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52–394 PDF 2009

THE PRESENT CONDITION AND 

FUTURE STATUS OF FANNIE MAE 

AND FREDDIE MAC 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JUNE 3, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–38 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

June 3, 2009 ...................................................................................................... 1 

Appendix: 

June 3, 2009 ...................................................................................................... 79 

WITNESSES 

WEDNESDAY, JUNE 3, 2009 

Berman, Michael D., CMB, Vice Chairman, Mortgage Bankers Association 

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

Lockhart, Hon. James B. III, Director, Federal Housing Finance Agency; 

accompanied by Mr. Edward J. DeMarco, Chief Operating Officer and Senior Deputy Director for Housing Mission and Goals, Federal Housing Finance Agency, and Mr. Christopher Dickerson, Deputy Director for Enterprise Regulation, Federal Housing Finance Agency ......................................... 11 

Morrison, Hon. Bruce A., Chairman, Morrison Public Affairs Group ................. 40 

Myers, Frances Martinez, Senior Vice President, Fox & Roach/Trident, LP, 

on behalf of The National Association of Realtors (NAR) ................................. 46 

Robson, Joe, Robson Companies, and Chairman of the Board, National Association of Home Builders (NAHB) ...................................................................... 50 

Wachter, Hon. Susan M., Richard B. Worley Professor of Financial Management, The Wharton School, The University of Pennsylvania .......................... 42 

White, Lawrence J., Arthur E. Imperatore Professor of Economics, Leonard 

N. Stern School of Business, New York University .......................................... 47 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 80 

Garrett, Hon. Scott ........................................................................................... 82 

Price, Hon. Tom ................................................................................................ 84 

Berman, Michael D. ......................................................................................... 85 

Lockhart, Hon. James B. III ............................................................................ 135 

Morrison, Hon. Bruce A. .................................................................................. 158 

Myers, Frances Martinez ................................................................................. 163 

Robson, Joe ....................................................................................................... 169 

Wachter, Hon. Susan M. .................................................................................. 179 

White, Lawrence J. ........................................................................................... 186 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

McClatchy Newspapers article entitled, ‘‘Private sector loans, not Fannie 

or Freddie, triggered crisis’’ ......................................................................... 197 

Letter from the Independent Community Bankers of America, ICBA, 

dated June 2, 2009 ........................................................................................ 201 

Letter from the Manufactured Housing Association for Regulatory Reform, with attachments, dated June 3, 2009 .............................................. 203 

Letter from the National Association of Federal Credit Unions, NAFCU, 

dated June 3, 2009 ........................................................................................ 223 

Manzullo, Hon. Donald: 

Letter to the Honorable James B. Lockhart, III, Director, Federal Housing Finance Agency, dated April 30, 2009 .................................................. 225 

Page

VI 

Manzullo, Hon. Donald—Continued 

Response letter from the Honorable James B. Lockhart, III, Director, 

Federal Housing Finance Agency, dated May 8, 2009 ............................... 228 

Royce, Hon. Ed: 

Restricted Fannie Mae Report from 2005 ...................................................... 230 

Lockhart, Hon. James B.: 

Responses to questions submitted by Hon. Steve Driehaus, Hon. Alan 

Grayson, and Hon. Donald Manzullo .......................................................... 300 

(1) 

THE PRESENT CONDITION AND 

FUTURE STATUS OF FANNIE MAE 

AND FREDDIE MAC 

Wednesday, June 3, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:07 p.m., in room 

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

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, McCarthy of New 

York, Baca, Miller of North Carolina, Scott, Klein, Perlmutter, Carson, Speier, Foster, Adler, Grayson, Himes; Garrett, Price, Castle, 

Lucas, Manzullo, Royce, Biggert, Capito, Hensarling, Barrett, 

Campbell, Neugebauer, McCarthy of California, Posey, and Jenkins. 

Also present: Representatives Miller of California and Kaptur. 

Chairman KANJORSKI. The committee will come to order. This 

hearing of the Subcommittee on Capital Markets, Insurance, and 

Government Sponsored Enterprises will be in order. 

I ask unanimous consent that Ms. Kaptur have permission to 

participate in today’s hearing. 

Pursuant to a prior agreement with the ranking member, each 

side will have 15 minutes for opening statements today. Without 

objection, all members’ opening statements will be made a part of 

the record. I yield myself such time as I may consume. 

We meet today to examine the present condition and future status of Fannie Mae and Freddie Mac, which together have lost more 

than $150 billion since the third quarter of 2007. This hearing is 

not only the first hearing in the 111th Congress on the two Government-Sponsored Enterprises, but is also the first in a series that 

the Capital Markets Subcommittee will convene to review these 

matters. 

Last summer, Congress completed work on an 8-year project by 

enacting the Federal Housing Finance Reform Act. Shortly thereafter, the new Federal Housing Finance Agency placed Fannie Mae 

and Freddie Mac in conservatorship. 

Since then, the Treasury Department has purchased $85.9 billion 

in senior preferred stock at the two Enterprises. This investment 

2 

could ultimately grow to as much as $200 billion per institution 

under current agreements. 

In recent months, the Treasury Department has supported 

Fannie Mae and Freddie Mac in other ways as well, by purchasing 

$5 billion of their mortgage-backed securities in 2008, and requesting $249 billion more in 2009. 

In addition, the Federal Reserve now has a sizeable interest in 

the success of the two companies, holding more than $71 billion of 

their bonds and $365 billion of their mortgage-backed securities. In 

total, these growing taxpayer commitments are quite sizeable, if 

not staggering. 

They have also led many to conclude that the implicit government guarantee toward the Enterprises has now become an explicit 

one. Our hearing today will therefore examine the government’s financial support for Fannie Mae and Freddie Mac, and explore the 

options for the future of their relationship with the government. 

From my perspective, the emergency actions taken to date by the 

Federal Housing Finance Agency, the Treasury Department, and 

the Federal Reserve were needed to ensure the continued functioning of our Nation’s housing finance system during this period 

of considerable economic turmoil. With all of these problems and 

imperfections, Fannie Mae and Freddie Mac have ensured that millions of Americans can continue to purchase and own their homes. 

While the existence at this time of Fannie Mae and Freddie Mac 

is essential for our Nation’s economic recovery, this is also an appropriate moment to begin to consider how we might modify their 

mission, operations, and ventures going forward. 

As former Treasury Secretary Henry Paulson has observed, we 

need to use this period while Fannie Mae and Freddie Mac stabilize to decide what role they should play in the markets. I must, 

however, caution everyone that this debate will be a long-distance 

relay between Congresses, not a 100-meter sprint within the 111th 

Congress. 

This debate over what roles and functions Fannie Mae and 

Freddie Mac should perform has, of course, raged for many years. 

Many good reform ideas have started to come to light in recent 

months, and we should study them closely. 

Some of our choices include: reconstituting the Enterprises as 

they were before the conservatorship decision; splitting them into 

smaller operating companies like we did with AT&T; regulating the 

prices they charge, like a utility; creating cooperative, nonprofit 

ventures; or revolving them back into the government. 

Many have also called for privatizing Fannie Mae and Freddie 

Mac, and there is some precedent for such actions. In the 1990’s, 

for example, we enacted a law that allowed Sallie Mae to graduate 

from the school of Government-Sponsored Enterprises. While we 

could do the same here, we ought to move cautiously. 

We created Fannie Mae and Freddie Mac because of a market 

failure, and we ought to ensure that any new system of housing finance continues to provide a stable source of funding and long-term 

credit to help people to purchase homes. 

In short, we must keep our minds open to all reform proposals, 

and refrain from drawing lines in the sand about what each of us 

3 

will or will not support until we have had the chance to consider 

the pros and cons of the many different options. 

That being said, I will use one key factor in my examination of 

these choices: Namely, I want to ensure that community banks and 

retail credit unions continue to have access to a neutral source of 

affordable funding to help them compete against large institutions. 

These mortgage providers are important participants in our markets, and we must ensure that they continue to have an opportunity to help hard-working families to achieve the American 

dream of homeownership. 

In sum, this hearing is timely. Congress has a constitutional responsibility to conduct effective oversight of the work of the Federal 

Housing Finance Agency to make sure that it is operating as we 

intended. We also have an obligation to ensure that the Executive 

Branch is effectively allocating Federal tax dollars and helping as 

many people as possible to remain in their homes. 

Finally, Congress needs to begin to think about how it will structure the government’s relationship with Fannie Mae and Freddie 

Mac once we emerge from this financial crisis. I look forward to a 

vibrant debate on these important issues. 

I recognize the gentleman from New Jersey, Mr. Garrett, for 5 

minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. I also want to thank 

the chairman for your comments, saying that you are open to different ideas with regard to restructuring our mortgage finance system. I think the one agreement is that doing right and keeping the 

status quo is unacceptable. 

You know, Fannie and Freddie played a leading role in adding 

fuel to the mortgage finance fire that burned down a good portion 

of our financial system and the economy as a whole. By financing 

roughly 36 percent of the subprime housing market, and increasing 

their leverage, they really used the governmental-granted advantages in the marketplace, and then ran up a bill to the taxpayers 

of $85 billion and counting. 

The total bailout costs of Fannie and Freddie are expected to 

climb much higher. When the Housing and Economic Recovery Act 

was passed, an arm-twisted CBO scored the GSE titles of the bill 

as $25 billion, and said there was less than a 50 percent chance 

that a bailout authority would ever be used, and less than a 5 percent chance that the costs would ever run over $100 billion. 

Now, the chairman of this committee, Chairman Frank, chastised Republicans on the Floor who said that the costs would likely 

go well over the CBO estimates. He said, ‘‘It is the most inflationary arithmetic I ever heard.’’ Of higher cost estimates being 

used by Republicans, he stated, ‘‘These numbers that are being 

thrown around are simply inaccurate and misleading.’’ 

Well, speaking of inaccurate and misleading, the CBO recently 

updated their scores, and the cost estimates have increased by over 

1,500 percent. So as we begin this month with a more formal debate over regulatory restructuring and providing the government 

with an explicit bailout authority, I think it is essential that any 

conversation begins and ends with GSEs, and any regulatory reform that does not include GSEs is not true reform. 

4 

Fannie and Freddie were a large part of the problem, and reforming them should be a large part of the solution. Also, I am very 

worried that proposals being discussed by the Administration and 

some others to create a so-called systemic risk regulator will actually create what amounts to another new set of government-sponsored entities. 

By creating a new systemic risk regulator, we could essentially 

establish a dozen new Fannies and Freddies that will be too-bigto-fail and have the inherent market advantage that will come with 

that distinction. As our distinguished ranking member from Alabama points out, privatizing profits and socializing risk is a bad 

business model, and we should learn from our past mistakes and 

not repeat them. 

So going forward, I do believe it is very important that we have 

a viable and liquid secondary mortgage market to provide additional funding so that people can experience the American dream 

of owning their own homes. And one tool that I believe that we can 

do that with—and I may have talked about it here before—is covered bonds. 

You know, covered bonds are debt instruments offered by financial institutions. They are backed by a collateralized pool of mortgages. Investors purchase these bonds, and the pool of mortgages 

are treated as secured collateral. 

Investors also continue to have a full recourse on the institution 

in case there is a failure. This type of securitization is widely used 

in Europe to provide liquidity over there, and I believe we can do 

it here in the United States as well. 

I also want to thank Chairman Frank for his comments some 

time ago when he said he would hold a hearing on this important 

topic. And I do look forward to working with him and all my colleagues as we continue to move forward on this. 

So I want to again thank the chairman, and thank the witnesses 

as well for coming forward. Thank you. 

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

We will now hear from Mr. Scott for 3 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. I want to thank the chairman and the ranking member for holding this important hearing 

concerning the state of Fannie Mae and Freddie Mac. This continues to be of utmost concern to our economy. 

The collapse of these two mortgage giants had a profound impact 

on our markets and total economy. And I am interested to hear 

more details and opinions about the risk of a prolonged economic 

slump, and how long the GSEs plan to proceed in the future as 

well as access their current conservatorship situation. 

I am further interested to hear what the Federal Housing Finance Agency has to say about the future of GSEs, and what this 

Agency believes they should or will look like down the line, especially as mortgage markets continue to face turmoil. 

There are many ideas and proposals regarding the direction that 

GSEs should take: making them a government entity or absorbing 

them into another government entity such as the FHA; splitting 

them up into multiple GSEs; or privatization, simply eliminating 

all implicit and explicit government backing for mortgage-related 

instruments. 

5 

The Fannie/Freddie fallout not only affected the economy overall, 

but it affected Main Street as well. Many of our Nation’s community banks have been hard hit because they have held some 85 percent of lenders that held Fannie and Freddie stock. 

Our community banks are the backbone of communities across 

this country. And this is especially true in my State of Georgia, as 

we are currently experiencing a very large number of bank closures. This whole situation is helping to reduce bank capital and 

impede upon the ability of banks to make new loans and renew existing ones. 

And I just want to mention one particular situation that has 

raised big questions. When Freddie Mac ignored the two leading 

rating agencies, Moody’s and Standard & Poor’s, on rating the market’s securitization in 9 months, relying instead on the market’s 

two small agencies, Fitch and Canadian agency Dominion Bond 

Rating Services, that $1 million deal has led to AAA ratings. Some 

close to the deal claim that Moody’s and S&P lost the Freddie mandate as their rating method used was considered too rigorous. 

So the question that has to be answered and dealt with today is 

this: Is it not the role of these agencies to be more vigilant in their 

rating process after getting chastised by Congress and the media 

over the handling of AAA ratings on complex securities that began 

to falter when home buyers could no longer pay their mortgages? 

And of course the flip side of that, is that the big credit rating 

agencies may be making some of these institutions jump through 

hoops that aren’t necessary. 

Serious questions, and a very timely hearing. I look forward to 

hearing from our witnesses. Thank you, Mr. Chairman. 

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

We will now hear from Mr. Baca for 3 minutes. 

Mr. BACA. Thank you, Mr. Chairman. I appreciate you convening 

this hearing. 

Congress established Fannie Mae during the New Deal to make 

homeownership more affordable. And they created Freddie Mac 

with a similar purpose in 1970. Neither provides home loans. Instead, their purpose is to increase the funding available for home 

mortgage financing, either by providing credit guarantees on mortgage-backed securities or by directing investing in mortgages and 

mortgage-related securities through their retained mortgage portfolios. 

To further their missions, the GSEs’ congressional charters 

granted them unique privileges, shielding them from many of the 

financial standards and tax burdens imposed upon their competitors. These benefits created a perception that Fannie and Freddie 

were backed by the U.S. Government, and this implicit guarantee 

also provided them a funding advantage over private sector participants. 

Not surprisingly, over time, the GSEs’ advantages enabled them 

to dominate the secondary mortgage market. Today they have more 

than $5 trillion in obligations outstanding, an amount that is nearly 40 percent of the size of the entire U.S. economy. 

The systemic risk posed by the size of these entities was only 

magnified by investor perceptions that GSE securities were backed 

6 

by the full faith and credit of the U.S. Government. In September, 

those perceptions became reality. 

On September 7, 2008, shortly after Congress passed the GSE 

regulatory reform legislation, the Federal Government placed 

Fannie and Freddie into conservatorship. That rescue was one of 

the most extraordinary Federal interventions into the private sector, and is on track to become one of the most expensive, if not the 

most expensive. 

As part of the GSEs’ conservatorship agreement, Treasury com- mitted up to $200 billion to purchase preferred stock from each 

company through December 31, 2009. In exchange, Fannie and 

Freddie provided the Treasury with $1 billion in senior preferred 

stock and warrants to acquire 80 percent of each GSE. 

In addition to Treasury purchases of preferred stock, both the 

Treasury and the Fed are also scheduled to purchase trillions of 

dollars’ worth of GSE debt in mortgage-backed securities. As of 

May 29th, Treasury has purchased $167 billion of GSE MBSs using 

authority granted under the HERA Act of 2008. The CBO estimates in March that the GSEs’ titles will cost $384 billion. The Fed 

currently holds $81 billion of GSE debt, and $507 billion of agency 

MBS. 

On March 18th, the Fed announced its purchases of agency MBSs will total $1.25 trillion by the end of the year. Finally, the 

Treasury has also initiated a credit facility for both GSEs to provide liquidity. 

Mr. Chairman, in conclusion, the magnitude of the trillion-dollar 

GSE bailout demands our full engagement about the future of the 

GSEs. Congress must work to develop a new model for housing finance. Some, like former Treasury Secretary Hank Paulson, have 

endorsed a utility model. Others, myself included, have proposed 

shrinking and privatizing the GSEs. 

Whatever the GSEs’ ultimate fate, we can agree that the GSEs 

cannot continue as before. Socializing risk and privatizing profit, as 

Mr. Garrett said, must end. The American people demand an end 

to the bailouts. Any discussion of the long-term future of the GSEs 

must include a bailout exit strategy. 

I would like to thank our witnesses for appearing today, and look 

forward to the hearing and their ideas for a transition period for 

the GSEs. And I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much. 

We will now recognize the gentleman from Illinois, Mr. Foster, 

for 2 minutes. 

Mr. FOSTER. I would like to follow up on Ranking Member Garrett’s expression of interest in covered bonds. I think we should all 

show some humility in our current situation and look laterally at 

countries that have systems that did not get into this mess. 

And in particular, the American Expertise Institute has recently 

had some public presentations and meetings on converting the 

present GSE-based system and mortgage-backed security-based 

system to a variant of covered bonds that is known as the Danish 

system for mortgage origination, which I personally think has tremendous potential. 

It has provided an efficient and liquid model for housing finance 

ever since the Great Fire of 1795 in Copenhagen, survived numerVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
7 

ous booms and busts, and as I say, I can’t see what is wrong with 

it. 

There is a fairly worked-out scenario in these presentations for 

actually transitioning Fannie and Freddie into this system. And I 

would be very interested in pursuing this, if not in this hearing, 

in subsequent hearings and conversations. 

Thanks you. I yield back. 

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

And now we will hear from the gentleman from Delaware, Mr. 

Castle, for 11⁄2 minutes. 

Mr. CASTLE. Thank you, Mr. Chairman, and thank you, Mr. Garrett, for holding today’s hearing. 

I believe debating the future of Fannie Mae and Freddie Mac is 

of importance as these entities have tremendous impact on our 

housing and finance markets. I also believe that we cannot neglect 

talking about the future of other elements of the housing market. 

While the GSEs are important, we also need to consider other aspects of housing finance and their role in the market moving forward. 

The events that began unfolding last summer have led many to 

believe the public/private business model of Government-Sponsored 

Enterprises is inherently flawed. Does this model invoke moral 

hazard, where entities backed by the government take unnecessary 

risks all because they know they will be provided a lifeline if things 

go really bad? 

On the other hand, does this argument apply to all public/private 

partnerships, even though some of these partnerships have worked 

well? Perhaps it is not necessarily the model it bought, but perhaps 

some of the practices adopted by the GSEs themselves that are in 

need of reform. 

So the question is raised: What do we do with Fannie and 

Freddie in the future? Should they return to GSE status after we 

have exhausted the conservatorship role? Should they become an 

official government entity? Or do we privatize them and eliminate 

the government backing role altogether? 

I am looking forward to the testimony of the panel before us to 

try and hash out this issue. I also hope that the experts before us 

today will be able to address the future of the housing and mortgage market in general, as Fannie and Freddie are simply parts of 

the greater debate this committee needs to address. 

Thank you, and I yield back the balance of my time. 

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

And now we will hear from the gentleman from California, Mr. 

Royce, for 11⁄2 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

I think I have warned 16 times in this committee about the danger of government involvement in the market with respect to GSEs. 

The goal of government should be to be a regulator. What we did 

was we replaced political pull with market forces. 

And in 2003, I introduced the first legislation to bring Fannie 

and Freddie under one regulator. In 2005, I got the amendment 

onto the House Floor, frankly, that would allow the GSEs’ regulator to control for systemic risk, to actually step in—which is exVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
8 

actly what the regulators wanted to do. But political pull and the 

lobby by Fannie and Freddie prevented this from happening. Now we have $6 trillion worth of a mortgage market out there. 

And basically what we did was we allowed a quasi-political Government-Sponsored Enterprise here to borrow at a much lower rate in 

the market. We allowed them to form a system in which they could 

arbitrage and in which they could build up a portfolio of $1.5 trillion. 

And then forces in Congress forced the majority of that loan portfolio to be in subprime and Alt-A loans. And when we called attention to this repeatedly, we were told, there is no risk, or we are 

going to roll the dice on this risk. 

Well, the consequences have been not only to drive up a balloon 

in the housing market, but with the collapse, to lose billions of dollars for stockholders; but more importantly, to lose for those who 

were involved in the housing market, and the side effect that this 

has had on housing prices in the United States. 

So the observation I would make first is, I would get ahold of any 

member who is interested in this debate. I would get ahold of economist Thomas Sowell’s new book, ‘‘The Housing Boom and Bust,’’ 

and see the role that Congress played in terms of helping create 

this crisis. And second, I would think long and hard in the future 

about creating political manipulation into the market. We should 

be the regulators. We shouldn’t be tying the hands of the regulator. 

In 1989, we had, from Freddie Mac, the chairman of that organization come up here and say it would risk safety and soundness to 

allow these kinds of portfolios to develop. And instead, we allowed 

a 101 to 1—a 101 to 1 leverage out of these institutions, and the 

resulting collapse, and the systemic risk. And we ignored the very 

institutions and regulators that tried to warn us, and we tied the 

hands of those regulators. 

That is the debate we should be having today, and we should be 

learning a lesson from it. I thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Royce. 

We will now hear from the gentlelady from West Virginia, Ms. 

Capito. 

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

you for holding this hearing today. It is my hope, as others have 

shared, that this will be the first in a series of discussions on the 

future of the GSEs, Fannie and Freddie. 

As we are all too well aware, the long debate over whether or not 

the GSEs’ Federal guarantee was explicit or implicit was resolved 

last fall; due to an overabundance of risk on their portfolios, Fannie 

and Freddie were placed in conservatorship by the Treasury and 

the Federal Housing Finance Agency. 

Since then, the government has set up new management teams 

within the two GSEs to control day-to-day operations, but remains 

in tight control of other overall operations. I look forward to hearing the Director of FHFA—did I get that right?—on the current 

status of the GSEs, the role they continue to play in the mortgage 

markets, and the future of the two entities. 

The current situation is not ideal, and it is my hope that we can 

return the GSEs to the private markets as quickly as possible. 

What shape or form this will take is unknown at this time, but it 

9 

is clear that the previous business model was not sustainable as it 

allowed the GSEs to take on too much risk, leaving the taxpayers 

to step in when the losses became too great. There are many proposals out there for the future, and our witnesses will be elaborating upon them. 

One issue that does concern me, and that I have heard from numerous constituents throughout the last several months, is the effect that adverse market fees from the GSEs are having on my constituents’ abilities to purchase a home. In some cases, these additional fees are actually pricing home buyers out of the market. 

I look forward to hearing the Director speak on the genesis of 

these fees and their effect on liquidity in the mortgage markets. I 

look forward to hearing from all of our witnesses today, and I want 

to thank the chairman for holding the hearing. 

I yield back. 

Chairman KANJORSKI. Thank you very much, Ms. Capito. 

And now we will hear from the gentleman from Florida, Mr. 

Klein, for 3 minutes. 

Mr. KLEIN. Thank you, Mr. Chairman. Thank you for holding 

this hearing, and I thank Ranking Member Garrett as well. 

The current downturn has certainly showed weaknesses at 

Freddie and Fannie, and it is important to determine the proper 

structure and goals of these programs going forward. However, it 

is equally important to ensure that FHFA is currently doing everything possible to stabilize the mortgage market and prevent foreclosures. 

I am particularly concerned about the current condition of housing markets where I come from in south Florida, particularly because of the lack of the quantity of staff at Freddie Mac and Fannie 

Mae servicing Florida. I have heard from plenty of loan modification specialists, law firms, and other distressed asset management 

in my district and throughout Florida, that are ready to assist 

Fannie with the vastly increased caseload of foreclosures, modifications, and refinancings, yet they are having trouble being approved 

by Freddie and Fannie because of red tape. 

My concern is that foreclosures are occurring because there isn’t 

enough staff to do proper loan modifications. And we also understand it is unacceptable—and we all know it is unacceptable—for 

families to lose their homes to foreclosure because there isn’t 

enough staff to do proper loan modifications. 

I would just like to point out, as I said, that we have had some 

conversations, and we certainly recommend and ask that as we 

work through this difficult time period, that we have the staff and 

support to get these modifications working through the process. 

I look forward to hearing the comments and I look forward to 

working with all of our members and the representatives to accomplish this. Thank you, Mr. Chairman. 

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

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

Mr. HENSARLING. Thank you, Mr. Chairman. From my perspective as a member of this committee, and as a member of the Congressional Oversight Panel for the TARP program, I believe there 

are a number of ‘‘but for’’ causes of our economic recession. 

10 

None loom larger than the monopoly powers that were granted 

to Fannie and Freddie, coupled with the so-called housing mission, 

that essentially mandated they loan money to people to buy homes 

that ultimately they could not afford to stay in. 

Many of you have said, though, that under H.R. 1427, passed in 

May of 2007, that somehow this situation has been rectified. Since 

that legislation has passed, the conforming loan limits have increased to $729,000, increasing taxpayer liability. The portfolio limits of the GSEs have been increased to $900 billion, more taxpayer 

exposure. 

Their share of new mortgages have gone from 50 percent to 90 

percent, more taxpayer exposure. Taxpayers have now been forced 

to invest almost $87 billion through the preferred stock agreements. They are exposed to up to $400 billion under those particular agreements. 

The Congressional Research Service has estimated the cost of the 

conservatorship to be $384 billion, at a time when Americans are 

struggling to pay their taxes and keep their jobs. 

I am glad, Mr. Chairman, that you are holding this hearing since 

certainly H.R. 1427 hasn’t taken care of the worst of Fannie and 

Freddie. Ultimately, we need to see this conservatorship have a 

time certain to end, and transition these Enterprises back to the 

private market and get the hand of government out of this Enterprise that has caused this taxpayer debacle for generations to 

come. 

Thank you, and I yield back the balance of my time. 

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

Now we will hear from the second gentleman from Texas, Mr. 

Neugebauer, for 11⁄2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I look forward to 

the testimony of our witnesses today. 

And I believe the task ahead for this committee and for Administrator Lockhart and his team is, number one, stop the bleeding. As 

obviously you are going to testify, the American taxpayers have 

had to put an extremely large amount of money into this entity, 

and it looks like we are going to have to put more. 

Number two, as we go down the road, is how do we keep this 

from happening again? Because certainly we want to take steps in 

the future that do not put us back in the position that we are in 

now. 

Number three, making sure that we develop an exit strategy that 

protects the money that the taxpayers have already invested in 

these entities. 

And number four, while we are doing all of this, though, we have 

to ensure that there is a substitute, another entity, another way to 

ensure that there is not a major disruption in housing finance in 

this country. 

If we do not have a way to transition to a housing finance source 

that will take up the slack—because what we are going to see is 

testimony that basically, the only game in town now is Freddie and 

Fannie and FHA—if we do not have entities in place to take up 

that slack, we will cause another major disruption in the housing 

market at a time when American families have already lost a subVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
11 

stantial part of their equity. We do not want to be in a situation 

where we are creating that. 

So it is easy to identify the problems that need to be addressed. 

Obviously, many people have reasons why we got here, but more 

importantly, the important question is, where do we go from here? 

I look forward to hearing from the witnesses today as to where do 

we go from here. 

Thank you, and I yield back. 

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

And now we will introduce the panel, if I may. I want to thank 

you for appearing before the committee today, and your written 

statement will be made a part of the record. 

Today, the Honorable James B. Lockhart, Director of the Federal 

Housing Finance Agency, will present a single statement on behalf 

of the Agency. Also joining him at the table are two of his Deputy 

Directors: Mr. Edward DeMarco, Chief Operating Officer and Senior Deputy Director for Housing Mission and Goals; and Mr. Christopher Dickerson, Deputy Director for Enterprise Regulation. These 

two individuals have the responsibility for regulating Fannie Mae 

and Freddie Mac. 

Mr. Lockhart, you are recognized for such time as you may consume to make your remarks. 

STATEMENT OF THE HONORABLE JAMES B. LOCKHART III, DIRECTOR, FEDERAL HOUSING FINANCE AGENCY; ACCOMPANIED BY MR. EDWARD J. DeMARCO, CHIEF OPERATING 

OFFICER AND SENIOR DEPUTY DIRECTOR FOR HOUSING 

MISSION AND GOALS, FEDERAL HOUSING FINANCE AGENCY, 

AND MR. CHRISTOPHER DICKERSON, DEPUTY DIRECTOR 

FOR ENTERPRISE REGULATION, FEDERAL HOUSING FINANCE AGENCY 

Mr. LOCKHART. Thank you, Mr. Chairman. Chairman Kanjorski, 

Ranking Member Garrett, and committee members, thank you for 

inviting me to speak today about Fannie Mae, Freddie Mac, their 

future, and Federal involvement in the housing finance system. 

With almost $12 trillion in outstanding mortgage debt, housing 

finance is critical to the U.S. economy. As the conservator, FHFA’s 

most important goal is to preserve the assets of Fannie Mae and 

Freddie Mac. That is our statutory responsibility. 

As the regulator, FHFA’s mission is to ensure the Enterprises 

provide liquidity, stability, and affordability to the mortgage market in a safe and sound manner. That is also our statutory responsibility, as it is the public purpose that Congress gave the Enterprises. 

The Enterprises own or guarantee 56 percent of the single-family 

mortgages in this country, for a total of $5.4 trillion. Given that 

massive exposure, the best way to preserve their assets and fulfill 

their mission is to stabilize the mortgage market and strengthen 

their safety and soundness. 

Working with the Federal Reserve, the Bush and Obama Administrations, and other regulators, that has been our top priority 

since the conservatorship began, and will continue to be so. Supporting mortgage modifications and refinancings for homeowners 

12 

into safer mortgages are an important element of stabilizing the 

housing market, and thereby the U.S. economy. 

The form in which Fannie Mae and Freddie Mac exit from conservatorship once the housing market is stabilized should be addressed by Congress and the Administration, and I think it is a 

great first step to have this hearing. 

FHFA continues to classify Fannie Mae and Freddie Mac as critical supervisory concerns. As there were significant risks that they 

would be unable to fulfill their missions, we placed them into conservatorship last September. Since then, the Treasury Department 

has purchased $86 billion in their senior preferred stock. 

The Enterprises’ short-term financial outlook remains poor, 

which will result in additional requests for preferred stock investment from the Treasury Department. However, both Enterprises 

have stress-tested their capital or shortfalls, and expect the Treasury’s commitment to fund up to $200 billion in capital for each of 

them to be sufficient. 

The senior preferred stock purchase agreements have given investors confidence that there is an effective guarantee of GSE’s obligations. In addition, the combined financial support of the Treasury Department and the Federal Reserve of over three-quarters of 

a trillion dollars to date for housing GSE debt and MBS have ensured they remain liquid. 

Because of this support, both Enterprises have been able to 

maintain a critically important presence in the secondary mortgage 

market. Their combined share of mortgage originations in the first 

quarter of 2009 and also in 2008 was 73 percent. That was double 

the 37 percent in 2006. 

While the Enterprises have continued to support the secondary 

mortgage market, new senior management teams have worked 

with FHFA to establish and implement comprehensive remediation 

programs. The Enterprises have made progress, but they face numerous, significant challenges to their operations. The staffs of the 

Enterprises and FHFA have been working hard to help to strengthen their safety and soundness. 

In the current mortgage crisis, the Enterprises have focused on 

mortgage availability, mortgage affordability, and foreclosure prevention. Loan modifications undertaken for their own book of business are critical for eliminating their own credit losses and, even 

more importantly, stabilizing the mortgage market. 

The Enterprises and FHFA worked closely with the Administration to develop the Making Home Affordable Program. Both Enterprises have undertaken a home affordable refinance initiative to 

enable homeowners who are current on their Enterprise-owned or 

guaranteed mortgages to refinance at lower rates. FHFA expects 

both modifications in the refinance program, which is expected to 

really ramp up rapidly by late summer. 

In my written testimony, I summarize what went wrong in the 

housing and mortgage markets. I identified some lessons learned 

and raised basic questions that policymakers face at this juncture. 

I will now focus on my thoughts on the potential roles for the 

Federal Government in the housing finance market, and some principles that I think should guide policy choices going forward. 

13 

The starting point has to be the future role of the secondary 

mortgage market, which connects global investors to local lenders 

and borrowers. Doing so helps to lower borrowing costs for home 

buyers, in part because large institutional investors may be better 

able to fund mortgages and manage the risk in those mortgage 

portfolios. Whatever options are chosen, the country’s financial system will continue to require a vibrant secondary mortgage market, 

including the functions performed by the Enterprises. 

There are three specific roles in the secondary mortgage market. 

The first role is that of a liquidity provider to the secondary mortgage market for mortgage-backed securities. The second role is that 

of a structurer and/or insurer of the credit risk of conventional 

mortgage-backed securities. Private firms are limited in their ability to ensure against catastrophic events, but government insurance comes with significant risks and moral hazards. 

A third role is to alter the allocation of resources by providing 

subsidies to attempt to increase the supply or reduce the cost of 

mortgage credit to targeted borrowers. Such a role has really been 

central to all the housing GSEs, not just Fannie and Freddie but 

the Federal Home Loan Banks, which we now regulate. Unfortunately, as the present crisis shows, it has had some mixed results. 

With these roles in mind, I would like to turn to what I consider 

are some of the basic principles you have to consider as you are 

looking at the future of the mortgage market and Fannie and 

Freddie. 

The first principle is these institutions should have well-defined 

and internally consistent missions, missions that do not encourage 

excessive risk-taking. 

A second principle is that there must be a much clearer demarcation of the responsive roles of the Federal Government and the private sector in the secondary mortgage market. Any Federal riskbearing should be provided explicitly and at an actual, real cost. 

The old hybrid model, as many of you said, of private, for-profit 

ownership underwritten by an implicit Federal guarantee poses a 

large systemic risk to the U.S. economy, as we found out. 

The third principle is to base any organization that provides 

mortgage guarantees or insurance on sound insurance principles. 

That requires strong underwriting, strong capital positions, riskbased pricing, and flexibility to react to changes in the marketplace. 

The fourth principle is to create a regulatory and governance 

structure that ensures risk-taking is prudent. From nearly the first 

day on my job 3 years ago, I pointed out the folly of allowing the 

Enterprises to have such large portfolios, which we did cap, and 

also the folly of allowing them to be legally leveraged on mortgage 

credit by over 100 to 1. And of course many others, including many 

in this room, did as well. Congress did provide a strong regulatory 

structure of the housing GSEs as part of HERA last July. But unfortunately, it was much too late. 

The fifth and final principle is that the housing finance should 

be subject to supervision that seeks to contain both the riskiness 

of individual institutions and the systemic risk associated with 

housing finance. The latter type of supervision would include counVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
14 

tercyclical capital and policies that counter the private sector’s 

tendency to generate lending booms and busts. 

With those principles in mind, there are really three basic structures for the future of Fannie Mae and Freddie Mac: a government 

agency; a hopefully much improved GSE; and a fully privatized 

firm. 

The first option would be the equivalent of nationalizing the Enterprises, which I am opposed to because I believe government insurance programs are particularly high risk and rife with moral 

hazards. 

The second alternative would be to keep the Enterprises as 

GSEs, building upon HERA. They could be a public utility or a cooperative structure. They could continue with Treasury net worth 

protection or government reinsurance for catastrophic risk. But extreme care would have to be taken to prevent the inherent conflict 

always present in the GSE model. 

A third option is to establish purely private sector firms to supply liquidity to mortgage markets with or without some form of 

government catastrophic reinsurance. Private firms could offer 

greater competition and improve operational efficiency. However, to 

maintain the level of liquidity the MBS market has enjoyed under 

Fannie Mae and Freddie Mac, a high degree of standardization and 

quality control across firms would be necessary. 

I would like to close with a few personal thoughts. Having 

worked at several private sector insurance companies and having 

advised many others, and actually run several government insurance programs, I can tell you government insurance programs are 

high risk. They invite the private sector to shift risk to the government. 

Among other issues, it is often difficult in a political environment 

to calculate or charge an actuarially fair price. It is difficult to resist pressure to broaden the mission and prevent inadequately compensated increases in risk-taking. 

Nevertheless, government has an important role to play in providing certain types of insurance, especially reinsurance against 

catastrophic risk. But again, that insurance has to be prefunded 

and then actuarially sound, and that is difficult in the government. 

The Enterprises and the Federal Home Loan Banks are playing 

a vital role in helping to stabilize housing in the economy today. 

Fannie Mae’s and Freddie Mac’s participation and leading role in 

the Making Home Affordable Program is extremely important in 

helping to stabilize the mortgage market and their own books. As 

Congressman Neugebauer said, that will help stop the bleeding if 

we can make this program work. 

As markets and the Enterprises stabilize, there will be a need to 

address the complex issues I have outlined in this testimony. It is 

important to get the mortgage market model right and the restructuring of the GSEs right for the U.S. economy and also for all 

present and future American homeowners and renters. 

I will be happy to answer any questions, as will my colleagues. 

Thank you. 

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

135 of the appendix.] 

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

15 

Mr. Lockhart, you know, part of the problem that we have, and 

I would probably like to clear it up very early, is we have never 

had a definitive set of hearings or a commission appointed to designate what the cause of the disaster, the economic crisis over the 

last year, year-and-a-half, has been. 

And I hear many of my colleagues, as I hear other commentators 

throughout our economy, asserting that it was caused for several 

reasons, and quite extreme reasons. I never knew that CRA was 

so extensive within our system that they brought down the whole 

system, but I have heard some people make that charge. 

I have also heard people make the charge that Fannie Mae and 

Freddie Mac brought down the system. And I guess I want to ask 

you the question: Is that your opinion? I can express mine, that 

Fannie and Freddie fell after the credit crisis occurred. And the 

credit crisis basically occurred more in the securitization in the private markets, particularly of subprime loans, than of Fannie and 

Freddie. They followed in the destruction of credit in the country. 

Is that relatively true? 

Mr. LOCKHART. There are many, many factors and lots of people 

guilty over this bubble we had in the economy and, in particular, 

the housing market. 

There was excess liquidity. As former Secretary Paulson used to 

say, risk was mispriced, not only in the housing market but across 

financial markets and across financial institutions. 

Certainly, in the housing market, underwriting standards fell 

dramatically and, in particular, the subprime and Alt-A market. 

Most of that did go into the private label securities. I have to admit 

that Fannie and Freddie were big buyers of those securities, but 

only the AAA ones. They and everybody else, including the rating 

agencies, did not do enough analysis on those securities. 

Certainly, to keep some market share—and their market share 

actually dropped over about a 3-year period, from over 50 percent 

to about 33 percent—they did lower their standards in 2006 and 

2007. They didn’t lower them as far as the rest of the market, but 

they did lower their standards. 

I do not think Fannie and Freddie were the cause. As I said, 

there were a lot of reasons for what happened, including the poor 

regulatory structure that OFHEO had. We didn’t really have the 

powers to stop them from being 100–to–1 leveraged. We actually 

had an extra capital charge on them. We froze their portfolios, and 

still there were problems. 

There were a lot of different reasons. Regulations: We were too 

slow to get the new legislation. The housing market bubble was 

caused by worldwide financial issues and not just Fannie and 

Freddie. 

Chairman KANJORSKI. And as you know, the reform legislation, 

to correct your present agency and give you the powers of a worldclass independent regulator, that started considerably before it actually became law. If I remember, in 2005 we put that legislation 

forth and it failed to get Senate confirmation, and therefore did not 

proceed to the President for his signature. 

But after that, it was not enacted, either. And not to place blame, 

because I think that is the worst mistake we can make in placing 

blame. It was a Republican Administration, a Democratic AdminisVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
16 

tration, a Republican Congress, a Democratic Congress. But so we 

do entertain the facts that at all times during this immediate 

runup to this crisis, that is the 4 or 5 years of the real estate bubble, the Senate and the House were in the control of the other 

party than they are now, that is, the Republican party. Is that correct? 

Mr. LOCKHART. Yes, sir. 

Chairman KANJORSKI. And the Presidency of the United States 

was in the control of a Republican. Is that correct? 

Mr. LOCKHART. That is correct. And that Republican was asking 

for reform from almost to the day he took the job. Yes, sir. 

Chairman KANJORSKI. And his party’s Congress did not respond. 

Is that correct? 

Mr. LOCKHART. As I understand the history, and I wasn’t here 

in 2005 so you will have to bear with me, but they wanted stronger 

legislation than was passed. 

Chairman KANJORSKI. There is no question that he wanted 

stronger legislation. But the people who controlled the House and 

the Senate were his own party. Is that correct? 

Mr. LOCKHART. That is correct. 

Chairman KANJORSKI. Now, I do not want to place blame. 

[laughter] 

Chairman KANJORSKI. I think if we could leave today’s hearing— 

I enjoin my colleagues on the other side that they appreciate my 

attempts here—I think we have to finally draw the lines on finding 

fault. It is not going to get us anywhere. 

The one thing that does disturb me, though, as we talk through 

that, there is a tendency to think that maybe if this had been done 

totally in the private market and government had not been involved. 

Do you see that as a viable alternative, that we can just let 

Fannie Mae and Freddie Mac dry on the vine, become prunes, and 

forget about them and let the private market go on? Or will there 

be a negative impact in the United States in terms of real estate, 

ownership of real estate? 

And so that history is correct, Fannie and Freddie were not instrumentalities forced upon the American people even though one 

of them was done in the depressionary times. It was to fill a void 

that the private market was not filling. We did not have a secondary market in real estate until government took the responsibility of establishing Fannie Mae. Is that correct? 

Mr. LOCKHART. That is correct. In the recent decade, the private 

market through these private label securities did increase their 

market share pretty dramatically from Fannie and Freddie and 

from the FHA, for that matter. 

Chairman KANJORSKI. And they did it— 

Mr. LOCKHART. And unfortunately, they did it in an unregulated 

and an unsafe and unsound fashion. 

Chairman KANJORSKI. I just want to say, they did not do it in 

a very superior way, did they? 

Mr. LOCKHART. That is correct. 

Chairman KANJORSKI. If we had to say anything in making the 

comparison between the government agency of creating a secondary 

17 

market and Wall Street left to its own designs, Wall Street those 

last 2 or 3 years became an absolute disaster 

Mr. LOCKHART. Right. And I think going forward we need a private sector of the market, though. There is a lot of activity going 

on— 

Chairman KANJORSKI. Okay. We are going to try Wall Street 

again. 

Mr. LOCKHART. A much reformed version with much more transparency and much stronger underwriting. One of the things we did 

in 2007 is we told Fannie and Freddie that they couldn’t buy any 

more private label securities unless they conformed to the nontraditional mortgage guidance, the subprime guidance. Those kinds 

of rules have to come forward so that we do have much better 

transparency. 

Chairman KANJORSKI. Last night, I had an interesting dinner 

with an interesting gentleman, and members of the committee 

were there—Mr. Simon, who is a financier, and quite renowned in 

the United States. 

He made a proposal to us, and I think it merits consideration. 

I would like your opinion of what it roughly is. He feels that one 

of the major blows to the securitization market was the failure of 

the rating systems, the institutions that were there to rate and did 

in fact create all these AAA ratings that we found out much later 

on were nonsense. 

And his suggestion and opinion was that we should take up 

forming a nonprofit, governmentally sponsored and supervised, 

super rating agency that does not make money from the issuer, but 

gets paid independently and separately, either through an assessment or a fee; and that it have to rate all of these bundled securities or securitized operations. 

Have you given any consideration to that type of thought? 

Mr. LOCKHART. There is no doubt that the rating agencies failed. 

If you look at the AAAs that Fannie and Freddie bought, about 60 

percent of them are now junk and only 5 percent are still AAA, not 

on downgrade. So there is no doubt that they failed and there is 

no doubt that they should be reformed. 

I had not really thought about that. There is somewhat of an 

analogy in the insurance world, where the NAIC does rate for insurance companies. Whether that works or not, I am not sure. It 

is something that could be considered. 

More importantly, we need to reform the rating agency, and we 

need to get them back to rating and not consulting and getting fees 

for structuring bonds. 

Chairman KANJORSKI. Thank you, Mr. Lockhart. I have already 

run over my time. And now I would like to recognize Mr. Garrett 

of New Jersey to proceed with his time. 

Mr. GARRETT. Thank you, and I too will not try to lay blame or 

be partisan on any of these things. I appreciate the fact that you 

are just laying out the history of things, that it was—the reforms 

did get through the House. They were requested by—well, you were 

here sometimes. Other people during the Bush Administrations 

were here. I remember Secretary Snow was here and a number of 

people pushing for limitations on portfolio, and other limitations as 

well. 

18 

We were able to get it through the House. It did go to the Senate, 

and then Senator—not President—Obama, I guess, was in the Senate at that time, and not being partisan one way or the other, just 

saying that we just couldn’t get cloture, as I recall, to be able to 

get that piece of legislation to the President’s desk. 

Had we done it at that time, perhaps we wouldn’t be sitting here 

today looking back to say, why didn’t the world-class regulator do 

the job? Because the world-class regulator potentially could have 

been doing the job. 

I also find interesting your comment with regard to whether the 

GSEs or other Federal regulations were part and parcel of the 

cause of it. Just very quickly, you ran down—you said it was excess 

liquidity. I guess that is in part and parcel—although I am not an 

economist—due to the excess by the Fed on monetary policy. 

You talked about lowering of underwriting standards. And I 

guess that is part and parcel again of the Fed and the Boston Fed 

and others, which instructed Wall Street to lower their underwriting standards. And also with regard to the GSEs, I appreciate 

your candor saying that those standards themselves were actually 

lowered at a period of time. 

And so we can’t say that this one factor was the cause of it. But 

certainly we can say that this one factor helped to exacerbate a 

problem when they bought up some of these bad securities that had 

bad underwriting standards. 

With that all said, one of my objectives has been to try to lower 

the risk that the GSEs have posed to the taxpayer. Both Enterprises have a significant amount of interest rate risk due to their 

hedging practices, with a limited number of counterparties. 

We have discussed this before, just a handful that you are able 

to deal with. These interest rate swaps really are basically standardized, bilateral transactions to help you manage your portfolio 

and hedge the risk. 

Now, there are new clearinghouses that have been popping up, 

if you will, being established, and they have the potential to significantly reduce the counterparty risk posed to the Enterprises 

through these transactions if you were just to funnel them through. 

And of course, you know how that works. 

So could you elaborate how you are working to try to reduce the 

risk to the taxpayer with their counterparty risk through clearinghouses like this for these swaps? 

Mr. LOCKHART. Counterparty risk is a big issue in the financial 

markets today. There has actually, over the last year, been a concentration of counterparties as there have been mergers and acquisitions, whether it is the mortgage market, the deposit market, or 

other areas. 

Certainly as the quality of some financial institutions has suffered, that has meant that Fannie and Freddie and many others 

have had to concentrate their derivatives activity. Fannie and 

Freddie both hold well over $1 trillion of derivatives, as do the Federal Home Loan Banks. 

So one of the concerns we have about counterparty risk is what 

can be done about it. We have certainly talked to them, and they 

are looking very seriously about starting to move some of their 

19 

business into clearinghouses and exchanges to diversify the risk 

and lower the risk. 

Mr. GARRETT. The product here is basically a standard product 

that we are dealing with. Right? 

Mr. LOCKHART. Right. Fannie and Freddie hedged the interest 

rate risk and the prepayment risk, basically. They used swaps to 

a large extent. Sometimes they used more exotic instruments, but 

they do a lot of interest rate swaps. 

Mr. GARRETT. Is there something holding you back, then, or is 

there a timeline that— 

Mr. LOCKHART. As you said, these are relatively new vehicles. 

We are looking at them. We want to make sure that they are done 

in a safe and sound manner. 

Mr. GARRETT. On another note, with regard to the portfolio, 

which is one of the areas that there was a request 4 years ago to 

try to rein them in, what is the purpose of keeping the portfolio 

where it is now? 

Actually, it has gone up since this whole problem began. I know 

it is supposed to begin to run down starting in 2010, next year. But 

why don’t we just begin running that down right now and then just 

say, we are going to eliminate that? 

Mr. LOCKHART. The key thing that the portfolio has been used 

for since the conservatorship is to support the mortgage-backed securities market. Now, obviously, the Treasury has been buying a 

lot. The Fed has been buying a lot. And that is extremely important to getting those mortgage rates down. 

Since the conservatorship, we have seen mortgage rates drop 

about 150 basis points, 11⁄2 percent, to about 5 percent from 61⁄2

percent. And part of that has been the Treasury, the Fed, and also 

Fannie and Freddie buying those mortgage-backed securities. 

Obviously, the Fed and Treasury have much more firepower. And 

at this point, the portfolios are relatively stagnant. 

Mr. GARRETT. They are stagnant. But are you actually—well, 

they went up over the course of— 

Mr. LOCKHART. They went up, and now they are coming down. 

Mr. GARRETT. And so can you give us a timeline projection, then, 

on when they will be— 

Mr. LOCKHART. Well, a lot of it will depend on what happens in 

the mortgage market. I mean, to be perfectly honest, what we need 

to do is to stabilize this mortgage market, and then we need to figure out, you know, what to do with the portfolios. 

The key job, the number one job, is to stabilize the mortgage 

market. And that is by bringing mortgage rates down. It is by 

modifications. It is by refinancing. 

Mr. GARRETT. And I guess that is my last question, if you will, 

is that your overall job—and this is one of your opening comments, 

is what is the job of the conservator. And you said it was to preserve the assets of the GSES. What you didn’t say in any sentence 

or paragraph after that, and balance it against the interest to the 

taxpayer. 

Do you see that actually—are you charged with that or you see 

that as part of your role? 

Mr. LOCKHART. Oh, very much so. If the assets of Fannie and 

Freddie go down, that means more money from the taxpayer. 

20 

Mr. GARRETT. Absolutely. 

Mr. LOCKHART. So part of the job is to try to, over time, limit the 

draws from the Treasury Department. In my view, the best way to 

do that again is to stabilize the mortgage market through modifications and refinancings. 

Mr. GARRETT. Yes. And we have had correspondence in the past 

with regard to the last point, and that is as far as the statutory 

authority to the GSEs to enter into these modifications. Some outside experts have said that there is not that statutory authority to 

enter those modifications, and in fact that doesn’t actually inure to 

the benefit to the taxpayer as well as a side issue as well. 

I just want to comment on your statutory authority to engage in 

what— 

Mr. LOCKHART. Right. You are asking about the modifications 

that are higher than an 80 percent loan-to-value. 

Mr. GARRETT. Right. Right. 

Mr. LOCKHART. Our view is that these are the risks that they are 

already holding. They already hold these mortgages. And by lowering the payment through a refinancing, they are lowering their 

risk and therefore helping the taxpayer, potentially, going forward. 

The guarantee fees on these new mortgages tend to be higher 

than the ones they are replacing. So it is really a benefit to the 

third party. 

Mr. GARRETT. My understanding is that Fannie Mae’s financial 

statement indicated that would actually increase risk for the GSE. 

Mr. LOCKHART. Not on refinancings. I think what they may have 

said is that modifications could potentially have the impact of increasing short-term losses. But my view is, over the long term, they 

will be a benefit to the GSEs and to the taxpayers. 

Mr. GARRETT. What is your foreclosure rate now? 

Mr. LOCKHART. The foreclosure rate is relatively low at Fannie 

and Freddie at the moment. We are talking about 100,000 properties. 

Mr. GARRETT. That is on everything. I am just talking about 

what we are talking about here, on the refinance side. 

Mr. LOCKHART. On the refinance side it is too early for these new 

refinancings to— 

Mr. GARRETT. Oh, really? 

Mr. LOCKHART. They haven’t missed a payment let alone re-default. Yes. 

Mr. GARRETT. So the figure that I was, I guess, thinking about, 

the 70 percent figure, that is— 

Mr. LOCKHART. If you are talking about the historical redefault 

rate at Fannie and Freddie— 

Mr. GARRETT. Yes. 

Mr. LOCKHART. —it has actually been relatively low, around 30 

percent. But in the last year, it has been raising quite rapidly with 

the downturn in the economy. 

Mr. GARRETT. Right. But that is what we are talking about with 

these—with this provision, as far as the modifications. 

Mr. LOCKHART. Again, these new modifications are significantly 

deeper than the ones even a year ago. I just saw a chart that a 

year ago in the first quarter, only 2 percent of the modifications 

21 

had payment reductions of 20 percent. This quarter, the first quarter of this year, it was 52 percent. 

The modifications have changed so dramatically over the last 

year that it is really hard to use those historical numbers to say 

that we are going to have those high redefaults. 

Now, the economy still has troubles. And certainly the reasons 

for the default tend to be lost jobs, lower income— 

Mr. GARRETT. Right. 

Mr. LOCKHART. —and the things that are affected by the economy. 

Mr. GARRETT. I appreciate it. 

Mr. LOCKHART. Thank you. 

Chairman KANJORSKI. We are in the midst of four votes right 

now. They should take probably 30 minutes. And we will recess 

until that time. 

[recess] 

Chairman KANJORSKI. The committee will reconvene. And we 

probably will get interrupted very shortly for another vote, but we 

are going to continue questioning while we can. 

Mr. Campbell, you are recognized for 5 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman, and thank you, Director Lockhart. 

There is a Bloomberg report out today about a letter from thenSEC Chairman Christopher Cox written to you, I guess, in January 

of this year with a number of subjects, including suggestions that 

perhaps Fannie and Freddie are being encouraged to make loans 

that might not be in the best interests of the profitability of that 

entity, or something. 

Are you familiar with this letter? 

Mr. LOCKHART. We don’t comment on correspondence from Board 

members. I can tell you that Chairman Cox was a member of the 

new Board that was created out of HERA. I can also tell you that 

we worked closely with Chairman Cox over the 3 years that I was 

at OFHEO, and now FHFA, where he was very involved, actually, 

in the Fannie fines that we did about 3 years ago. 

The issue as reported, and I will comment on the issue as reported in the Bloomberg article, and the issue, I think, if you want 

to sum it up, is: Does modifying mortgages and refinancing them 

cause damage to Fannie and Freddie? And in my view, as I think 

I said earlier, they sit on $5.4 trillion of mortgages. That mortgage 

book is so large and so important that what they can do to stabilize 

the market will be good. 

Now, one of the problems is, from an accounting standpoint, 

when you modify a loan, they have to take it out of their mortgagebacked securities and they have to write it down as if it wasn’t 

modified. There is a large deduction. 

There is a short-term cost. My view is if it goes into foreclosure, 

the costs will be worse on that mortgage, but more importantly, it 

will be worse than the neighborhood and it will be worse for their 

$5.4 trillion book. 

So the view I have had, and I share it with the management of 

Fannie and Freddie, is that their number one job at the moment 

is to help try to stabilize the mortgage market. 

22 

Mr. CAMPBELL. Even if that, maybe in the short term or whatever, is not the best thing for the financial result of Fannie and 

Freddie? 

Mr. LOCKHART. It is really a very short-term negative on the financial result because they get to take it back in. In fact, that accounting is going to change January 1st of next year with the consolidation of all their mortgage-backed securities. It is an extremely 

short-term effect, and then some of that actually may be written 

back. 

Mr. CAMPBELL. Let me ask you, Director Lockhart, if I can, could 

we, the members of this committee, see this letter? 

Mr. LOCKHART. I don’t think that is appropriate, but I will check 

with my lawyers. 

Mr. CAMPBELL. Okay. Yes. Because I don’t—Mr. Chairman— 

Mr. LOCKHART. I think it was an SEC letter so it may be better 

to ask the SEC. 

Mr. CAMPBELL. Okay. Mr. Chairman, there was a letter written 

from then-SEC Chairman Christopher Cox to Director Lockhart in 

January. And so that is something I think the committee members 

should be able to see. 

And I will just say I would have a hard time understanding why 

members of the committee, given that Fannie and Freddie are 

under receivership— 

Mr. LOCKHART. Conservatorship. 

Mr. CAMPBELL. Conservatorship, sorry; you are correct, my bad— 

would not be allowed to see this letter. But I would hope that the 

chairman and the committee would support that position. 

Mr. LOCKHART. I can tell you this letter has been discussed at 

the first meeting of the new Board, as the new Secretaries came 

in. We have gone through the contents, and we are continuing to 

look at those issues. And we will continue to work through those 

issues. 

It is an advisory board and they have been very helpful. I think 

it is very useful to have that kind of dialogue. But I think to the 

extent that dialogue gets out into the public, it is not as helpful 

and we may not have as much dialogue in the future. 

Chairman KANJORSKI. It is a very confidential letter. The only 

people that I know who have it are the press. 

[laughter] 

Mr. CAMPBELL. I guess that probably makes my point for me. 

Thank you, Mr. Chairman. I think since we have an oversight responsibility, we should be seeing that letter. 

But another question is that I believe the SEC—I think your belief, sir, is that we have about $150 billion in risky—Fannie and 

Freddie have about $150 billion in risky outstanding mortgages. 

But the SEC believes that it is closer to $1.7 trillion. 

How do you reconcile that difference, or why do they feel it is so 

dramatically higher than, I believe, if I have the numbers right, 

that you believe? 

Mr. LOCKHART. I don’t know where the $150 billion came from. 

It might be that they have about $170 billion in private label securities, which are risky. There is no doubt about it. They also have the rest of their book, which is well over $5 trillion. There are obviously higher-risk mortgages in that book. There 

23 

is some subprime, not a lot, but there are Alt-A mortgages, interest-only mortgages, option ARMs and a series of other things. 

Mr. CAMPBELL. That add up to about— 

Mr. LOCKHART. They don’t add up to $1.7 trillion. The SEC double-counted some of the mortgages. The number, I would say, is 

about 1.4 out of the 5.4. 

Mr. CAMPBELL. Okay. I would love to ask more questions, but I 

believe my—well, then I will ask a question we discussed earlier. 

It is my understanding that some of the early default rates, first 

payment default, that sort of thing, on loans made since the first 

of the year—so in other words, long after we knew about this crisis—at Fannie and Freddie are equivalent to some default rates 

that were done before all of the subprime stuff kind of became out 

there. 

Is that true? And if so, is that part of the strategy of helping the 

housing market by continuing to make loans to subprime and other 

lower-qualified buyers and lower underwriting standards? 

Mr. LOCKHART. It does no one any good and it is one of the lessons we really learned in the last 2 years. To make a loan that we 

think they are gong to default on, or Fannie and Freddie think 

they are going to default on, hurts the individual. It hurts the 

neighborhood. It is just terrible. It is certainly not part of the strategy to make loans that we or Fannie and Freddie think there are 

going to be defaults on. 

Fannie and Freddie have tightened their credit standards over 

the last year, since the conservatorships. Frankly, they have gotten 

grief from many groups for doing that. I think it is appropriate. 

You have to take a balanced look at the credit, and it certainly does 

no one any good to make a loan that someone is going to default 

on. 

Mr. CAMPBELL. Do you know what the first payment default rate 

is? 

Mr. LOCKHART. I don’t have the number in front of me. I can provide it to you. It is not only a function of the loan, but it is a function of the economy. It also, as I told you earlier, can be a function 

that the underwriting was poorly done. In that case, Fannie and 

Freddie have the right to return it to the financial institution that 

sold it to them. 

Mr. CAMPBELL. Thank you for your forbearance there, Mr. Chairman. 

Mr. GARRETT. Will the gentleman yield on that— 

Mr. CAMPBELL. I am happy to yield whatever time the chairman 

will allow me to have. 

Mr. GARRETT. Maybe, actually, it would be—along the analogy 

that there may be some costs involved short-term on some of the 

aspects of things, but in the long term, the overall goal, overarching goal, is just to stabilize the marketplace, maybe it is not 

a bad thing—from that analysis, it may not be a bad thing to say, 

we are going to underwrite loans on rates—at terms that aren’t 

necessarily likely to get paid back because it will prop up the economy over the long term. I am just— 

Mr. LOCKHART. Again, Congressman, a default doesn’t help anything, and it certainly doesn’t help individuals, neighborhoods, 

and— 

24 

Mr. CAMPBELL. Particularly a first payment default, if that information that I have is correct. 

Mr. LOCKHART. Right. 

Chairman KANJORSKI. We have two votes. We will take a recess 

that will probably consume at least 15 minutes, and then we will 

reconvene. The committee stands in recess. 

[recess] 

Chairman KANJORSKI. The subcommittee will reconvene. 

We will recognize Mr. Hensarling of Texas for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Mr. Lockhart, in your testimony, you stated that, ‘‘As conservator, FHFA’s most important goal is to preserve the assets of 

Fannie and Freddie. But as regulator, FHFA’s mission is to ensure 

liquidity, stability, and affordability in the mortgage market.’’ 

It seems to me that kind of gets to the crux of the matter. How 

do you reconcile these two missions? How are you serving two masters? 

Mr. LOCKHART. We actually reconcile it pretty easily because the 

safety and soundness that you left out of that statement is also important on the mission side. And certainly conserving assets is a 

safety and soundness principle. 

What my view is, and this is critical, is that the best way to conserve assets for Fannie and Freddie is to be able to be aggressively 

modifying loans, refinancing loans, and ensuring the liquidity in 

the mortgage market. They sit on $5.4 trillion of mortgages and, 

if the market continues to fall, those losses will continue to mount. 

The best way to conserve assets is for them to continue to fulfill 

their mission of providing liquidity, stability, and affordability to 

the housing market. 

Mr. HENSARLING. Under what scenario would you recommend an 

alteration of the status from conservatorship to receivership? Already we are at about $85 billion of taxpayer exposure—$400 billion has been authorized. But yet Uncle Sam is 80 percent owner 

of the GSEs, ostensibly really on the hook for $5.3 trillion, I believe. 

Is there a scenario under which you say conservatorship simply 

is not working? 

Mr. LOCKHART. We had looked at receivership versus conservatorship last August and September as we considered what to 

do with Fannie and Freddie, and we weighed the pluses and 

minuses. It was our view that conservatorship was the better alternative for the mortgage markets and for the U.S. economy, and 

that is still my view. If we are going to stabilize the mortgage markets, receivership might have the wrong impact and might destabilize the markets. 

At this point, we are not contemplating receivership. I really 

don’t see the advantage of receivership versus conservatorship. 

Mr. HENSARLING. Is the taxpayer on the hook for the $5.3 trillion 

or not? 

Mr. LOCKHART. The taxpayer is on the hook for the senior preferred facility that the Treasury Department negotiated, which is 

$200 billion each to Fannie and Freddie. 

Mr. HENSARLING. But the $5.3 trillion, the Federal Government 

is an 80 percent owner. Correct? Of the GSEs? 

25 

Mr. LOCKHART. The Federal Government has an 80 percent warrant. It has never exercised that warrant, but it has the right to 

exercise that warrant. It is a common warrant. And as you know, 

if you are a shareholder, you are not responsible for the debts of 

a company. 

Mr. HENSARLING. Well, it is a very unique shareholder at the moment. 

It seems to me that part of the problem that was created was the 

whole implicit versus explicit guarantee. And we know that one of 

the reasons that Fannie and Freddie seemingly are the only game 

in town, and their market share of new mortgages is roughly doubled, is because of that guarantee. 

Is there any scenario where you would recommend that the full 

faith and credit of the United States be behind all $5.3 trillion of 

MBS? 

Mr. LOCKHART. The implicit guarantee was a problem. We talked 

about it in this room many times, and other places, that there was 

no market discipline for these two companies because of that. And 

we didn’t have the powers as others regulated to, for example, control their growth, and the market wasn’t doing it, either. 

My view is that there is no reason at this point to make that explicit. I think the $200 billion senior preferreds give an effective 

guarantee, and I think that is all that is necessary at the moment. 

Certainly, there are buyers of their debt and mortgage-backed securities— 

Mr. HENSARLING. Don’t you think the buyers of this paper think 

that, once again, Congress would come to the rescue and bail them 

out? 

Mr. LOCKHART. The buyers of this paper think that there is 

strong support from the U.S. Treasury through the senior preferred, yes. 

Mr. HENSARLING. So what is the exit strategy? 

Mr. LOCKHART. The exit strategy is partially the new structure 

we have been talking about here today. And you can’t do that, in 

my mind. You can’t bring them out of conservatorship until the 

market is stabilized and you can see a profitable future. 

There may be a portion, as in receivership, that gets left behind 

in what you might call a bad bank, if you will, that is protected 

by the senior preferred. And then there is a bridge to a new organization. 

Mr. HENSARLING. Thank you. I see I am out of time. 

Chairman KANJORSKI. The gentlelady from Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

I have several questions, Director Lockhart, so if we could run 

through them rather quickly in my time allotted. 

Mr. LOCKHART. Okay. 

Mrs. BIGGERT. Number one is many consumers in my district are 

thinking long and hard about purchasing a condo based on all of 

the new GSE requirements, which are also causing strain for home 

builders and community bankers. You know, so many people start 

and then they say, well, I am just not going to go through the process when they get into that. 

Could you comment on that? 

26 

Mr. LOCKHART. The GSEs have historically had standards for a 

new condo that 70 percent has to be pre-sold. During the period 

when they lowered the credit standards in many areas, they lowered the credit standard there as well. Now, they have restored 

that old standard. 

In some markets, there is a big issue of very empty condos. 

Again, it doesn’t make sense to make a loan that might go into default. So, they continue to work with condo developers, and to the 

extent that they see that it is a good project, they can bend and 

change those rules. But it is something that they think, from a 

safety and soundness standpoint, makes sense. 

Mrs. BIGGERT. So it is a waiver, or just bending the rules? 

Mr. LOCKHART. It would be a waiver. Bending the rules is probably not the right phrase. Basically, they look at projects, and to 

the extent that they see that it is a good, sound project, they will 

make the loans. 

Mrs. BIGGERT. Thank you. And why is it that nonprofit social 

services in—this is in Illinois—who provide housing to very-low-income people and families with disabilities can’t qualify for lower refinancing rates? You know, these are multi-family houses or homes 

that are now considered commercial versus home-occupied properties. And why is that designation for them? 

Mr. LOCKHART. I am not sure about that. I am going to have to 

look into that. I really had not heard about that issue before. 

Mrs. BIGGERT. Okay. Would you get back to me? Thank you. 

Then another Illinois issue is why is it that Fannie and Freddie 

still have a policy, for example—in the State of Illinois, they only 

permit a handful of law firms, and I think in Illinois it is two, to 

handle foreclosures? And this continues to bottleneck the system, 

it is anti-competitive and, I think, a disservice to lenders and sellers and borrowers. 

Mr. LOCKHART. I am not sure about the situation in Illinois. But 

I know in some other States, they are trying to expand their legal 

representation. Historically, there weren’t a lot of foreclosures. Now 

that we are seeing, unfortunately, a pretty rapid growth in them, 

they too will be looking at how to more expeditiously work through 

the issue. 

Mrs. BIGGERT. Is that something—is there any regulation on 

this, or is it just— 

Mr. LOCKHART. Not that I’m aware of. We will certainly go back 

to ask Fannie and Freddie about that issue. 

Mrs. BIGGERT. Okay. Then why is it that the home valuation 

code of conduct has been implemented without the traditional public scrutiny and review? It seems like this new policy wasn’t vetted 

through Congress, but only on a side deal made with the officials 

from the State of New York. 

You know, I think it really is a dramatic policy that could severely impact many small businesses, in my district and elsewhere. 

Mr. LOCKHART. The new appraisal code actually is by Fannie and 

Freddie and they have historically had appraisal codes. This is a 

strengthening of that code and it was done after a lot of comment. 

They received many comments from a whole series of different 

groups and they made significant changes in the appraisal code 

from what they had originally agreed to. 

27 

It is really designed not to hurt small businesses. What it is designed to do is in many ways the opposite, that is, to take pressure 

off appraisers to do bad appraisals or to do too high an appraisal. 

There were a lot of problems that went on in the last 3 or 4 years 

in the housing market, and one of them was appraisal fraud. This 

code was designed to help reduce that. Chairman Kanjorski has obviously been working on— 

Mrs. BIGGERT. Right. He is head of—yes. 

Mr. LOCKHART. —a companion piece of legislation as well, and 

we applaud that effort. Certainly, Fannie and Freddie will comply 

with it. 

Mrs. BIGGERT. Then just quickly, what is the compelling reason 

to increase consumer fees? 

Mr. LOCKHART. If you are talking about the fees related to guarantee fees that Fannie and Freddie have in place, they have a 25 

basis point adverse market fee that they have had for a while. 

They were going to raise that another 25 basis points after the conservatorship. They decided not to. 

They have also done some risk-based pricing. So where they have 

raised fees is because the risks are higher. This is the balance of 

trying to conserve assets versus helping the mortgage market. 

There are things that have to be done there. 

We have watched what they have done, and certainly we have 

talked to them about what they have done. We are trying—and 

they are very much trying—to achieve balance between safety and 

soundness and mission. 

Mrs. BIGGERT. Well, thank you. There is no question that we 

need a GSE reform package. I don’t know that we want to have the 

taxpayers eternally bailing out all of these various companies, including the mortgage giants. So thank you very much for being 

here. 

Mr. LOCKHART. I agree with you, Congresswoman. 

Chairman KANJORSKI. Thank you very much, Mrs. Biggert. 

And now we will hear from Mr. Adler from New Jersey for 5 

minutes. 

Mr. ADLER. Thank you, Mr. Chairman. 

Mr. Lockhart, I want to follow up on some questions on some of 

the dialogue I heard earlier. My sense is that mortgage insurers 

lack the capital to underwriting new mortgages. I am wondering 

what you suggest the FHFA could do to solve that problem for 

America. 

Mr. LOCKHART. That is a good question. As you know, Fannie 

and Freddie cannot write mortgages above 80 percent loan to value 

so they have relied historically on mortgage insurers. In the more 

recent past, there was something called piggyback mortgages, but 

those have totally disappeared. 

They have relied on mortgage insurers to make greater than 80 

percent loan to value mortgages. The mortgage insurers, like many 

other players in the mortgage market, have suffered some very significant losses, and their capital has been depleted. And that has 

meant that they can do less mortgage insurance than they have in 

the past, and rightfully so. They have tightened their standards as 

a result. 

28 

And that has meant that Fannie and Freddie can make less 

loans in that space, which historically has been an affordable 

space. And we have been working with the mortgage insurers, ‘‘we’’ 

being FHFA. Fannie and Freddie have also worked with the mortgage insurers. FHFA in particular has been working with the 

Treasury Department, and we are looking at whether there is some 

mechanism under the TARP funding to help them get back into the 

marketplace and help bring some more liquidity to the mortgage 

market. 

Mr. ADLER. Do you think the TARP is a proper vehicle to achieve 

more— 

Mr. LOCKHART. It is certainly well within the philosophy of the 

TARP that was related to mortgages and housing as one of the key 

target markets for the TARP funds. We have been talking to Treasury to see how it is structured because it is different. 

The TARP banks all have Federal regulators. The insurance companies, as you know, do not have Federal regulators. It was the 

Federal regulators that made the recommendations to the Treasury 

team. We are working our way through the various issues there. 

Mr. ADLER. Leaving aside TARP for a second, are there other 

governmental solutions, congressional solutions, you would seek for 

us to consider that would try to right the situation? 

Mr. LOCKHART. My view is that the better mechanism would be 

TARP. It is difficult to see, as these are State-regulated entities, 

what Congress could do to help. 

Mr. ADLER. I think there is enormous concern that Fannie and 

Freddie are big, and maybe too big. There is some discussion that 

maybe we need to have a few smaller entities to provide the GSE 

service that Fannie and Freddie have traditionally provided. Do 

you have any view on that? 

Mr. LOCKHART. I have always said that their portfolios are too 

big. One way to shrink them would be to shrink their portfolios 

over time, and that is part of the senior preferred agreement. I 

don’t think it should be done right away. I think we need to get 

through this crisis first. 

There are proposals on the table that say maybe there should be 

more GSEs or more players in the secondary mortgage market 

space. I think that is something that has to be looked at. I really 

have not formed an opinion one way or the other, but it definitely 

should be looked at. 

Mr. ADLER. I am sure we are going to look at it. Thank you very 

much. I yield back the balance of my time. 

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

And now we will hear from the gentleman from California, Mr. 

Royce. 

Mr. ROYCE. Thank you very much, Mr. Chairman. 

I think when we look at the factors that created this economic 

catastrophe here, I don’t think anybody says there was a sole 

cause. 

I think most economists believe that one of the major causes— 

besides Fannie Mae and Freddie Mac—one of the major causes was 

the Fed funds rate in Europe and here in the United States, the 

central banks setting a negative interest rate when adjusted for inVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
29 

flation for 4 years running. There is no way that wouldn’t cause a 

housing bubble. 

But the question about the involvement in Fannie and Freddie 

purchasing subprime, purchasing Alt-A loans, purchasing the instruments that otherwise would not maybe find ready buyers out 

there, that is unique. And that is a part of their role as Government-Sponsored Enterprises, really, that they evolved into. 

And as I said, originally in 1989, they wouldn’t go near a lot of 

these practices, and especially wouldn’t go near the idea of buying 

these things for their own portfolio. But then that process changed, 

and politics took over. 

What I wanted to ask about—and I will mention a couple of 

other factors as well. 

I don’t think anybody says it was solely Fannie and Freddie. But 

a number of economists worry about the amount of bullying of the 

market that went with CRA in terms of the direction of loans to 

be made. 

There is a lot of worrying about what we placed in statute in 

terms of the NRSROs, in terms of the credit-rating agencies, in the 

way in which we replaced by statute what otherwise would have 

been done by market discipline. 

The implication there was that because these were governmentsponsored, or because the government was engaged in setting up 

these standards, that it removed market discipline from the equation. And that helped compound the problem. This is the root of my 

question, and I wanted to ask this of Mr. Lockhart and Mr. 

Dickerson. 

I think one of the most telling statements of the GSEs’ impact 

on the entire mortgage market came, for me, from a former Freddie 

Mac employee, who mentioned that the executives at the company 

understood that when they began purchasing junk mortgagebacked securities, as he called them, based on subprime and AltA mortgages, they were sending a clear message to the market that 

these were in fact safe investments. 

In other words, if the duopoly that controls most of the market 

is now going out and buying this from Countrywide, it is a message 

to the market that these have been analyzed as safe. 

As you know, prior to that, Fannie and Freddie were exclusively 

known for buying more conserve conforming loans. So when they 

began purchasing junk mortgage-backed securities, it was a clear 

deviation from their prior endeavors. 

Do you believe the executives at Fannie and Freddie understood 

the message they were sending when they began to invest in junk 

mortgages, and especially at such a large scale? 

Mr. LOCKHART. They were investing in these private label securities that had subprime, Alt-A, option ARMs, and other higher risk 

mortgages that were nontraditional mortgages. There is no doubt 

about it. They stayed in the AAA space. As it turned out, they and 

the rating agencies’ models failed dramatically. 

Yes, they probably had some endorsement factor by buying them. 

There is no doubt about that. Whether the management realized it 

or not, I cannot speak for them. I can tell you, to pick up your 

other point, that they did get affordable housing goals credit from 

HUD for buying these securities. They thought they were profitVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
30 

able. They were buying them because they thought they were profitable. It also did help them to get those credits. 

Mr. ROYCE. I wanted to go to something that the Treasury Secretary mentioned; former Secretary Paulson actually said this. And 

this has to do with the three objectives that he thought we should 

have in terms of a reformed GSE structure. I will ask Mr. 

Dickerson about this, too. 

These three objectives are: no ambiguity as to government backing; a clear means of managing the conflict between public support 

and private profit; and a strong regulatory oversight of the resulting institution, taking politics out of the regulatory oversight function, and allowing the regulators to actually do their job. 

Now, going forward, do you agree that these three objectives 

should be achieved? And what do we risk if we fail to meet that 

task in the future? 

Mr. LOCKHART. I definitely agree with the three objectives. I believe I incorporated them in my five principles as well. It is extremely important to get it right. The ambiguity between public 

and private and the ambiguity between mission and safety and 

soundness helped cause some of the problems we have today. 

As we go forward, we are going to have to really concentrate on 

what I said were five principles and what he said were three, to 

make sure that we can recreate the secondary mortgage market in 

this country in a safe and sound fashion. 

Chris, do you want to— 

Mr. DICKERSON. Right. I would agree with that. Certainly, the 

need for strong regulatory oversight is going to be a need that we 

will need to continue, with no ambiguity as far as the private/public. 

Mr. ROYCE. Thank you very much. 

Chairman KANJORSKI. Mr. Manzullo, for 5 minutes, please. 

Mr. MANZULLO. Thank you, Mr. Chairman. 

Mr. Lockhart, I personally want to thank you for the phone conversation that we had several weeks ago concerning the home valuation code of conduct. But I am very disappointed in the answer 

that I got to our letter dated April 30th under your pen on May 

8, 2009. 

The ostensible purpose of the home valuation code of conduct, as 

set forth in your news release of December 23, 2008, is to improve 

the reliability of a home appraisal. My question to you is: If a 

homeowner gets an appraisal that he doesn’t like, what is his remedy? 

Mr. LOCKHART. If a homeowner gets an appraisal he doesn’t 

like— 

Mr. MANZULLO. That is correct. What is his remedy? 

Mr. LOCKHART. His remedy is to try to get another appraisal. 

Mr. MANZULLO. That is not correct. If you take a look at page— 

Mr. LOCKHART. And a different lender. 

Mr. MANZULLO. Well, he would be forced to go to a different lender. 

Mr. LOCKHART. Yes. 

Mr. MANZULLO. Well, that— 

Mr. LOCKHART. The lender has the right to make the decision 

whether they want to make— 

31 

Mr. MANZULLO. No. I understand that. But what if the lender is 

open to another appraisal? 

Mr. LOCKHART. What if the lender is open to another— 

Mr. MANZULLO. That is correct. 

Mr. LOCKHART. My view is that the lender cannot shop around 

for appraisals. 

Mr. MANZULLO. That is not— 

Mr. LOCKHART. That is one of the big problems we had in the 

last 2 or 3 years. 

Mr. MANZULLO. Right. I understand. The other problem is this: 

I would refer you to page 3, no. 9. We discussed this at length on 

the telephone and you gave me no answers in the written inquiry: 

‘‘If an appraisal comes back that is an error, the only way that 

you can get another appraisal, second or subsequent appraisal, is 

if there is a reasonable basis to believe that the initial appraisal 

was flawed or tainted, and such basis is clearly and appropriately 

noted in the loan file; or unless such appraisal or automated valuation model is done pursuant to written, pre-established, bona fide 

pre- or post-funded appraisal review or quality,’’ etc., etc. 

Your inability to understand my question and the inability to answer is based upon the fact that I don’t think that your organization knows anything about real estate closings. 

You know, the people who came up with this rule— 

Mr. LOCKHART. The people who came up with this rule are the 

biggest mortgage lenders in this country. 

Mr. MANZULLO. Well, that is interesting. 

Mr. LOCKHART. It is Fannie and Freddie that came up with the 

rule. 

Mr. MANZULLO. I understand. I understand that. But my question— 

Mr. LOCKHART. The point is that if there is a mistake, the mistake can be— 

Mr. MANZULLO. Not under your rules. If you read— 

Mr. LOCKHART. If there is a problem, every State has an appraiser regulatory board. They can go to that. 

Mr. MANZULLO. So here we are. We are trying to close a real estate sale and there is a big problem with an appraisal. Let me give 

an example. 

In a townhouse area that I know, end units are selling for 

$500,000 and inside units for $470,000. And an end unit just sold 

for $350,000 because the party had died and it was out-of-State 

heirs and they were in a hurry in order to get that sale done. 

So the appraisal comes in at $350,000. And the guy who wants 

to sell a townhouse that is an end unit that should be selling for 

around $500,000, under these rules—I mean, these are your own 

rules here—he has to either go to another lender, which is absurd 

under the circumstances, or he has to show a reasonable basis to 

believe that the original appraisal was flawed or tainted. 

I mean, your rules can purposely devalue a home that somebody 

is trying to sell because you have so much bureaucracy tied up in 

it. 

Mr. LOCKHART. If the appraiser is a professional, he will have 

looked at the circumstances of that $350,000 sale. 

32 

Mr. MANZULLO. Ah, that is not correct. That is not correct because you may have somebody who may not know that the original 

owner died, and that it was a fire sale. 

I mean, my whole point here is if your job is to come up with 

a fair appraisal, which you say to improve the reliability of home 

appraisals, there is no recourse in here for the homeowner. And the 

homeowner doesn’t choose who the mortgage company will be to 

say, let’s get another appraisal. Somehow you think that is collusion. And I think that is just a lack of foresight on the part of the 

people who came up with the regulations. 

Mr. LOCKHART. A lot of this regulation is based on the USPAP, 

as you know, and that— 

Mr. MANZULLO. Based on the what? 

Mr. LOCKHART. The U.S. appraisal practices that have been— 

Mr. MANZULLO. Well, I understand that. But that is a methodology of doing it, in fairness. But I am just talking about—it is a 

very simple situation that I brought up. 

Mr. LOCKHART. I would be happy to see your proposal. We will 

certainly forward it to Fannie and Freddie. 

Mr. MANZULLO. I would like you to answer my letter, number 

one. And number two, we asked in there the number of banks that 

actually own these appraisal— 

Mr. LOCKHART. We tried to answer your questions in the letter. 

If there are some areas that you feel that we didn’t— 

Mr. MANZULLO. I would like to submit this under the authority 

of the Chair, if it is okay with Mr. Kanjorski, and force you to answer my questions. I mean, one of the basic questions in there— 

Mr. LOCKHART. I think we tried to answer your questions. 

Mr. MANZULLO. If I may finish. 

Mr. LOCKHART. If there are some that you feel we haven’t answered as well as— 

Mr. MANZULLO. Well, you haven’t answered. I mean, just take a 

look at my questions and your answers to them. One of my questions was very simple: How many banks actually own AMCs? And 

you said, well, we don’t know. Well, would you consider— 

Mr. LOCKHART. We don’t know, but we will try to find out for 

you. 

Mr. MANZULLO. Yes. Well, that is not what you told us in the letter. 

Mr. LOCKHART. Well, that is what I am telling you now. 

Mr. MANZULLO. Well, then, I would like—would you consider regulations forcing any bank that owns an AMC to disclose that so 

that you can avoid any collusion, which is the purpose of this document? Would you consider regulations to that effect? 

Mr. LOCKHART. We don’t have powers over banks. We only have 

powers over Fannie and Freddie. 

Mr. MANZULLO. Oh, no. You could make the suggestion, or you 

could even put it into an amended rule if your whole purpose is to 

stop collusion. Wouldn’t you agree with that? 

Mr. LOCKHART. Excuse me? 

Mr. MANZULLO. I mean, you could amend your rule here, couldn’t 

you? 

Mr. LOCKHART. It is Fannie and Freddie’s code, not— 

33 

Mr. MANZULLO. No. I understand that. But you are the regulator 

for them. 

Mr. LOCKHART. As I said earlier, Congressman Kanjorski is 

working on legislation in this area. If there is something that you 

feel that Fannie and Freddie did not do properly, what Fannie and 

Freddie were trying to do, and I think it is an extremely important 

role that, frankly, they didn’t do as well the last two or three, is 

set better standards in the marketplace. 

Mr. MANZULLO. No. I understand. But what— 

Mr. LOCKHART. And that is what we are really trying to do here. 

And to the extent— 

Mr. MANZULLO. But what you gave here was banks—you gave 

banks the sole authority to pick the appraisers. That is what you 

did. 

Mr. LOCKHART. No. I don’t think that is what we did at all. 

Mr. MANZULLO. Well, that is what you did because it is the bank 

that chooses the appraiser either through an in-house appraisal 

company that the bank owns or through picking somebody else. 

Mr. LOCKHART. What we tried to do is definitely separate the 

lending officer from the person who was choosing the appraiser. 

Mr. MANZULLO. Well, that is like asking people to go to separate 

restrooms. I mean, that doesn’t work. You know that doesn’t work. 

I mean, if you had the opportunity to stop collusion, you would say, 

look, the banks cannot own these AMCs. Wouldn’t you agree that 

would be the better way to do that? 

Mr. LOCKHART. Again, it is up to the bank regulators as to the 

ownership of AMCs. 

Mr. MANZULLO. No. I know. But you could have made that suggestion, could you not? 

Mr. LOCKHART. We can make suggestions, but it wouldn’t have 

the power of a regulation. 

Mr. MANZULLO. No. I understand that. But I mean, do you understand what I am trying to get at here? 

Mr. LOCKHART. I certainly understand your concern in this area, 

and certainly will try to respond. We will be happy to have another 

meeting with you to go through these issues to figure out what you 

think should be changed in the code that would make it more responsive to your needs. 

Mr. MANZULLO. Fair enough. Thank you. 

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

And if I may recognize for a motion Mr. Royce. 

Mr. ROYCE. Just for a second, Mr. Chairman. I would like to introduce for the record a highly confidential restricted report from 

2005 that Fannie Mae staff presented to management at that time 

which showed the tradeoffs between staying the course and maintaining strong credit discipline in the company versus accepting 

higher risk, higher volatility, and higher credit losses in order to 

drive up profits for their shareholders. 

Chairman KANJORSKI. Without objection, it is so ordered. 

And now we will recognize the gentleman from California, Mr. 

Miller. 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Kanjorski. And I 

have great respect for the chairman. We just happen to disagree 

on this one issue, which is very unusual. 

34 

I did write you a letter, and I appreciate your response. But I 

have read the letter several times, and it basically boils down to 

one sentence, your response: ‘‘Business practices have been adjusted, and each market participant can adapt to a more responsible system that avoids coercion of appraisers and reduces the opportunity for fraud.’’ 

And I guess the problem I have with this is I know a lot of Realtors and mortgage brokers and appraisers—I have been in the real 

estate business since I was in my early 20’s—who are really good 

people. And it seems like we have struck a deal here between the 

attorney general of New York—and perhaps fraud is prevalent in 

New York; I don’t know—and your Office that impacts 80 percent 

of all the loans made in this country, period. 

It didn’t go through the Administrative Procedures Act or the 

Regulatory Flexibility Act, which I think normally it should have. 

And I am really bothered that we are in a very difficult real estate 

market—I mean, most of the people I know are somewhat involved 

in development or real estate; I was a real estate broker and a developer since I was in my early 20’s—and everybody I know is 

doing pretty badly out there. 

I know banks are suffering out there because they are having to 

foreclose homes and they are having to shove them on the marketplace, which is further declining the value of homes out there that 

are for sale. And I think it is problematic and ever reaching a real 

bottom in the market so the market can somewhat recover. 

And if we are going to look and say, what can we do that really 

helps consumers? What can we do that is really fair to business 

people and everybody in a broad base? It seems like we are going 

in the wrong direction. This is just my opinion. 

You could have a mortgage broker who has a client, and they are 

really trying to shop for the best loan that they possibly can. But 

they can’t even shop for the best loan and provide an appraisal associated with it that lenders can look at, and where they can determine where they can really get the best deal for their client because now we solely have to rely on the bank to do the appraisal. 

Now, when I was a developer, building subdivisions, that was 

very common. You would go a bank and the bank would do their 

appraisal on your subdivision. But a subdivision is altogether different and much more complicated than making a loan on an existing single-family home or a new home that has just been completed 

and you can establish some reasonable fair market value. 

One has much broader pitfalls and more areas that can go wrong 

for a lender when you are dealing with a subdivision than when 

you are dealing with an individual home. 

And I just—I am really concerned that—we are dealing with a 

very difficult marketplace. We are dealing with consumers who are 

having very difficult times even getting loans today, as you know. 

They have to have stellar credit to get a good loan, and if GSEs 

weren’t in the market, they would be making no loans in California, to be quite honest with you, because they are the only ones 

really willing to lend, especially in a jumbled marketplace. Most 

lenders can’t make a fixed 30-year loan and sit on that loan for 

that period of time because they don’t have the liquidity to do it. 

35 

So when you have consumers out there who go to their Realtor 

or they go to their local mortgage broker, who is trying to package 

a loan for them, and go out and shop that loan in the marketplace, 

it seems like we are making it much more difficult and 

hamstringing them in more ways by saying that an agreement that 

perhaps works in New York—and maybe it is the best thing for the 

State of New York; I don’t know—but I can say it doesn’t seem to 

be the best thing for the State of California and for many other 

parts of this Nation, to make it much more difficult and place much 

more control in the hands of one bank rather than having an individual being able to shop a loan with numerous banks. 

Because the problem is, if you go approach a bank with a loan, 

they are going to do the appraisal. You can’t take that to another 

bank because the appraisal is propriety property of the lender. 

And I don’t know why we are going in this direction. So maybe 

you can tell me—I mean, I understand fraud. But we can deal with 

fraud. If you have appraisals, writing improper or fraudulent appraisals, you can hold that appraiser accountable, and it is very 

easy to do. That is why we have laws in this country and there are 

laws against that. 

And it seems like we have all these laws on the books that prohibit coercion and prohibit fraud, and yet we are saying, yes, that 

we might have laws, but that is not good enough. We are just going 

to make it illegal altogether. 

Could you—I mean, I would like to understand the benefit of 

why we are doing this. 

Mr. LOCKHART. I certainly agree with you that we don’t need to 

make life more difficult for the housing market at this point. I 

think you are right on there. On the other hand, we also want to 

make sure things are done on a safe and sound basis. 

The mortgage broker can take an appraisal ordered by one bank 

and use it for the other banks. That is certainly— 

Mr. MILLER OF CALIFORNIA. It is a propriety appraisal in many 

cases, where they prohibit that package from being shopped. 

Mr. LOCKHART. As I understand it, the bank regulators do permit 

the transfer of that— 

Mr. MILLER OF CALIFORNIA. Well, they permit them, but the 

banks donate necessarily, is the problem. They paid for the appraisal, the bank did. That is like I am not allowed to go to use— 

I am not trying to interrupt you. I am saying I am not allowed to 

go—without authorization, I am not allowed to use somebody else’s 

appraisal because somebody paid for the work product. 

Mr. LOCKHART. Yes, you will have to get another appraisal from 

another bank. There may be some occasions where more than 

one—another bank will order its own appraisal. Unfortunately, 

there is a little extra friction in the system that could happen. 

The idea was that in too many cases, brokers were getting inflated appraisals during that period that so many things went 

wrong in the mortgage market. And I think it is— 

Mr. MILLER OF CALIFORNIA. Well, let me back up. What went 

wrong in the mortgage market was GSEs did a great job of bundling mortgage-backed securities for years. They really did. 

Mr. LOCKHART. Yes. 

36 

Mr. MILLER OF CALIFORNIA. And if a loan that they bundled went 

bad, they would replace that loan. And then a lot of these other private sector lenders said, that is a really good idea because look at 

all the money coming from Wall Street. 

And they started making loans, just forgoing normal underwriting standards and appraisals and to see if a person had a job. 

I mean, we can go back to predatory versus subprime and we can 

really define what went wrong in this marketplace. And I can 

blame the lenders who made that amount of business today who 

made a fortune bundling mortgage-backed securities, making loans 

that were not even junk bond quality because they never even confirmed the person had a job. 

But I don’t want to go back and blame my local mortgage broker 

and Realtor who didn’t participate in that fraudulent act and say, 

perhaps there are a few bad apples out there, so let’s overturn the 

entire bucket. And I am not trying to argue with you. I just—I 

don’t think we have thought that particular process through. 

I think we are lumping—and I agree there was a lot of fraud. 

But I can point to a few people out there who made it, that caused 

a lot of this problem, that I don’t need to publicly point out because 

a lot of them are gone today. They have been bought by other 

groups. 

But we know who bundled these, and we know who made a fortune bundling them and who left the investors holding the bag who 

bought the junk. But we seem to be going after a sector of the marketplace that was not responsible for that, and drawing—I would 

just ask you—I am not—I am trying to be polite in this. 

Mr. LOCKHART. I appreciate it. 

Mr. MILLER OF CALIFORNIA. I am not trying to argue with you, 

and I not trying to be rude and cut you off. I have the greatest respect for Mr. Kanjorski. I really do. We just don’t agree on this one 

issue. 

I would really hope that you would just take a moment and have 

somebody go back and review the process that normally took place, 

how we would deal with this. Look at the existing laws that are 

on the books if modifications need to be made as far as corrupt brokers and corrupt mortgage brokers and corrupt appraisers or whatever, that we deal with that effectively without taking and turning 

the entire cart over. 

Because an agreement between one State and your Office that 

perhaps—maybe there is a real problem in the State of New York. 

I don’t know. Maybe there is a real reason why the attorney general would come to you saying, there is such rampant fraud within 

our housing market here that we need to turn the laws over. 

Perhaps they need to shine a light on their own problem. But I 

think we have done it nationally and impacting 80 percent of the 

marketplace in a very, I think, negative way at the worst time. 

And I would just ask that you please take a moment and revisit 

this and say, did we really do the right thing? I understand what 

you were trying to get at, and I applaud you for that, for getting 

the bad apples out of the marketplace. 

But what caused us to get in this problem we are in today are 

not the people I believe who are being impacted by it. I am just 

asking you if you would take time—and Mr. Kanjorski, you have 

37 

been very generous with your time on something you hate for me 

to talk about. 

So I want to thank you for being generous and granting me more 

time. But we are good friends, and I have great respect for the individual. And Mr. Lockhart, I have a great respect for you, and I am 

asking that—and you did mention something earlier that—for 

years, I think we sent five bills to the Senate that were really good, 

fighting a strong regulator over GSEs and changing the way they 

could do business. 

We never accomplished that, but we tried hard. And I would just 

ask you to please revisit with earnestness what we have done here 

because I think we are going at the wrong people, trying to resolve 

a legitimate problem. 

Mr. LOCKHART. Yes. There is a legitimate problem there, and it 

is not just in New York State. Why the attorney general of New 

York got involved is all these securities, the ones you don’t like— 

Mr. MILLER OF CALIFORNIA. I understand that. 

Mr. LOCKHART. —were sold in New York. Fannie and Freddie 

have put out the rule, and they are continuing to look at the impact. As they get impact back and they understand better what is 

happening out there, they certainly have the ability and will continue to— 

Mr. MILLER OF CALIFORNIA. And you will look at this? 

Mr. LOCKHART. We will look at the—I mean, we don’t see it directly. We see it through— 

Mr. MILLER OF CALIFORNIA. That is what I am asking. But you 

responded to my letter, so I am going to you. You are the one who 

signed it, and I want to thank you for taking the time to respond. 

Mr. LOCKHART. There you go. We continue to dialogue. I have 

meetings now with both CEOs once a week. 

Mr. MILLER OF CALIFORNIA. Good. 

Mr. LOCKHART. Certainly, this issue has come up in the last 

month with both CEOs. And so we are continuing to dialogue as 

to what is happening out there in the marketplace, and we will 

continue to do so. 

Mr. MILLER OF CALIFORNIA. And I was elected to dialogue and 

have my picture taken. So let’s continue this dialogue. Is that fair? 

Mr. LOCKHART. Yes, but the other point you have to realize, too, 

is that the bank regulators are also looking at this issue at this 

point, and are looking at potentially making changes as well. 

Mr. MILLER OF CALIFORNIA. Yes. But see, I have a problem 

with—when you say bank regulators are looking into it, we are focusing on one sector. And I think I would like to look at all the people who are being impacted by this. 

Mr. LOCKHART. Right. 

Mr. MILLER OF CALIFORNIA. And I agree that bank regulators 

need to look at it. But if we just revisit it. And I thank you, sir, 

and I thank you, Mr. Chairman. 

Mr. LOCKHART. Thank you. 

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

Mr. Lockhart, I am sure we would have more questions from 

more members. We still have one left, the gentleman from Florida, 

Mr. Grayson, for 5 minutes. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

38 

I have here the Form 10–Q filed by Fannie Mae the month before 

it went broke. I actually went through it and read it myself personally, and I had some questions I want to ask you about that to try 

to get a sense of how this happened and what we can learn from 

it. 

Specifically, on page 112, it says, ‘‘Risk Management Derivatives,’’ and there is a table there, and it indicates that between December 1, 2007, and June 30, 2008, Fannie Mae increased its notional balances for derivatives by $255 billion. 

Can you give me some idea of the justification for a company like 

Fannie Mae increasing its exposure to derivatives at seemingly the 

worst possible time by a quarter of a trillion dollars? 

Mr. LOCKHART. Fannie and Freddie had many problems that surfaced over the last year. Certainly, in their June 10–K of last year, 

they mentioned many issues. 

The derivatives have not been an issue that actually caused any 

significant problems at the two firms. The derivatives were used to 

hedge their mortgage portfolios. 

What they do oftentimes as the market changes, is they add a 

derivative. Then rather than closing it out, they just buy one to 

counter the one that they had before. And so you get this piling up 

of derivatives. It is an issue that we have talked to them over the 

years about. Could they close these derivatives out rather than just 

buying a counter one? 

Oftentimes, they buy it with the same counterparty, and so the 

actual exposure is not that large. It is an issue that we have been 

talking to them about before the conservatorship and after the conservatorship. As I think Congressman Garrett asked earlier, there 

are ways to lessen the exposure through exchanges and clearinghouses. And that is something we are looking at, at the moment. 

Mr. GRAYSON. I wonder if it is really true that this had no effect 

on them. I mean, logically, having an exposure that as of June 30, 

2008, totaled $1,141,000,000,000 is something that could conceivably have some effect on your operations, particularly since we are 

talking about a time just 2 months before it went broke. 

Mr. LOCKHART. Right. 

Mr. GRAYSON. Why would they have such an exposure like that 

unless it were for a purpose? And for that purpose, couldn’t it easily have been something that went wrong? 

The reason I am asking this question is because if you look at 

page 78 of this same 10–Q, what you see is that for nonperforming 

single family and multi-family loans together in their portfolio, 

which was almost a trillion dollars by itself, the amount of interest 

income that they lost because of nonperforming loans was only 

$192 million and going down—$192 million versus $255 billion— 

isn’t it more likely that they got into trouble over the $255 billion 

than they did over the $197 million? 

Mr. LOCKHART. I can tell you, in retrospect, they haven’t lost significant money in the derivatives area. They are using derivatives 

to hedge their mortgage-backed exposure. 

The vast majority of those losses, the over $100 billion in combined losses in the two companies, has been not on their interest 

rate risk and their interest rate risk management, although there 

has been some there. Most of it has been in credit losses. And it 

39 

is credit losses related to the private label securities, and credit 

losses related to their books. 

When we did a very extensive look at the two companies in August, we worked with the OCC and the Fed. Also, Treasury had 

hired an investment bank as an advisor. 

As we looked through all the issues in these two companies, the 

derivatives was an issue but nowhere near the top. The key issues 

really were they had a deferred tax asset and they had credit exposures in their private label securities. The three quarterly reports 

since then have shown that is where the big losses were. 

Mr. GRAYSON. Well, again, let’s look at the information I just provided to you. If in fact the interest income that was lost—and interest income is defined in the 10–Q as, ‘‘the amount of interest income that would have been recorded during the period for on-balance sheet nonperforming loans had the loans performed according 

to their contractual terms.’’ 

If those losses are only $192 million, how could a $192 million 

loss result in a $100-billion-plus loss to the taxpayers? How is that 

possible? 

Mr. LOCKHART. What has happened since then is they have had 

to put up reserves for loans that are in default. And they have also 

had to take other-than-temporary impairments on their private 

label securities. And they booked a lot of losses related to the credit. 

The interest give-up is a very small issue. Under proper GAAP 

accounting, if you think you cannot recover, you have to take an 

other-than-temporary impairment. Or if it is a loan, you have to 

write it down to the value that you expect to recover. And that is 

what has happened. 

Mr. GRAYSON. Well, I see my time is up. But let me just ask you 

this last follow-up question, and thank you, Mr. Chairman, for your 

indulgence. 

I still don’t have a clear understanding from you about how a relatively tiny amount, like $192 million in unpaid mortgage interest 

on what is a trillion-dollar portfolio, how that possibly lead to the 

taxpayers having to shell out $100 billion plus. 

Mr. LOCKHART. They have had a lot more missed payments since 

then. It has spread throughout not only their lower quality book, 

but even to some of their prime loans. They have had to put up 

reserves. They have built the reserves very dramatically since June 

because of the deterioration in the mortgage market and the deterioration in the economy. 

We would be happy to go through those numbers with you, and 

meet with you and show you what really happened, and go through 

not only the June numbers but the September, December, and 

March numbers, and how these losses have unfortunately marched 

through their financial statements. 

Mr. GRAYSON. Well, that would be great. Thank you very much 

for doing that because, as we know, those who don’t understand 

history are doomed to repeat it. 

Mr. LOCKHART. Yes, sir. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

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

40 

Mr. Lockhart, I want to thank you very much for appearing. And 

gentlemen, I am sorry that we had two interruptions and have 

taken such a long time. But I am actually sorrier to the next panel 

because you are going to—but thank you very much. 

And we may ask your indulgence again to appear, because I 

think this is an important area where we want to spend a little 

more time on it. 

Mr. LOCKHART. Thank you for having the hearing, and we would 

be happy to come back. 

Chairman KANJORSKI. Okay. Thank you, Mr. Lockhart. 

I am pleased to welcome our second panel. Each of you will have 

5 minutes to verbally summarize your written statement. First, we 

have the Honorable Bruce Morrison, chairman of the Morrison 

Public Affairs Group, a former member of our committee, and the 

former head of the Federal Housing Finance Board. 

Mr. Morrison, welcome. 

STATEMENT OF THE HONORABLE BRUCE A. MORRISON, 

CHAIRMAN, MORRISON PUBLIC AFFAIRS GROUP 

Mr. MORRISON. Thank you, Mr. Chairman, and members of the 

committee. I appreciate the opportunity to be here, and I commend 

you on starting this process. You have correctly said that it is not 

something that can be done in a sprint. 

These institutions were built over a long period of time. Our 

mortgage industry and our secondary market have been built over 

a substantial period of time. Repairing what has gone wrong needs 

to be done carefully. 

When you are talking about an industry of $11- to $12 trillion 

of assets, you are talking about real money. And it is important 

that the future of housing opportunity in the country not suffer as 

it has suffered in the last several years because of mistakes, 

misjudgments, that have been made historically. 

I think it is important to acknowledge that the Federal role is 

not going away and cannot go away. We can pretend that this entire industry could be operated without Federal risk, without government risk, and then wait until the calamity comes. 

But you can ask, where was the Federal role in AIG? And yet 

there are all those credit default swaps which related to the housing market, among others, resulted in huge Federal intervention, 

nothing that anybody really anticipated before it happens. 

With respect to the mortgage industry, we have used the Federal 

Government to facilitate liquidity on a broad international basis for 

a very long time, and on an increasing basis. 

I think our challenge is not to try to privatize our way away from 

that, but to narrow and focus what the Federal role is, and to make 

sure that the guarantees that are being given are paid for and are 

priced up front so that the system really insures itself, rather than 

wait for the calamity and go out looking for the taxpayer money for 

the bailout. 

We have gained a lot in this country by a broad liquidity function 

that the secondary market provides. We need to preserve that. We 

don’t have to preserve the precise institutional structures that provided it in the past, but we have to protect the function. 

41 

It is important when we talk about this subject to separate who 

bears the credit risk and other risks involved in the mortgage industry, and who owns which entities that participate. A lot of the 

discussion that goes on on this subject tends to fuzz up which is 

it that the Federal Government is going to do and the private sector is going to do. Who is going to own the GSEs? 

The most important question is who is going to take which risks? 

And I think that the Federal Government should take a very narrow and catastrophic risk, that is, the risk of catastrophic failures, 

and that the private sector should take as broad and extensive a 

risk position as possible, as we are able to define. 

And I think in the past that the GSEs have taken more risk than 

they needed to take; that their role in the market, their limitations 

and their size, both of which led to the growth of the private label 

securities market in a way that undermined the entire structure. 

And it wasn’t Fannie and Freddie who led the way, but it was 

Fannie and Freddie who followed along and become part of the 

problem. I don’t think we should be drawing those lines. I think we 

need a broader structure that brings the entire mortgage industry 

under one structural scheme. 

And we can do that without implicating the Federal Government 

more. We can actually implicate the Federal Government less. But 

we are going to have the Federal Government as the ultimate guarantor, not as the guarantor of all risks but of the catastrophic risk. 

So that goes in the credit risk and the scope of the guarantee. 

And I think if you think about all of the credit risk that can be and 

will be covered by a securitization model—a first loss protection 

that mortgage insurers and others carry; a general expected loss 

coverage; the kind of structured debt that parcels out different levels of credit, but which requires a rating agency system that is not 

corrupted in the way that the system we currently have was during 

the crisis. 

You can design a model that has a narrow Federal guarantee 

that will give the kinds of liquidity, the international access to 

funding that we have had, but have the Federal Government very 

rarely if ever have to step up to the plate. And you can pay for it 

through guarantee fees from the beginning if you design it that 

way. And I think that is what we ought do. 

I think other attempts to carve up the market, that leaves the 

Federal Government’s role not that broad, will lead to regulatory 

arbitrage, as we have already had, will lead to the situation in 

which the private market brings down the whole system because 

it is not part of the scheme. 

With respect to ownership of the entities, as I say in my testimony, I really think that a serious look ought to be given to cooperative ownership of Fannie and Freddie or whatever comes after 

Fannie and Freddie. 

I think that the Federal Home Loan Bank system is a success 

in terms of its ownership structure; that it is better than the GSEs 

have been at aligning the interests of the public sector and the interests of the capital providers; that it doesn’t require government 

capital; that it is able to scale its capital to the needs of the people 

who are the customers of the entity; and that you don’t hear people 

saying, the Federal Home Loan Banks are displacing us out of the 

42 

marketplace, as you always heard about Fannie and Freddie from 

other players in the mortgage business. 

Because the people in the mortgage business own the Federal 

Home Loan Banks, and in the same way the people in the mortgage business can own the secondary market outlet and get an advantage in terms of an overall Federal catastrophic guarantee, but 

can provide both the capital and the risk-taking to make the system run. And in routine times, there will be no calling forth of any 

Federal participation beyond that. 

Finally, I would say that in thinking about your regulatory restructuring that you are going to be thinking about across a broad 

range of financial institutions, think about the mortgage industry 

as a subject for functional regulation. 

Right now you just heard from FHFA, and you have heard when 

certain issues were being raised about appraisals, about how they 

don’t regulate this or that, they would have to go to the bank regulators. The mortgage industry should not have its regulatory structure divided into so many pieces because looking just at the GSEs 

as a regulator doesn’t give you the authority nor the perspective to 

see that the mortgage industry is properly regulated. 

So think of mortgage industry regulation as a functional regulation subject. And maybe when you overall change the financial institution regulatory structure, that will mean a specialization within one agency, a coordination among several agencies. But there 

ought to be a mortgage regulator. There ought not to be just a GSE 

regulator. Thank you very much. 

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

158 of the appendix.] 

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

And now we will hear from the Honorable Susan Wachter, the 

Richard B. Worley Professor of Financial Management of the Wharton School at the University of Pennsylvania. Professor Wachter? 

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

THE WHARTON SCHOOL, THE UNIVERSITY OF PENNSYLVANIA 

Ms. WACHTER. Chairman Kanjorski, members of the committee, 

thank you for the invitation to testify at today’s hearing on the 

present condition and future status of Fannie Mae and Freddie 

Mac. It is my honor to be here today to discuss the role of secondary mortgage market institutions in contributing to the crisis, 

and what form these institutions should take going forward. 

The Government-Sponsored Enterprises, Fannie Mae and 

Freddie Mac, have historically provided a secondary market for 

mortgages. But in considering their future role, today it is most important to consider how we may develop and maintain a housing 

finance framework that supports homeownership that is sustainable and contributes to overall financial stability. 

Broadly speaking, there are three options for the future of GSEs: 

first, privatization; second, nationalization; and third, a return to 

their original Federal charter as hybrid public/private entities. I 

will outline here the pros and cons of these three approaches and 

43 

the facts that can be and should be considered as the subcommittee, and indeed, the Nation, weigh the options. 

Privatization of the GSEs in theory could have the benefit of 

desocializing the risk involved with secondary market housing finance. Critics argue that the GSEs’ special access to cheap credit 

and high leverage expose the taxpayer to large liabilities. However, 

as we have seen with the socialization of private entities’ losses, 

privatization does not exempt the taxpayer from such liabilities. 

A second option is to nationalize the GSEs and have a solely public secondary market—essentially, FHA/Ginnie Mae for everyone. 

Taxpayer exposure to large liabilities is still a risk in a solely public sector approach. There is automatic socialization of risk and no 

market check on underwriting because of the U.S. Government 

guarantee. 

The third possibility is a hybrid public/private secondary market. 

Hybrid public/private base financing worked fairly well until private label securitization arose. The GSEs found themselves losing 

market share, and shareholders pressured the GSEs to lower underwriting standards to compete while Federal regulators did not 

stop it. 

In fact, it is useful to think of privatization and nationalization 

as one choice and not two choices because nationalization effectively means that the existing FHA function is augmented with a 

larger sphere for lending, and the private sector of course would 

originate and securitize mortgages much as it did in the run-up to 

the crisis. Thus, a private label mortgage securitization would take 

off again. 

Within the hybrid public/private approach, there are various options such as cooperative versus shareholder ownership, and 

choices on regulation such as public utility approach versus a larger role for the Federal Government in governance. 

These choices are not inconsequential in system design. But 

today I will focus on the larger pros and cons of this middle ground 

versus the alternative of a Federal Government entity and GSE 

privatization, that is, a private label mortgage-backed securities 

market, which it would lead to. 

While this issue is complex and multi-faceted, the overriding 

question is: Which of these two alternatives best serves the interests of the public? The public has an interest in systemic stability 

in the financial system. Individual households are the least wellequipped to weather instability in the financial system. 

In addition to financial stability, a key public interest in mortgage finance is consumer protection. Moreover, from a household 

portfolio perspective, the long-term fixed-rate mortgage supports 

the goal of most families to at least have the option of continuing 

to live in their homes and neighborhoods. And the availability of 

this mortgage and this option depends on securitization. 

To understand why and to understand the importance of the secondary mortgage market, it is only necessary to note that historically in the United States, housing finance was provided through 

banking systems funded by demand deposits. 

In most countries today, deposit-funded banks remain the predominant, if not the sole source of funding, for mortgage borrowing. 

In countries with bank-provided mortgages, adjustable rate mortVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
44 

gages predominate, and the long-term fixed-rate mortgage is largely absent. 

As colleagues and I have shown, real estate, including residential 

real estate, has been linked to banking and financial crisis, not just 

once but many times. Real estate crashes and banking crises tend 

to occur together. In our own recent history, the savings and loan 

crisis of the 1980’s both contributed to the recession of 1990/1991 

and destabilized the financial system, requiring a Federal bailout. 

Securitization was the answer to this crisis. With the recognition 

that the stability of the banking system depended upon banks not 

lending long, financed by short-term demand deposit liabilities. 

Securitization enabled the housing finance system to continue to 

offer the long-term fixed-rate mortgage to America’s homeowners 

without endangering banks’ stability. 

Elsewhere, in the absence of secondary market institutions, 

banks provide borrowers with adjustable rate mortgages. As I 

noted, the long-term fixed-rate mortgage is essentially absent. The 

exceptions to this, besides the United States, are Denmark, and to 

a lesser extent, Germany. Both of these countries, also historically, 

had in place extensive secondary market institutions which, while 

they differ from those of the United States, do in fact link longterm funders to long-term borrowers. 

Fannie Mae and Freddie Mac grew with banks’ continued 

securitization of long-term mortgages originating and securitizing. 

The growth occurred both in the GSEs’ guarantee business, in 

which they guaranteed mortgages, bundled into pass-through securities, and sold to investors, and in their portfolio purchases. 

The growth of the secondary market coincided with a period of 

financial and economic calm in the United States known as the 

Great Moderation. Nonetheless, controversy arose over the GSEs’ 

continued growth, to a great extent focused on the growth of their 

portfolios. 

Ultimately, it was viewed that these institutions were implicitly 

guaranteed by the Federal Government. Thus, with the growth of 

their portfolios, taxpayers were liable for interest rate risk taken 

on by these institutions. Interest rate risk was and is an unnecessary risk for the GSEs to take on. 

Importantly, however, the GSEs’ Federal charters did and does 

require them to set standards for default risk, to minimize default 

risk, and to monitor and standardize contracts to do so. 

The current crisis originated not with the growth of GSEs, but 

rather with the growth of private label mortgage securitization. In 

an era of deregulation, private label securitization drove the supply 

of risky mortgages. The demand for scrutinized mortgages fed the 

demand for recklessly underwritten loans. 

As private label MBS grew in market share, so did nonstandard 

mortgages, from only 15 percent of market origination in 2002 to 

almost half of market origination in 2006. 

Lending standards were not monitored by private label 

securitization, and declined over time. Surprisingly, so did risk premiums, and Wall Street encouraged such lending despite growing 

risk. Home prices were artificially inflated due to the willingness 

of institutional investors across the world to buy these subprime 

45 

mortgages in the form of complex securities created by investment 

banks. 

As lending standards deteriorated, the demand for homes and 

the price buyers were willing and could pay was artificially driven 

up. There was no and is no regulation in place to stop the deterioration of lending standards over time, driven by the competition for 

market share for private label securitized loans. 

This lending was not sustainable, and resulted in a credit bubble 

that burst, bringing down not only poorly underwritten nontraditional loans, but carefully underwritten traditional loans as well. 

The private label securities backing these loans were not liquid, 

nor did they bear risk premium based on their issuers and the underlying loans’ originators’ balance sheets. Because these securities 

were not backed by standardized assets, they generally did not 

trade. 

Even if short sellers knew of the heightened risk and mispricing 

of securities, they could not easily trade on this knowledge. Private 

label securities were marked to model with the imprimatur of rating agencies and not to market. Thus, market discipline was absent 

and could not work. 

While it is clear that systemic risk derives from the procyclical 

erosion of lending standards, there is not yet a consensus on how 

to avoid this going forward. While no system is perfect, securitized, 

fixed-rate, long-term mortgages are critical for a stable mortgage 

system. And that robust standardized securitization is unlikely to 

be accomplished by an FHA-like entity alone. 

Chairman KANJORSKI. Professor, could we wrap it up? 

Ms. WACHTER. I will finish up now. 

In any event, standardization need not only apply to securitized 

mortgages. Financial institutions could still originate nonstandard 

mortgage products and hold onto them on their books or resell 

them to each other. This means that financial institutions could 

continue to serve as a laboratory for product innovation. But they 

would be required to retain the risk on those products. This is the 

proper niche for niche products. 

And in closing, the GSEs should not be removed from conservatorship until the economy is on a stable recovery path. They 

are currently helping to stabilize the economy through their support of the housing market. This effort is especially critical in light 

of recent discussion over government purchase of toxic assets that 

may be difficult to price and liquidate. 

In the future, the benefits for long-run stability and consumer 

protection point to the need for strongly regulated and private market disciplined entities to support the U.S. housing finance system. 

Thank you. 

[The prepared statement of Professor Wachter can be found on 

page 179 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Professor. 

And next we will hear from Ms. Frances Martinez Myers, senior 

vice president, Fox & Roch/Trident, LP, on behalf of the National 

Association of Realtors. Ms. Myers? 

46 

STATEMENT OF FRANCES MARTINEZ MYERS, SENIOR VICE 

PRESIDENT, FOX & ROACH/TRIDENT, LP, ON BEHALF OF THE 

NATIONAL ASSOCIATION OF REALTORS (NAR) 

Ms. MARTINEZ MYERS. Chairman Kanjorski, Ranking Member 

Garrett, and members of the committee, thank you for inviting me 

to testify today on the current condition and future status of 

Fannie Mae and Freddie Mac. 

I am a senior vice president for Fox & Roach/Trident LP, the 

holding company of six home services financial and relocation-related companies located in southeastern Pennsylvania. I am here 

to testify on behalf of more than 1.1 million Realtors, who are involved in all aspects of the real estate industry. 

Realtors believe that the GSEs’ housing mission and the benefits 

that are derived from it continue to play a vital role in our Nation’s 

real estate market. Had no government entity existed when private 

mortgage capital dried up in 2008, America’s housing market 

would have come to a complete halt, throwing our Nation into a 

deeper recession. 

We need only look at the current status of the affairs in the commercial and jumbo residential mortgage market to see how different things might be today in the traditional residential mortgage 

market without Fannie Mae and Freddie Mac. 

For those reasons, Realtors believe that pure privatization of the 

GSEs is unacceptable. Rather, NAR supports a secondary mortgage 

market model that includes some level of government participation, 

protects the taxpayers, and ensures that all creditworthy consumers have reasonable access to affordable mortgage capital. 

NAR is currently conducting research to determine what model 

for the secondary mortgage market would best achieve these goals. 

We will share that information with you as soon as it is compete 

For now, I would like to briefly outline a set of nine principles that 

NAR’s board of directors has adopted, and that we are using to 

guide in our research: 

1. Capital must flow into the mortgage market in all market conditions. 

2. Qualified borrowers should have access to affordable mortgage 

rates. 

3. Affordable housing goals should ensure that all qualified borrowers, including low- and moderate-income households, have an 

opportunity to realize the dream of homeownership. However, such 

goals must also promote sustainable homeownership. 

4. Financial institutions should be required to pass on the advantage of lower borrowing costs and other costs of raising capital by 

making mortgages with lower rates and fees available to qualified 

borrowers. 

5. Conforming loan limits should be based on increases in median sale prices, including higher index limits for areas with high 

housing cost. 

6. Sound underwriting standards must be implemented and adhered to. 

7. Institutions must uphold the highest standards of transparency and soundness with respect to the disclosure and structuring of mortgage-related securities. 

47 

8. There must be sufficient capital to support mortgage lending 

in all types of markets. 

9. The government must provide rigorous oversight. Simply stated, the housing market must work in all economic conditions at all 

times, and mortgage capital needs to be available to all potential 

qualified housing consumers. 

In conclusion, NAR respectfully asks that Congress and our partners in the industry carefully consider these nine principles when 

discussing a new secondary mortgage model. Working together, I 

believe we can create a solution that will serve our best interests 

now and become a model for the global real estate and financial 

markets well into the future. 

I thank you for this opportunity to present our thoughts on the 

current and future status of Fannie Mae and Freddie Mac. And as 

always, the National Association of Realtors is at the call of Congress and our industry partners to help facilitate a housing and national economic recovery. 

Thank you. 

[The prepared statement of Ms. Martinez Myers can be found on 

page 163 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Ms. Martinez 

Myers. 

Next we have Dr. Lawrence J. White, the Arthur Imperatore Professor of Economics at the Leonard Stern School of Business at 

New York University. Dr. White? 

STATEMENT OF LAWRENCE J. WHITE, ARTHUR E. 

IMPERATORE PROFESSOR OF ECONOMICS, LEONARD N. 

STERN SCHOOL OF BUSINESS, NEW YORK UNIVERSITY 

Mr. WHITE. Thank you, Chairman Kanjorski, Ranking Member 

Garrett, and members of the subcommittee. My name is Lawrence 

J. White. I am a professor of economics at the NYU Stern School 

of Business. During 1986 to 1989, I served as a board member on 

the Federal Home Loan Bank Board, and in that capacity, I also 

served as a board member of Freddie Mac. Thank you for the opportunity to present my views on the present condition and future 

status of Fannie Mae and Freddie Mac. 

The hybrid private/public model that is and was and continues 

to be at the heart of the operation of the two companies is broken 

and should not be reconstructed. Before addressing what should be 

done, however, it is important to step back and remember that 

Fannie and Freddie have been just one part of a much larger mosaic of government policies to encourage the construction and consumption of housing. 

Much of this encouragement is broad-brush, unfocused. It mostly 

just encourages people who would otherwise buy a home anyway, 

so it is really not encouraging homeownership but just encouraging 

them to buy a bigger, better-appointed house on a large lot. I don’t 

see a big social purpose in that kind of encouragement, instead of 

doing what social policy should be doing, which is focusing on encouraging homeownership itself. 

Now, Fannie and Freddie’s structure was just part of and still is 

just part of this broad brush approach through the implicit and 

now somewhat more explicit support for their debt by the United 

48 

States Government. It looked like a free lunch, something for nothing, but we have now found out just how costly this meal has been. 

So what is to be done? For the short term, it is clear. Fannie Mae 

and Freddie Mac need to continue to be wards of the United States 

Government, wards of the FHFA. The financial markets are simply 

too fragile to support anything else. 

However, for the longer term, because the model is broken, 

Fannie and Freddie should be really, truly privatized. To replace 

their implicit broad brush, off-budget effects in housing finance, 

there should instead be an explicit, on-budget, adequately funded, 

targeted program to encourage—and of course, including appropriate counseling—low- and moderate-income households who 

might not otherwise be homeowners to become homeowners, focusing on the first-time home buyer in the low- and moderate-income 

household category through targeted help on downpayments and 

targeting help on monthly payments. 

This is an appropriate function for government to really deal 

with that important spillover effect that yields benefits when a 

neighborhood is more stable, with more homeowners. 

Finally, there are some other things that the Congress could do 

that could lower the real costs of housing, make housing more affordable, that would improve the efficiency of markets and benefit 

consumers. I would hope all of the people at this table as well as 

the people on your side of the table could support these measures. 

They would include: making sure that there aren’t impediments 

to shipments of timber from Canada so that we can keep the costs 

of construction of housing lower; making sure that there aren’t impediments to shipments of cement from Mexico so that we can keep 

the costs of constructing housing lower; leaning on the States and 

localities to relax unduly restrictive zoning that would otherwise 

keep the costs of property higher and make it hard to build lower 

cost housing; and leaning on the States and localities to undo restrictive building codes that inefficiently cause the costs of constructing housing to be higher. These are all things that could really make housing more affordable. 

Thank you again for the opportunity to appear here before the 

subcommittee. And I will be happy, of course, to answer questions. 

[The prepared statement of Dr. White can be found on page 186 

of the appendix.] 

Chairman KANJORSKI. Thank you, Dr. White. 

Next we have Mr. Michael Berman, vice chairman of the Mortgage Bankers Association. Mr. Berman. 

STATEMENT OF MICHAEL D. BERMAN, CMB, VICE CHAIRMAN, 

MORTGAGE BANKERS ASSOCIATION (MBA) 

Mr. BERMAN. Thank you, Mr. Chairman. 

Every part of the real estate finance industry was deeply impacted by the financial crisis which led to the conservatorship of 

Fannie Mae and Freddie Mac—large and small lenders, servicers, 

investors, multi-family lenders, and most importantly, consumers. 

A smoothly functioning secondary mortgage market is not only important for our industry but for the entire economy. 

Despite their financial situation, the GSEs currently participate 

in over two-thirds of single family mortgage transactions and about 

49 

75 percent of all multi-family mortgage transactions. While the 

FHA also facilitates a significant share of residential mortgages, 

the GSEs currently are the prevailing force in the mortgage market. 

In addition to falling housing prices and an unprecedented foreclosure crisis, the GSEs face severe management challenges. At the 

same time, they are being used as instruments of public policy. 

While MBA supports the temporary use of the GSEs in this manner, this is an unsustainable and artificial business model. We are 

committed to working with you to create a new structure for the 

future. 

Before we discuss the future, we must ensure that the current 

market works as efficiently as possible. For example, the credit facilities established by Treasury for the GSEs expire at the end of 

this year, as does Treasury’s authority to purchase GSE mortgagebacked securities in the open market. We must ensure that these 

important programs are extended at least until the East Coast recovers. 

Congress should also help make mortgage credit more available 

and affordable by permanently raising the GSE loan limits. The 

higher loan limits have benefitted consumers, but because they are 

temporary, investors have been hesitant to purchase high-balance 

loans. 

This dilutes the full benefit of higher loan limits because liquidity has artificially restricted them. Ultimately, consumers are 

forced to pay higher interest rates on their loans. 

After the conservatorship was announced, MBA convened a council of mortgage finance experts from every part of the real estate 

finance industry to examine these issues. The Council on Ensuring 

Mortgage Liquidity, which I am privileged to share, has identified 

the key ingredients of a functioning security market and established a set of principles for you and the policy community to consider when debating how to rebuilt the secondary mortgage market 

in the future. 

Our approach has been to examine the issues so that stakeholders could assess options in a measured and thoughtful way. We 

agreed early to avoid an overly prescriptive approach, and instead 

to assess the market and present alternatives, which we plan to refine in the coming weeks and months. 

I have attached to my testimony a white paper on this issue that 

has been cited as one of the more helpful compilations of options 

available today. This paper presents a set of building blocks to aid 

in understanding and discussing the merits of various market 

structures. It also lists and begins to describe nine alternative models for channeling government support to the housing finance system. 

I have also attached to my testimony a set of guiding principles 

based on the key considerations mentioned in the white paper. The 

scope of these principles is the entire secondary market, including 

responsibilities of the private market participants as well as the 

role of the Federal Government. 

I hope to address our principles at greater length during the 

question-and-answer period. But let me close with a few thoughts 

to help guide the policy discussion moving forward. 

50 

First, secondary market transactions should be funded by private 

investors seeking market returns who understand, accept, and are 

held accountable for the risks that they take. 

Next, in order to attract consistent levels of private capital from 

a wide range of investors, the MBA believes that there is a role for 

an explicit Federal Government credit guarantee on mortgage-related investments in the core single family and multi-family products. There is also a clear government role as a liquidity backstop 

in times of market distress. 

Finally, a careful, measured approach should be adopted so that 

current markets are not further destabilized. Safeguards should be 

established to ensure a smooth transition from the present to whatever future model is developed. 

Thank you for the opportunity to appear before you today, and 

I am happy to answer questions that any of you may have. 

[The prepared statement of Mr. Berman can be found on page 85 

of the appendix.] 

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

And next, and last, we will hear from Mr. Robson of the Robson 

Companies and chairman of the board of the National Association 

of Home Builders. Mr. Robson? 

STATEMENT OF JOE ROBSON, ROBSON COMPANIES, AND 

CHAIRMAN OF THE BOARD, NATIONAL ASSOCIATION OF 

HOME BUILDERS (NAHB) 

Mr. ROBSON. Chairman Kanjorski, Ranking Member Garrett, and 

members of the subcommittee, I too am thankful for the opportunity to be here and testify today. 

The housing GSEs, Fannie Mae, Freddie Mac, and the Federal 

Home Loan Banks are viable components of the housing finance 

system, providing liquidity to the mortgage markets and supporting the flow of credit to meet affordable housing needs. 

Fannie Mae and Freddie Mac recently have encountered severe 

problems, and are currently operating under conservatorship under 

their new regulator, the Federal Housing Finance Agency. 

The Federal Home Loan Bank system has also experienced 

stresses which, while considerably less intense, have affected its capacity for mission pursuit. 

NAHB believes that the housing benefits that the GSEs have 

provided in the past, and their significant roles in dealing with the 

current financial system’s problem, clearly demonstrate the need 

for Federal Government support for the secondary mortgage markets. There is broad agreement, however, that Fannie Mae and 

Freddie Mac will not be able to emerge from conservatorship without alteration in their current structure. 

While NAHB believes the liquidity and affordable housing mission must continue with Federal Government backing, the primary 

objective is a system that assures that the continued availability of 

affordable housing credit, that facilitates healthy housing markets 

and consistency in satisfying community housing needs. Therefore, 

NAHB looks forward to discussing different models for achieving 

that objective. 

As the credit crisis has worsened, Fannie Mae and Freddie Mac 

have tightened underwriting standards and increased loan delivery 

51 

fees at the same time their combined market share has increased, 

and now represents nearly 75 percent of the single family market. 

The continual ratcheting up of delivery fees and tightening of underwriting standards has swung the pendulum too far, denying 

credit to viable buyers. NAHB urges the repeal of these obstacles 

to help to increase mortgage affordability, enhance policymakers’ 

attempts to reduce foreclosures, and help the country get back on 

the road to economic recovery. 

Last year, NAHB housing finance task force recommended a permanent Federal backstop to the housing finance system in order to 

ensure a consistent specially of mortgage liquidity as well as to 

allow rapid and effective responses to market dislocations and crises. 

The current crisis has clearly demonstrated that the private sector, unaided, is not capable of consistently fulfilling this role. The 

task force concluded that the Enterprises should not be transformed into fully private companies because such companies could 

not be counted on to provide liquidity in times of crisis or to consistently address affordable housing needs. 

And they should not be converted to Federal Government agencies because such entities would be burdened by government red 

tape and would lack the resources and ability to respond effectively 

to market developments and housing finance needs. 

NAHB’s task force recommended that Fannie Mae and Freddie 

Mac be recast, retaining Federal backing but limited primarily to 

providing credit enhancement of mortgage-backed securities. Some 

portfolio capacity should be permitted to accommodate mortgages 

and housing-related investments that do not have a secondary outlet, although Fannie Mae and Freddie Mac should have the flexibility to support the mortgage market under the types of conditions 

we are currently experiencing. 

Specific principles for restructuring the housing finance system 

are outlined in my written testimony. 

In closing, NAHB urges that any changes to the role and structure of the GSEs not proceed until the current financial turmoil 

passes, and that the markets return to more normal conditions. It 

would be extremely difficult, if not impossible, to restructure 

Fannie Mae and Freddie Mac when they are so intertwined in ongoing efforts to address the deepening financial morass. 

NAHB looks forward to working with you to develop an effective, 

safe and sound, and reliable flow of housing credit under all economic and financial market conditions. 

Again, I thank you for the opportunity to testify today, and I 

would be happy to answer any questions. 

[The prepared statement of Mr. Robson can be found on page 169 

of the appendix.] 

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

Listening to all this testimony here today, I have sort of come to 

the conclusion that maybe we should go back to basics. I want to 

pose just some basic questions, if I may. 

Who says that the government should have a role in ownership 

of real estate? I mean, I hear some arguments posed and form 

sometimes questions or opinions, that the private sector and the 

private marketplace can take care of it. Is there anybody on this 

52 

panel who agrees that we do not need government involvement in 

real estate? 

[no response] 

Chairman KANJORSKI. Unanimous consent. I do not know if I am 

going to ask for party registration. 

It seems to me that there is a little bit of an analogy—not clear, 

but a little bit—of what happened in the late 1920’s and what happened most recently in the real estate bubble and burst, and that 

is that greed, to an extent, caused people to overinflate and create 

a false value that kept on feeding on itself, to the extent that just 

as the boiler shops did in the 1920’s with securities that did not 

have the financial worth behind them in the ultimate end, the real 

estate did not have the ultimate end. 

Fortunately or unfortunately, I sat here and watched this fever. 

And I remember quite well having Alan Greenspan before us not 

too many years ago, about 5 years ago, and I posed a direct question to him. I think we have a tape of that; I think I will play that 

at my retirement party. 

[laughter] 

Chairman KANJORSKI. And I asked him whether or not he had 

any fear whatsoever of the real estate bubble, and he said, ‘‘Absolutely not.’’ This was in 2005. And it could not cause a problem. 

They had it all handled and managed and analyzed. 

Now, I have a lot of respect for Mr. Greenspan’s economic capacity and ability to calculate economics. But he certainly missed that 

one. And it seems to be the story today that we always miss the 

one at hand. 

And then somebody in their testimony used those horrible words, 

‘‘So this will never happen again.’’ Could we knock those words out 

of our vocabulary? It is going to happen again regardless of what 

we do. It is just in another form or another method. 

Now, the question is: Do we owe some loyalty to the private market, that government should stand behind these things? And if, in 

fact, it is necessary—you know, one of the methods I was thinking 

about here, if we pay the average people just a few percentage, 

maybe 10 or 20 percent more, in wages and income in this country, 

we would not have a problem. You would think that because it is 

a difficulty in some of these people in honoring their commitments. 

Now, on the other hand, we do know that some people, regardless of the amount of money they have, they always overbuy, overshoot. But what is the role of government? Are we to put a label 

of teaching responsibility through government action? Yes, Dr. 

White? 

Mr. WHITE. Yes, Mr. Chairman. I have been thinking about your 

earlier question as well as this one. And I didn’t raise my hand before because there is a role for government in housing. But I think 

it is a much more limited role than in fact we see government playing. It ought to be dealing with the true social spillover effects, the 

positive externalities, to use an economist’s term, that comes with 

homeownership. 

There is a role for encouraging innovation. After all, it was 

Ginnie Mae, an arm of the Department of Housing and Urban Development, that was the first securitizer of home mortgages. 

53 

Freddie Mac was a fast second a year later, but it was Ginnie Mae 

that was first. So there is a role for government to play. 

But markets can be terrifically efficient in allocating resources. 

I think we are all appreciative of that. And I believe that there is— 

yes, there is room for government, but it is a much more limited 

role. We ought to— 

Chairman KANJORSKI. I did not ask whether there is room for it. 

That seems to say that we want to compete. As a member of the 

government, I do not want to compete. The only reason I vote for 

housing is I want people to have good housing to live in. And if 

they cannot otherwise do it, I would not give them a penny. I 

mean, I would not support any— 

Mr. WHITE. There are better ways: by funding direct transfers 

rather than trying to lean on housing markets. By broadly subsidizing housing, all we do is encourage inefficiency in housing 

markets. We end up investing too much of our income, too much 

of our total capital stock in housing, not enough in productive physical capital, not enough in social capital, not enough in human capital, that could help people earn higher income. 

Chairman KANJORSKI. We have two more activists here, so we 

want to get to them. 

Mr. MORRISON. Mr. Chairman, you will always get the answer 

from the economists that, you know, if you appropriate the money 

directly and you target it most narrowly, that will be the best outcome. And yet our political system doesn’t really work that way. 

And we have been much more successful in providing fundamental 

benefits that work for the society as a whole when they work for 

the whole society. 

And it is really that you can just compare how successful our Social Security program is compared to targeted income support that 

only goes to the worthy, or those things that are most needy. And 

the fact is that we gain public support for a broadly successful 

intervention and a necessity like housing when it is broadly shared. 

And that doesn’t mean that the targeted interventions that Dr. 

White is suggesting aren’t good ideas. But our basic access to housing for individuals, both multi-family and single family, need an ultimate liquidity backstop to make it most affordable and most 

broadly available. 

And that can be done with a minimal government risk and a 

maximum private sector operation and risk-taking. It is not the 

system we have because certainly Fannie and Freddie took on 

much more risk and much more power than they needed to take 

on. But it can be redesigned so that you get minimal government, 

but something that is broadly available and has broad political support, as the system has had. 

So I think we should be careful of not facing up to the political 

realities of how we get the best overall result. You and I both have 

worked for years on what goes on in the committee on specific targeted matters. We have limited success. The broadly available benefits have broad political support. 

Chairman KANJORSKI. Thank you, Mr. Morrison. 

Doctor, and then I have to get to my friend. But we are going 

to get a lot of time because I do not see a heavy population here. 

Doctor? 

54 

Ms. WACHTER. We need mortgages for homeownership. I think that is obvious. People can’t put down $200,000 or $300,000. We 

need mortgages. We need government to set the rules for a mortgage market. If we don’t have a secondary market, we will have 

short-term variable rate mortgages. Many crises in other countries 

have come from that system. And of course, our savings and loan 

crisis came from that system. 

Thus, we need a secondary market. If we have a secondary market without standards, we have a private label securitized system. 

I am not calling it a market because it is not a market. Rather we 

actually did not have a mortgage market. In order to have a market that works, you need to have the structure, the rules of the 

game, set out for the market players. 

In the private label securitized market, heterogeneous mortgage 

securities were not traded. Thus we did not have the discipline of 

a market. The heterogeneity itself was a way of hiding the true 

costs and prices, both to investors and to borrowers. 

Chairman KANJORSKI. Thank you, Doctor. I have another couple 

of questions myself, but I am going to allow my friends here on the 

other side to be heard. Mr. Garrett? 

Mr. GARRETT. Mr. Chairman, thank you. Thank you to the panel. 

And I appreciate your opening comments as far as some basic questions. When you said, is there a role for the government here, I 

thought your next was going to go—and everybody concurred. 

Is there a constitutional basis for the Federal Government here? 

I know we have a professor. Anybody want to cite the constitutional basis for the Federal Government intervening directly or indirectly in assisting someone to buy a House? 

Mr. WHITE. I am not a lawyer, and I never try to practice law 

without a license. 

Mr. MORRISON. It is the commerce clause. 

Mr. GARRETT. That commerce clause, we can do just about everything. I am not exactly sure why we have 50 States any more, actually, since we had that. 

But also on a broader note, is there—we sort of had this discussion back when things were going well in the housing market, and 

the past Administration would oftentimes be championing the fact 

that things are going well in the housing market, and the percentage of homeownership was always going up? 

And some of us who would hear from those in the rental community and construction trades and what have you would say, well, 

you know, there is another trade out there as well. And how about 

us? 

And so the question would be: Is there a target number that we 

should be looking at and saying, this is what we are trying to get 

to in homeownership, that when we reach 65 or 68 or 69 or 70 percent—we are never going to get a 100 percent homeownership 

rate—that we have reached the approximate number that we 

should be striving for in homeownership, realizing that there will 

always be some people who have to rent and there will always be 

some construction guys out there and investors who say, we should 

be building multi-family housing? 

Ms. MARTINEZ MYERS. Our view on that, I think, would be that 

if you limit—if you decide that once we get to a 75 percent homeVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
55 

ownership rate, we should stop pushing that button, also says that 

you would stop pushing the button that allows people to create 

wealth through homeownership. 

And homeownership creates so many other opportunities for people and families and the government because there is a higher paying of taxes, there is greater investment in the community, and all 

those things that you would sort of limit its capability. 

So in my view, if you are going to limit the homeownership rate 

by saying, oh, once we get there, that is good enough, you are also 

saying you would limit the possibilities of what it could mean to 

the— 

Mr. GARRETT. Now, I am not going to put words in his mouth. 

But Dr. White might say that there are other ways to create 

wealth in this country other than homeownership—is that something we are—we might go down that road? 

Mr. WHITE. I was going to say that in the last 3 years, it hasn’t 

been a creator of wealth, among other things. 

Mr. GARRETT. Yes. There you go. 

Mr. WHITE. Yes, it was, for previous decades. Look, I don’t know 

what that number is. It can’t be 100 percent because it is clear: 

Homeownership is not for everyone. It requires a relatively steady 

income. It requires budgetary discipline. It requires an understanding of the obligations you are taking on. 

There are, as Ms. Martinez Myers just indicated, positive consequences for communities. That is why we want to be encouraging 

it. But, you know, within limitations, and for sure the very broad 

brush approach mostly doesn’t encourage homeownership. It mostly 

just encourages people who would otherwise buy anyway to just 

buy a bigger house with five bedrooms rather than four, four bathrooms rather than three, on a bigger lot. Where is the social value 

in that? 

Mr. GARRETT. Right. 

Ms. WACHTER. This deregulated environment did not encourage 

homeownership. Contrary to what Dr. White said, homeownership 

rates have declined in the last 3 years. Homeownership rates were 

at the maximum in 2004. And since 2004, homeownership rates 

have declined in this country. 

What is important is a mortgage market that works, not only for 

homeownership but also for multi-family housing. A mortgage market that works supports multi-family options as well. 

Mr. GARRETT. Did you comment on recourse loans in your testimony with regard to—I guess you talked about the Danish system? 

Ms. WACHTER. I would be pleased to talk about that. 

Mr. GARRETT. Just a sentence because I don’t have much time. 

Their system has recourse loans. Right? 

Ms. WACHTER. That is correct. 

Mr. GARRETT. We generally don’t. 

Ms. WACHTER. That is correct. 

Mr. GARRETT. Which is better? Which works better? 

Ms. WACHTER. Well, certainly recourse is decided by the States. 

And I do think we can have a viable system that is consistent with 

financial stability with non-recourse. We had it for decades. It is 

only with the growth of the private label mortgage-backed securiVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
56 

ties that we have had the financial instability that we have seen 

the last few years. 

Mr. GARRETT. Okay. I will go to Mr. Morrison. Really quick, 

though, with regard to the private label, what I hear is it didn’t 

work because, in part, we didn’t have all the rules and regulations 

in place so you would have all those problems. 

But if we come up here with all the right rules and regulations 

in place for the private label marketplace, could we see that with 

one of my pet projects, which you heard before, the covered Bond 

situation? Could we see those combined to basically expand the 

level that we need for a secondary market and the— 

Ms. WACHTER. I am sorry, Congressman. I may not be understanding your question completely. 

Mr. GARRETT. Sure. 

Ms. WACHTER. But my understanding of the Danish mortgage 

system is actually it is not that different than our GSEs. 

Mr. GARRETT. Mr. Morrison? 

Mr. MORRISON. Yes. Mr. Garrett, I am a proponent of recourse. 

I think recourse is an important part of a good system. And there 

is no reason you can’t have recourse of various structures. 

Recourse is actually wrung out of our system by Basel I capital 

rules, which made a transferred asset with recourse look exactly 

the same as a retained asset in terms of capitalization. And that 

is really why we have a non-recourse market. 

And we could have a recourse market if we designed the capital 

rules sensibly to measure the risk. So you can have a recourse market, and it is one option for ways for the private sector to bear the 

risk. And it is not the only model; it can be a part of a model. It 

can be a mixed model. 

So I would support your notion. Covered bonds are no magic— 

Mr. GARRETT. Right. 

Mr. MORRISON. —vehicle. It is another way of putting certain 

amounts of collateral behind your credit guarantee. So it is a way 

for the originating institution to stand behind it. 

The question at the end of the day still is: Where does the liquidity come from? The system as a whole. And what kind of liquidity 

do you get for those bonds versus bonds which have some kind of 

guarantee on them? 

And you can do both. I don’t think we are really at war with each 

other on the options. I think it is a question of maximizing the benefit in the end. 

Mr. GARRETT. Right. And I will close on this, then, is that we are 

hopefully coming up with a solution. And in light of your comments 

on the political realities, some great sage one said, ‘‘Don’t let any 

great crisis go to no good use.’’ 

Mr. MORRISON. Right. 

Mr. GARRETT. We are going to try to use this crisis to come up 

with something that actually works. 

And one last comment is is that I know you made a comment to 

Mr. White’s comment as far as—and I appreciate your thought as 

far as targeting the money. And you are suggesting you can’t always target, and you gave the example of Social Security being the 

broader system that really works, as an example, of course. 

57 

But we know that within a decade or so, Social Security is broke. 

And so that may not be the best example of saying—giving us a 

system that is really working well across-the-board. And targeting 

health care systems or targeting things might actually be— 

Mr. MORRISON. Whatever system you have, you have to pay for 

it. 

Mr. GARRETT. Yes. 

Mr. BERMAN. If I may respond to an earlier part of your question, 

with respect to multi-family— 

Mr. GARRETT. Yes? 

Mr. BERMAN. —in that instance, and I happen to be a multi-family lender, Fannie, Freddie, FHA—that system today as well has 

become totally reliant on the GSEs. Over 75 percent of lending 

today in the multi-family sector in through the GSEs. 

And so it in part points to another role of the government, which 

is to smooth out times—certainly times like this, when we are in 

crisis. But also it is not just when there is a 100-year flood. But 

between those times, to create a stable system where there is always liquidity in those markets for both multi-family and for single 

family. 

Ms. MARTINEZ MYERS. I wanted to add to that as well. And I 

guess to go back to some of the original questions around the role 

and why the government should continue to play a role, I guess 

when you look at real estate in general, the industry, and we 

looked at it honestly and said all the various sectors of the industry 

combined represent, what would you say, 20 to 25 percent of our 

GDP? 

I would think the government would have an interest in preserving and keeping a healthy industry because it is so much of our 

GDP. 

Chairman KANJORSKI. Mr. Manzullo. And after you get your reservation, if you guys do not mind, we will open it up to the three 

of us to throw questions back and forth and sort of make it a 

roundtable panel because I think we could get some interesting responses that way. 

Mr. Manzullo? 

Mr. MANZULLO. Well, I want to thank you guys for sticking 

around. I had some other things to do, but I called my wife and 

I said, these people have been here all day, and it is a very interesting and tremendously important topic. 

I have been listening to the testimony going on here, and this is 

very interesting. Ms. Martinez Myers, on behalf of the National Association of Realtors, you want to have this hybrid. And Dr. White, 

you say no hybrid. Let’s let the market forces determine everything. 

But the real mess has to do with the fact that people bought 

homes who couldn’t afford them in the first place. Isn’t that correct? 

Mr. WHITE. Certainly. In many instances, that has to have been 

true. 

Mr. MANZULLO. I mean, that is what made the loans go bad, is 

they closed on these loans, the so-called cheater loans, and the— 

58 

Mr. WHITE. But it is because everybody was drinking the KoolAid that housing prices can only go up. And if housing prices can 

only go up, it is never going to be a problem. 

Mr. MANZULLO. Right. But even under the Fed, the Fed had the 

authority, has the authority, to do, among other things, two things. 

Number one, the Fed can govern the instruments. And number 

two, it can set forth underwriting requirements. Okay? 

So the regulator that could have stopped all of this was already 

in place. And it wasn’t until December of 2007 that the Fed did 

this top to bottom review and came to the incredible decision that 

you can’t buy a house unless you can afford to buy it. 

I was stunned when the testimony came forth. And then again, 

that testimony came forth in October of last year. But the requirement is not effective until October of this year. 

And I am listening to your testimony and see the tremendous 

angst that goes on from the builders, with Mr. Robson, to the Realtors and the mortgage folks in between. But, I mean, if somebody 

had just—if the Fed had said, look, you can’t sell a house to somebody who can’t afford it—I mean, the regulatory agency was in 

place. Don’t you think that would have stopped this? Yes? 

Ms. MARTINEZ MYERS. If I may comment, because your comment 

that says that all of this is only because people got loans they 

couldn’t afford to pay. And I know that in the light of our conversation around the GSEs, I think that we need to kind of step back 

a moment and say, okay. For many, many years, decades, the 

GSEs did a really great job at providing affordable product that 

was sustainable. 

And in fact, their foreclosure rate was something less than 1 percent. So for years they did a very good job at helping to grow homeownership, particularly among low- to moderate-income folks. 

Now, their biggest crime is probably diverting from that and buying those bulk loans with some assets and loans that were not the 

kind of loans— 

Mr. MANZULLO. Under pressure from both parties. 

Ms. MARTINEZ MYERS. That’s right. They diverted from what 

they normally would do. So I think when we are sort of using the 

hammer to sort of hit them over the head for that action, I think 

everybody has to take a little responsibility for that. 

And I think the industry has to take some responsibility because 

there is no doubt—and I think Chairman Kanjorski said—there is 

a lot of greed out there. The fuel got hotter. People kept selling. 

People kept pushing. People thought it would continue. People took 

loans thinking that they could flip the house or sell it and make 

a profit. And when it stopped, it was not a good story. 

So I think there are lots of different factors that contributed to 

that. Some people themselves—I mean, a lot of people who have 

been homeowners for years refinanced their house, took out that 

equity, used it for things unrelated to their home, and the market 

changed, and guess what? Now their house is worth less. 

Mr. MANZULLO. But, you know, there are—there have been, in 

the past 20 years, periods of time when people paid ‘‘X’’ amount for 

their house, and then the houses have fallen in value. You have 

seen it happen here in northern Virginia. 

59 

But they just hang on, and then 5, 6, 7 years later they recover. 

And, you know, that is a lot different than whether or not they 

could afford the house when they bought it in the first place. 

But what I don’t understand, and maybe somebody here can clue 

me in, why did the Fed sit back and do nothing? Does anybody 

want to take a stab at that? 

Mr. MORRISON. I think it is a very good question. I think the 

Federal Reserve fed this crisis in two ways. They fed this crisis by 

keeping interest rates low for an excessive period of time, and they 

didn’t discharge their regulatory responsibility with respect to the 

subprime market. 

Those things I think you are absolutely right about, although it 

doesn’t do us much good to be right about that. 

Chairman KANJORSKI. Whoa, whoa, whoa. Let me break in here 

a second. What obligation does the Federal Government have to do 

anything? You are the guys on that side saying, stay out of our 

bedroom. Now why do you want us to get into all your business? 

Mr. MANZULLO. No, no, Mr. Chairman. What I was saying is that 

we are looking for a new regulatory system that will— 

Chairman KANJORSKI. Not really. Not really. We are looking 

really for the answer of why do we get ourselves so involved, create 

systems that fail— 

Mr. MANZULLO. Right. 

Chairman KANJORSKI. —and then we end up blaming the person 

who was not originally part of the transaction? 

Mr. MANZULLO. Well, no. But— 

Chairman KANJORSKI. Your indication here is the Federal Government had a responsibility to see that prices were not too high 

or— 

Mr. MANZULLO. No, no, no. 

Chairman KANJORSKI. What was the Fed supposed to do? 

Mr. MANZULLO. No, no. The Federal Reserve has the authority 

to—they could have stopped the 2/28 mortgages and the 3/27 mortgages. And the Federal Reserve could have said, look, we have 

some very basic underwriting requirements that when you buy a 

house, you have to have, you know, a minimum of 5 percent down 

or some other type of mortgage insurance, etc. 

I am just saying that those—that the means by which these 

subprime mortgages could have been stopped—because they were 

too easy; the credit was too easy—that regulatory process was already there. It just wasn’t used. That is what Mr. Morrison just 

said. 

Chairman KANJORSKI. You know, I think you all convinced me at 

this point we have to prevail upon the Speaker and the Leader of 

the Senate to convene a committee to determine what caused this 

thing. If we think 2/28 mortgages caused this thing, no wonder we 

cannot solve this thing. 

It has nothing to do with it. It is minuscule. Who testified earlier, Mr. Lockhart, about the $200 million in lost interest on a $100 

billion loss. It is minuscule. Our problem is why are we accepting 

the presumptions that we have a role to play, a committed role, a 

have to play? And why are we blind to what really happened? 

60 

And I have a suggestion. I did the—got here a little earlier. You 

know, our severeness in the real estate breakup occurred in the 

last 4 years. 

Mr. MANZULLO. Right. 

Chairman KANJORSKI. And it is when securitized mortgaging left 

government-regulated entities, went to Wall Street, and Wall 

Street discovered a way to sell crap for a AAA rating, and did. And 

they sold it all around the world. 

And the only reason we felt obliged to go in and buy that crap 

from around the world is it looked like it had a Good Housekeeping 

seal of approval of the United States of America. And we were too 

embarrassed to recognize we stole this money all around the world 

with crap. 

Mr. MANZULLO. No. I agree. I mean, crap is crap. But the— 

Chairman KANJORSKI. Well, then, why do we not identify who 

put that crap together? It was the private— 

Mr. MANZULLO. Mr. Robson wants to clear up this crap. 

Mr. ROBSON. Well, I wish I could. 

[laughter] 

Chairman KANJORSKI. It helps things grow. 

Mr. MANZULLO. Mr. Chairman, are we in the informal portion of 

the hearing now? All right. Okay. 

Mr. ROBSON. There are a number of issues, and I don’t want to 

claim that I am the expert on how what is whole crisis came. But 

I think it goes to the point of—I think if you have too much government or too much private side, there can be a problem. 

There needs to be checks and balances. And I am not going to 

get into whether the Fed could have stopped it, or whether they 

could or would have or anything else. But I think there are a number of issues. 

If you look back where the private sector, the private mortgage 

security started, it was really because there was a failure of FHA 

to a certain extent, that they had not monetized. They had not kept 

up with a number of—really, kind of providing mortgages on the 

low end of the market. 

The private sector stepped in and started offering a lot of things 

that FHA was not able to do because of government red tape and 

a lot of bureaucracy that was there. That kind of started the whole 

ball rolling. Certainly— 

Chairman KANJORSKI. We can cut that red tape real fast by taking away any tax consequences of letting interest be deducted from 

income. Would you recommend we do that? 

Mr. ROBSON. No, I wouldn’t. 

Chairman KANJORSKI. Why not? 

Mr. ROBSON. As far as what? 

Chairman KANJORSKI. I will bet I can identify three people at 

that table who would disagree with doing that because you get an 

advantage in your business with it. You have bought interest an 

advantage. 

I am not castigating it. I vote for it. I think it is a good principle 

to get private housing out there. But everybody sitting at that table 

and everybody in this country is pushing their own self-interest, 

and have extended to the point it took the system down. 

61 

Now the question is: How do we get out of it? I am trying to suggest that let us not get out of it by redoing what we did before. 

Mr. ROBSON. And that is to my point. I mean, GSEs were—their 

primary responsibility was liquidity. I mean, it wasn’t necessarily 

guaranteeing. It was providing liquidity because those of us who 

remember the days when you had a savings and loan, you couldn’t 

get a new loan until they either sold them or you got new deposits 

in. 

The whole liquidity question changed the mortgage finance system of this country. And the new system, whatever way—forget 

about how we are going forward. A joint private government system—and I would say start with the Federal Home Loan Bank, is 

a good place to start. 

Mr. MANZULLO. Well, that is because the banks are shareholders 

in it. They eventually would be the losers if their loans went bad. 

Mr. ROBSON. And they have skin in the game as owners of that 

bank system. 

Mr. MANZULLO. No, but Dr. White, you were on the board for 

that, weren’t you? 

Mr. WHITE. It was a different time, but that’s right. Part of the 

responsibility of being a board member of the Federal Home Loan 

Bank board was overseeing the Federal Home Loan Bank system, 

as well as Freddie Mac, as well as regulating the savings and loan 

industry. 

Mr. GARRETT. But would that give us the problem that you were 

talking about before, of a subsidization that just is even more obscure than what we have today? 

Mr. WHITE. Well, I mean, it is the same implicit guarantee that 

supports the Federal Home Loan Bank debt as is supporting the 

Fannie and Freddie debt. It is the same—the Federal Home Loan 

Bank system is a GSE as well. 

The mutual ownership hasn’t prevented a number of the banks 

from having their financial difficulties—not as serious as Fannie 

and Freddie, but still, they are suffering their difficulties as well. 

Chairman KANJORSKI. That gets you in trouble. Good regulation 

and open regulation will tend to subside excess. Is that correct? I 

mean, I am a great supporter of the Home Loan Bank system. Mr. 

Morrison knows. But we know a few Federal Home Loan Banks 

that started to really get into serious trouble. If they had not been 

reined in by the regulator at the time, we would have been bailing 

them out, if we are not already. 

And we have seen that in all of our financial institutions. But the 

problem really goes to excess, is the argument I am trying to make, 

that—you know, if you went back to the values that you are not 

trying to get a free lunch—not you but we, the American people. 

If we are not trying to get a free lunch, if we are not trying to 

find pie in the sky over something that does not cost us anything, 

we will start evaluating things at their real value, and that is all 

we are going to pay. And if you are going to be a cosigner or a supporter of that, that is all you are going to support or cosign for. But 

we are always pushing the envelope. 

There was a great gentlemen, this morning on the Secretary of 

the Treasury. It went through his purchase of his home in Westchester County, New York. Did anyone hear that, by any chance? 

62 

You know, he bought a $1.7 million McMansion and in a very short 

period of time had to sell it. And it showed what the drop of value 

was and how it went underwater very quickly for him. 

But drive out in Virginia and look at the McMansions that are 

out there. And I think we need to start asking the question: Where 

are these people making all this money to buy all these 

McMansions? And they are not. They are getting it from institutions that government-supported or underwritten, are they not? 

Unless there are an incredible amount of millionaires that I am 

not aware of in this country, it seems to me they are expending a 

great deal more for a piece of real estate than they should in rational terms. 

Do you find that to be the case, Mr. Robson? 

Mr. ROBSON. Those sorts of homes, I mean, if they are the 

McMansions, wouldn’t be part of Fannie and Freddie anyway. 

Chairman KANJORSKI. I agree. I agree. I am not— 

Mr. ROBSON. Those are going to be the private label mortgages. 

Chairman KANJORSKI. And are some of those underwater or not? 

Mr. ROBSON. Sure. 

Chairman KANJORSKI. And why should they be under? You 

know, here is a question I really—going to the private sector, I am 

very impressed with all of the home builders, the Realtors, all of— 

but I have to ask the question: Did you, any of you, see this happening 3, 4, 5 years ago as some of us did? 

And some of us fought the question that—you know, I remember 

with embarrassment this committee passing an amendment to reduce the requirement—I think it was the FHA requirement, reducing it from 3 percent to 1 percent or zero on the downpayment. 

Does anybody remember that just recently? Actually doing it at the 

time, the market was starting to collapse because of these ‘‘crap 

mortgages’’ that were out there? 

Now, some saw it here and some made a question about it. Did 

any of you in the industry see that, and did it not bother you? 

Okay. What did you—did it bother you? 

Ms. MARTINEZ MYERS. Actually, the Realtors testified before this 

committee about predatory lending in 2004. 

Chairman KANJORSKI. Yes. But I am not talking about predatory 

lending. That is not necessarily predatory lending. Predatory lending is a much higher price on a piece of real estate than it is worth 

according to a legitimate appraisal; and then a high price of interest to be paid that should not finance a piece of property that expensive. 

I am talking about just a simple question: Did you not see the 

real estate excesses that occurred in this country in probably the 

last 4 or 5 years? 

Ms. MARTINEZ MYERS. We put out brochures in 2005 and 2004 

to help the industry and the consumers understand how to buy 

mortgages, and to prevent them from buying unsuitable loans. We 

talked about— 

Chairman KANJORSKI. So all the smart people did not buy the 

loans, and all the stupid ones did? 

Ms. MARTINEZ MYERS. No, no. I mean, at the end of the day, we 

have to face it. Whether people buy homes—well, people only buy 

63 

homes once every 7 years, on average, I think, in this country. And 

they never become experts in the process. 

And we know that as people in the industry. And we constantly 

have to educate them around what is available, what they should 

be watching for, and to watch out for predators who are out there 

giving them more mortgage and more promises than they probably 

should have been involved in. 

We also tried to push for FHA reform, as Mr. Robson said earlier, in 2004. 

Mr. GARRETT. But you also pushed for higher conforming loan 

limits. And so for those people who were buying those McMansions, 

and even though a $700,000 house is still a McMansion in most 

parts of the country. 

Ms. MARTINEZ MYERS. Well, except only in high-market areas because affordability was outpacing the ability for a buyer to get into 

a starter home at that point. Incomes weren’t increasing at the rate 

that housing was increasing. But— 

Mr. GARRETT. A $700,000 house, even in New Jersey, I mean, 

they are still pretty darned nice houses. 

Chairman KANJORSKI. That is not a starter home. 

Mr. GARRETT. It is not a starter home. 

Ms. MARTINEZ MYERS. Well, it is not. But in the State of California, it would be a starter home—$500,000. People could not get 

into the State of—not today, but— 

Chairman KANJORSKI. That is economic discrimination. Maybe 

they should not be living in California if they cannot afford it. 

[laughter] 

Ms. MARTINEZ MYERS. But I think that the industry knew. The 

industry started—I can tell you at the National Association of Hispanic Real Estate Professionals, we started to talk to them about 

the changes that were coming on as well. So the Realtors have 

been very involved in trying to alert the brokers to protect their 

customers and to push for reforms. 

Chairman KANJORSKI. How about the home builders? What do 

they do? They stopped building. 

Mr. MANZULLO. I have a question. 

Mr. ROBSON. You know, the private—it was really the private 

label mortgages that funded the McMansions and a lot of this, and 

the exotic stuff. I mean, Fannie and Freddie didn’t fund exotic 

mortgages. 

Chairman KANJORSKI. No. Quite frankly, they did not. They 

ended up buying the private stuff, and they ended up, you know, 

helping— 

Mr. ROBSON. Unfortunately, yes. 

Chairman KANJORSKI. Right. 

Mr. ROBSON. I mean, they bought the stuff they wouldn’t underwrite. 

Mr. GARRETT. So should the FHA be raising its downpayments, 

then? 

Mr. ROBSON. Down payment? From 31⁄2 percent? 

Mr. GARRETT. Yes. 

Mr. ROBSON. I think in order to promote people to get into a 

home, I think they ought to pay something. 

64 

Mr. GARRETT. Should they be tightening up—you made the comment before that part of the reason why we—part of the reason 

people weren’t going FHA before was because of the darned red 

tape, which some people could construe that as being underwriting. 

Mr. ROBSON. Well, it was red tape and not keeping up with technology. I had a meeting with former Commissioner Montgomery 

last year. They were still hiring people who knew Fortran. And this 

was last year. 

Chairman KANJORSKI. Were doing what? 

Mr. ROBSON. Fortran. This is a 40-year-old computer programs. 

And as of last summer, they were still using Fortran computers. 

Mr. GARRETT. So just as to the underwriting, I mean, Director 

Lockhart was here before, and I think he mentioned it yesterday, 

that—and I guess you probably know the numbers—is that the default rate on FHA loans is beginning to spike up as well. 

So some might say, hey, that is like our first warning sign that 

we might have some problems over there that we all should be 

looking at. And so call it red tape or—I understand the computer 

stuff and what have you. But we should be tightening these things 

up over there before we create a whole new problem. Anybody 

agree? 

Mr. MANZULLO. I have a legitimate question down here. 

Mr. GARRETT. That’s a legitimate question. Should we be tightening things up with the FHA despite the fact that it may have a 

dampening effect—right? I mean, if you tighten things up, it may 

have a dampening effect on what you guys do. But would that be 

a prudent thing to do? 

Ms. MARTINEZ MYERS. Well, I am not sure it would be a prudent 

thing to do at this time since we are trying to absorb as much of 

those foreclosed properties and the inventory that is in the market 

to get things going again. 

But I believe Secretary Donovan has just said that FHA is doing great, and that they expect to see a profit of $1.6 million this year. 

So— 

Chairman KANJORSKI. That is only because we made the markto-market rule. 

Mr. MORRISON. Mr. Garrett, I think you are right to ask questions about where FHA is going. So you had better look at FHA for 

sure. 

Chairman KANJORSKI. Let me ask you this: Are we just going to 

be putting a patch on a tire as we come out of this? Or are we 

going to get the opportunity to focus and really make fundamental 

corrections to the system? And is that possible? 

Now, Professor, you had mentioned non-recourse loans? I am not 

quite up on my real estate law. Are you talking about the principle 

that you cannot go back for excess assets against the owner? The 

Pennsylvania rule. 

Ms. WACHTER. Yes. That is what I understood the Congressman 

to be asking. I don’t know if that is what he is asking. 

Chairman KANJORSKI. Right. Well, let me ask you about that 

principle. Where did that come from, that you can throw the keys 

in and walk away? In my State, you cannot do that. You throw the 

keys in and they say, okay, where is your car, your firstborn, and 

everything else you own? 

65 

Ms. WACHTER. It does vary by State. 

Chairman KANJORSKI. Yes. It varies by State. And did anybody 

do a comparison as to the foreclosure rate in Pennsylvania, relative 

to California or almost any other State that has a recourse rule? 

It is very low. When I sat on a bank board, a foreclosure of 1⁄2 of 

1 percent was huge because people did not want to give up their 

trucks or their guns. They like guns in Pennsylvania. 

Mr. GARRETT. But that is when you were patching tires, too. 

[laughter] 

Mr. MANZULLO. I have a question that I would like to ask Ms. 

Martinez Myers. 

I looked at your testimony, along with the testimony of everybody else, including the Libertarian to your left. And you talk 

about wanting this hybrid. Okay? Well, apparently in today’s economy in the United States, any business is subject to being taken 

over by the Federal Government. 

We have had several hearings here on systemic risk, and when 

Mr. Geithner testified before this committee—I believe it was in— 

gosh, I am not sure when it was. It was in January—and he talked 

about this great super-regulator that would be over all the companies that could pose a systemic risk or perhaps a moral hazard. 

And a moral hazard really is a teetotaler who drinks a beer, because nobody could define these terms. 

But I guess what bothers me is, you know, in the old days, you 

got a mortgage, you went to the bank, and the bank held it. And 

the mortgage was securitized by an appropriate ratio of demand 

deposits. And the money was simply set aside to cover the mortgage in case there was a problem on it. 

And then we lost that great personal contact. But my question 

to Ms. Martinez Myers is: You talk about having a system that is 

fluid and liquid and that works. But you also make the statement 

that you want to make sure that money is available during tough 

times, and only the government can make that possible, as Dr. 

White gives us his big smile on that. 

Would you explain that? And Dr. White, could you respond to 

that? 

Ms. MARTINEZ MYERS. I guess you are asking me to explain why 

we feel that way. Well, the government has proven, through the experience with the GSEs, that through their existence, we were able 

to have liquidity in the market in good times and bad times. When 

things are tough in bad situations, they pull their money back, 

they don’t make it available, and the market gets unstable. 

We are looking to make sure that we can continue to help people 

sell their homes, help people buy homes in any kind of market because people are going to have housing needs regardless of what 

the market is doing at any given time. 

I mean, we have situations. If you look at the example in the 

commercial mortgage scenario and the jumbo residential mortgage 

scenario, those are not guaranteed by the U.S. Government. 

Mr. MANZULLO. That is true. 

Ms. MARTINEZ MYERS. Those folks, right now there are people 

who are in trouble, say, in the jumbo market who are looking to 

refinance their house. So let me give you an example. 

66 

You are somebody who has made a good living. You have a partner who loses a job. Suddenly you can’t make this big payment 

anymore. You have one of those exotic loans. You want to go and 

try and refinance it. Now your house is worth less. And it is not 

guaranteed, and you don’t fit into the program that the President 

has put out there. And there is no guarantee, and you can’t refinance it because there is no money available. 

So now you are going to be delinquent, when you have been trying to avoid that, and you are going to lose your house. And the 

likelihood is you are going to go into foreclosure. And there are lots 

and lots of stories like that, commercial folks who are looking to— 

their debt is coming due. 

They are trying to get them refinanced. They can’t get any liquidity in the market. There is no funding for them. And they are 

in the same boat. We are seeing delinquencies rise, and we are seeing them go into foreclosure. 

Mr. MANZULLO. So that— 

Ms. MARTINEZ MYERS. That would happen to the whole market. 

Mr. MANZULLO. Okay. That is a good answer. 

Dr. White, what is wrong with her answer? 

Mr. WHITE. Look, we do have a Federal Reserve. They are a 

lender of last resort. They are a provider of liquidity. We have seen 

just how creative Mr. Bernanke has been able to be over these past 

few years, and I applaud his creativity. I really do. I think he has 

done a spectacular job. 

At the same time, we saw that the GSEs weren’t able to step up 

when hard times hit, and in fact, they went into the ditch. And it 

is only because the FHFA now is steering them and trying to get 

them out of a ditch that now they are part of the solution. But they 

weren’t part of the solution, and were going into the ditch themselves. 

And so we do have—back to my point. We have a Federal Reserve. They are the lender of last resort. 

Mr. MANZULLO. Yes. But so you are substituting the private/public partnership that is advocated by Ms. Martinez Myers by saying 

privatize the GSEs but have Federal Reserve on a standby? 

Mr. WHITE. I do believe in there being a lender of last resort in 

the financial system. I think that is terrifically important. 

Mr. MANZULLO. Then you believe the same way she does. 

Mr. WHITE. Well— 

Mr. MANZULLO. That is okay. 

Mr. WHITE. —I think by lending— 

Ms. MARTINEZ MYERS. That is not a bad thing. 

Mr. WHITE. Well, thank you. 

Chairman KANJORSKI. Dr. White— 

Mr. WHITE. You focus it in a single entity. You don’t spread it 

out. 

Mr. MANZULLO. I have always wanted to ask a professor questions like that. And thank you, Mr. Chairman, for the opportunity. 

Mr. WHITE. I am happy to help. 

Chairman KANJORSKI. Doctor, you are just switching insurance 

companies, are you not? You are changing—making the Federal 

Reserve the insurance company to the system. 

Mr. WHITE. Well, I would— 

67 

Chairman KANJORSKI. I mean, to be sort of consistent with the 

free market system, you all should be pressing not to have the Federal Reserve as the lender of last resort. 

Mr. WHITE. Oh, no. I’m sorry. But when we do have financial crises, that is exactly when we do need a lender of last resort. 

Chairman KANJORSKI. So you do need the government? 

Mr. WHITE. Oh, for sure. For sure. And I said that before. We 

need a Federal Deposit Insurance Corporation. 

Chairman KANJORSKI. Why did you not say that when some of 

our members were here? 

Mr. WHITE. Well, and we need a Federal— 

Chairman KANJORSKI. These guys are telling me every day they 

do not need the government. We are interfering with them. 

Mr. WHITE. All right. I am with you on this. And let me say for 

the record, we need a Federal Deposit Insurance Corporation. 

Chairman KANJORSKI. Mr. Manzullo, did you hear that, that you 

guys are wrong on that side? 

Mr. MANZULLO. This hearing started out pretty boring, but it has 

really picked up in the last hour or so. 

Mr. BERMAN. Mr. Chairman? Mr. Chairman, if I may, you know, 

we have a situation today where we have a 100-year flood about 

every 10 years. 

Chairman KANJORSKI. And the government causes it. 

Mr. BERMAN. Well, no. What I would suggest is that the government can play a role in helping to smooth out those kinds of crises. 

And there is not only a role for the government as a lender of last 

resort, but there is also a role in providing ongoing liquidity for a 

core set of products for both single family and for multi-family that 

can really be the central nervous system, if you will, for the secondary mortgage market and providing that liquidity; stable pricing, which is also important for homeownership; and a stable set 

of mortgage products that the economy can be built on. 

Chairman KANJORSKI. No. I agree with you. And of course I 

sound terribly radical up here. I mean to because I want to excite 

you people. But the reality is I am getting very tired of having witnesses come in and testify, and some of my friends on both sides 

of the aisle say, ‘‘We are going to pass this special law so this will 

never happen again.’’ 

Now, none of these people are that stupid. Okay? So they know 

it is going to happen again. It has happened all the way through 

our history. The fact of the matter is, if you really look at our 

present situation, we went 50 years minimally without having a financial crisis. 

That was the first time in our history as a nation that we went 

that long; or we perhaps went 75 years. And I think everybody 

would have to admit the reason was we had good regulation until 

it went awry. 

Now, our problem is we have to get back to ‘‘good regulation.’’ 

Maybe we even have to go a little beyond that and say, we need 

to get back to good values. And that is what I am sort of digging 

you all on. 

You and I have a responsibility, it seems to me, that when we 

see somebody who is hedging the system, feeding the system, hurtVerDate Nov 24 2008 18:34 Oct 28, 2009 Jkt 052394 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 K:\DOCS\52394.TXT TERRIE
68 

ing the whole system, we have to realize it hurts us, too, because 

if they destabilize this system, all of us are going to get hurt. 

And the question is: What are we doing about it? And I don’t 

think for the last 5 years, we did a lot; certainly not enough. And 

if we go right back into repairing this, correcting some of our regulation, but we allow all these people to function out there in the 

system until they can find another way to escape responsible regulation in capitalism and it goes critical, and it has in the last 5 

years, what have we gained? 

We have gained very little. All we are doing is chasing our tail 

around the block. Maybe that is not wrong. Maybe that is how the 

system is intended to be. But I would hope after—there is a lot of 

pain, an awful lot of pain. And we don’t see it down here. 

You know, quite frankly, all of you are probably wearing suits 

that exceed the cost of most Americans’ suits. You are driving cars 

that exceed the cost of most Americans’ cars. Your kids are going 

to universities, and it is not—no, seriously. In Washington, you do 

not see the pain that you see when you go back to my district or 

you go back to Mr. Manzullo’s district. 

There are people living in this country for whom a sickness is a 

disaster. Just meals, just food, a disaster. It is a worrisome thing. 

It is not a question of educating your children; the need to actually 

not have them in school because you cannot even afford to have 

them there. 

Now, we are not making accommodation for that. Oh, we are 

passing goody acts and we are, you know, doing nice things that 

are covering it up with whitewash, if you will. But this time, my 

friend Rahm is right. A disaster should not go unused. We can fundamentally change some of this system to make it fairer, better, 

and more equitable. And in some respects, all of us are going to 

have to give a little. 

I am going to ask a question, and we have to wrap this up. Do 

not worry, though, we checked. The airplanes are not flying because of the thunderstorm, so you are all safe. 

But take a shot at us now. Republican, Democrat, Banking Committee. Give me the worst criticism you can of our failures as a 

government and as people. And do not pull any punches. 

Ms. MARTINEZ MYERS. May I? 

Chairman KANJORSKI. You may start. You seem to like to do 

that, Ms. Myers. Go. 

Ms. MARTINEZ MYERS. I am going to give you two. 

Chairman KANJORSKI. Yes. 

Ms. MARTINEZ MYERS. Okay. I think that—and I am actually 

going to do one better. I am going to say, we are going to take some 

responsibility for this, too. The FHA piece, and we have talked 

about this and have alluded to this before. 

Industry probably wasn’t pushing the FHA reform soon enough. 

We should have been talking about this in 2001, maybe when we 

started to see changes, and we didn’t. We got around to it in 2003/ 

2004. We presented it to Congress. And it sat around and sat 

around. 

And we have to ask ourselves: If we had the FHA program that 

we have today that was relevant in the marketplace, would we ever 

69 

have had the need for subprime mortgages, and would we be here 

today? I think we all have to take responsibility for that. 

The second area that I would point out to you is we have seen 

a lot of moratoriums on these foreclosed properties. We need to rip 

the band-aid off so we can start the how long because right now, 

if we keep those moratoriums—and now they are released, and we 

are going to see a big flood of real estate in the marketplace over 

the summer. There are something like 800,000 foreclosed properties that are going to hit the street. 

That is going to have an impact on our market. We have to get 

those absorbed. If we are ever going to right this market, we have 

to get those absorbed. And the only shining light on that foreclosed 

property—and it saddens me and breaks my heart; like, you know, 

I am involved in some of that business myself—that people are losing their homes. 

But the bright spot is there are a lot of first-time home buyers 

buying those homes. People who didn’t jump into that subprime 

market, people who sat on the sidelines because they couldn’t afford it, and are in there. And maybe our homeownership rate will 

get back to normal in the process. 

But we have to get that—blow that inventory through here and 

out of here for those that we cannot save instead of dragging our 

feet. No good is going to come of that. 

Mr. ROBSON. Mr. Chairman, could I— 

Chairman KANJORSKI. Mr. Robson, do you have something to 

add? I just happen to know you have a pressing engagement. 

Mr. ROBSON. I appreciate that. 

Well, two things. I think I would just follow up to— 

Chairman KANJORSKI. This is hate mail, now. You are supposed 

to give us the worst you have. 

Mr. ROBSON. One, the whole credit problem, I mean, there is a 

whole credit problem in this country. It is not just mortgages. It 

is AD&C loans on the construction side. It is commercial. It is— 

credit has completely frozen up. 

And what sprouts we are seeing in the economy, especially in 

housing, hopefully that it looks like we are maybe reaching a bottom on—at least as far as home sales are concerned, both new and 

existing. 

But if we don’t get credit flowing throughout this country— 

whether it is small business, whether it is construction of development loans or anything else—we will not have a recovery. 

And then I just echo—and some of the other things that have 

been said today earlier that—some of the questions with Mr. 

Lockhart, the appraisal problems are a very, very big issue. If we 

don’t correct some of the abuses on the appraisal problems, we will 

never recover, either. 

Chairman KANJORSKI. Very good. 

Mr. BERMAN. Mr. Chairman? 

Mr. ROBSON. If I could, Mr. Chairman? 

Chairman KANJORSKI. Yes. You are excused. 

Mr. ROBSON. Thank you very much. 

Mr. BERMAN. Two issues that I put out there that I think maybe 

we could have done better on. One is taking a more holistic approach. And there have been a number of comments about not only 

70 

the GSEs today but FHA, the banks, the private label market, and 

the rating agencies. I think if we are too focused on just one piece 

of the regulatory puzzle, it is unlikely that we will be successful in 

solving and preventing this from happening again. 

Secondly, it has troubled me a little bit that some of the members are eager to latch onto a label of a solution. I think that at 

this stage of the debate, it is absolutely critical that we focused on 

principles and that we drill down on: What kind of ownership do 

we want for the entity? 

What kind of regulation do we want? What kind of products do 

we want? Where do we want the interest rate risk to be? Where 

do we want the credit risk to be? What do we need to do for liquidity? And jumping ahead and trying to put a label on that, whether 

it is a public utility model or a coop model or a bond model I think 

is a serious mistake. 

And rather, I think, if we have a principled approach and we 

start building up with building blocks from the ground up, we will 

end up with a model that—we will figure out what the name of it 

is after we create it, as opposed to trying to latch onto a model and 

say, that is a good one or that is a bad one. 

So I would encourage us to use that ground-up principled approach. 

Chairman KANJORSKI. Very good. Shall we save Mr. Morrison or 

the professor for last? 

Ms. WACHTER. Well, thank you. If I were to criticize, going backwards, one, the consideration of lowering the FHA mortgage downpayment to zero at that moment to me was just a 13th gong of the 

clock. 

And related to that, although I have no evidence but this is hearsay, it is out there that the GSEs were being encouraged, by Congress as well, to move into Alt-A and to subprime to help support 

that market. 

Going forward, I think that Congress has to be farsighted in understanding the problems with asset bubbles. Asset bubbles are 

just as lethal as inflation and recessions. Japan was brought to its 

knees for 10 years. The Asian financial crisis affected many of the 

tiger countries for more than 10 years. 

We have seen one. We can see more. We have had a housing 

market for decades in the United States, more than that, hundreds 

of years, even, in part because we have a very elastic supply of 

housing historically. We do not have an elastic supply of housing 

any more. 

And my colleague Dr. White argues for reducing restrictions locally so we would have a more elastic housing supply. But I just 

don’t think that is in the cards for a variety of reasons, including 

concerns over the environment. And local control is simply in our 

blood 

So I don’t think that is going to happen. Therefore, like Europe, 

like Asia, we are in a different world now. We are in a world where 

housing supply is inelastic. That means we are in bubble-potential 

world. But I don’t think we can do anything about that from the 

basic regulation side. I think that means that we have to be attentive when housing bubbles are being formed. 

71 

There were those of us in academe—I was one of them—who 

said, in the real estate academe, in the real estate department at 

the Wharton School, we were in a bubble in 2006. And I wasn’t 

alone. 

And paying attention to this, and therefore to the potential for 

a major crisis when even reasonable loans are being priced at a 

point where prices aren’t going to decline 20 percent; a 20 percent 

downpayment gives you no protection under those circumstances— 

we will need to pay attention. 

Chairman KANJORSKI. Let me stop you there for a moment because I am from Pennsylvania and I have a great deal of respect 

for the Wharton School. My father, my brother, my nephew, they 

are all Wharton people. 

They do have telephones, do they not? 

Ms. WACHTER. Excuse me? 

Chairman KANJORSKI. You do have telephones at the Wharton 

School? 

Ms. WACHTER. I was not at Wharton. I did put my papers out 

there. But why wasn’t it picked up? And my understanding—and 

this is a question to which I do not know the answer; this is an 

historian kind of a question. It is not empirical. I can’t do econometrics, to answer your question. 

But my understanding is there were good models out there. 

There were people saying this. But the models were not being purchased because there was no money in purchasing those models. 

Where the money was was continuing to get the deals done. 

Chairman KANJORSKI. Did you have absolutely no faith in government, either the congressional— 

Ms. WACHTER. No. I absolutely have faith in government. 

Chairman KANJORSKI. Why did you not take the time and the effort as an academic? You know, when a professor of your standing 

calls my office, you would probably get a priority because I assume 

that you would not waste your time or my time by calling. So I am 

going go talk to you about it, whatever the issue is. 

Why did you not do that? We have a lot of lonely people on the 

committee. They would have been— 

Ms. WACHTER. Well, that is wonderful. I am thrilled to hear that 

is an option. We did publish our papers. We gave our papers at all 

of these meetings. They were in newspapers. 

There were models out that were—Case-Schiller had his models 

out there. You know, Case-Schiller is obviously out there. Mark 

Zandi was out there. Mark Zandi’s company was purchased by 

Moody’s. But prior to that, Moody’s did not use Mark Zandi’s models, which were excellent models. 

Chairman KANJORSKI. Well, going forward, use the telephone. 

Ms. WACHTER. I will. Thank you very much for the offer. 

Chairman KANJORSKI. Thank you. 

Mr. Morrison? You know, I just want to blame you. You were 

here. Why did you not cure this problem? It is your fault. 

[laughter] 

Mr. MORRISON. Well, I thought I fixed the savings and loan problem, so then I left. 

Well, I think that just to go back to the GSE question, Fannie 

Mae and Freddie Mac were a wonderful symbolic battleground in 

72 

the Congress. They either were the devil incarnate, and needed to 

be dismantled and got rid of so that the private market could function; or they were the best thing that was ever done for affordable 

housing. Without them, we would have no housing at all. 

And they were allowed to run a model which was totally 

unsustainable, a portfolio model of chasing growth stock status in 

the markets, and whatever they had to do to get there. After the 

years and years of the regulatory debate, what was most surprising 

to all the participants was that they were both wrong. 

Those people who wanted to take Freddie and Fannie down apparently thought that Freddie and Fannie were so powerful that 

they would never be taken down. And on the other hand, there 

were those who thought they were so powerful that they would be 

the cash cow forever for affordable housing. 

And what really turned out is they were a house of cards that 

collapsed because of the very model that made them appear strong, 

the growth stock model: ‘‘We can get this capital from the marketplace. We can give them portfolios, whatever it takes.’’ 

I think everybody was blind to the reality behind that. It was 

parties warring over symbols. And I think by missing that, yes, 

they were not the ones who created the private market securities. 

But they in fact created that marketplace in many ways by funding 

the AAA tranche of subprime securities early on and made that 

market go, and then everybody else followed on. 

So I think that if the debate had been more honest—in 1995, I 

had a conversation with Alan Greenspan about huge portfolios and 

the impact that they would have. And he was very concerned about 

the Federal Home Loan Banks, but not at all concerned about 

Fannie and Freddie because he said, ‘‘Jim Johnson is the smartest 

man in town.’’ 

Well, he might have been. But his legacy we see. So we should 

be watching out for smart people and maybe do our own research. 

Ms. WACHTER. But Bruce, if I may, it wasn’t that they bought 

these early on. They bought them— 

Mr. MORRISON. They did. 

Ms. WACHTER. What year did they start buying them? 

Mr. MORRISON. No. They started buying them—they funded 

Ameriquest and others in 2002/2003 by buying their AAAs. 

Chairman KANJORSKI. Well, now, Mr. Johnson was gone by that 

period. 

Mr. MORRISON. Oh, yes. No, I am not blaming Mr. Johnson. I am 

just saying that we had a lot of people who were blind to a model 

that was not sustainable, including Mr. Greenspan in 1995. 

Chairman KANJORSKI. No question about it. 

Mr. Manzullo, are you going to wind us up? I think Dr. White 

should get a crack at us, too. 

Mr. MANZULLO. No. You know, the district I represent, in 1980 

and 1981, we had 25 percent unemployment. And there were more 

people unemployed in Rockford, Illinois, during the early 1980’s 

than there were proportionally during the so-called Great Depression. 

And Americans worked their way through that. A lot of it had 

to do with the inversion of the dollar and the collapse of the ability 

73 

to sell manufactured items overseas, including machine tools, etc., 

because your district is very much like mine. 

But, you know, maybe I am thinking too simplistically here, is 

that we would not be in this problem, in this trouble, had not people bought homes that they couldn’t afford in the first place. 

And Mr. Chairman, do you know who some of the people were 

that were waving a red flag 5 years ago? It was the National Association of Realtors. They would come in the office, and of course 

they were thrilled to sell real estate and make everything. 

But I was questioning all the easy money going on, and you 

know that, and so were a lot of your Realtor colleagues, saying, this 

is great, but you just can’t keep on going on like this because somewhere along the line something is going to happen. 

Chairman KANJORSKI. I held hearings on it. 

Mr. MANZULLO. Pardon? 

Chairman KANJORSKI. I held hearings in my district. 

Mr. MANZULLO. That’s correct. 

Chairman KANJORSKI. In 2004. 

Mr. MANZULLO. That’s correct. And these are the types of signals 

that were being sent out that people like myself and you were saying, there is something wrong here. It started with the laundering 

of the books by Fannie Mae in 1990—no, in 2003 and 2004, with 

Franklin Raines and those characters taking those incredibly high 

salaries. 

And their bonuses were predicated upon the fact that they had 

to get to a certain point of profit, and they got down to the mill. 

Do you remember that, Mr. Chairman? It was mills, just so they 

could get that extra amount of money squeezed out. And we were 

screaming here. 

In fact, Fannie Mae had hired 17 lobbyist firms that were out 

there getting bogus postcards from 2,500 of my constituents saying, 

don’t change anything at Fannie Mae. We don’t want any reforms. 

And then the reforms that we wanted really were to tighten up the 

lending standards. 

But I guess we were just like John the Baptist, just crying out 

in the wilderness and no one was listening. 

Mr. WHITE. All right. I will try to be brief. It is getting late. 

If I were to offer the criticism that you invited, I would say you 

let us get way too deep into the whole housing issue. Again, there 

is a role for government. Bruce, you and I differ on this, but I have 

to speak truth to power. It ought to be a focused, targeted role. 

The broad brush role just gets us with a far too large stock of 

housing, and a far too small stock of human capital, of physical 

capital, as a consequence. That is a big cost that we have paid. We 

are paying it now in the current crisis as well. 

Let’s see. Some other things. Some small things— 

Chairman KANJORSKI. How could that have been— 

Mr. WHITE. There is RESPA. 

Chairman KANJORSKI. Yes. But how could that have been prevented? 

Mr. WHITE. Sorry? 

Chairman KANJORSKI. How could that have been prevented? 

Mr. WHITE. Well, okay. You asked. The rating agencies. 

Chairman KANJORSKI. They are the buggers. 

74 

Mr. WHITE. They are—you know, there is lots of blame to go 

around. But clearly they were one of the central parties here. And 

it was no accident that they became a central party. They were a 

central party because of financial regulation. 

Had that whole structure, and again, you could see each step 

made sense. But by the time you went down the road, you had a 

handful, a literal handful of rating agencies— 

Chairman KANJORSKI. I have to ask you: Should they have been 

federally regulated? 

Mr. WHITE. Say again? 

Chairman KANJORSKI. Should the rating agencies have been federally regulated? 

Mr. WHITE. I would argue no. But they also should not have been 

thrust into the center of the bond markets the way the bank regulators, the insurance regulators, the pension fund regulators, the 

Securities and Exchange Commission, all forced them into the center of the bond markets. And when the securitization process started— 

Chairman KANJORSKI. No. I am trying to figure out, then. You 

would have had us not have a rating agency in any way giving indications of— 

Mr. WHITE. Oh, no. No. I would have the rating agencies still 

there, but not as a mandated source of information. I want banks 

to have safe bonds. I want the regulator to work with the banks 

to have safe bonds. But it should be the responsibility of the bank 

to either demonstrate the bonds’ safety to the regulator or have an 

advisor that it can demonstrate to the regulator. 

Chairman KANJORSKI. Something like AIG Financial Products in 

London? A small operation of 400 people who have a bank, and 

have a regulator come over for a couple of weeks every year to look 

them over. And they get involved in transact counterparty positions 

of $2.7 trillion. That is what you would like that unregulated— 

Mr. WHITE. Oh, no. Heavens, no. Heavens, no. 

Chairman KANJORSKI. Well, is that not what— 

Mr. WHITE. They were running a big insurance operation and— 

Chairman KANJORSKI. Is that not what an unregulated system 

brings us? 

Mr. WHITE. If we are going to let entities get so big with so many 

counterparties, then we have to have a regulator. 

Chairman KANJORSKI. So, now, that is a good point. Then you 

would have liked us not to have repealed Glass-Steagall? 

Mr. WHITE. Say again? 

Chairman KANJORSKI. Glass-Steagall should not have been repeated? 

Mr. WHITE. No. No. The repeal of Glass-Steagall had absolutely 

nothing to do with the debacle—everything that has happened 

could have happened. 

Chairman KANJORSKI. Well, that is what allows entities to become huge. 

Mr. WHITE. Well, Merrill and Bear Stearns and Lehman and 

Morgan Stanley were all going to—and Goldman—were going to 

get huge regardless, and Citi. Citi got a little bit bigger because the 

repeal of Glass-Steagall allowed it to buy an insurance operation. 

75 

Chairman KANJORSKI. Well, I am not sure I catch your drift, 

though. Do you think the government should have had more or less 

regulation? 

Mr. WHITE. It needed to be smarter regulation. In some places 

it needed to be less, and in other places it needed to be more. For 

sure it needed to be smarter. 

Chairman KANJORSKI. That sounds like Monday morning quarterbacking. I am on the field on Saturday. We are calling the plays 

on Saturday. 

Mr. WHITE. Well, okay. In the case of the credit rating agencies, 

I have been there for about 8 years now. So I could have told you 

basically this story 8 years ago, and did—well, sorry. I was publishing it. 

Chairman KANJORSKI. Well, should they be allowed to be paid by 

their users? 

Mr. WHITE. That is something that the institutional bond market 

could figure out on their own. I don’t trust this guy because I am 

worried about his conflicts of interest. I am going to trust somebody 

else who’s business model I think is a more solid model. 

The bond market is fundamentally an institutional market, and 

those institutions can figure that out. 

Chairman KANJORSKI. For some reason I think—I am sensing 

you are putting a foot on two icebergs here. You are not being 

straight with us. Give me an image of what you want the government to do. 

We are the big government that you have a right to hack at us. 

So tell us what the right direction is, in your opinion, and then you 

are going to be held responsible for it. 

[laughter] 

Mr. WHITE. Okay. As I said, we cannot do anything radical at the 

moment. The financial markets are far too fragile. 

Chairman KANJORSKI. So you would clearly give advice to us to 

go easy. Do not speed through this and have unintended consequences. Let us get back on the recovery stage, and then be very 

serious about reforming some of these institutions. 

Mr. WHITE. For sure. And then I would privatize Fannie and 

Freddie. I would have a targeted program to be encouraging firsttime homeownership. 

Chairman KANJORSKI. So if we privatize Fannie and Freddie, 

they can do exactly what Wall Street did with their special securities that they privatized. Is that— 

Mr. MANZULLO. Well, given the size and the systemic risk, like 

it or not, we need a systemic regulator. 

Chairman KANJORSKI. Well, then you do not. You mean you want 

Fannie and Freddie privatized, but with a very stiff systemic risk 

regulator? 

Mr. WHITE. For sure. For sure. Yes. Yes. 

Chairman KANJORSKI. Well, then, all you are doing is where the 

money flows. You want— 

Mr. MANZULLO. Well, no. I think it makes a difference. 

Chairman KANJORSKI. You want the wealthy institutions to be 

making more money off mortgage securitization than they are now. 

Is that not the only difference? 

76 

Mr. WHITE. I don’t—Congressman, I don’t see it that way. But, 

you know, I think it makes—I think it makes a difference. Also, I 

would not have the kind of implicit guarantees that were—where 

everybody knew that Fannie and Freddie were— 

Chairman KANJORSKI. You think if we have a private institution the size of $5.6 trillion, that there is not an implicit statement that 

the United States Government has to come in and rescue it when 

it fails or else it brings the entire system down? 

You don’t think we made that hard vote, going back to September of last year, because we wanted to ‘‘bail out’’ Wall Street? 

You do know the circumstances of that vote, don’t you? You remember what—you know what the Secretary of the Treasury and 

Chairman Bernanke told us that famous meeting or several meetings that we had? 

That we were 24 hours away from a total meltdown of the American economy, and 72 hours away from a total meltdown of the 

world economy, that it would take us back several hundred years, 

that we did not have even the security to feed America at the time 

if it happened. I could go on to other scary things. I am not about 

to do it now. 

But you do not think we did that because we just did not want 

some rich people on Wall Street to lose their banks? 

Mr. WHITE. For sure. For sure. 

Mr. MANZULLO. I didn’t do that. 

Chairman KANJORSKI. What? 

Mr. MANZULLO. I didn’t believe it. 

Chairman KANJORSKI. You did not believe him? 

Mr. MANZULLO. It was $700 billion was supposed to buy up the 

bad assets. They still haven’t been bought up. 

Mr. WHITE. Anyway, I would be happy to expand on these. And 

I hope I can take up the invitation you offered to Professor 

Wachter. 

Chairman KANJORSKI. Absolutely. All of you. The other two left 

already, and we will send them a letter. No, do not—really. If you 

have ideas on the subject, regardless of how wacky they may sound 

or out of the normal configuration of things, do not hesitate to tell 

us. 

We are going to try and do the best we can to do some management of what has been a relatively disturbing, unstabilized system 

that we now have. And we are going to do our best. 

We are looking for the best thought process in the world, and 

that is why we asked you all to testify today, so that, one, we could 

harass you, two, we could keep you here until 7:30 at night and 

get you—you know, I am actually leading a seminar for divorce 

lawyers. Anybody has spouses you are going to get into potential 

catastrophes with at home? No. We are going to close it up now. 

I do want to thank you all very much. I hope you did not mind 

going informal like this. 

Mr. WHITE. Thank you, Mr. Chairman. 

Mr. MANZULLO. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you for appearing. And I am supposed to read something into the record now. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

77 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

Before we adjourn, the following items and statements will be 

made part of the record for this hearing: a statement from the 

Manufactured Housing Association for Regulatory Reform; a statement of the Independent Community Bankers of America; a letter 

from the National Association of Federal Credit Unions; the letter 

requested by Congressman Campbell from Mr. Cox to Mr. 

Lockhart; and an article by David Goldstein entitled, ‘‘Private sector loans, not Fannie or Freddie, triggered crisis.’’ 

Without objection, it is so ordered. 

The panel is dismissed, and the hearing is adjourned. 

[Whereupon, at 7:28 p.m., the hearing was adjourned.] 

(79) 

A P P E N D I X 

June 3, 2009 

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