 181 pages, called ‘‘A Forensic Study: Government Housing Policies and the Lead-Up to the Financial Crisis,’’ and I have documented, step by step, what happened with Fannie and Freddie. 

What happened, starting right after the Congress passed this in 

1992, starting in 1993, Fannie and Freddie—or Fannie, in particular—went into competition with FHA. And that was the goal of 

the 1992 Act, one of them, that private sector would go into competition and provide the same kind of loans that FHA was doing. 

Fannie did—started doing that in 1993. Fannie and Freddie offered 

a 97 percent loan for the first time in the history, starting in 1994, 

in direct response to the affordable housing goals. 

In 1996 they started buying subprime, private mortgage-backed 

securities, to meet the goals. In the early part of late 1990’s, early 

2000, they started buying alt-A loans, private mortgage-backed securities, to meet the affordable housing goals. In 2000 they offered 

a zero downpayment loan in direct response to a major increase in 

the goals that was announced in 1999. 

They were—the way I describe it is it was like a team of mush 

dogs, and FHA was the lead dog. They were always out in front— 

and I have documented how they were out in front on all these 

issues—downpayment, FICO scores, etc.—they were always out in 

front. Fannie and Freddie were forced to follow. The private sector 

was forced to compete. And at the end of the day, the private sector 

came up with a way to compete in 2004. 

Mr. ROYCE. I understand that point. But let me ask you another 

point, because one of the executives at Fannie made this point to 

me. He said their desire was—at the GSEs, their desire was to 

send a signal to the market that these were, in fact, safe loans. 

So, on top of the moral hazard problem that we had with the perception that the government was behind the GSEs—and that time, 

they were securitizing most of these loans—you also had this understanding in the market that if the Government-Sponsored Enterprises have looked at this and deemed that Countrywide is safe, 

or whatever, then we can follow that lead. 

And I was going to ask you if you agreed with this statement. 

I have actually had two executives who were at Fannie at the time 

share this with me. I was going to ask you for your viewpoint on 

that. 

Mr. PINTO. I do agree with that, and that was actually a policy 

at Fannie and Freddie to do that. And HUD actually, in 2000, recognized it in their rulemaking, that Fannie and Freddie, once they 

pulled these loans in, these affordable housing loans in, would be 

calling them prime loans. And the market would have to try to figure out what they really were, if they could. There is an actual 

statement by FHA as to that effect. 

37 

The other thing—I think it gets back to your initial question— 

Fannie and Freddie—and, again, I can speak more about Fannie— 

Fannie, right from the get-go—I have documentation from 1994 

through the period that shows that they had to subsidize these 

loans because they had higher default rates than they expected, 

going back to 1994, 1995, and because of the initial risk that they 

were projecting before they actually had higher default rates. And 

this continued throughout this period. 

So, this argument that they were doing this to make money is 

just completely counterintuitive. They were losing money on these 

loans, or they were— 

Mr. ROYCE. And they were also nervous about the risk. Or at 

least— 

Mr. PINTO. They were very nervous about the risk. 

Mr. ROYCE. —the loan officers told me they were, because they 

would wait until the end of the quarter to make the purchase. 

The CHAIRMAN. Time has expired. 

Mr. ROYCE. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from North Carolina, Mr. Miller. 

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

Just like Mr. Bachus’ insinuation earlier, I do support capitalism, 

but I don’t think support for capitalism requires the idolatry of 

every predatory business practice. And I think the capitalist economy works better for almost everybody if there are sensible rules. 

Despite the obvious failures of our safety and soundness regulation in the last decade, we are much better off with safety and 

soundness regulation and deposit insurance than we would be with 

the banking system we had in the 1920’s, which led to bank runs, 

bank failures, and contributed greatly to the Great Depression. 

I agree we need to bring back the private securitization market, 

and the continued lack of life in that market is an enormous burden on our economy, since it was half of lending not long ago. But 

I have talked to investors, private investors, who are enthusiastic 

participants in capitalism, but they say that they will not buy 

mortgage-backed securities again, based upon the lack of rules that 

existed before. Unless there are sensible rules, they are not going 

to buy mortgages. 

And they won’t standardize disclosure. They want rules for mortgage-backed securities or any kind of debt-backed security that is 

similar to the rules for the issuing of stocks, that there be standardized disclosures, that there be cooling-off periods, waiting periods, that they be allowed to sample the pools, that they be able to 

do their own due diligence, their own risk assessment, and not rely 

upon a rating agency, AAA rating, based upon God only knows 

what. 

And unless there are—unless they can do their own due diligence, their own risk assessment, they are not coming back into 

the market. And they say the SEC rules help, but there is more 

to be done to bring back the securitization market and to make private investors feel confident that they know what they’re buying. 

And they say that the sales side, the securitizers, continue to resist those changes and those standardized disclosures. Mr. Bentsen, do you support those kinds of standardized disclosures? 

38 

MR. BENTSEN. Absolutely. I think that we all believe that there 

has to be a very strong regime for the issuance and sale of assetbacked securities, whether it’s in the mortgage-backed security 

area, credit cards, or whatever. And, at the same time, it has to 

be a workable regime. 

I think you are absolutely correct, that investors will—as investors have always been able to do—to really do their own due diligence, and should be doing their own due diligence, in whatever investment product they are going to buy. But we agree there should 

be a very strong regime. It should be uniform. 

And again, that goes back to the comments that we made and 

our colleagues at the ASF made, with respect to concerns about 

regulators getting out in front of what you tried to do in DoddFrank, in coming up with the FDIC taking action. And, frankly, 

even with the SEC on reg AB, we believe they’re going to have to 

go back, in the advent of Dodd-Frank, and rethink those rules, and 

make sure that they’re uniform across markets. 

Mr. MILLER OF NORTH CAROLINA. They don’t agree that they 

could always do their due diligence. They say that they were pretty 

much captive to rating agencies’ ratings of mortgage-backed securities, which, as we all know, proved to be pretty nearly worthless. 

Mr. Deutsch, do you support standardized disclosures? Do you 

support cooling-off periods? Do you support allowing potential investors to look at individual mortgages, a sample of mortgages in 

a securitized pool before it’s issued? 

Mr. DEUTSCH. Absolutely, to each one of those. In 2008, we developed and started a Project Restart, where we developed the loan 

level standardized disclosures over the course of the past 2 years. 

But the SEC in their reg AB II proposals actually used, as the 

basic model, what the ASF had developed for loan-level disclosure, 

which was a joint working group of investors and originators to develop over 150 fields of loan-level information. 

Mr. MILLER OF NORTH CAROLINA. There appear to be some odd 

alignment of interest, if you have the usual kinds of ideas of what 

constitutes a conflict of interest. Why should a trustee or a servicer 

of a securitized pool be an affiliate of the securitizer? That seems 

an obvious conflict of interest. Mr. Bentsen? 

Mr. BENTSEN. I think historically you had a broad array of 

servicers in the marketplace. I think, through this crisis that we 

have been through recently we have had consolidation that has occurred in the market. And that has raised a question of whether— 

and I know you have legislation that’s looking at this issue—that 

has raised a question. I think it’s a legitimate question to look at— 

The CHAIRMAN. All right, let me say this. We’re going to—things 

have gotten a little hairy over there, so would you—you or anyone 

else, it’s a very important question, and we would ask you to respond in writing. And we will go to Mr. Posey, and then we’re 

going to adjourn the hearing, because there is no—I don’t know if 

we will ever get back. Mr. Posey? 

Mr. POSEY. Thank you, Mr. Chairman. I don’t have any questions. I wanted to echo your comments to the witnesses. It’s nice 

to have somebody in here who can speak frankly and give us 

straight answers, and even know or have in their vocabulary the 

words ‘‘yes’’ and ‘‘no.’’ We do appreciate that. 

39 

And, Mr. Heid, I wanted to comment. Wells Fargo has been having some mortgage seminars for homeowners who are having problems with their mortgage in central Florida, and I think that’s an 

outstanding idea. I just wanted to pass my compliments on to you 

and your company. I wish more of them would do that. 

Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. I thank the gentleman. The hearing will be adjourned, because there is an extra adjournment vote. It would be 

unfair to people to keep them here. And we have had a very useful 

discussion. 

I would encourage every one of you—because sometimes we really do have hearings to get information, and this is one of them. I 

will tell you that a great number of members here know what we 

shouldn’t do and continue to do. There is less certainty about what 

we should do. I would encourage all of you, please, if you have anything you want to supplement in writing, I guarantee you it won’t 

be wasted effort. It will be looked at. And we will be back here 

after the election, talking about this. I thank you all very much. 

[Whereupon, at 11:57 a.m., the hearing was adjourned.] 

(41) 

A P P E N D I X 

September 29, 2010 

42 


62689.001
43 


62689.002
44 


62689.003
45 


62689.004
46 


62689.005
47 


62689.006
48 


62689.007
49 


62689.008
50 


62689.009
51 


62689.010
52 


62689.011
53 


62689.012
54 


62689.013
55 


62689.014
56 


62689.015
57 


62689.016
58 


62689.017
59 


62689.018
60 


62689.019
61 


62689.020
62 


62689.021
63 


62689.022
64 


62689.023
65 


62689.024
66 


62689.025
67 


62689.026
68 


62689.027
69 


62689.028
70 


62689.029
71 


62689.030
72 


62689.031
73 


62689.032
74 


62689.033
75 


62689.034
76 


62689.035
77 


62689.036
78 


62689.037
79 


62689.038
80 


62689.039
81 


62689.040
82 


62689.041
83 


62689.042
84 


62689.043
85 


62689.044
86 


62689.045
87 


62689.046
88 


62689.047
89 


62689.048
90 


62689.049
91 


62689.050
92 


62689.051
93 


62689.052
94 


62689.053
95 


62689.054
96 


62689.055
97 


62689.056
98 


62689.057
99 


62689.058
100 


62689.059
101 


62689.060
102 


62689.061
103 


62689.062
104 


62689.063
105 


62689.064
106 


62689.065
107 


62689.066
108 


62689.067
109 


62689.068
110 


62689.069
111 


62689.070
112 


62689.071
113 


62689.072
114 


62689.073
115 


62689.074
116 


62689.075
117 


62689.076
118 


62689.077
119 


62689.078
120 


62689.079
121 


62689.080
122 


62689.081
123 


62689.082
124 


62689.083
125 


62689.084
126 


62689.085
127 


62689.086
128 


62689.087
129 


62689.088
130 


62689.089
131 


62689.090
132 


62689.091
133 


62689.092
134 


62689.093
135 


62689.094
136 


62689.095
137 


62689.096
138 


62689.097
139 


62689.098
140 


62689.099
141 


62689.100
142 


62689.101
143 


62689.102
144 


62689.103
145 


62689.104
146 


62689.105
147 


62689.106
148 


62689.107
149 


62689.108
150 


62689.109
151 


62689.110
152 


62689.111
153 


62689.112
154 


62689.113
155 


62689.114
156 


62689.115
157 


62689.116
158 


62689.117
159 


62689.118
160 


62689.119
161 


62689.120
162 


62689.121
163 


62689.122
164 


62689.123
165 


62689.124
166 


62689.125
167 


62689.126
168 


62689.127
169 


62689.128
170 


62689.129
171 


62689.130
172 


62689.131
173 


62689.132
174 


62689.133
175 


62689.134
176 


62689.135
177 


62689.136
178 


62689.137
179 


62689.138
180 


62689.139
181 


62689.140
182 


62689.141
183 


62689.142
184 


62689.143
185 


62689.144
186 


62689.145
187 


62689.146
188 


62689.147
189 


62689.148
190 


62689.149
191 


62689.150
192 


62689.151
193 


62689.152
194 


62689.153
195 


62689.154
196 


62689.155
197 


62689.156
198 


62689.157
199 


62689.158
200 


62689.159
201 


62689.160
202 


62689.161
203 


62689.162
204 


62689.163
205 


62689.164
206 


62689.165
207 


62689.166
208 


62689.167
209 


62689.168
210 


62689.169
211 


62689.170
212 


62689.171
213 


62689.172
214 


62689.173
215 


62689.174
216 


62689.175
217 


62689.176
218 


62689.177
219 


62689.178
220 


62689.179
221 


62689.180
222 


62689.181
223 


62689.182
224 


62689.183
225 


62689.184
226 


62689.185
227 


62689.186
228 


62689.187
229 


62689.188
230 


62689.189
231 


62689.190
232 


62689.191
233 


62689.192
234 


62689.193
235 


62689.194
236 


62689.195
237 


62689.196
238 


62689.197
239 


62689.198
240 


62689.199
241 


62689.200
242 


62689.201
243 


62689.202
244 


62689.203
245 


62689.204
246 


62689.205
247 


62689.206
248 


62689.207
249 


62689.208
250 


62689.209
251 


62689.210
252 


62689.211
253 


62689.212
254 


62689.213
255 


62689.214
256 


62689.215
257 


62689.216
258 


62689.217
259 


62689.218
260 


62689.219
261 


62689.220
262 


62689.221
263 


62689.222
264 


62689.223
265 


62689.224
266 


62689.225
267 


62689.226
268 


62689.227
269 


62689.228
270 


62689.229
271 


62689.230
272 


62689.231
273 


62689.232
274 


62689.233
275 


62689.234
276 


62689.235
277 


62689.236
278 


62689.237
279 


62689.238
280 


62689.239
281 


62689.240
282 


62689.241
283 


62689.242
284 


62689.243
285 


62689.244
286 


62689.245
287 


62689.246
288 


62689.247
289 


62689.248
290 


62689.249
291 


62689.250
292 


62689.251
293 


62689.252
294 


62689.253
295 


62689.254
296 


62689.255
297 


62689.256
298 


62689.257
299 


62689.258
300 


62689.259
301 


62689.260
302 


62689.261
303 


62689.262
304 


62689.263
305 


62689.264
306 


62689.265
307 


62689.266
308 


62689.267
309 


62689.268
310 


62689.269
311 


62689.270
312 


62689.271
313 


62689.272
314 


62689.273
315 


62689.274
316 


62689.275
317 


62689.276
318 


62689.277
319 


62689.278
320 


62689.279
321 


62689.280
322 


62689.281
323 


62689.282
324 


62689.283
325 


62689.284
326 


62689.285
327 


62689.286
328 


62689.287
329 


62689.288
330 


62689.289
331 


62689.290
332 


62689.291
333 


62689.292
334 


62689.293
335 


62689.294
336 


62689.295
337 


62689.296
338 


62689.297
339 


62689.298
340 


62689.299
341 


62689.300
342 


62689.301
343 


62689.302
344 


62689.303
345 


62689.304
346 


62689.305
347 


62689.306
348 


62689.307
349 


62689.308
350 


62689.309
351 


62689.310
352 


62689.311
353 


62689.312
354 


62689.313
355 


62689.314
356 


62689.315
357 


62689.316
358 


62689.317
359 


62689.318
360 


62689.319
361 


62689.320
362 


62689.321
363 


62689.322
364 


62689.323
365 


62689.324
366 


62689.325
367 


62689.326
368 


62689.327
369 


62689.328
370 


62689.329
371 


62689.330
372 


62689.331
373 


62689.332
374 


62689.333
375 


62689.334
376 


62689.335
377 


62689.336
378 


62689.337
379 


62689.338
380 


62689.339
381 


62689.340
382 


62689.341
383 


62689.342
384 


62689.343
385 


62689.344
386 


62689.345
387 


62689.346
388 


62689.347
389 


62689.348
390 


62689.349
391 


62689.350
392 


62689.351
393 


62689.352
394 


62689.353
395 


62689.354
396 


62689.355
397 


62689.356
398 


62689.357
399 


62689.358
400 


62689.359
401 


62689.360
402 


62689.361
403 


62689.362
404 


62689.363
405 


62689.364
406 


62689.365
407 


62689.366
408 


62689.367
409 


62689.368
410 


62689.369
411 


62689.370
412 


62689.371
413 


62689.372
414 


62689.373
415 


62689.374
416 


62689.375
417 


62689.376
418 


62689.377
419 


62689.378
420 


62689.379
421 


62689.380
422 


62689.381
423 


62689.382
424 


62689.383
425 


62689.384
426 


62689.385
427 


62689.386
428 


62689.387
429 


62689.388
430 


62689.389
431 


62689.390
432 


62689.391
433 


62689.392
434 


62689.393
435 


62689.394
436 


62689.395
437 


62689.396
438 


62689.397
439 


62689.398
440 


62689.399
441 


62689.400
442 


62689.401
443 


62689.402
444 


62689.403
445 


62689.404
446 


62689.405
447 


62689.406
448 


62689.407
449 


62689.408
450 


62689.409
451 


62689.410
452 


62689.411
453 


62689.412
454 


62689.413
455 


62689.414
456 


62689.415
457 


62689.416
458 


62689.417
459 


62689.418
460 


62689.419
461 


62689.420
462 


62689.421
463 


62689.422
464 


62689.423
465 


62689.424
466 


62689.425
467 


62689.426
468 


62689.427
469 


62689.428
470 


62689.429
471 


62689.430
472 


62689.431
473 


62689.432
474 


62689.433
475 


62689.434
476 


62689.435