U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

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

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

45–626 PDF 2009

OVERSIGHT HEARING TO EXAMINE 

RECENT TREASURY AND FHFA ACTIONS 

REGARDING THE HOUSING GSEs 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 25, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–142 

( 

(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, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

DON CAZAYOUX, Louisiana 

TRAVIS CHILDERS, Mississippi 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

September 25, 2008 .......................................................................................... 1 

Appendix: 

September 25, 2008 .......................................................................................... 55 

WITNESSES 

THURSDAY, SEPTEMBER 25, 2008 

Allison, Herbert M., Jr., President and Chief Executive Officer, Fannie Mae ... 36 

Lockhart, Hon. James B. III, Director, Federal Housing Finance Agency ......... 11 

Moffett, David M., Chief Executive Officer, Freddie Mac .................................... 38 

APPENDIX 

Prepared statements: 

Bachmann, Hon. Michele ................................................................................. 56 

Brown-Waite, Hon. Ginny ................................................................................ 58 

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

Allison, Herbert M., Jr. .................................................................................... 62 

Lockhart, Hon. James B. III ............................................................................ 67 

Moffett, David M. ............................................................................................. 83 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachmann, Hon. Michele: 

Letter to Hon. James B. Lockhart, signed by Members of Congress, 

dated September 11, 2008 ............................................................................ 86 

Article from Investor’s Business Daily, ‘‘How A Clinton-Era Rewrite Made 

Subprime Crisis Inevitable,’’ by Terry Jones, dated September 24, 2008 89 

Kanjorski, Hon. Paul E.: 

Written statement of the Massachusetts Bankers Association .................... 91 

(1) 

OVERSIGHT HEARING TO EXAMINE 

RECENT TREASURY AND FHFA ACTIONS 

REGARDING THE HOUSING GSEs 

Thursday, September 25, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 12:08 p.m., in room 

2128, Rayburn House Office Building, Hon. Maxine Waters [member of the committee] presiding. 

Members present: Representatives Kanjorski, Waters, Watt, 

Sherman, Capuano, Lynch, Miller of North Carolina, Green, 

Ellison, Wilson, Perlmutter, Murphy, Speier; Bachus, Castle, 

Royce, Biggert, Shays, Capito, Hensarling, Garrett, Brown-Waite, 

and Bachmann. 

Ms. WATERS. [presiding] The Committee on Financial Services 

will come to order. This hearing is an oversight hearing to examine 

recent Treasury and FHFA actions regarding the housing GSEs. 

I will yield myself as much time as I may consume. Let me start 

by saying that Chairman Frank and, I suppose, Subcommittee 

Chairman Kanjorski, should be joining us shortly. I think the world 

knows where Mr. Frank is today and what he is doing. 

And, of course, the hearing that we are having today is a hearing 

that is absolutely necessary based on the recent actions that 

stunned many of us with the takeover of Fannie Mae and Freddie 

Mac. 

Let me just say that when I first came to the House of Representatives, I was eager to be involved on the Financial Services 

Committee because of my concern for housing. And I was very 

pleased to learn about the mission of Fannie and Freddie and very 

pleased to work with Fannie and Freddie as we helped to find more 

ways to offer housing opportunities in communities that had been 

redlined in those days. 

I think the mission of Fannie and Freddie was a good mission 

then, and should continue to be a mission that can certainly help 

many Americans realize the American dream. I know that Fannie 

and Freddie both were criticized very strongly by many, because 

some thought that they had too much perceived support from the 

government and were able to get money at favorable rates. Some 

thought they were much too big, and still others thought that their 

mission had creeped into areas where it should not be. And so I 

can recall when FM Watch was organized and all of the politics of 

that. 

2 

And, having said all of that, we find ourselves here today talking 

about oversight of Freddie Mac. But I want to remind everyone 

that it was this committee, under the leadership of Mr. Frank in 

May of 2007 that passed out the legislation to strengthen the oversight of Fannie and Freddie. So we took into account some of those 

criticisms, and I think that this committee was certainly responsible in what it did to address some of those concerns. 

I think we were first directed towards some of the problems in 

accounting when we held some very interesting hearings about the 

accounting practices of Fannie, and then later on Freddie. I am 

hopeful that our new Oversight Committee is moving in the right 

direction. 

But let me just say first, as a Nation, we absolutely need the 

functions that Fannie Mae and Freddie Mac fulfilled in the mortgage markets to continue to be carried out. And they need to be 

carried out by an entity or entities that are committed to affordable 

housing, as we required Fannie and Freddie to be. 

How that entity or entities are constructed is something that 

Congress has to think carefully about. And I look forward to hearing from the witnesses on that issue clearly. The word ‘‘quasi’’ is 

an adjective that should probably not be applicable to the new 

structure. 

Second, in addition to preserving the critical liquidity and secondary market functions and commitment to affordable homeownership Fannie Mae and Freddie Mac undertook, we need to 

bear in mind another object lesson of this crisis. No entity, no matter how large, is an island unto itself. By this, I mean that in the 

end, as big as Fannie and Freddie were, and as solid as the underwriting standards were to the subprime and Alt-A industry, they 

could not survive the turmoil created by the utter lack of Federal 

regulation that pervaded the rest of the mortgage market. 

Therefore, any restructuring of Fannie Mac and Freddie Mae, 

however sound, will be of little impact in the absence of a complete 

overhaul of our regulatory structures. As Chairman Frank has frequently noted in recent days, this will be the top of our agenda in 

the committee next year. But I think it is important to note how 

inextricably linked it is to today’s hearing. 

With that, I will yield to—oh, you are sitting in, Mr. Neugebauer. 

I was going to call on Mr. Bachus, but you certainly are not he. 

So I will yield to Mr. Neugebauer. 

Mr. NEUGEBAUER. I am not even going to touch that. Thank you. 

You know, as we look forward to this hearing today, I think one 

of the things that we all realize is that a very stable mortgage market is the key to bringing stability back to the housing market. And 

as it has done in the past in times of credit crises in this country, 

going back to the savings and loan problems in the 1980’s, Freddie 

Mac and Fannie Mae are really one of the few—the only game in 

town in many cases for the mortgage market. And so it is imperative that we continue this process to make sure that Fannie and 

Freddie provide the opportunities that they have provided in the 

past to the marketplace today. 

But there is a new dynamic, Director Lockhart, as you know, and 

that is now the American taxpayers have a very strong stake, or 

a very big stake, a potential stake in the safety and the soundness 

3 

of these two entities. And so not only are you directing an entity 

that is providing mortgage liquidity to the market so that many 

American citizens can own homes and continue to do that, but you 

are also going to have to manage this entity in a way that we minimize any potential repercussions to the American taxpayers. 

I have been talking with some folks over the last few days about 

how these markets are performing, and I am going to be very interested to hear from you—as you have been purchasing these loans, 

securitizing them, and hopefully selling the mortgage instruments 

into the marketplace—how that is going. 

There are some other market functions that Freddie and Fannie 

have played in previous years of providing some liquidity for some 

existing product out there. I am going to be anxious to hear what 

you have done to do that. I think there are a couple of concerns 

that I know I have, and I think some of my colleagues have, is that 

where are we with, for example, the decision to—whether to fund 

any additional money or to fund any money to the affordable housing fund? 

I know that Freddie and Fannie have been generous in some of 

their giving to other entities over the years. Quite honestly, my 

personal opinion is that in a time like this, where we have two 

companies that are in conservatorship, that the dividends have 

been suspended, who all of the shareholders and—preferred shareholders—and we have an entity that is in conservatorship, that is 

not an entity that ought to be passing out money to other entities 

and affecting the overall capitalization of that company or those entities. Because, quite honestly, at some point in time, this committee and others, we are going to have to have a discussion about 

our exit strategy here. 

We have gotten the American taxpayers basically into a position 

here of having some stakeholder positions in these companies and 

it is not the intent, I don’t think, of many of us for that to be a 

long-term relationship, and that at some point in time, we have to 

determine what is the best course of action without disrupting the 

mortgage markets and without disrupting and causing angst in the 

marketplace, but at some point in time coming to some decision as 

to where we go on a post-conservatorship relationship with these 

companies. But again, I want to stress to you that I believe that 

continuing to make any distributions out of these entities is not appropriate, and I am going to be anxious to hear your thoughts on 

that. 

And with that, I yield back my time. 

Ms. WATERS. Thank you very much. 

Mr. Sherman for 2 minutes. 

Mr. SHERMAN. Thank you. This is the season of bailouts. There 

is one model of bailout that we call the Fannie, Freddie, and AIG 

model where the Federal Government takes control of the entity 

and limits executive compensation, and, at least with AIG and I believe with Fannie and Freddie, has a real upside. 

The other model is the Bush-Paulson bailout model. With that 

model, the Federal Government gets zero control of the entity but 

only takes control of toxic assets. The Federal Government has no 

serious limit on $10-million-a-year salaries, though there may be 

some limit that Bush implied he might tolerate on the bonus comVerDate Aug 31 2005 17:34 Jan 16, 2009 Jkt 045626 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\45626.TXT TERRIE
4 

pensation and esoteric formulas that are used to calculate it. But 

the $10-million-a-year salaries would continue. 

And finally, under the Bush-Paulson bailout model, the upside 

stays with the shareholders and the executives. We put up the 

cash; they have the upside. I have yet to be convinced that we 

should be following the Bush-Paulson bailout model and not looking at the Fannie-Freddie-AIG model as something to use as we go 

forward. I yield back. 

Ms. WATERS. Thank you very much. 

Mr. Shays for 3 minutes. 

Mr. SHAYS. Thank you, Madam Chairwoman. For too long, we, 

Congress, allowed Fannie Mae and Freddie Mac to play by a different set of rules than other publicly traded companies. They 

didn’t even have to disclose any basic financial information or adhere to minimum accounting standards, yet their implicit Federal 

guarantee made both enterprises quite attractive to investors. 

In 2002, I authored a bill with Congressman Markey, the Uniform Security and Disclosure Act, which would have extended Federal security and registration and reporting requirements to Fannie 

and Freddie Mac by bringing them under the 1933 and 1934 Securities Act. This bill had only 21 cosponsors—15 Republicans and 6 

Democrats. We introduced this bill again in 2003, this time with 

27 cosponsors—13 Democrats and 15 Republicans. 

Then in 2003, I introduced an amendment to H.R. 2430, the Mutual Funds Integrity and Free Transparency Act, during a Financial Services Committee markup. The amendment would have prohibited any registered investment company, particularly Fannie 

and Freddie, from using deceptive or misleading names. The 

amendment was opposed by both sides of the aisle and overwhelmingly defeated by voice vote. No one spoke in favor of it. During 

this markup, I warned that we would be back if we didn’t address 

the need to better regulate Fannie and Freddie. 

The same concerns were raised by the SEC, the Federal Reserve, 

and the Treasury Department in a 2003 report, jointly recommending the repeal of these exemptions to the 1933 and 1934 acts. 

That was in 2003. The report cited a need to provide investors the 

same basic financial and operation information about GSEs as they 

would need for any other publicly traded company. 

We also considered regulatory form in the 109th Congress, the 

year 2005 to be exact. I was an original cosponsor of this reform 

legislation which would have replaced the Office of Federal Housing Enterprise Oversight, OFHEO, and established a more robust 

regulatory authority to oversee the GSEs and their risky investment portfolios in order to alleviate the systemic risk that now has 

put the entire financial system in jeopardy. 

I recommend to all members who seem to want to criticize this 

Administration to see if they were cosponsors of that amendment 

and to see what they did to make reforms. 

Unfortunately, it was not until this year both Chambers of Congress were able to enact meaningful reform. We are here today because we didn’t act soon enough. We knew Fannie and Freddie 

were so big and so underregulated that they posed a threat to our 

economic security. 

5 

I think it is pretty clear we need to demand accountability from 

these companies for their previous actions as well as transparency 

in the future. But right now our job in Congress is to restore liquidity in the market. My only hope is we will not have Members in 

this Chamber and in the Senate act like somehow they were part 

of the reform, part of the solution, and blame someone else, when 

they weren’t there when you had a chance to act. 

Ms. WATERS. Thank you very much. 

Mr. Scott for 2 minutes. 

Mr. SCOTT. Thank you, Madam Chairwoman. So much is happening so fast here, it is almost difficult to keep up with it. There 

are so many moving parts. We are in such a terribly, terribly, challenging time economically. But this hearing is very timely. 

I have a couple of concerns as a result of the government takeover of Fannie and Freddie. I worry about the situation facing our 

community banks. Our community banks make up 85 percent of 

the lenders that hold Fannie Mae and Freddie Mae stock, and the 

Fannie and Freddie fallout is particularly affecting Main Street 

America because these community banks are the backbone of communities across the country. 

So I definitely hope we can get into that and see what this takeover means as far as that is concerned. 

I also would like to get your opinion on what this takeover means 

as far as a loss of share value of these companies. And as if that 

is not enough problems, we have the FBI looking at Fannie and 

Freddie for investigations. And as if that is not enough problems, 

there are 25 other investigations going on with Freddie and 

Fannie. So we have a real, real doosie here. 

I am looking forward to getting into this with you and I appreciate it, Madam Chairwoman. I yield back the balance of my time. 

Ms. WATERS. Thank you, Mr. Scott. 

Mr. Hensarling for 2 minutes. 

Mr. HENSARLING. Thank you, Madam Chairwoman. When you 

have a wheel in a ditch, the first thing you need to do is get the 

wheel out of the ditch, not point fingers. 

Having said that, I feel there is a little bit of revisionist history 

that I must comment upon. People who came to the Fannie and 

Freddie reform issue in May of 2008 came about a decade too late. 

I have been here for 6 years and there have been people pointing 

out the systemic risk that these two organizations posed to the 

economy for every day that I have been here. Not once did Alan 

Greenspan come before this committee and not warn about the systemic risk in Fannie and Freddie. 

I believe, one, we have to get the wheel out of the ditch; but at 

the same time, we have to look at the root cause of the problem 

that we are in today. I believe that is Fannie and Freddie, creatures born in a government laboratory, not in the competitive environment of a market economy. 

Because of that, Madam Chairwoman, I believe it would help instill more confidence in the markets if we would go to the root of 

the problem. And because of that, later today, I will be introducing 

the GSE Free Market Reform Act that over a period of time would 

return Fannie and Freddie to a competitive marketplace. It would 

end the conservatorship after 2 years. It would allow FHFA to eiVerDate Aug 31 2005 17:34 Jan 16, 2009 Jkt 045626 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\45626.TXT TERRIE
6 

ther, one, send it into receivership at that time or put them back 

into the marketplace where they would see new portfolio limits 

that would decline 20 percent each year, increase minimal capital 

requirements that would mirror those of well-capitalized banks. It 

would repeal the recent increases and the conforming loan limits 

and limit those conforming mortgage purchases that are at or 

below the area median income price. 

After such time, the GSEs would have an opportunity to renew 

this charter for 3 years. After 6 years, it would sunset. Their special privileges would be withdrawn. I think it is a piece of legislation that hopefully will be considered by the committee, and soon. 

With that, I yield back the balance of my time. 

Ms. WATERS. Thank you very much. 

I see that Mr. Kanjorski has entered the room. Mr. Kanjorski, do 

you have an opening statement? 

Mr. KANJORSKI. Let me submit it for the record. 

Ms. WATERS. Mr. Kanjorski will submit his opening statement 

for the record. 

Mr. Green for 2 minutes. 

Mr. GREEN. Thank you, Madam Chairwoman. In his absence, I 

would like to thank the Chair of the full committee, Chairman 

Frank, because he has been a champion for reform. And I would 

like to echo what the chairwoman has said about 2007 and his taking positive productive action to reform and strengthen with the 

legislation for oversight as relates to Fannie and Freddie. He truly 

has done what he could within the time that he has had the gavel 

to make a difference, and I salute him for it. 

I am concerned about restructuring of loans. There are many 

people who will not be able to keep their homes by simply extending the time to pay, by simply deciding that some forgiveness may 

take place with reference to fees that are owed while they are in 

foreclosure. 

Many people are going to lose their homes. And when I say 

‘‘many,’’ we are talking about more than a few hundred thousand. 

Many, many people. And it seems to me that restructuring loans 

is important, which is why we with FHA allowed for the refinancing that would take place when loans have been embraced by 

both the seller—the lender and the borrower, to the extent that the 

holder of the note is willing to write down the loan to the current 

market and then 15 percent, thereabout, of the current market 

value. That is a helpful means by which people can stay in their 

homes. 

The unfortunate circumstance is that there has not been enlightened self-interest on behalf of the holders of the mortgages such 

that we could see an accelerated pace. And perhaps there is one 

that I have not noticed. So I will be interested in seeing how much 

restructuring is actually taking place. That is an important thing 

to know. And I thank you for appearing today. I yield back. 

Mr. KANJORSKI. [presiding] Mr. Garrett, for 2 minutes, please. 

Mr. GARRETT. I thank the Chair and the ranking members for 

holding this important hearing today. And in light of the severity 

of the situation the country is in, I am a little surprised that there 

are not more people here for this very important hearing. 

7 

I do appreciate the Director and welcome him to the committee. 

It is good to see you again and I look forward to your testimony. 

In the wake of Fannie Mae and Freddie Mac being put into conservatorship by the Federal Housing and Finance Administration, 

I am pleased to see more and more people are coming to grips that 

the GSE model, as was set up and ran, was a failed model. That 

was acknowledged by Secretary Paulson, by Chairman Bernanke, 

and even by the former CEO of Freddie Mac, Richard Syron, as 

well, saying it was an impossible task that he had there. 

I want to take this minute, though, to thank Director Lockhart 

for two specific actions that you have already taken directly after 

the GSEs were put into conservatorship. First, I want to thank you 

for cutting off their lobbying activities. Federal Government agencies are not allowed to lobby Congress or give campaign contributions to Members. And since Fannie and Freddie are essentially 

agencies, and it has now been proven, that fact—of the Federal 

Government, they should not be donating money or influencing 

Members in regard to policy that we are considering that will affect 

on them or their new regulator. 

This, as an aside, is something that I have tried to do in the past 

and during this Congress as well, and have been rebuffed at every 

attempt to do so. So thank you for doing that. 

Second, I want to thank you for reining in the compensation that 

was supposed to be paid to the now departed executives. The government, quite honestly, should not pay executives millions of dollars in compensation when the government had to come in and 

take over the company and then use taxpayer dollars to keep it 

afloat. 

So I thank you for those two very important actions you have 

taken, and I look forward to your additional testimony. 

Mr. KANJORSKI. Thank you, Mr. Garrett. 

Mr. Ellison, for 2 minutes, please. 

Mr. ELLISON. Let me join my voice to those who agree that this 

is no time for finger pointing. It is actually time for all of us to try 

to work together to restore confidence and liquidity in the financial 

markets and the American economy. 

But one of the things that I am concerned about is that housing 

financing efforts that have resulted in giving moderate- to low-income people opportunities to be able to get into housing have come 

under attack this last week and have been blamed for being the 

problem. I want to very soundly reject that idea. I plan on asking 

you about that, Mr. Director. I was hoping to ask about it yesterday, but I didn’t get a chance to. I mean, I even heard things like 

the Community Reinvestment Act is the cause of this current crisis, even though the Community Reinvestment Act only applies to 

commercial banks, does not apply to mortgage originators, who are 

the ones that originated the overwhelming number of these 

subprime loans. In fact, the CRA probably reduced the impact of 

this problem because they limited the ability for subprime loans to 

be issued through banks because they were regulated. 

Also today, you know, we have heard quite a bit of criticism over 

the Fannie and Freddie model, and I just want to remind my 

friends that Fannie and Freddie were pretty late to the game of accepting as part of their assets these more liquid—these—what we 

8 

are calling illiquid assets today. In fact, the subprime model, which 

has been going on for a number of years, but Fannie and Freddie 

really added this as part of their business in 2005, 2006, 2007, 

which is late in the game. 

And so I just want to make it clear that part of what I want to 

make sure to do is to protect programs for low- and moderate-income people to be able to gain housing. And I personally am not 

going to just sit by and let people trash programs that have helped 

folks get into housing who have been struggling to get it. 

Fannie and Freddie, I don’t think, are failed models. The CRA 

certainly is not a failed program. These are important and good 

programs and should be protected. And if you want to find blame 

somewhere, let’s look at Gramm-Leach-Bliley. Let us look at the 

very deregulation that so many people called for and clamored for, 

and now we have seen the full manifestation of what deregulation, 

lack of corporate responsibility, put together with flat declining 

wages for the American people will bring about. It has brought 

about this. So I look forward to the debate. 

Mr. KANJORSKI. Thank you, Mr. Ellison. 

Mr. Manzullo. 

Mr. MANZULLO. Thank you, Mr. Chairman. In June of 2000, I 

gave a cadre of Fannie Mae lobbyists the heave-ho and told them 

to get out of my office; I didn’t want to see them back in my office 

ever again. I said some other things which I can’t repeat to the 

public. They had gone out, under the arrogance of Franklin Raines, 

who had siphoned off $90 million in 6 years from Fannie Mae, and 

stole the name of 2,000 of my constituents whom I represent, and 

used them to petition me against the bill that would have reformed 

Fannie Mae and Freddie Mac the way they were intended to do 

business. 

But the problem was not only did my constituents not consent to 

the use of their names in this Astro Turf lobbying campaign, but 

the very reforms that Fannie and Freddie were posing may have 

protected the very homeowners and taxpayers whose identities 

were stolen by the garbage that was running Fannie Mae at the 

time. 

In one of his first Capital Markets Subcommittee hearings on 

GSE reform in March of 2000, Congressman Baker, the author of 

H.R. 3703, said the bill seeks to improve supervision and diminish 

systemic risk now, whether they are waiting for the time of crisis 

to expose the faults of a hobbled regulatory structure. That was 8 

years ago. And through an army of lobbyists armed with foundations or fake coalitions, Fannie Mae and Freddie Mac have been allowed to continue their record of questionable business practices. 

It comes as no surprise that that type of leadership has led to 

the disaster that we have on our hands today. My constituents are 

angry. They want to know why somebody who siphoned off from 

the organization that kind of money, and now they come back asking for a rescue, and their great plan to privatize the profits into 

their own deep pockets and to socialize the risk and let the American taxpayers pick up the bill for an organization whose very purpose was to help them buy homes. 

Mr. KANJORSKI. Mr. Royce, for 2 minutes, please. 

9 

Mr. ROYCE. Thank you, Mr. Chairman. I think for Mr. Garrett 

and for Mr. Shays and for myself and for many others, this is a 

time for, ‘‘I told you so.’’ I think after 5 years of calling attention 

to this and laying out exactly this problem, this is a time to look 

into how this risk was created and why it wasn’t stopped. 

And frankly, the takeover of Fannie Mae and Freddie Mac—that 

marks the official failure of this experiment—but, you know, because of the implicit guarantee, the implicit guarantee there, these 

institutions could borrow at a lower rate in the market than a legitimately private institution. And this model led to excessive risktaking by these firms, because they didn’t have a regulator with a 

right to look into systemic risk. 

On September 7th, with their capital base rapidly deteriorating 

and with leveraged ratios 6 times higher than our depository institutions, that is how far they were leveraged, the Federal Housing 

Agency moved against Fannie and Freddie and put them into conservatorship. 

Now, while the quasi-public model was the foundation for the 

troubles that sank these two institutions, weak regulatory authority established by Congress in 1992 failed to prevent the excessive 

risk taking that many of us cautioned against. And it is unfortunate that our fears were proven correct, and this episode could 

have been prevented in 2005 when I introduced an amendment on 

the House Floor to give the regulator the necessary authority, with 

the support, by the way, of the Federal Reserve that argued for 

this. 

Mr. Shays referenced this. We had legislation to try to do this. 

And we brought the amendment to the House Floor to curtail these 

companies’ portfolios based on systemic risk. And my amendment 

was defeated, leaving the underlying legislation unable to address 

the grave risk that these institutions posed to our broader capital 

markets. 

Now, the 1992 legislation which established what was then 

OFHEO, for the first time in history placed explicit mandates on 

the GSEs, which dedicated a percentage of their business on three 

specific affordable housing goals each year, and these mandates 

skewed the marketplace by providing excessive liquidity to the 

lending institutions, making loans to individuals that could not afford them, and exposed the GSEs to a riskier class of loan. 

Alt-A loans at both Fannie and Freddie made up 10 percent of 

their business. It accounted for 50 percent of their recent losses 

earlier this year. So the move by Congress in the early 1990’s, the 

inherent flaw in the government-sponsored enterprise structure, 

the lax regulations, all enabled Fannie and Freddie to take on more 

risk than they could handle and ultimately led to their demise. 

I think Congress’ failure to pass such critical legislation over the 

years, especially since the mortgage industry began to deteriorate 

18 months ago, is one of Washington’s greatest oversights in recent 

history. And I am glad, Mr. Chairman, that we are having this 

hearing now to discuss it. Thank you. 

Mr. KANJORSKI. Thank you very much, Mr. Royce. 

Ms. Bachmann. 

Mrs. BACHMANN. Mr. Chairman, I thank you for this opportunity 

and I appreciate the severity of the crisis that we are looking at 

10 

today. In an article written by Terry Jones of Investor’s Business 

Daily he said, and I quote, Fannie Mae and Freddie Mac, even into 

the early 1990’s, with the juggernauts or would later be. 

While President Carter in 1977 signed the Community Reinvestment Act, which pushed Fannie and Freddie to aggressively lend 

to minority communities, it was President Clinton who supercharged the process. After he entered office in 1993, he extensively 

rewrote Fannie’s and Freddie’s rules, and in doing so he turned the 

two quasi-private mortgage funding firms into a semi-nationalized 

monopoly that dispensed cash to markets, made loans to large 

Democrat voting blocks, and handed favors, jobs, and money to political allies. 

This potential mix led inevitably to corruption and to the Fannie 

and Freddie collapse. The rewrite that was done back in 2000 made 

getting a satisfactory Community Reinvestment Act rating harder 

to get. Banks were given strict new numerical quotas and measures for the level of diversity in their loan portfolios. Getting a good 

CRA rating was key for a bank that wanted to expand or merge 

with another, so loans started being made on the basis of race and 

often on little else. 

The HUD Secretary at that time was Andrew Cuomo. He made 

a series of decisions, reported the Village Voice newspaper, between 

1997 and 2001 that gave birth to the country’s current crisis. These 

were changes that led Freddie and Fannie to get into the subprime 

loan market in a big way. 

Between campaign donations and between the changes in the 

rules of the Community Reinvestment Act, we have seen a dramatic impact on the current subprime mortgage meltdown. It is important that minorities have access to money. It is important that 

communities of color have access to homeownership; however, we 

need to have strong lending rules that have served our Nation so 

well. This has hurt, unfortunately, the minority community and 

communities of color even more than other communities. 

This was a well-intentioned law. I firmly believe that the Community Reinvestment Act was well-intentioned and meant to put 

more minorities and people of color into homes. This is a good, positive movement; however, the final event of this Act was to, in fact, 

remove communities of color from true homeownership and subject 

other communities to a more difficult time to receive the loans that 

they so desperately need to be able to get into homeownership. 

Fannie and Freddie, with their massive loan portfolios stuffed with 

securitized mortgage-backed paper created from subprime loans, 

are a failed legacy of the early 1990’s era. I yield back. 

Mr. KANJORSKI. Thank you very much. All members having 

sought recognition have been recognized. 

I now have a unanimous consent request that the Massachusetts 

Bankers Association statement be entered into the record without 

objection. There being none, it is so ordered. 

And now, we want to recognize our good friend from Connecticut, 

Mr. Shays. 

Mr. SHAYS. Thank you, Mr. Chairman. For the purpose of an introduction—while I hope I have some tough questions for our witness, I have tremendous admiration. He is a constituent from 

Greenwich, Connecticut—and, when you look at his biography you 

11 

just realize—a very dedicated man. He is clearly the Director and 

Chairman of the Oversight Board of the Federal Housing Finance 

Agency that regulates Fannie Mae and Freddie Mac and the 12 

Federal Home Loan Banks. 

He previously served as Deputy Commissioner and Chief Operating Officer of the Social Security Administration and as Secretary 

to the Social Security Board of Trustees from 2002 to 2006; and 

then in 1989 to 1993, under the first Bush Administration, Mr. 

Lockhart was the Executive Director and CEO of the Pension Benefit Guaranty Corporation. This is obviously a wealth of service in 

the private sector. 

He is a graduate from a Connecticut institution, Yale, and got 

his MBA from Harvard. And probably the most important thing in 

his resume, he was an officer in the U.S. Navy. We appreciate your 

service, and this is the man who is now coming to testify before us. 

Mr. KANJORSKI. Thank you, Mr. Shays. Mr. Lockhart, that was 

quite an introduction. I don’t know what you paid for it, but—if you 

will, sir. 

STATEMENT OF THE HONORABLE JAMES B. LOCKHART III, 

DIRECTOR, FEDERAL HOUSING FINANCE AGENCY 

Mr. LOCKHART. Thank you, Mr. Chairman. I appreciate that and 

I certainly thank you, Congressman Shays, and the members of the 

committee. Thank you for the opportunity to testify on Fannie Mae 

and Freddie Mac and the conservatorships. 

Before doing so, I would like to thank this committee for its efforts to pass the GSE reform legislation and create the Federal 

Housing Finance Agency, which is not quite 2 months old. Fannie 

Mae and Freddie Mac share the critical mission of providing stability, liquidity, and affordability to the housing market. Between 

them, these enterprises have $5.3 trillion of guaranteed mortgagebacked securities and debt outstanding. Their market share of all 

new mortgages originated in the first half of this year was 76 percent. 

During the turmoil that started last year, they played a very important role in providing liquidity to the conforming mortgage market which really required a very delicate balance of mission versus 

safety and soundness. It also required adequate capital. That balance was completely upset in August as house prices, credit losses, 

and markets continued to deteriorate. Without the ability to raise 

capital, they could not provide stability or liquidity to the mortgage 

market. In fact, they were adding to the instability. Their antiquated capital structures, even with the OFHEO additional capital 

requirements, were not adequate for this market. 

Rather than putting the markets in further jeopardy, FHFA decided to take action. The goal of these dual conservatorships is to 

help restore confidence in Fannie Mae and Freddie Mac in the 

mortgage market, enhance their capacity to fulfill their mission, reduce systemic risk, and make mortgages available at lower costs to 

the American people. 

FHFA based its determination for conservatorships on five key 

areas which worsened significantly over the last 2 or 3 months. The 

first area was accelerating safety and soundness weaknesses. The 

second was continued and substantial deterioration in equity, debt, 

12 

and MBS markets. The third was the current and projected financial performance and condition of each company. Fourth, they had 

the inability to raise capital or even to issue debt at normal prices, 

at normal amounts. Fifth, was their inability to fulfill that mission 

which is so critical to supporting the Nation’s residential housing 

market. 

As part of our examinations, we have supplemented our own 

exam teams with senior mortgage credit examiners from the Federal Reserve and the Office of the Comptroller of the Currency. 

These examiners corroborated our own analysis of a deteriorating 

credit environment and its threat to capital. In August, Freddie Mac reported losses of $4.7 billion over the last year and Fannie Mae reported losses over the last year of $9.7 

billion. We had finished our semiannual examination that pointed 

to significant and critical weaknesses across the board. Each company reported to FHFA and to the Treasury that it was unable to 

access capital markets and, as you know, we have been asking and 

putting pressure on them to continue to raise capital. They couldn’t 

do it, and the only way they could do it was with Treasury support. 

Without the ability to raise capital, they would have had to shed 

assets in a very weak market, which would have been disastrous 

for the mortgage market and also for the actual credit losses of the 

two companies. Therefore, in order to restore the balance between 

safety and soundness and mission, FHFA placed Fannie Mae and 

Freddie Mac into conservatorship. 

We did not take this action lightly. We consulted with Chairman 

Bernanke who was made a consultant, as you know, in the legislation that just passed. We also consulted with Secretary Paulson. 

They both concurred with me that conservatorship needed to be undertaken. 

Let me now turn to the conservatorships. First signs, despite all 

the market turmoil, are that the conservatorships are positive. I 

am pleased to say that enterprise funding cost and the spreads on 

the MBS have declined and, most importantly, home rates for 30- 

year mortgages in particular fell below 6 percent for the first time 

since January. On the first day after we announced the 

conservatorships, two businesses opened with stronger backing for 

the holders of their mortgage-backed securities, their senior debt, 

and subordinated debt. The enterprises will now have the ability 

to grow their portfolios and their guaranty books again to support 

this market. 

We were able to hire highly qualified new chief executive officers, 

whom you will be hearing from shortly, and nonexecutive chairmen. FHFA worked with the new CEOs to establish employee retention programs. In order to conserve over $2 billion in annual 

capital, the common stock and preferred dividends were eliminated. 

Critically, the liquidity, MBS investment, and senior preferred 

stock facilities with the U.S. Treasury are all in place. These facilities provide the needed support to Freddie Mac and Fannie Mae to 

fulfill their mission over the long term while giving a potential upside for the taxpayers. 

The key facility is a senior preferred stock agreement which supports all past and future debt and MBS issuances until the terms 

of the facilities are completely satisfied. 

13 

The second facility is a secured credit facility. This facility is not 

only for Fannie Mae and Freddie Mac but also for the 12 Federal 

Home Loan Banks. 

Another element of the Treasury’s financing plan is to hire investment managers to purchase Fannie Mae and Freddie Mac 

mortgage-backed securities. 

Separately, we also support President Bush’s and Secretary 

Paulson’s comprehensive approach to relieving the stress on other 

financial institutions and markets. 

I can promise you that FHFA will continue to work expeditiously 

on the many regulations needed to implement the new law. 

Importantly, the new legislation also adds affordable housing and 

mission enforcement to the responsibilities of safety and soundness 

regulator. While FHFA has had these responsibilities for less than 

2 months, we are placing a high priority on them. As companies’ 

operating under conservatorships, I have already instructed each 

new CEO to examine underwriting standards and pricing. Fannie 

Mae and Freddie Mac will continue to be active in multifamily 

lending, which is really a critical component of affordable housing. 

Over the last year, we have been challenging Fannie Mae and 

Freddie Mac to be more creative on foreclosure preventions. They 

have responded and are doing so. 

The new legislation established a Housing Trust Fund to increase and preserve the supply of affordable, rentable housing and 

increased homeownership for very low-income families. I recognize 

the importance of the Housing Trust Fund to many Members of 

Congress. Enforcement of the affordable housing goals is now an 

FHFA responsibility as well. The very ambitious goals set by HUD 

back in 2004 do not reflect today’s market. Even if these goals are 

not obtainable, however, each enterprise will develop and implement ambitious plans to support the borrowers and markets targeted by those goals. 

In conclusion, the decision to appoint a conservatorship for each 

enterprise was a tough but necessary one. They can now play their 

correct role of being part of the solution and not part of the problem. With the new legislation and your support, we can restore confidence in the enterprises, and build a stronger and safer future for 

the mortgage markets, homeowners, and renters in America. 

Thank you. I would be pleased to answer questions. 

[The prepared statement of Director Lockhart can be found on 

page 67 of the appendix.] 

Mr. KANJORSKI. Thank you, Mr. Lockhart. 

Mr. Lockhart, how did your assessments of the capital position 

of Fannie and Freddie change in late August and early September? 

Mr. LOCKHART. We were assessing Fannie and Freddie continuously for over the last year. In July, we started an examination in 

combination with the Federal Reserve, the OCC, and others. We 

also were continuing our semiannual examination. The combination of those exams showed that the capital position of these two 

companies was continuing to deteriorate and there were significant 

questions about loss reserves and other than temporary impairments, which going forward we felt would impair their ability to 

serve their mission. 

14 

Mr. KANJORSKI. What was the primary cause for their deterioration of capital? 

Mr. LOCKHART. It was a series of issues, but the primary cause 

was changes in the housing market and, in particular, the business 

they put on their books in 2006 and 2007 that was of lower credit 

quality than previous years. 

Mr. KANJORSKI. You are not saying it was the deflation of real 

estate, but it was the bad business choices made in 2006 and 2007? 

Mr. LOCKHART. It was a combination. Certainly, the housing 

market hurt all lenders, and in reality they probably had better 

books than many other lenders. But still, just the magnitude of 

$5.3 trillion of exposure on a very thin capital base meant that 

base could not support the potential losses. 

Mr. KANJORSKI. If the real estate market had not deteriorated in 

the last few years, and if the bad practices had not been carried 

on in 2006 and 2007, do you have an opinion as to whether or not 

Fannie and Freddie would have continued to exist as they did prior 

to the conservatorship? 

Mr. LOCKHART. Well, certainly 2 or 3 years ago they were doing 

fine before the housing market turned down. They always had, as 

you know, and I was talking about, for the last 21⁄2 years the need 

for reform. They needed to be strengthened and they needed a 

stronger capital position. 

Mr. KANJORSKI. So you have an opinion that this failure—if I recall, my memory says we did the GSE reform starting in 2003 and 

we passed it in the House; it would go to the Senate and linger 

there, and we passed it 2 years later and another 2 years later, and 

it lingered until this last summer. If, in fact, we changed and went 

into that world-class independent regulator that you now are, 

would that potentially have given you the strength and capacity to 

save these two organizations? 

Mr. LOCKHART. If the legislation was similar to the one that was 

passed this year— 

Mr. KANJORSKI. Yes. 

Mr. LOCKHART. —it certainly gave us the kind of capital controls 

we needed. It certainly gave us the ability to control the size of the 

portfolios. I think those were two of the very important things. 

Also, it gave us a lot more power in the safety and soundness side 

that we didn’t have either. It is certainly a much stronger bill. If 

we would have had it 5 years ago, maybe we wouldn’t be having 

this hearing. 

Mr. KANJORSKI. So potentially when Congress failed to adequately respond to everybody’s comments that we needed a stronger world-class regulator, and we tried to do it for 5 years and failed 

for 4 of those 5 years, and then finally passed the same bill that 

had been sent to the Senate before, if we had done that earlier 

when we originally sent it over—we are not trying to find out who 

may have been at fault here, we will leave that up to the press and 

the public to determine that—but it is reasonable to assume that 

Fannie and Freddie would have succeeded in remaining in place 

without a conservatorship? 

Mr. LOCKHART. Certainly, that would have helped. I mean, obviously, this market is a tougher market than anybody has seen in 

a long, long time. Certainly we had much stronger capital requireVerDate Aug 31 2005 17:34 Jan 16, 2009 Jkt 045626 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\45626.TXT TERRIE
15 

ments. If their portfolios were smaller, if they had taken less risk, 

they would certainly be much better off than they are today. 

Mr. KANJORSKI. I have just asked a lot of questions of you, but 

let me go to just one other one. Appraisal independence is very important. How will the conservatorship affect the agreements with 

Attorney General Cuomo? 

Mr. LOCKHART. We have been working with the Attorney General 

on those appraisal standards and we are very near finalizing them. 

We hope within the next couple of weeks to put them out. They 

have been modified somewhat. They still really show that we 

strongly support the independents. Because it has taken us longer 

than we expected to do it, we would expect to actually not have the 

January 1st implementation date. We expect to slip that in a 

month or 2, or maybe 3. We expect to have the appraisal standards 

out very shortly. 

Mr. KANJORSKI. Very good. Seeing that I have exhausted my 

time, I will recognize Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you. Director Lockhart, when you look 

at Fannie Mae and Freddie Mac’s business, obviously they were in 

the portfolio business and in the securitization business as well. 

When you go—and you were assessing their losses, can you give me 

a breakdown of what percentage of the losses were attributed to 

portfolio and what were attributed to the securities that they had? 

Mr. LOCKHART. At the moment, their major losses are related to 

credit and they have credit risk in both their portfolios and their 

mortgage-backed securities. Historically, the portfolios also took on 

a significant amount of interest rate risk and they have shown over 

the last year some relatively large losses from interest rate risk as 

well. 

The portfolios also took on what are called private label mortgage-backed securities. These AAA securities that they invested in 

were underlying mortgages that were subprime and Alt-A mortgages. Those have shown significant declines. In the case of 

Freddie Mac in particular, they have shown something like a $20 

billion loss on those securities. In Fannie Mae, it is more like an 

$8 billion loss. 

So, there were big losses from credit in both their mortgagebacked security portfolios and their guarantys. 

Mr. NEUGEBAUER. When you look at those private-label securities, do you have the infrastructure in place to really unwrap those, 

look inside those securities, and begin to give somewhat of a picture of, you know, what the underlying credit risks to Fannie and 

Freddie are? 

Mr. LOCKHART. Yes. We have been working with both of the companies and we have actually been asking them to do cash flow 

analysis down to the individual mortgage. We have also been working with other providers of that kind of software to look at the risk 

inherent in those private label securities. 

Mr. NEUGEBAUER. So, do you have any indication of what the 

contingent liability is? In other words, if you have a capital structure of ‘‘X,’’ and then when you look inside these securities and look 

at both their interest rate risk and their credit risk, do you have 

an idea of what the potential liability is, and does that exceed the 

current assets of those entities? 

16 

Mr. LOCKHART. The companies disclose every quarter a mark to 

market of those portfolios. As I said in the end of June, they were 

about $20 billion underwater at Freddie Mac and about $8 billion 

at Fannie Mae. Obviously, these markets continue to move and 

there has been deterioration since then. If you look at the balance 

sheets of both companies, they still have more assets than liabilities. As you know, that is the test for the Treasury to put in 

money. 

Mr. NEUGEBAUER. Now, one of the issues that is being kicked 

around outside of Freddie and Fannie is the Treasury getting into 

a similar business that I guess Fannie Mae was in and making a 

market or purchasing some of these private-label securities. Is 

there the infrastructure within Freddie Mac and Fannie Mae not 

necessarily to purchase those, but to help provide some idea of 

what is exactly inside those securities and to help establish a fair 

market value of those? Because one of the things, as you know in 

the marketplace right now, everybody is looking at these individual 

securities and each one of them is an individual, if it is private 

label, it is an individual security and it depends on what kind of 

mortgages, where those mortgages were originated. And so to be 

able to determine an accurate value of that security, you have to 

kind of take the wrapper off and look inside. 

Do these entities have the ability to help facilitate that? 

Mr. LOCKHART. Fannie and Freddie have internal models, but 

also they have been working, as we have, with external experts in 

the field. I assume the facility that Secretary Paulson is proposing 

would also be using these many external experts. There certainly 

is the ability to go mortgage by mortgage and look at the characteristics in the mortgages. To get an accurate price, there is no such 

thing in this marketplace. But you can certainly get some ranges 

of prices that are indicating the underlying economics. 

Mr. NEUGEBAUER. I think one of the key determination factors 

here is to get a feel for what was the underlying value of the collateral under those securities because the bottom line is that in the 

event of a default, you are going to go back and look at the collateral, and not just the mortgage collateral, the mortgage itself, but 

the collateral underlying the mortgage. 

Are you able to go that deep where you can tell, for example, in 

Sacramento, California, we have a loan in this portfolio; and it may 

be current or it may be 30 days delinquent, but also the prices in 

that particular zip code for resale are down 20 or 30 or 40 percent— 

Mr. LOCKHART. Certainly, people are working on those kinds of 

models to better obtain that kind of detail. It needs to be done to 

better understand what is underlying these securities. 

Mr. NEUGEBAUER. You really couldn’t make a fair assessment of 

the value of that security without that information, could you? 

Mr. LOCKHART. It is certainly very helpful to have the underlying 

mortgage information, yes, sir. 

Mr. NEUGEBAUER. I think my time is up. I saw you reach for the 

gavel and I was— 

Mr. KANJORSKI. Mr. Sherman is recognized. 

Mr. SHERMAN. Thank you. Mr. Lockhart, are Fannie and Freddie 

currently allowed to purchase no doc or low doc loans? 

17 

Mr. LOCKHART. Fannie and Freddie do make a few low doc and 

no doc loans, although that has really stopped pretty dramatically. 

They are reviewing that practice. Basically, at this point, I don’t 

think they are making any no doc loans. The vast majority of the 

loans they are making today are well documented. 

Mr. SHERMAN. Why would you allow them to make any such 

loans? At very best, these are loans to creditworthy borrowers who 

are cheating on their taxes. And now that the Federal Government 

more explicitly controls these entities, rewarding those who choose 

to cheat on their taxes doesn’t seem to be part of your mandate. 

Why wouldn’t your board absolutely prohibit no doc and low doc 

loans? 

Mr. LOCKHART. Both companies are reviewing their practices, as 

we have asked them to do, and we will be hearing from them. 

Mr. SHERMAN. In other words, you are not going to answer my 

question except to say they are working on it and you won’t express 

an opinion on it yourself here in spite of the fact that— 

Mr. LOCKHART. I will express an opinion that historically low doc 

loans have been one of the big problems in the mortgage market. 

Certainly no document loans have been a big problem, and they are 

well aware of it. It has been a big problem in Fannie and Freddie, 

and they are fixing them. 

Mr. SHERMAN. Well, I would hope that you would look at this. 

Since you do work for the Federal Government, also on the tax 

side, in facilitating tax fraud or facilitating people who are either 

lying to their lender or they are lying to the tax authorities strikes 

me as not consistent with your role. 

The executive compensation is something we are focused on a bit 

with this bailout bill. It looks like you hired a Fannie Mae or a 

Freddie Mac CEO for $900,000. Now, there are very few positions 

involving the financial world that are quite as challenging or as 

complex as being CEO of Freddie Mac. Are you able to get executives who can handle Freddie Mac for less than $1 million a year? 

Mr. LOCKHART. We are in the process of negotiating contracts 

with the two CEOs. In my view, we have two very high-quality people whom you will be hearing from shortly. They have only been 

on the job 21⁄2 weeks, so hopefully you won’t ask them too many 

tough questions. 

Mr. SHERMAN. Then you have already paid them for the last 21⁄2

weeks. Are you paying them at a rate below or above a rate of $1 

million a year currently? 

Mr. LOCKHART. The question is that high-quality financial executives in my mind certainly should and could earn more than a million dollars a year; and if that is the question you are asking me, 

certainly— 

Mr. SHERMAN. I am not asking what you think is fair, because 

I could take you to my district and have you—you seem to have 

lined up a good quality financial executive for under a million dollars a year. Does this demonstrate that it is at least possible to get 

somebody reasonably capable of doing one of these major jobs for 

less than a million dollars? 

Mr. LOCKHART. The two individuals have taken these jobs because of the public service element as well. I would expect to pay 

them more than a million dollars a year. 

18 

Mr. SHERMAN. So this headline that it is going to be $900,000 is 

erroneous? 

Mr. LOCKHART. Well, that is their salary. They will probably 

have bonuses related to their performance. 

Mr. SHERMAN. Okay. I noticed that we are able to get somebody to preside over the Federal Government for only $400,000 a year 

and free housing. 

Now, dividends: Which dividends have actually gone out the door 

and been paid in July, August, and September by Fannie and 

Freddie? And are you taking or demanding any legal action to recover those dividends from shareholders? 

Mr. LOCKHART. The dividends that were declared were paid, 

but— 

Mr. SHERMAN. How much money did we lose on that? 

Mr. LOCKHART. I am not quite sure, but it was about $100 million—no, it was significantly less than that. I am sorry; I don’t 

know. I will have to look up that number. 

There was only one dividend payment that was declared before 

we put them into conservatorship that had to be paid under the 

contract. Since then, no dividends have been paid. 

Mr. SHERMAN. Did you make any effort to try not to pay that dividend that went out, even after the conservatorship started? 

Mr. LOCKHART. No, we actually followed the law. 

Mr. SHERMAN. Without litigation, without— 

Mr. LOCKHART. No, we decided the appropriate thing to do was 

to follow the law. 

Mr. SHERMAN. To pay the dividend? 

Mr. LOCKHART. Yes. 

Mr. SHERMAN. Okay. 

The housing markets, in retrospect, look like—or those involved 

at Fannie and Freddie seem to be using models for what mortgages 

would be paid, what the mortgages would be worth that were based 

on the idea that it was unlikely that housing prices would ever decline. And now, in retrospect, you look back and you see charts 

showing the fair market value of all homes in the country being far 

more than the household income of the country could support. 

And you also see—as Alan Greenspan has, I believe, pointed 

out—the large, increased inventory of unoccupied homes available 

for sale. 

How is it that so many people who were worth so many millions 

of dollars a year got it so wrong when these two charts show that 

obviously housing prices had to come down? 

Mr. LOCKHART. As the chairman has said before, there was exuberance in markets. This is one of the markets that obviously had 

a bubble in it. People just thought that house prices would continue 

to go up. 

There were a lot of people who were starting to say at some point 

they were going to come down. Certainly, even the two companies 

were saying that a year or so ago, that housing prices were going 

to start to fall. 

Mr. SHERMAN. But they didn’t change their behavior. I hope for a mere $900,000, you can get smarter people. 

I yield back. 

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

19 

Mrs. Biggert? I am sorry, it should be Mr. Royce. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Director Lockhart, I think you spoke about the credit risk and 

the interest rate risk that these portfolios took on, and I assume 

now those portfolios are about $100 billion underwater. At one 

point, they had $1.5 trillion in the portfolios. 

You mentioned that the credit profile at both enterprises followed 

the market down in 2006 and in 2007. So my question would be, 

had Congress acted in the early stages of this crisis to pass meaningful GSE reform—and that would imply reform with a systemic 

risk regulator to do something about the problem, as argued by the 

Federal Reserve at the time and as would have been included in 

my legislation and my amendment—do you think, had that happened, could that have led not to a situation today where Fannie 

and Freddie were in conservatorship? Could we have prevented 

that potentially? 

Mr. LOCKHART. A significantly stronger regulatory regime with 

stronger capital rules, stronger safety and soundness rules, stronger portfolio rules, many of the things we tried to do, but really 

didn’t have the power to do over the past few years, would certainly have helped prevent this from happening, yes, sir. 

Mr. ROYCE. The other question I would ask, as has been reported 

in the press, even as the bubble was popping, these institutions 

dived into pools of subprime and Alt-A liar loans, as they have 

been called, to meet congressional demand to finance affordable 

housing. As the Wall Street Journal wrote the other day, Fannie 

and Freddie’s patrons on Capitol Hill didn’t care about the risks inherent in their combined trillion-dollar-plus mortgage portfolios so 

long as they helped meet political goals on housing. 

Even after taxpayers have had to pick up a bailout tab that may grow as large as $200 billion, House Financial Services Chairman 

Barney Frank still won’t back a reduction in their mortgage portfolios, says the Wall Street Journal on that. 

So Director Lockhart, in your testimony you also mention the increased portion of riskier loans taken on by the GSEs in recent 

years, especially since the beginning of 2007. And I have heard 

that while Alt-A loans make up, what, 10 percent of the portfolio, 

they make up 50 percent of the recent losses for the GSEs. 

Can you expand upon the role this riskier class of loans played 

in the GSEs’ downfall? 

Mr. LOCKHART. Certainly what was happening in the mortgage 

market in late 2005, 2006, and 2007, there was really a feeding 

frenzy on lower-quality loans. Wall Street was packaging them together and putting them into these many tranched securities, either subprime or Alt-A, and Fannie and Freddie, to meet their 

housing goals and for other reasons, purchased those securities. 

They also did a lot of not subprime, but did Alt-A and lower documentation loans and some of the more interest-only and other exotic mortgages in that period. And that basically led to them taking 

on more risk than they traditionally had, and that caused significant losses. 

Mr. ROYCE. And my last question: Due to the lack of the ability 

of the regulator at this point to basically regulate for systemic risk, 

to stop systemic risk—we know banks leverage 10 to 1 typically— 

20 

how much were Fannie Mae and Freddie Mac leveraging at this 

point in time? 

Mr. LOCKHART. If you look at the leverage, and one way you can 

look at it, I think it is reasonable, is their mortgage credit exposure, the $5.3 trillion that they have versus their capital, they were 

at about 1 percent. They were significantly leveraged. 

Mr. ROYCE. Give me an approximate percentage, just a ballpark. 

Mr. LOCKHART. 1 to 2 percent. Based on their capital— 

Mr. ROYCE. In terms of their capital. And so they had the credit 

risk and the interest rate risk inherent in these portfolios on top 

of, you know, all of this compounding to leverage in a way that was 

just reckless. 

Mr. LOCKHART. I think that is why we kept asking. I testified in 

this committee even before I had my confirmation hearing in the 

Senate about the need for capital for these two companies and 

about the need for reform. 

Mr. ROYCE. Right. 

Mr. LOCKHART. For the last year, we have been pushing them to 

build more and more capital. One of the things that happened is, 

they just couldn’t do it anymore. 

Mr. ROYCE. Well, a number of us, including Mr. Garrett, Mr. 

Shays, and myself have been pushing for over 5 years. But I appreciate that very much, Director Lockhart, and thank you. 

Mr. KANJORSKI. Thank you very much, Mr. Royce. 

We have three votes on. It will take us approximately 30 minutes, so the Chair will recess. Upon the completion of the three 

votes, we will continue. Thank you. 

[Recess] 

Mr. KANJORSKI. The committee will reconvene. And Mr. Lynch of 

Massachusetts is, I think, our next questioner. 

Mr. LYNCH. Thank you, Mr. Chairman. And I want to thank the 

witness as well for his good work and his willingness to help the 

committee with its work. 

I just have a question regarding the wider problem that we are 

having here with the complex derivatives and especially those with 

mortgage-backed elements to it. I am trying to get an answer; and 

this is more on the implementation stages of trying to right the 

ship, so to speak. 

And I guess, very generally, I would like to ask you, Mr. 

Lockhart, if you have overseen any of the what they would call 

‘‘unwinding process’’ between some of these complex—taking some 

of these, you know, mortgage-backed securities, multitranche securities, and trying to unwind them—trying to unwind them so that 

they can be sold, repackaged, and saved. 

And, you know, I am going to have some traders come in and explain to me in micro detail how this happens. Because I have some 

misgivings about the bigger program that we are considering in the 

next few days and the speed at which we might be able to unwind 

some of these securities that we buy and get them back out on the 

market and try to recapture some of the money that we are taking 

from the taxpayer perhaps in the next few days. 

Can you shed any light on this? I know you are a pretty smart 

guy, and you are sort of in the middle of this, but you might have 

other smart people that you rely on for this piece. 

21 

So I am not sure. I don’t want to put you on the spot, but any 

information you could give us would be helpful. 

Mr. LOCKHART. Wall Street sold a lot of what are called ‘‘private 

label securities,’’ where they packaged up mortgages, and sometimes they were subprime mortgages, sometimes what they call 

Alt-A, and sometimes even prime mortgages. 

They structured them into sometimes 10 different what they call 

tranches, and the highest one would have AAA, and you go down 

to something that is really junk. 

What happened is Wall Street then took some of the lower-quality ones and put them into a new security, a collateralized debt obligation, and did it all over again, and did those tranches. 

Fannie and Freddie never bought any of the collateralized debt 

obligations; they just bought the private label securities. 

Mr. LYNCH. I see. 

Mr. LOCKHART. They just bought the AAAs. 

Now, what has happened as the house prices have deteriorated, 

some of those AAAs are no longer AAAs. Trying to put those securities together is somewhat difficult. We have actually been talking 

over the last year with both companies about a Humpty-Dumpty 

back together again approach. And potentially, part of the proposal 

coming out of Secretary Paulson and President Bush would be to 

be able to buy some of those securities and be able to work through 

those mortgages. Hopefully, what can be done is, we can work with 

individual homeowners, prevent foreclosures, have loan modifications, and then potentially get the people into new mortgages or 

sell those mortgages in a less toxic way. 

Mr. LYNCH. And I appreciate—you described the intention or the 

hope of the administration of, I know, Secretary Paulson; but what 

I am trying to dig at is, how does that happen at the implementation stages? How do we get that done? Because looking at some of 

these CDOs, it is difficult. And I have talked to some pretty smart 

people on this—Harvey Pitt, former SEC—and it is very difficult to 

understand who owns what in some of these very complex derivatives. 

And here we are about to consider, you know, taking $700 billion 

in taxpayers’ money for the purpose of purchasing, okay, $700 billion, 80 percent of which are securitized. There are—only 20 percent of them are whole loans, whole home mortgages; the rest of 

them are securitized, and most of those are subprime and Alt-A 

and God knows what rating they have today. 

I am just nervous about the complexity of trying to unwind some 

of these securities. And I am looking for some assurances that the 

impact of what we are doing here is actually going to be felt in the 

market and not be diluted with a process of unwinding that takes 

months and months and months. 

And, you know, unfortunately, you are the witness who is before 

me this afternoon, so you get the question. 

Mr. LOCKHART. It is a complex process, but it needs to be done. 

We need to free up the balance sheets of the financial institutions 

so they can lend again. 

As these are taken off the balance sheets, there will be the opportunity. One of the key opportunities will be to get into the underlying mortgages. And that is the key thing, to help people in 

22 

these underlying mortgages to have their mortgages modified, to 

prevent foreclosures, and to try to get them into new, better mortgages. 

Many of the mortgages, as you know, had teaser rates at the beginning that are now going up. We need to get these people out of 

those mortgages. 

Mr. LYNCH. I understand my time has expired. If I could ask you, 

though—and thank you for your forbearance, Mr. Chairman—can 

I get somebody from your shop to sit down, and let’s go over that 

whole unwinding process? 

Mr. LOCKHART. Our people would be happy to do that. 

Mr. LYNCH. Thank you very much. 

I yield back my time, Mr. Chairman. Thank you. 

Mr. KANJORSKI. Thank you, Mr. Lynch. 

The gentlelady from Minnesota, Ms. Bachmann. 

Mrs. BACHMANN. Thank you so much, Mr. Chairman, and also to 

our witness, Mr. Lockhart. 

Mr. Lockhart, I am interested in your thoughts regarding the 

Housing Trust Fund that was created in the Housing and Economic Recovery Act, and whether or not FHFA plans to finance it 

while the GSEs remain in conservatorship. I sent you a letter that 

was signed by 37 other Members of our body, urging you not to 

sign it during these very dire, dismal economic times for the GSEs. 

And, Mr. Chairman, I would ask unanimous consent that this 

letter would be submitted for the record, Mr. Chairman. 

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

Mrs. BACHMANN. Thank you, Mr. Chairman. 

The legislation that authorizes this fund, Mr. Lockhart, also specifically directs you to suspend payments to the fund if these allocations: Number one, are contributing or would contribute to the financial instability of the enterprise; number two, are causing or 

would cause the enterprise to be classified as undercapitalized; or 

number three, are preventing or would prevent the enterprise from 

successfully completing a capital restoration plan under section 

1369(c). 

It just seems to me that the GSEs have already met these specifications one, two, and three. And I am wondering, Mr. Lockhart, 

do you plan to suspend financing of the Housing Trust Fund while 

the GSEs are in the present state of conservatorship? 

Mr. LOCKHART. We are well aware of the language and certainly 

have analyzed the language. We will be reviewing, when they put 

out their third quarter numbers, whether we think it is right to 

suspend or not. 

At this point, as you know, the money for the first year is not 

going to go into an affordable housing fund, it is going into the 

HOPE for Homeowners part of the bill. To the extent that happens, 

Treasury would have to put in the money instead of Fannie and 

Freddie. 

We will be working that over, looking at the language and looking at the financial results, and I will be happy to respond to your 

letter. 

Mrs. BACHMANN. Mr. Chairman, if I could just follow up with 

Mr. Lockhart? 

23 

Mr. Lockhart, do you know about what date that would be when 

you receive that information? 

Mr. LOCKHART. They should be reporting their third quarter 

numbers in November. There will be no funding before then. Once 

we have seen the numbers, we will make our decision. 

Mrs. BACHMANN. Mr. Chairman, and Mr. Lockhart, I am wondering, so you stated then that Treasury would be putting money 

into the HOPE NOW account? 

Mr. LOCKHART. That is, as I understand it, how the law works, 

yes. 

Mrs. BACHMANN. Okay. Mr. Chairman, I yield back. Thank you 

so much. 

And thank you, Mr. Lockhart. 

Mr. KANJORSKI. Thank you very much, Ms. Bachmann. 

Mr. Cleaver? 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. Lockhart, I have about four questions, and the first is rather 

simple: Have you been involved with the Fed Chairman and the 

Treasurer in the negotiations and discussions that have been taking place in an attempt to produce some kind of rescue plan? 

Mr. LOCKHART. No, not actively. We were certainly very involved 

with them when we were looking at the conservatorships. I was on 

a panel with them earlier this week, but we have not been active 

in negotiations. We have been talking to people off and on, but we 

have not been an active participant. 

Mr. CLEAVER. I am just wondering because—I mean, if in fact 

the crisis we are facing was launched by the housing crisis, I just 

have some difficulty not seeing you involved. 

Mr. LOCKHART. We have talked to people in Treasury and certainly people in the Federal Reserve about the issue; but as I said, 

it has really been the Chairman and the Secretary that have done 

most of the structuring. 

Mr. CLEAVER. One of the sticking points for many of us is the 

bankruptcy change that we are advocating, which would allow a 

bankruptcy judge to modify the principal in an attempt to keep 

people in their homes. 

Is that a realistic—I mean, I know you are going to talk around 

it, but I am going to ask you anyway. Is that a realistic and fair 

inclusion in the legislation that we are going to ultimately consider 

this weekend, I think? 

Mr. LOCKHART. I can’t answer that for the Secretary, but I can 

tell you that I think the better solution is to modify people before 

they get into bankruptcy; and to prevent foreclosures before, because bankruptcy is such a big blot on their record. Fannie and 

Freddie are reaching out to people and trying to help them modify 

before they get into the need for bankruptcy. 

Mr. CLEAVER. I agree, and we were a part of that, this committee 

was. But you can understand why we, most of us have 100 percent 

of our constituents opposed to any kind of resolution of this issue 

that would require large investment of the taxpayers’ dollars into 

the purchasing what could be toxic assets, and wealthy folk would 

have a second home actually excluded in a bankruptcy, whereas 

people in their primary home cannot. 

24 

And that doesn’t sell well in Sedalia, Missouri. People are angry 

about that. So that is one of the reasons many of us are concerned 

about it. 

My other question is related to the preferred stock issued by 

Fannie and Freddie and the claim by many of the banks that it is 

dragging them under. I read somewhere that upwards of $30 billion has been negatively impacted by the dividend payments of 

Fannie and Freddie on preferred stock. And I am wondering, is 

there any kind of evaluation right now of the suspension of dividend payments on Fannie’s and Freddie’s preferred stock? 

Mr. LOCKHART. Fannie and Freddie had about $35 billion in preferred stock outstanding, and it was widely held. But there are certainly some holdings, and significant holdings, by banks and smaller community banks as well. We felt that they could not afford that 

preferred dividend in conservatorship, and that is why it was eliminated. 

We are not rethinking that decision. We had talked to the bank 

regulators before that decision was made, and we are continuing to 

talk to the bank regulators; and certainly they are taking actions 

with the individual banks to try to help them address any that 

have capital problems. 

Mr. CLEAVER. Of course, many of those banks are the smaller 

community banks. I had a conference call with a number of them 

in Missouri this morning. 

Mr. LOCKHART. Right. 

Mr. CLEAVER. And this is one of the concerns they are expressing. 

Mr. LOCKHART. We also now, because of the new law, supervise 

the Federal Home Loan Banks, which deal a lot with smaller 

banks. They are very actively working with the smaller banks and 

certainly making advances as necessary to the smaller banks. So 

that part is continuing to work, and we will be working with the 

smaller banks, some of which may have these preferred stocks. 

Mr. CLEAVER. That is all, Mr. Chairman. 

I would like to express appreciation to you, Director Lockhart, for 

the genteel, evasive way you dealt with the question on bankruptcy. 

Mr. LOCKHART. Thank you. 

Mr. CLEAVER. That was very skillful. 

Mr. LOCKHART. Thank you, Congressman. 

Mr. KANJORSKI. Thank you, Mr. Cleaver. 

Mr. Ellison is recognized. 

Mr. ELLISON. Thank you, Mr. Chairman. 

Sir, thank you for coming here today. I have a few questions for 

you. First of all, in your view, is the Community Reinvestment Act 

at all to blame for this housing meltdown we have seen over the 

last several days and weeks and months? 

Mr. LOCKHART. I am not an expert in the Community Redevelopment Act because— 

Mr. ELLISON. Reinvestment Act. 

Mr. LOCKHART. Reinvestment Act, I am sorry, CRA, because 

Fannie and Freddie are not subject to that. 

Mr. ELLISON. I understand. I am going to get to that. 

25 

Mr. LOCKHART. I can’t really say that it is responsible. It 

wouldn’t seem apparent to me that it would be. 

Mr. ELLISON. Now—okay, so just to ask a few basics: You do 

know that CRA applies only to commercial banks, right? 

Mr. LOCKHART. Right. 

Mr. ELLISON. And you do know that not most, but the overwhelming number of subprime loans that have ended in foreclosure 

had come from mortgage originators, not commercial banks? 

Mr. LOCKHART. Certainly some came from commercial banks, but 

a lot came from various other channels, mortgage brokers and 

other originators, and they were packaged up and sold to Wall 

Street, yes. 

Mr. ELLISON. Right. So to somehow imply it is the CRA, your 

sense of what you do know, though you are not an expert, is that 

it is really not the case. Am I right about that? 

Mr. LOCKHART. Again, my view is that I have never heard that 

to be a major issue at this point. 

The real problem was everybody lowered their underwriting 

standards dramatically. They were making loans to people who 

couldn’t afford them, and they were not telling people that they 

couldn’t afford them when they were making the loans. That was 

the problem. 

Mr. ELLISON. And based on your understanding, there is nothing 

in the CRA that says, you shall lower your underwriting standards. 

Am I right about that? 

Mr. LOCKHART. I assume so, yes. 

Mr. ELLISON. Let’s talk about Fannie and Freddie. They had 

their own goals for affordable housing. Is that right? 

Mr. LOCKHART. That is correct. 

Mr. ELLISON. Can you tell me whether Fannie and Freddie’s pursuit of its own affordable housing goals contributed in any way to 

the demise of Fannie and Freddie? 

Mr. LOCKHART. They are not demised. They are actually ongoing 

companies— 

Mr. ELLISON. Right. That is true. 

Mr. LOCKHART. —that are extremely active in the mortgage market, and still the major players in the mortgage market. 

Mr. ELLISON. Thank you for that correction. 

You know what I mean. I mean the fact that they— 

Mr. LOCKHART. They are in conservatorship, and they are continuing to do and fulfill their mission in conservatorship. They had 

goals set by HUD which, before the legislation passed, set the 

goals. Now that the legislation has passed, we will be setting goals 

in the future, this new agency. 

The goals were aggressive and, significantly, they were set in 

2004 and escalated over the years. As they escalated, it became 

harder and harder for the two companies to meet those goals, and 

sometimes they had to stretch. And sometimes that stretch meant 

that they potentially lowered the underwriting standards. 

Certainly, they got credit for many of the subprime mortgages in 

those AAA securities that they bought. 

Mr. ELLISON. But is there anything in the mandate of Fannie 

and Freddie that says, reduce your underwriting standards in 

order to meet affordable housing goals? 

26 

Mr. LOCKHART. No. The mandate of Freddie and Fannie actually 

is to keep strong underwriting standards. For instance, by charter, 

they are only allowed 80 percent loan-to-value loans. 

Mr. ELLISON. Right, so Fannie and Freddie are actually enjoined 

to keep good underwriting standards. So if somebody made a decision to take an overabundance of, say, Alt-A loans, that would not 

be in the spirit of that mandate to keep good underwriting standards. Is that right? 

Mr. LOCKHART. They made some trade-offs over the years, and 

it turned out those trade-offs were unsuccessful. They basically 

lowered their underwriting standards; and maybe part of that was 

to get affordable housing, but oftentimes it was just that they felt 

it was an attractive loan. 

Mistakes were definitely made, and that is one of the reasons 

that they are in conservatorships. 

Mr. ELLISON. Right. 

And other than, for example, getting credit for trying to move toward affordable housing goals, Fannie and Freddie’s decision to 

take a greater percentage of its portfolio in those no doc, low doctype loans, they got other benefits from that as well. Am I right 

about that? 

Mr. LOCKHART. Certainly it was a higher margin business than 

just prime business, yes. 

Mr. ELLISON. They made more money from it? 

Mr. LOCKHART. Yes. 

Mr. ELLISON. So it really wasn’t altruism? 

Mr. LOCKHART. They thought they were going to make more 

money. 

Mr. ELLISON. Right. They thought they were going to make more 

money for it. 

Mr. LOCKHART. Right. 

Mr. ELLISON. So altruism about affordable housing probably 

wasn’t the major factor. Wouldn’t you agree with that? 

Mr. LOCKHART. I can’t really get into the minds of the underwriters of Fannie and Freddie. 

They were looking at a variety of things. Affordable housing 

goals were one. Profitability was one too, and certainly credit risk 

was another. 

Mr. ELLISON. Right. 

Now, the Washington Post reported on its front page a few weeks 

ago that Fannie and Freddie actually engaged in some accounting 

procedures that may not be standard on affordable housing; and 

HUD let them do it. Instead of buying responsible CRA mortgages 

made by banks and nonprofits in Minnesota, they let GSEs nurture 

brokers who would finance subprime, higher-cost loans. 

Can you respond to that statement? 

Mr. LOCKHART. I am not sure that I— 

Mr. ELLISON. Follow that? 

Mr. LOCKHART. —am aware of that. 

Mr. ELLISON. Me either. Anyway, thank you very much. 

Mr. LOCKHART. Thank you. 

Mr. KANJORSKI. The gentleman from Colorado, Mr. Perlmutter. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

27 

And Mr. Lockhart, thank you for your testimony today. I do appreciate really—you know, with maybe one exception—your answering these pretty straight. So I just have some factual questions 

so I understand this a little better. 

The balance sheet, let’s go Freddie Mac first. In July, you all 

were here to talk to us about the new bill, the FHA, Fannie MaeFreddie Mac regulatory bill. 

In July, what did the balance sheet of Freddie Mac look like? 

Mr. LOCKHART. Freddie Mac had core capital of about $37 billion. It had a shareholders net worth of about $13 billion. Actually, another way some commentators were looking at it, as if they marked 

everything to market, it was a negative number. There are a variety of ways to look at balance sheets, but the legal way, the one 

that is in the law, is core capital, which was $37 billion. 

Mr. PERLMUTTER. All right. And we will talk about marked to 

market in just a second. 

So assets versus liabilities, what were the assets, and generally 

what are the assets of these two organizations? 

Mr. LOCKHART. The assets of the two organizations are really 

their mortgage portfolios. At that point, I think Freddie had almost 

$800 billion in mortgage portfolios, $69 billion in liquid assets; and 

debt of $874 billion really pretty much offset that. The balance 

sheet is very simple. They borrowed to invest. 

Mr. PERLMUTTER. Okay. And so from whom do they borrow? 

Mr. LOCKHART. They issue their securities worldwide. They borrow from institutions in this country, they borrow from central 

banks around the world, and they borrow from international investors. It is really spread throughout the world. 

Mr. PERLMUTTER. Short-term, long-term, mixture? 

Mr. LOCKHART. They try to do long-term, because their assets are 

long-term, but they have, especially at the moment, a big mix of 

short-term debt. 

Mr. PERLMUTTER. Okay. 

Now Fannie Mae, back in July when you were here, what was 

their balance sheet, what were their assets and their liabilities? 

Mr. LOCKHART. They had core capital of $47 billion, so they were bigger. They had shareholders equity of $41 billion. They actually 

had a positive fair value of $125 billion, as well. 

Mr. PERLMUTTER. What was their portfolio? 

Mr. LOCKHART. Their portfolio was somewhat similar, $758 billion in mortgage-backed securities, and then another $104 billion 

in liquid assets, and debt of $846 billion. 

Mr. PERLMUTTER. Okay. Fast forward to September whatever, 

whenever you took the conservatorship. What were the assets and 

liabilities and core capital of Freddie Mac and what were the assets 

and liabilities of Fannie Mae? And tell me how mark to market 

played a role in that. 

Mr. LOCKHART. We did not see a new balance sheet. They only 

produce public information once a quarter. 

What we were looking at at that point, and in August and September, were some of the very big exposures on the balance sheets 

and the ranges of possible losses, particularly in areas like credit 

losses, and also the losses on their private label securities, and also 

some other issues related to things like their deferred tax asset. 

28 

There were a lot of exposures on that balance sheet that could 

produce a much lower capital number. 

Mr. PERLMUTTER. So during the month of August, if I understand 

correctly, your office, as well as some outside firms, tried to come 

in and examine the books of Fannie Mae and Freddie Mac. Is that 

right? 

Mr. LOCKHART. Our job is to examine. We are continuously examining both firms. In July, we brought in help from the Federal 

Reserve and also the Office of the Comptroller of the Currency, including some of their credit examiners to look at the situation as 

well. 

Mr. PERLMUTTER. In August, were these organizations—when 

you took the conservatorship, were they paying their debts as they 

came due? I mean, were they—what was their income versus their 

operating expenses? 

Mr. LOCKHART. They were paying their debts as they came due, 

and they continued to pay their debts as they came due. The problem was the markets were starting to close up. They were starting 

to look like they might not be able to borrow in the future, and the 

risks were too high to the system not to take the conservatorship 

action. 

Mr. PERLMUTTER. And did it apply—were both in the same boat, 

or was Freddie Mac in a worse position than Fannie Mae? Or how 

would you, as the regulator, compare the two? 

Mr. LOCKHART. That is a good question. Certainly, on June 30th, 

the capital position of Fannie Mae was stronger than the capital 

position of Freddie Mac. However, they were losing more money. 

They lost about $2.2 billion in the second quarter while Freddie 

lost about $800 million. Fannie Mae also has a much bigger portfolio, so they had a bigger exposure to credit risk. 

It is hard to equate the two, but they both had significant risk. 

Mr. PERLMUTTER. I thank you, and I would like to visit with 

some of your staff to really get into this a little bit more. 

Mr. LOCKHART. We would be happy to do that. 

Mr. PERLMUTTER. Thank you very much. 

Mr. KANJORSKI. Okay. The gentleman from Colorado has completed his examination. 

The gentleman from Connecticut, Mr. Murphy. 

Mr. MURPHY. Thank you very much, Mr. Chairman. 

Thank you, Mr. Lockhart. I just have a few quick questions, 

building on Mr. Cleaver’s questions regarding the effect on depository institutions. I certainly understand the statement in the prepared testimony regarding your understanding that their regulator 

is willing to work with banks that may be put in a particularly difficult position by the lack of dividends. 

I think much of the frustration from those institutions, whether 

they held 5 percent of their capital in Fannie and Freddie, or 20 

percent of their capital, was that, you know, they felt that they 

were being asked, in fact, and saw the rules regarding the amount 

of position that they could take be relaxed in order to try to be part 

of the solution. And having seen regulators allow them to take bigger positions in Fannie and Freddie, they now feel, I think, a little 

bit more dispirited about where this has gone since then. 

29 

And so I have heard sort of two things, whether the dividends 

have been suspended or whether they have been permanently terminated. And you certainly said to Mr. Cleaver’s questions that you 

don’t have any plans now to revisit that issue. But do you have any 

timeframe, do you have any belief or reason to believe that in the 

future you may return dividends to those preferred shares? 

Mr. LOCKHART. First of all, the dividends are noncumulative, so 

the ones that are missed are missed. 

Mr. MURPHY. Yes. 

Mr. LOCKHART. Going forward, coming out of conservatorship, 

there is a possibility. I don’t know how large that possibility would 

be, but there is a possibility. 

Many banks were aware. These prices had deteriorated well before we took our action in September, and many banks had already 

started to take impairments for well over a year on their holdings 

in these preferred. It wasn’t as sudden as you might think. In fact, 

the preferred stocks were selling at about 50 percent of their face 

value before we took the action. 

Mr. MURPHY. And without being able to reinstate those dividends, there are several other solutions that might be able to help 

those institutions, including a postponement of their ability to 

mark-to-market those assets pending some resolution of the actual 

value of the asset, as well as some differential tax treatment, their 

ability to potentially take ordinary versus capital losses. 

Have you been involved at all in those conversations or spoken 

to the community banks about those requests pending on the legislation that we are examining now? 

Mr. LOCKHART. We have talked to some of the community banks, 

and we have had some of the State banking associations in to discuss alternatives. It is really up to the bank regulators. To the extent it is going to be a change in the tax treatment, that is up to 

Congress. 

Mr. MURPHY. And just lastly, to the extent the actions taken 

through the conservatorship have led to this problem for many 

banks that now precipitate them to be asking for relief before other 

bodies, to the extent that if you believe that that is a reasonable 

ask, I think that many of us would certainly appreciate your advocacy with them or on their behalf. 

Mr. Chairman, thank you very much for the time. 

Mr. KANJORSKI. Thank you, Mr. Murphy. 

The gentlelady from California, Ms. Speier. 

Ms. SPEIER. Thank you, Mr. Chairman. 

Director Lockhart, the Federal Government, the taxpayers, have 

injected $250 billion into Fannie and Freddie, correct? 

Mr. LOCKHART. No, that is not correct. They actually haven’t invested anything yet. What they have done is, they have put facilities in place that they might draw down in the future if needed. 

At this point, there has been no taxpayer money put into Fannie 

and Freddie. 

Ms. SPEIER. So they continue to be private companies? 

Mr. LOCKHART. They are private companies in conservatorship, 

which means that the Agency, FHFA, has replaced the board of directors as the executive, if you will, and we have chosen new CEOs 

to take over the companies. The shareholders are still in place; 

30 

both the preferred and common shareholders have an economic interest in the companies. 

Ms. SPEIER. All right. Do you think that the naked shorts contributed to the financial ruin of Fannie and Freddie? 

Mr. LOCKHART. There was certainly a lot of activity in Fannie 

and Freddie’s stocks over the last 2 or 3 months, and there was 

probably some short selling. Whether they were naked or not, I 

don’t know. 

Ms. SPEIER. Do you think there is any reason to call in the appropriate Federal investigators to see if there was any fraud associated with it? 

Mr. LOCKHART. I am sure that the SEC is looking at those issues. 

We are pretty close to the SEC; in fact, the Chairman of the SEC 

is on our Oversight Board. I am sure that they are very aware of 

the situation and are looking at it. 

Ms. SPEIER. So it is certainly, I think, the intent of those in Congress that if we are going to assist Fannie and Freddie to the tune 

of $250 billion, that we see mortgages reset so that foreclosures 

don’t take place. But the reality, it appears, is that most of what 

you hold are not mortgages, but securities that are mortgagebacked. Is that correct? 

Mr. LOCKHART. Their basic business is to buy mortgages. They 

package them into securities and then put a guarantee on them. 

They have well over $3 trillion of those outstanding. 

In addition, they buy some of those securities themselves and 

keep them in their portfolio. They have also bought securities 

issued by other issuers, those private label ones I was talking 

about. In addition, they have whole mortgage loans. 

The vast majority of their holdings are either that they have 

guaranteed or they hold in their portfolios. They have about, of 

their $5 trillion, $200 billion or so that are not their own securities, 

but are mortgages. 

Ms. SPEIER. So you are in a position then to do, for instance, 

what some of the other institutions have done, FDIC being one, to 

freeze the interest rates, keep people in their homes, and adjust 

the mortgages? 

Mr. LOCKHART. Fannie and Freddie have very active loan modification/foreclosure prevention programs. It is very important to 

them; they are working very hard on expanding those activities. 

We just put out a report yesterday, which we are going to update 

quarterly, looking at those loan modification activities. I would be 

happy to send you a copy of it. 

Ms. SPEIER. Do I have any more time, Mr. Chairman? 

Mr. KANJORSKI. There are no lights. 

Ms. SPEIER. My last question, I guess I am very confused by why 

you would continue a no doc or low doc policy when the Fed has 

basically said that verification by institutions is mandatory now. 

Mr. LOCKHART. They are not continuing. What they are doing is, 

they are making a few low documentation loans at this point, as 

I understand. The amount has dropped dramatically, as far as I 

know, and they are looking at that policy. Basically, as I understand, the ones that are made are to people with relatively high incomes and very high FICO scores. 

31 

Ms. SPEIER. Well, I have income, not high income, and a high 

FICO score; and I had to give all that documentation when I put 

an offer in on a house just 2 weeks ago. So I would encourage you 

to abandon that policy. 

Thank you, Mr. Chairman. 

Mr. KANJORSKI. The gentleman from Connecticut, Mr. Shays. 

Mr. SHAYS. Thank you. 

Mr. Lockhart, thank you for being here. I want to get back to 

what I wrestle with, and that is why Fannie and Freddie, two of 

the largest financial institutions in the world, were never under the 

1933 and 1934 Securities Acts. The 1933 and 1934 Acts were to 

prevent the kind of problems we have now; they were part of the 

Franklin Delano Roosevelt Administration. 

And I know that you were recommending that we get them to 

play by the rules. Everyone else has to. But they still don’t. They 

are under the 1934 Act; they are not under the 1933 Act. Can you 

give me a reason why they shouldn’t be under the 1933 Act? 

Mr. LOCKHART. They have both now registered with the SEC. 

Freddie just completed that in June. They went through a very 

thorough registration process. 

Mr. SHAYS. With all due respect, that is under the 1934 Act? 

Mr. LOCKHART. Right. 

Mr. SHAYS. And let me just say, to express my bias, the reason 

they agreed to come under the 1934 Act is, they were concerned 

they might have to come under the 1933 Act, so they voluntarily 

told the Congress and the SEC that they had agreed to go under, 

so back off. 

When we put this legislation in, I got a call from Frank Raines 

the next day saying, ‘‘What the hell are you doing?’’ I had one of 

their lobbyists practically knock down my door and say, ‘‘How dare 

you introduce this bill before checking with me?’’ 

So I am not impressed that they voluntarily agreed. What I am 

troubled with is that they are not under the 1933 Act. Why are 

they not under the 1933 Act? 

Mr. LOCKHART. Congress, when they passed the new law, put 

them under the 1934 Act, but not the 1933 Act. 

The 1933 Act has additional disclosures on securities. My view 

is when you look at the financial statements and their disclosures, 

they are quite extensive at this point. Of course, it is an issue that 

Congress can continue to look at. 

Mr. SHAYS. Okay. Let me put it differently. So you are not advocating. Is there any reason why they should not be under the 1933 

Act? 

Mr. LOCKHART. My view is that the 1933 Act would not add significant disclosure beyond the 1934 Act, and it could increase cost 

and friction in the mortgage market. 

Mr. SHAYS. Because they would have to play by the same rules 

that everyone else has to play by? 

Mr. LOCKHART. Effectively, because they are the biggest issuers 

of mortgage-backed securities and securities in this country, and it 

would be extremely paperwork-intensive. 

But, again, it is an issue for Congress to look at. 

Mr. SHAYS. I understand that. The bottom line to this is, though, 

that had they been under the 1934 Act a lot sooner, they wouldn’t 

32 

have been in the mess they are in because they played by different 

rules. Isn’t it true that Freddie Mac has still not complied to the 

1934 Act? 

Mr. LOCKHART. Freddie Mac just completed registration in June 

under the 1934 Act. 

Mr. SHAYS. And that is how many years after—I am sorry, I interrupted you. 

Mr. LOCKHART. It is the first time in their history that they were 

ever registered with the SEC, if that is the question you are asking. 

Mr. SHAYS. Well, no, my question is, didn’t they volunteer to be 

under the 1934 Act about 3 years ago? 

Mr. LOCKHART. Probably longer than that—4 or 5 years. 

Mr. SHAYS. So it has taken them that long? 

Mr. LOCKHART. What happened was, all the accounting messes 

were discovered. They were never able to. It took them 3 years to 

actually become a timely filer. 

Mr. SHAYS. And the reason the accounting mess was there was 

they weren’t under the 1934 Act. Because had they been under it, 

they would have had to disclose, there would have been transparency; the SEC would have said, you are not conforming. 

And we would have been able to at least not be in as deep a mess 

as we are in right now; isn’t that correct? 

Mr. LOCKHART. If they had been registered with the SEC, there 

may have been more disclosure than they historically had. There 

is no doubt about that. 

Mr. SHAYS. And if they had disclosure, they wouldn’t have been 

able to do some of the things they had done, correct? 

That is not a hard question to answer. 

Mr. LOCKHART. Yes, it is. You can disclose, but not disclose the 

truth. 

Mr. SHAYS. But they didn’t have to disclose it. They didn’t have 

to lie. 

Mr. LOCKHART. Yes. So I mean— 

Mr. SHAYS. Well, let me ask it differently. 

If they had disclosed and disclosed the truth, they wouldn’t have 

been able to do that; isn’t that correct? 

Mr. LOCKHART. That is correct. If they would have had good disclosure and good accounting, which they didn’t back then; they 

didn’t have good accounting. 

Mr. SHAYS. They did not? 

Mr. LOCKHART. They did not. 

Mr. SHAYS. Yes. 

Mr. LOCKHART. And that was one of the big problems. 

Mr. SHAYS. Well, it is not your fault. It is Congress’ fault for letting them get away with it. 

And the only problem I have in this whole process is hearing 

Members of Congress mouth off about what a tragedy this is, why 

it happened, blaming someone else, when they voted against the 

very legislation that would have gotten them under the 1933 and 

1934 Acts. 

I yield back. 

Mr. LOCKHART. Thank you. 

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

33 

Mr. WATT. Thank you, Mr. Chairman. I am over here. 

I wasn’t here for Director Lockhart’s testimony, and I don’t have 

any questions, but I did want to publicly apologize to him. I accused him of doing something that he did not do. It was actually 

Mr. Preston who did it. I just wanted to apologize to him publicly. 

He knows what I am talking about, so please accept my apologies. 

Mr. LOCKHART. I appreciate that. Thank you, Congressman. 

Mr. SHAYS. Is that sackcloth over your back? 

Mr. KANJORSKI. Does anybody have a chain? 

Mr. Capuano from Massachusetts. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Lockhart, thank you for being here. I know you have already 

answered the question, I heard it earlier, but I want to hear it 

again very clearly. 

At this moment, how many taxpayer dollars are invested in 

Fannie and Freddie since the conservatorship has been— 

Mr. LOCKHART. No taxpayer dollars are invested in Fannie and 

Freddie. 

Mr. CAPUANO. Thank you. I knew it, but I think it is an important point to make, particularly this week, that the possibility is 

there, we all know that, but up until this point things—absent 

things beyond your control, at least things internally are heading 

in the right direction, and no taxpayer dollars have been put on the 

table. 

Mr. LOCKHART. No. There is a senior preferred facility from the 

U.S. Treasury that they will tap if they have negative net worth, 

that is, assets minus liabilities are negative. They will put money 

in, but until that happens, there is no money that has been put in. 

They haven’t had to borrow under the facilities either. 

Mr. CAPUANO. Thank you. 

The other question I had, as I understand it, other than the degree or maybe some of the amounts of the dollars, as I understand 

it, Fannie and Freddie were not doing anything unique to Fannie 

and Freddie that other people in the marketplace were not doing, 

such as investing in Alt-As and maybe some exotic items and 

maybe some low verification items. 

Is that a fair assessment or an unfair one? 

Mr. LOCKHART. They were not doing things that other people 

didn’t. In fact, their underwriting standards, frankly, were higher 

than many other people’s standards. 

Their problem was really the structure of the companies, that 

they didn’t have enough capital to support the kind of risks that 

they were taking. The capital requirements put on them by Congress were changed, but unfortunately, a little late. 

Mr. CAPUANO. Right. And I agree with that assessment. Again, 

I am just trying to have you say it. 

That being the case, one of the things I am interested in is, right 

now, because of the conservatorship, it is my understanding that 

some private institutions, particularly—banks in particular—I am 

also interested in public pension funds, who in many ways were 

doing the right thing by investing in Fannie and Freddie, doing 

something that they are supposed to do—safe, secure, good cause; 

Fannie and Freddie do good work, at least their mission is good. 

They were doing the right thing, but because of the conservatorVerDate Aug 31 2005 17:34 Jan 16, 2009 Jkt 045626 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\45626.TXT TERRIE
34 

ship, they may be now technically in violation possibly of some of 

the capitalization requirements that they have; and pension 

funds—not capitalization requirements, but some of the underwriting standards that they are required to. 

And I know you are aware of it, but again I would like to put 

it on the record that: Number one, you are aware of it; and number 

two, you are working positively towards trying to address those 

issues. 

Mr. LOCKHART. We certainly are aware of it. One of the key reasons that the financing was put in the way it was, was to protect 

the mortgage-backed security holders and the debt holders of these 

companies, that over $5 trillion. 

That was so important, to track that exposure. We had to make 

a decision that there were some parts that couldn’t be protected, 

and that was the common and preferred. Common and preferred 

holders are equity holders, and they are more at risk. When you 

are investing in common stock or preferred, you have more risk 

than you do when you are in debt. 

Mr. CAPUANO. And I understand that. If everything works out 

the way we hope it works out and people hold on to what they 

have—again, I know there are some bumps in the middle of the 

road—in theory, there is no reason to believe that anybody, in the 

final analysis, should lose any money when this is all said and 

done? 

Mr. LOCKHART. I can’t say that. 

Mr. CAPUANO. I understand. I said it. I didn’t think you would, 

but I thought I would try. 

Mr. LOCKHART. I would think that the common shareholders 

have already lost a significant amount of money, and certainly the 

preferreds. It is hard to imagine they would go all the way back. 

At any rate, they still have some economic interest in this company, and going forward there may be some value. 

Mr. CAPUANO. Okay. Thank you very much. 

Mr. KANJORSKI. Mr. Garrett, do you have a desire to examine 

Mr. Lockhart, or are you going to allow him to escape? He has been 

on that seat for a number of hours. 

Mr. GARRETT. Two minutes. Thank you. I will be brief, and I 

apologize for just running in. 

Following up on my introductory comments to you and commending you for some of the actions that you have previously taken 

in that area, I read through your full testimony, because your testimony here was an abbreviation of that testimony. 

Along the lines of contributions by Fannie and Freddie, what you 

did was good, as far as I know, was the elimination, as far as lobbying on the Hill and also contributions by Fannie and Freddie 

from their respective accounts. 

A question for you, though—and it is not clear in here—is, what 

is the status with regard to these entities making contributions, 

charitable contributions, instead? Is that continuing? 

Mr. LOCKHART. What we said and what they are doing is they 

are reviewing their charitable contributions. They are going to put 

together a plan of what charities they think they should be giving 

to in the future. 

35 

Obviously, when you are in conservatorship, one would think 

your contribution budget would be significantly less, and they will 

certainly be looking at that. On the other hand, there are some 

good causes there that they have supported over the years. They 

are going to be making recommendations to the conservator as to 

what they think they should continue to contribute to. 

Mr. GARRETT. Okay. Just a couple of questions along that line, 

and maybe a comment. You have heard both sides say what they 

believe caused this problem, and you have heard probably both revisionist history, as Jeb said effectively, what did occur and what 

didn’t occur. 

One of the expressions out there in politics, as you know, is follow the money, as to what influence at least political contributions 

may have in any organization on the drafting of reform or not 

drafting of reform. Clearly, political contributions, has been said 

throughout history, that it can have a direct impact. 

I would think, considering, if you look from my reading of the 

paper at least, that charitable contributions can also, if those charitable contributions just coincidentally go to the same places as political contributions—not necessarily, of course, directly to the 

Members, they can’t, but to one of the Members’ community, their 

pet projects and that sort of thing. So I would have a real concern 

from a political aspect of trying to get the reform, I think, that you 

and I both would like to see here occur. 

Along that line, as well—I know you can’t give me an answer to 

this right now, but I am curious about this—are you looking, not 

just prospectively, you are saying you are going to look into as far 

as what the future, are you looking also retrospectively what has 

been their history of charitable contributions? 

And I guess before you answer that, I will say, if the answer is 

yes, is there data that we can get that would document where that 

has been over the last ‘‘X’’ number of years? 

Mr. LOCKHART. We made a commitment to the chairman a 

month or so ago to put out a record of the history of their contributions for this year. Certainly, we will be putting that out. I am not 

sure if we are going to go back in history, but we will put out this 

year’s contributions. 

Mr. GARRETT. Okay. If it is possible—I mean, I assume it would 

be; I don’t know how hard—but if it is possible just to go back a 

few years, 3 or 4 years, I would really be curious, and I think the 

public would just be curious, to see if there is any correlation as 

to where the charitable contributions go. 

One of the questions that I bet somebody asked but I will throw 

out a different line, your opinion on the housing fund, which came 

about, of course, through the July bill and what have you, just your 

opinion as to whether or not that has—I always coin the phrase— 

a tax on the GSEs and the bottom-line effect of that on going forward? 

Mr. LOCKHART. As I answered the Congresswoman from Minnesota, we will be looking at whether they should pay the 4.2 percent basis points for this year. Certainly, we will be looking at their 

financial results as they publish them for the third quarter. 

You can look at that as a tax. You can look at it as a cost of 

doing business. You can look at it in a variety of different ways. 

36 

They don’t pay State income taxes. They have some significant benefits from their GSE status, as you know, historically. So, to me— 

Mr. GARRETT. That was always the argument why it was there, 

the benefit that they got. And so they have an obligation in going 

forward, if we want to make sure that they are able to continue 

to do those things, whether or not we want to at least give them 

a temporary break of that. 

Mr. LOCKHART. Right. 

Mr. GARRETT. Yes. Thank you very much. I appreciate your candor on those questions, and I look forward to hearing back from 

you, if possible, on some of those in more details. Thank you, Director. 

Mr. LOCKHART. Thank you. 

Mr. GARRETT. Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you, Mr. Garrett. 

Thank you, Mr. Lockhart. If you are fast, you can get out of that 

table before another Member shows up. 

Mr. LOCKHART. Thank you, Mr. Chairman. I appreciate it. 

Mr. KANJORSKI. At this point, we are going to ask our two members of the next panel to come forward, Mr. Allison and Mr. 

Moffett. 

Gentlemen, welcome to the hearing. 

Maybe we will try Mr. Allison first for his opening statement. 

STATEMENT OF HERBERT M. ALLISON, JR., PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, FANNIE MAE 

Mr. ALLISON. Thank you, Mr. Chairman, and members of the 

committee. Thanks for inviting me to testify this afternoon. 

I am Herb Allison, and I spent 36 years in the financial services 

industry, including as president and chief operating officer of Merrill Lynch and, most recently, as chairman, president, and chief executive of TIAA–CREF. I am honored to have been selected as the 

new president and CEO of Fannie Mae. 

The Federal Housing Finance Agency placed Fannie Mae into 

conservatorship to conserve our assets, restore sound operations, 

and ensure that Fannie Mae could continue to fulfill its mission. 

Our job is to balance the needs for safety, soundness, and taxpayer 

protection with providing the most support possible to the mortgage market. 

You asked me to address how Fannie Mae plans to operate, pursue its mission and prevent foreclosures. 

Since September 7th, we have provided a steady supply of funding and liquidity to mortgage lenders. Our single-family and multifamily purchase and securitization activities have continued at a 

strong pace, despite the uncertainty of the markets. We securitized 

about $31 billion in single-family mortgages during the first 3 

weeks of September. 

On September 10th, we sold $7 billion in 2-year debt securities 

to global investors, the largest such offering in our history and a 

strong sign of confidence that investors are willing to fund our 

work. Since early last year, Fannie Mae has provided more than 

$1 trillion in liquidity to the mortgage market, and we are preparing to do even more. 

37 

In a market like this, making sure mortgages are accessible and 

affordable to homeowners is vitally important, but so is preventing 

foreclosures. Because working with borrowers in trouble requires 

personal interaction, we have increased staffing in our servicing operations in Dallas, Texas. We are also increasing the use of specialty servicers skilled in problem loan workouts, and have revamped our incentives to all of our servicers. We have issued 

38,000 bridge loans this year to borrowers who fell behind because 

of a temporary life event such as a serious illness or a job loss. 

But the scale of the current crisis and the responsibility entrusted to us by the government require that we do far more to stabilize the market, provide liquidity and prevent foreclosures to 

keep people in their homes. So we are looking at every aspect of 

our business, with the goal of improving our funding, pricing, trading, risk management and foreclosure-prevention efforts. 

We are evaluating how we can participate in the FHA HOPE for 

Homeowners Program. We are also, as Director Lockhart said, in 

discussions with the FDIC and IndyMac on how we can help that 

institution with its streamlined loan modification program. We are 

increasing our purchases of mortgage-backed securities to bolster 

market liquidity, so that new mortgages remain available and affordable. Finally, we are examining our underwriting and our pricing standards to assure that we strike the right balance between 

expanding our activities and safeguarding taxpayers. 

Mr. Chairman, we are working closely with our conservator and 

Treasury to find ways to assist in government efforts, including the 

mortgage asset liquidity fund proposed by Secretary Paulson to 

help the mortgage market recover. 

As we take these steps to support the market, we are also taking 

steps to improve Fannie Mae. We are re-examining the company’s 

risk posture, controls, expenses, operations, technology, corporate 

governance, and management structure, all to align Fannie Mae 

more closely with our mission and eventually to remove the need 

for government assistance. 

Thank you again, Mr. Chairman, for this opportunity. I look forward to working with you, this committee, and the Congress during 

this difficult period in our housing markets and in our country. 

Thank you. 

[The prepared statement of Mr. Allison can be found on page 62 

of the appendix. ] 

Mr. KANJORSKI. Thank you, Mr. Allison. 

And now the CEO of Freddie Mac, Mr. Moffett. 

STATEMENT OF DAVID M. MOFFETT, CHIEF EXECUTIVE 

OFFICER, FREDDIE MAC 

Mr. MOFFETT. Thank you, Mr. Chairman. My name is David 

Moffett, and I am the new CEO of Freddie Mac. I am pleased to 

appear before you today. 

With the committee’s permission, I would like to submit my written testimony for the record. 

I joined Freddie Mac less than 3 weeks ago, when the company 

was placed under the conservatorship of its regulator, the Federal 

Housing Finance Agency, or FHFA. I have a long career in the 

38 

banking industry, having served as vice chairman and chief financial officer of US Bank from 1993 until my retirement last year. 

It is indeed an honor to have been chosen to lead Freddie Mac 

at this critical time. Nothing could be more important to our country’s economic strength than to support housing markets with a 

stable supply of low-cost mortgage funds. 

Along with Freddie Mac’s dedicated employees, I am firmly committed to achieving the goals described by Treasury Secretary 

Paulson on September 7th, namely those of stability, mortgage 

availability, and taxpayer protection. 

Working collaboratively with FHFA Director Lockhart, I am 

quickly getting up to speed. And I am working with Freddie Mac’s 

nonexecutive chairman, John Koskinen, to appoint a new board of 

directors. 

The combination of conservatorship coupled with Treasury’s 

strong support has already been beneficial. The conservatorship 

lets us focus on strengthening our company, and the Treasury program is providing needed confidence to those who help fund our operations. 

The easing of capital and liquidity concerns made possible by the 

Treasury funding commitment under the senior preferred stock 

purchase agreement and the Treasury’s GSE credit facility is enabling us to bring greater liquidity in the market. Since the conservatorship, we have begun ramping up our purchases of mortgage-backed securities, buying more than $8 billion in mortgagebacked securities in the past 10 days alone. 

Freddie Mac also remains focused on our affordable housing mission. Although the challenging market is making the housing goals 

very difficult to achieve, we estimate that our affordable mortgage 

purchases will substantially mirror the levels of the goal-qualifying 

loans being originated today. 

And our multifamily program continues to provide needed liquidity to the affordable housing market. Every day, we are working 

diligently with our servicers to keep families in their homes, by 

providing borrowers viable workout alternatives such as forbearance, repayment plans, and loan modifications. 

I am impressed with the company’s innovative approach, such as 

the mass modification pilot that we are now conducting. In the 

weeks to come, I will be reviewing all of Freddie Mac’s approaches 

to see if there are any other ways that we can help lenders in a 

prudent and a very sustainable way. 

In closing, let me affirm that the conservatorship and the strong 

Treasury support is helping rebuild confidence in the company and 

in the U.S. mortgage market. I look forward to working closely 

with this committee and others on all these vital issues confronting 

the mortgage market and the housing market today. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Moffett can be found on page 83 

of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Moffett. 

I am just going to take a few moments so we can move into questions quickly. Welcome onboard. You are, should I say overpaid executives or underpaid executives? I am not sure. 

Mr. MOFFETT. We are not sure either. 

39 

Mr. KANJORSKI. But I am sure both this committee and the 

American people will take a little bit out of your hides before it is 

over. 

If I could ask really in a joint question, what are your anticipations of success for Fannie and Freddie after everything settles 

down and you come up with a workable model? What can we expect on how they will contribute to stabilizing of the real estate 

market? 

Mr. Allison? 

Mr. ALLISON. Actually, I believe, first of all, we can take heart 

from the fact that Fannie Mae has a very strong employee base, 

extremely dedicated to the mission of providing affordable homeownership to Americans. 

We have, as you know, a very large book of assets. Much of those 

are good assets. They have been current for years. We do have, 

though, a large subportion of those assets that are troubled, and 

it is going to take some time to work those off the balance sheet. 

But I do believe that when that is done—and it will be done— 

that the company will be in a very strong position to continue to 

serve the country. 

Mr. KANJORSKI. Very good. 

Mr. Moffett? 

Mr. MOFFETT. Yes, Freddie Mac, just as Mr. Allison stated, has 

some wonderful employees, and they are very dedicated to the mission of Freddie Mac and the housing market. 

I think what you would expect from us over the near term and 

over the long term is to work out some of these problems in our 

mortgage portfolio. And I think what you will see over time, we 

will work through those loans and we will get some resolution with 

regard to the outcome of those loans. 

I think, in addition to that, we need to spend some time examining our credit criteria, all the programs around credit underwriting. Several of the Congressmen have mentioned accounting. 

We are focusing a lot of time and attention around the accounting 

area. 

We are going to build an organization that can sustain itself and 

continue to meet its mission over time, which really means we are 

reviewing every aspect of the business. And we are working hard, 

at the same time, to restore confidence in Freddie Mac, both with 

our customers and also the securities market to provide us debt. 

Mr. KANJORSKI. I guess one other question: If we had in some 

way totally privatized Fannie and Freddie, would they have been 

a sufficient threat to the American economy that, as private organizations, the Federal Government would have had to have taken action to rescue them? Or could they have just been allowed to cease? 

I don’t know if my question is clear, but I am trying to jump into 

what we think we should do in the future with regard to Fannie 

and Freddie. In other words, should you be this special model that 

you are, or should we totally privatize you and then, if there is a 

failure in the future, let you go? 

Mr. ALLISON. I think what we are confronting right now is the 

need to put these institutions on a sound footing in their current 

situation and given the crisis in the financial markets. And that is 

going to take a great deal of effort on the part of both institutions. 

40 

I don’t think we are in a position today to look forward and make 

recommendations on what the form of these companies should be 

in the future. I think that is something that Congress will be involved in, as well as the next Administration. 

But the fact is that, as Mr. Lockhart said earlier, these companies were highly leveraged, and, given the almost unprecedented 

disruption of the capital markets, they were facing grave difficulties, and that the conservatorship seems to me to have been necessary. 

Mr. KANJORSKI. You really do believe it was a perfect storm? 

Mr. ALLISON. I think it is a storm that we haven’t seen, certainly 

in my lifetime. And I think it is today still an extreme threat to 

the country’s economy and to the global economy. 

Mr. KANJORSKI. Very good. 

Mr. Moffett? 

Mr. MOFFETT. I think the role of the conservatorship is really the 

time and the place to rebuild Freddie Mac. And I think, with the 

support of Treasury and the support both in the capital and in the 

funding, it gives us that time to rebuild the company. 

I am in no position at this time to recommend how Freddie Mac 

should be structured in the future. I certainly wouldn’t pretend to 

be in that position. But I think this rebuilding period, while we are 

in conservatorship, will yield good results. And I think the employees are dedicated to building back the reputation of Freddie Mac. 

And, during this time of conservatorship, I think it will make a big 

difference to regain that confidence and regain both the employees’ 

and the public’s view of Freddie Mac. 

At that time, then certainly the question of in what form it 

moves forward once it gets through this conservatorship, I think, 

does need re-examination. 

Mr. KANJORSKI. Very good. Thank you very much. 

I think I have exhausted my time. 

The gentleman from Connecticut, Mr. Shays. 

Mr. SHAYS. Thank you. 

Thank you both very, very much, Mr. Allison and Mr. Moffett. 

I am unclear on a few things that are obvious to a lot of people, 

but just walk me through it fairly quickly. You both are the CEOs 

of the companies. Do you have a board of directors? 

Mr. ALLISON. We don’t as yet, no. 

Mr. SHAYS. So who do you answer to? Do you answer to the regulator? 

Mr. ALLISON. Well, currently the regulator is serving as our 

board of directors. We do have a nonexecutive chairman who has 

been appointed, Mr. Philip Laskaway. 

Mr. SHAYS. Is that the same for you, Mr. Moffett? 

Mr. MOFFETT. Exactly. 

Mr. SHAYS. Okay. No stockholders? 

Mr. ALLISON. We have stockholders. We still have public stockholders. 

Mr. SHAYS. So the public stockholders basically have no value 

right now? 

Mr. ALLISON. The stock today at both companies is selling at a 

little over $2 a share. 

41 

Mr. SHAYS. Okay. Explain to me the difference between conservatorship or—you are a conservatorship; is that correct? 

Mr. ALLISON. That is correct. 

Mr. MOFFETT. Yes, sir. 

Mr. SHAYS. Okay. Explain what that means. 

Mr. ALLISON. The company remains in its current form, but its 

board has been replaced by our regulator, Director Lockhart. He is 

exercising the authorities of the board. And I have been delegated 

by the director to be the chief executive responsible for the— 

Mr. SHAYS. And how is that different from a receivership? 

Mr. ALLISON. A receivership looks to liquidate the company, 

whereas, in a conservatorship, the conservator is conserving the assets. 

Mr. SHAYS. Thank you. 

Mr. Moffett, I am assuming that you would be saying basically 

the same thing. 

Mr. MOFFETT. Yes, exactly. 

Mr. SHAYS. Okay, and I thank you for not saying it twice. 

Neither of you have called on the $100 billion that is available 

to you; is that correct? 

Mr. MOFFETT. That is correct. 

Mr. SHAYS. When you do, what do you give up for the stockholders? 

Mr. ALLISON. Well, if we had to turn to the— 

Mr. SHAYS. Let me ask you this way. If you could go to the private marketplace, would that be preferable than turning to the government? 

Mr. ALLISON. Well, right now we have a facility from the Treasury where the Treasury stands behind us with $100 billion in return for the preferred stock arrangement. 

Mr. SHAYS. Right. And does that enable you to go to the private 

marketplace with credibility? Or, when you need funds, where is 

the first place you go to seek some of those funds? 

Mr. ALLISON. Well, first of all, we can go directly to the debt 

markets today. And we do every day. We are extremely active. In 

fact, Fannie Mae— 

Mr. SHAYS. And that is true for you, Mr. Moffett? 

Mr. MOFFETT. Yes. 

Mr. SHAYS. I am sorry to interrupt, but you are being very helpful, and I am learning a lot. 

Is there a point in time when you do not think you will be able 

to go to the debt market? And is that proprietary, or is it in weeks? 

Months? What? 

Mr. ALLISON. We are active in the debt markets today. In fact, 

Fannie Mae issued a 2-year note about 2 weeks ago for $700 billion. Demand was over $9 billion. It was the largest debt financing 

of its type in the history of the company. 

Mr. SHAYS. So the fact that the Federal Government is there is 

making the debt market more comfortable? 

Mr. ALLISON. Yes, sir. 

Mr. SHAYS. Is it conceivable you might be able to avoid having 

to turn to the Federal Government for any of this $200 billion? Unlikely or likely that you could avoid it? 

42 

Mr. ALLISON. Speaking for Fannie Mae, we are now in the midst 

of an intensive examination of all of our assets. 

Mr. SHAYS. Give me the short version to the question. 

Mr. ALLISON. We are not sure, at this point. It is going to take 

a couple of months of intensive work to really understand the risk 

composition of the assets and to begin to plot a path forward. 

Mr. SHAYS. Is it the same with you, Mr. Moffett? 

Mr. MOFFETT. Yes. I think this next 6 months is going to be very 

telling, because we are both spending a lot of time trying to evaluate the assets. 

Mr. SHAYS. And your question will be also the condition of the 

market, as well. 

Mr. MOFFETT. First of all, I think the next 6 months will determine whether we are going to need to access the facility. 

Mr. SHAYS. Is it conceivable that the plan that we are trying to 

work out with the Treasury Department and with the Federal Reserve will help make it less likely that you will have to turn to Federal dollars for assistance? 

Mr. MOFFETT. It is conceivable. 

Mr. SHAYS. Or certainly less reliant on it? 

Mr. MOFFETT. It is conceivable that the facility you are describing could help, and it could especially in several ways. One, it could 

give confidence to the securities market and confidence to the mortgage markets. That could play a role in allowing more refinancing 

and more mortgages. 

Mr. SHAYS. So, in some ways, we may be double counting when we say we are going to have to spend $200 billion here and so on. 

You may, by our taking action elsewhere, you may not have to rely 

on the $200 billion to $100 billion each? Is that possible? Not likely, but possible? 

Mr. MOFFETT. It is just hard to determine, at this point. 

Mr. SHAYS. Fair enough, fair enough. 

Thank you both very much. 

Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you, Mr. Shays. 

The gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. Mr. Allison, Mr. Moffett, 

it is good to see you. 

Mr. Allison, you have done a good job with TIAA–CREF, moving 

part of it to Charlotte. I appreciate that. 

Mr. ALLISON. Thank you, Congressman. 

Mr. WATT. We always appreciate the fine citizenship of that corporation there. 

I presume you are not related to the Allison who is now the head 

of BB&T? 

Mr. ALLISON. Sir, actually, that Mr. Allison and I had dinner together a few nights ago, and over the years we have traded e-mails, 

because we are distantly related. My own family comes from North 

Carolina. 

Mr. WATT. All right. We won’t pursue that in public. 

[Laughter] 

It might embarrass somebody. 

Perhaps I should have taken an opportunity to ask Mr. Lockhart 

some of the questions. I really wanted to get more focused on the 

43 

future of Fannie and Freddie, but it sounds like you all are not prepared to talk about the future of Fannie and Freddie. So let me try 

to get into this this way. 

It seems to me, based on what I have read, that the mission of 

Fannie and Freddie changed by default when you all took it over, 

because—when we took it over, I guess—in the takeover statement, 

Mr. Lockhart said, ‘‘I have determined that the companies cannot 

continue to operate safely and soundly and fulfill their critical public mission.’’ 

I have read Mr. Paulson’s statement that says, ‘‘Since the difficult period for the GSEs began, I have clearly stated three critical 

objectives: Providing stability to financial markets; supporting the 

availability of mortgage finance; and protecting taxpayers.’’ 

Apparently, in testimony before the Senate, Mr. Lockhart said, 

‘‘There is no expectation that either Fannie or Freddie will meet 

the affordable housing goals that were set for 2008.’’ They didn’t 

meet them in 2007 either, even when things were going great. 

I am trying to figure out what Fannie and Freddie’s goal mission 

is as you understand it now. And if it is not trying to meet its affordable housing goals, if it is just supporting housing for richer 

people rather than affordable housing, why that couldn’t be done 

through the regular private market without any government subsidy. 

I guess my question is, both now and future, can Fannie and 

Freddie have a useful purpose that is a government objective of 

helping people get into housing without either an implicit or an explicit government subsidy of some kind? 

Now, that is a big, broad question that I just asked, but I don’t 

know how to ask it any more succinctly than that. And maybe I 

should shut up before time runs out and let you all wax and wane 

in that context a little bit. 

Mr. ALLISON. All right. David, do you want to begin? I would like 

to follow up, though. 

Mr. MOFFETT. First of all, the company today is seeking to fulfill 

its mission. It is seeking to provide stability to the mortgage market, and we are doing that by being active in purchasing mortgagebacked securities, which will lead and have led to lower mortgage 

rates. 

We are seeking to fulfill our affordable housing goals. I think the 

point that I made earlier is it is a very difficult market to do that 

in today. We are buying and providing mortgage money in the affordable housing market in two ways. One is in the multifamily 

area. That business continues to operate, and it has continued to 

provide financing in the multifamily market. It is also doing that 

in the affordable market, as well. 

So both of those missions we are continuing. I think the issue 

that you are raising is, how can we pursue this mission and, at the 

same time, be concerned about safety and soundness. And I— 

Mr. WATT. No, I don’t think those things are mutually exclusive. 

I am just—well, go ahead. 

Mr. MOFFETT. Well, what I am trying to get to is I think the conservatorship provides the time, in order to rebuild the capital of the 

company, to work through the credit problems and, at the same 

time, meet our mission responsibilities. 

44 

Granted, the affordable housing goals that were established in 

2004 were based on some assumptions about what the environment 

would be in 2008. That has clearly changed. And, therefore, we are 

still seeking avenues and ways to reach those goals, but they are 

going to be very, very difficult to meet. 

Mr. ALLISON. Let me just add, if I may, that we are totally committed to striving to meet our housing goals, and that is a central 

part of our mission. In fact, I recently reorganized Fannie Mae, in 

just the last 2 weeks, so that our housing and community development area reports directly to me. 

We have been very active in supporting efforts to prevent foreclosures in cities and in rural areas. We have developed a strong 

and preferred partnership with State housing finance agencies. In 

fact, we have made a $10 billion commitment to finance single-family loans for first-time homebuyers. Fannie Mae has purchased 

$1.88 billion in FHA loans this year alone. 

We are the Nation’s largest investor in affordable multifamily housing. We provided $26 billion for multifamily housing this year 

alone. And so far this year, we have served more than 350,000 families who are at or below the area median income and 170,000 families at or below 60 percent of area median income. And even as 

we have done all that, we are redoubling our efforts going forward. 

Mr. KANJORSKI. Mr. Allison, I thank you. 

And, Mr. Watt, we have about 6 minutes left in our vote. 

Mr. WATT. Thank you, Mr. Chairman. 

Mr. KANJORSKI. There are three votes. We will take them and 

take about 25 minutes to return. 

Fortunately, this is a great learning process for both of you. You 

will find out why you won’t want to come testify before Congress. 

[Laughter] 

But we will be back, and several of our members want additional 

time. So thank you very much for your indulgence. 

[Recess] 

Mr. LYNCH. [presiding] In the interest of time, I would like to reconvene the hearing. We will be joined by Chairman Kanjorski in 

a bit. We appreciate the forbearance of the witnesses here. 

And I would like, at this point, to recognize Mrs. Capito for her 

questions. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

I want to thank the two gentleman for waiting, as well. I am 

going to ask a couple of short questions now. Both your stocks are 

still trading. Are they trading as preferred and then general 

stocks? What is the stock price now— 

Mr. MOFFETT. Roughly $2, both of them. 

Mrs. CAPITO. Both $2. And what was the high? 

Mr. ALLISON. If you mean prior to the conservatorship? 

Mrs. CAPITO. Yes. 

Mr. ALLISON. I think ours was around $60 or so. 

Mr. MOFFETT. I think ours was more like $70 at some point. 

Mrs. CAPITO. Last summer? 

Mr. MOFFETT. Yes. 

Mrs. CAPITO. I know that a lot of Members have been contacted 

by community banks, and you might have addressed this in your 

statements, so excuse me if you are repeating. But I just talked to 

45 

a community banker who invested, and when asking their regulator if this was a good investment, they were very much encouraged to go to the preferred stock. And they are asking for, like, a 

fair treatment, I believe is what they would prefer, excepting losses 

maybe. 

But I think the fact that the government now is in front of the 

other shareholders is a difficult thing for them to accept, especially 

since they have been playing by the rules and doing what they 

should do. What do I tell my banker at home? 

Mr. ALLISON. I think you can tell them, as the Director said this 

morning, that the regulators are working with these banks; they 

understand the problem and the concerns. I believe the regulator 

also said that there is no plan to resume dividends but that they 

would work with the various banks to see how they can give them 

some relief, perhaps, from the capital requirements. That is my understanding. 

David? 

Mr. MOFFETT. Yes, my understanding is that the conservator 

made the decision to suspend the dividends. And I think the testimony earlier this morning basically suggested that, for the time 

being, they are not going to relook at the dividend issue. 

So that is really a conservator issue. It is really a question for 

Director Lockhart. 

Mrs. CAPITO. Looking at your balance sheets now, could you sustain the dividends now in your current condition? 

Mr. ALLISON. Again, there was a decision by the conservator to 

suspend the dividends at the time that the conservator took over 

these institutions. 

I can speak for Fannie Mae. We are looking at our entire financial situation. We are about to embark on financial planning for the 

coming year. We are reviewing all of our risk portfolios. So we are 

not yet in a position to have visibility toward what our future financials might look like. And even then, when we finish our planning, we will have a range of possible financial scenarios, depending mainly on housing prices over the next year or 2. 

Mr. MOFFETT. Yes, I would agree. We are in the midst of doing 

a plan for 2009, which a lot of the issue is going to be focused on 

capital. And that capital is going to be focused on, can we sustain 

our capital over a longer period of time? I think, in the near term, 

the assessment that we are going through right now is more critical, quite frankly. 

Mrs. CAPITO. One final question, and I think it is sort of a mindof-the-man-on-the-street type of question, that these financial instruments were all packaged, and nobody really knew what was in 

them. 

Do you know now what is in these packaged mortgages in the 

detail that you need to know so that you can determine—this may 

be naive, the way I am thinking about it. If something is packaged 

with 100 loans, 2 are bad, 80 are good, and 18 are in the middle. 

Do you know now what you are holding, and can you say with a 

certainty that you will know that? 

Mr. ALLISON. Oh, yes. And speaking for Fannie Mae, we have 

begun a complete review of our balance sheet in depth. 

Mrs. CAPITO. In depth to, like, even to— 

46 

Mr. ALLISON. Down to, in many cases, singular loans. We can 

also type certain types of loans, which are similar in documentation 

and risk characteristics. 

But where we have to—we are going down to single loans. And 

this is going to take us several months. It is a very intense effort 

that started 2 days after I arrived. We need to move quickly on this 

and intensely, because we will be filing our third quarter reports 

later on in the fall and we want to make sure those are as accurate 

as possible and that our disclosure is as complete as we can make 

it. 

Mr. MOFFETT. And we are doing exactly the same thing. I think 

it is going to take several months in order to drill down to each 

individual asset at the loan level or at the security level to really, 

fully understand the impact that this has had on the securities 

and, therefore, on the mortgages underneath them. So it is going 

to take some time. 

Mrs. CAPITO. Okay. Thank you both. 

Mr. LYNCH. Following up on Mrs. Capito’s question, with respect 

to the community banks, there needs to be some type of accommodation for those banks. They were encouraged by government officials and by others to invest. They are a bulwark in many communities against the current crisis. And there has to be some way to 

provide some relief. 

Let me just ask you, earlier, in response to questioning from Mr. 

Shays of Connecticut about the necessity of resorting to the $100 

billion support that you might rely on if you need it, I just—I guess 

I have a more pessimistic view of this thing. And I also serve on 

the Government Oversight Committee, and so we are looking from 

a much more critical standpoint. 

But if I look at, over the last year, what some of these international commercial firms and what some of these investment 

banks have written down based on their portfolios, they have written down about $500 billion in holdings. As a matter of fact, if you 

take the top 25 firms there, you know, they have written down considerably more than Fannie and Freddie have, which have a much 

higher, a much larger portfolio. They have written down $500 billion. Fannie has written down $5 billion, and Freddie has written 

down $2 billion, roughly. 

That just does not jive. They have looked already at their portfolios, and they have written it down. And we are in the process 

of looking at ours, you know, figuratively speaking. That does not 

look good to me. And if there is something I am missing in that 

analysis, could you explain that to me? 

Mr. ALLISON. Well, Congressman, again, I think both of these institutions are taking a fresh look at that balance sheet. And we are 

using outside experts, as well as our own people, as a double check. 

This is going to be an extremely intensive process. 

Mr. LYNCH. It could be bad, right? 

Mr. ALLISON. Well, I wouldn’t draw any conclusions at this point. 

We will be disclosing this fall what we think the position is. 

And, also, one has to keep in mind that we have to look at various scenarios of housing prices, which have a very important impact on the expected value of those securities. So, at best, we can 

47 

present a range of possible outcomes to the conservator and, eventually, I am sure, to Members of Congress. 

Mr. LYNCH. Okay. I understand that is the process, and you have 

explained that quite well on several occasions, and I don’t want to 

eat up all my time on that. 

Mr. Moffett, I assume you are going to give me the same— 

Mr. MOFFETT. I would just give you—we are going through exactly the same process. But one thing I think is important to think 

about is that the composition of what different institutions have 

can vary wildly. So their business, although it may be mortgage, 

it may be different kinds of mortgages. 

Mr. LYNCH. Fair enough. 

Mr. MOFFETT. I think that is one of the things that we are also 

trying to do, is not jump to any conclusions but get the facts. 

Mr. LYNCH. And I do understand that you were more likely to 

have AAA, you know, or top-rated securities, as opposed to what 

some of these other firms were doing. So I think that might ameliorate things as well. 

Let me ask, again, sort of piggy-backing on Mrs. Capito’s questions, we have a program now where we are anticipating at the 

outset $700 billion, you know, purchasing a lot of securities. Eighty 

percent of that $700 billion is basically—80 percent of the entire 

market there is securitized mortgages. 

And you are talking about going through this process that is taking several months to pull these mortgages out and look at each 

one of them. I can’t imagine that the new entity doing this is going 

to have any better time with such a larger portfolio they are going 

to acquire. 

Is there any estimate that you have on what you are doing, how 

many months that will take? 

Mr. ALLISON. I don’t think I could give you an estimate. I think 

one of the ways that the government may try to ascertain the value 

of those securities is through an auction process where many different players can give their own estimates of those values. 

And let me also say that we are having conversations with the 

Treasury about how we might help them in their administration of 

their program down the road. 

Mr. LYNCH. Okay. 

Mr. ALLISON. But, honestly, I can’t tell you how they would value 

those securities. 

Mr. LYNCH. All right. 

Mr. Moffett, could you enlighten us on that at all? 

Mr. MOFFETT. No, I think that is exactly right. I think what the 

Treasury is trying to do is create a market so they can get the best 

prices for the securities, so that there is at least a way to find the 

price. And I think it is just going to take some time, quite frankly, 

to sort out what it is. 

Mr. LYNCH. All right. 

The Chair recognizes Mr. Garrett from New Jersey. 

Mr. GARRETT. Thanks to the gentlemen, realizing you are new on 

the job, so to speak. I appreciate that, as far as your answers are 

concerned, but can you give me the best estimate? 

You have probably heard some of my previous questions. One of 

the questions I should have asked at the end of each one of those— 

48 

well, he said, we are looking into these things. I should have asked 

the question, can you give us a ballpark timeline of when we 

should look at them? So I will throw them out to you, since you 

are the guys that are dealing with them on a daily basis. 

One of the areas, as you saw my concern, was just the charitable 

contributions by the organizations. Correct me if I am wrong. You 

are looking at the situation now. 

Mr. MOFFETT. No, that is exactly—we have been instructed by 

Director Lockhart to go through them in detail and give him a plan 

as to what we would do and what we wouldn’t do. And it is really 

going to be in his hands. 

Mr. GARRETT. Okay. Oh, okay. So then you have to give him— 

I should ask that question, then. What is the timeframe that you 

are supposed to give him the plan? 

Mr. MOFFETT. We haven’t set a timeframe, but it is a high priority of his. And we are working to meet that. 

Mr. GARRETT. And you heard my other— 

Mr. ALLISON. Yes, sir. 

Mr. GARRETT. You heard my other question to him also. Is it possible to do a retrospective look, go and have somebody go into the 

accounting office someplace or the other in the old files and pull 

out the records and say, this is what we gave in 2007, 2006, and 

2005? Is that a big— 

Mr. MOFFETT. I don’t know yet, but we are going to try to do 

that. 

Mr. ALLISON. We will be glad to respond to any inquiry from a 

Member of Congress about that. And I don’t know what the records 

are, but we will certainly attempt to provide the information. 

Mr. GARRETT. If you could both consider this a request to put it 

in writing, I would appreciate that. Because you see my concern. 

I mean, the article in one of the papers said that there was just 

a happenstance correlation, as far as charitable contributions going 

to those Members who happen to be stronger supporters of the 

GSEs. Maybe that is just happenstance, just as most earmarks 

happenstance only go to the chairmen of the various committees 

down here. That is just a coincidence, too, always. 

But the other question that I asked—and I will ask your side— 

is, what is your opinion on the element of the housing trust fund 

in the July legislation? Does that make your life any easier? 

I know, Mr. Moffett, your closing remarks were that you are trying to make this company stronger and what have you, and I assume Mr. Allison is also trying to do that. Does that make your life 

easier, or does it have no impact upon you? 

Mr. MOFFETT. Well, my view is that the most important issue at 

this time is to figure out the values of the securities, just like we 

addressed before, to figure out exactly what we need to do going 

forward. And that is going to be a byproduct of either how—the 

capital needs of the company are ultimately going to determine 

that. But we are way too early. 

Mr. GARRETT. When you come out with your plan, I guess, going 

forward, will you come out—and Mr. Allison, too—will you come 

out with a plan and say, this is how we should go forward? And, 

in that plan, say one of the elements of going forward will be the 

current law, which requires us to do ‘‘X,’’ and if we keep that in 

49 

place, it will mean this, and if we don’t do that, it will mean ‘‘Y?’’ 

Is that how— 

Mr. MOFFETT. I think the interim step is—it is really going to be 

Director Lockhart’s call, because he is the one who has to make 

that assessment. We are going to give him the facts, and we will 

give him the projection. 

Mr. GARRETT. You will give projections both ways? 

Mr. MOFFETT. Both ways. 

Mr. GARRETT. He has been doing all the talking. 

Mr. ALLISON. My understanding is the rules have not yet been 

promulgated on that. So we are waiting for the rules, and as soon 

as we have them, we are going to analyze that and then make our 

recommendations to Director Lockhart. 

Mr. GARRETT. And another question from the other side—I 

thought it was an interesting one; I didn’t know it was still going 

on—it was with regard to the no doc loans. That is also something—documentation loans that are apparently still going on. And 

this is also all part of the package that you would be looking at. 

Mr. ALLISON. Let me try to be clear on that. From a Fannie Mae 

standpoint, we are not actively engaged in any significant no doc 

or low doc lending today. 

I think we have to look a little differently at the secondary market activities, where, in order to provide greater liquidity into the 

mortgage market, we may decide to purchase some securities in the 

open market that do have some Alt-A in them, but where the AltA is current and it is seasoned. In other words, if there is a record 

that it has been paying steadily, we might view that differently. 

But we are not doing new Alt-A type business today. 

Mr. GARRETT. I understand. I appreciate that clarification. 

Last question—I am on the yellow light here, so let me just ask 

this, and this was brought up because of your comment at the end 

of your—making a stronger company and all. There are some people who thought it should not have been a conservatorship, that it 

should have been a receivership and go in that direction to address 

future systemic problems. 

The question I have was, your predecessor made the comment 

that was in the paper that said his role was almost, I think his 

words were, an impossible one. It really applies to you, as well. He 

was implying that he had dual responsibilities and that it was an 

impossible task for him to serve both masters, basically. I am paraphrasing. 

Do both of you see that the current structure is, as Mr. Syron 

said, an impossible role for any CEO to actually to try to cater to 

both masters? 

Mr. ALLISON. From my standpoint, as I said in my prepared remarks, we have to balance the need for safety, soundness, and protecting the taxpayer with the mission of the organization, which is 

to be active in the markets and help provide affordable financing 

for homeowners. 

That is a balance, and we have to gauge both. And we have to 

be open about the way we are making that balance and those 

tradeoffs. 

Mr. GARRETT. He was also comparing with regard to, at that 

point, the equity holders in the company as well. 

50 

Mr. ALLISON. Well, today the taxpayers are, in fact, indirectly equity holders, and we have to keep their interests in mind. So, on 

the one hand, the American public owns homes, but they are also 

taxpayers. We have to make a tradeoff. 

And I think the key to this is going to be to be transparency 

about the decision tools we are using to make those types of tradeoffs. We will have to get approval of the conservator, as well as 

eventually our own board. And we will have to come to Congress 

and explain those tradeoffs, as well. 

Mr. MOFFETT. I think ultimately the tradeoffs are going to have 

to be made by Congress. I think you are going to have to deal with 

that issue, that seemingly very difficult balance between shareholders and the taxpayers. And I don’t think we are in a position, 

at least at this juncture, to comment on that. But that is ultimately 

going to be the issue. 

Mr. GARRETT. It is the proverbial ‘‘above the pay grade.’’ 

Thank you, gentlemen. 

Mr. LYNCH. All right. The Chair recognizes the distinguished 

gentleman from Colorado, Mr. Perlmutter, for 5 minutes. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

Ordinarily, I am the guy who sees the glass as half-empty, and 

Mr. Lynch and Mr. Garrett see it as half-full. But I am going to 

reverse that today, because, coming from Colorado, we have seen 

our foreclosures drop and the number of homes available on the 

market reduced substantially. So I think, you know—but we went 

into this before anybody else did. So I just see that. 

My questions to you, first I would like to ask—they are just kind 

of the simple ones. 

For Fannie Mae, what is your cash flow each month, I mean, 

your income versus your expenses on a general basis? And you can 

give it to me before taxes, after taxes, I don’t care. 

Mr. ALLISON. Well, if you look at total cash flows from financings 

and the cash flows out through loans, etc., today the cash flows are 

actually positive. And we have been able, as I mentioned in my 

earlier remarks, to raise our all-time record 2-year financing of $7 

billion. We are able to raise money, as well, in the short-term 

money markets. And we have managed to maintain stability in the 

amount of mortgage-backed securities underwriting that we are 

doing today, in spite of the turmoil in the markets. 

Mr. PERLMUTTER. So you are making $1 million, $2 million, $3 

million? 

Mr. ALLISON. Again, there is a difference between cash flow and 

earnings. And, again, that is something we are looking at today. 

Mr. PERLMUTTER. What about Freddie Mac? 

Mr. MOFFETT. Well, exactly. Freddie Mac also has positive cash 

flow. It is too early to determine what the earnings will be in the 

third quarter and then in the future. But right now it is positive 

cash flow. 

Mr. PERLMUTTER. Which then brings me to the question that you 

both have talked about, which is capital. How much capital does— 

I mean, I can’t remember whether, in the law that we passed in 

July, whether we set a capital requirement for Fannie Mae and 

Freddie Mac. 

If we did, what is it? If not, what are you shooting for? 

51 

Mr. Allison or Mr. Moffett, go ahead. 

Mr. ALLISON. Allow me, then. 

One of the reasons we are conducting this exercise to value the 

portfolio on our balance sheet is to determine how much capital we 

actually have. And that is going to depend on an analysis of the 

value of the balance sheet with the assets, what are these assets 

worth today—and, by the way, there will be ranges of values, depending on projections of home prices—and also what are our liabilities today. And we will deduct the liabilities from the new 

asset valuations and conclude what our equity capital is. 

And, again, there is economic equity, to make this a little more 

complicated, and there is GAAP equity. And we will be reporting 

both when we publish our third-quarter financial statements. So I 

can’t give you a precise answer today until we do that valuation 

as to how much capital we have. 

Mr. PERLMUTTER. Okay. But my question to you two is, Mr. 

Lockhart said that, back in July, it was 1 or 2 percent capital. 

Now, I don’t know whether it was equity or GAAP or what he was 

talking about, but apparently that was too low. What are you 

shooting for, like, 5 percent like a bank has to have, or what? 

Mr. MOFFETT. At this juncture, I am just going to, not repeat 

what Mr. Allison said, but I think we have to determine what the 

base is, the base capital, based on the assessment of the assets at 

the end. And I think that is where all the energy is being focused, 

on what exactly is the fair value of the assets. 

From the capital point, then I think both of our goals are to retain capital and build capital in the companies. And I think that 

is going to depend on future losses and future expectations for 

home prices. But I think the goal is to establish that base and then 

to try to grow the capital base from there. 

I do understand that Director Lockhart’s team is working on capital ratios, re-assessing what those capital ratios are going to be 

and should be. And it is too early, and I certainly am not privy to 

that. But they are working at that level, to determine what those 

ratios should be. 

Mr. PERLMUTTER. All right. We have this $700 billion thing we 

have just been kicking around for a couple of days and are supposed to act on it very quickly. But let’s take your organizations, 

all right? You guys go in, you look at your portfolio, you say, ‘‘Okay, 

we have 10 percent distressed properties.’’ Do you then cordon that 

off and then sell it? Is that something that you would be planning 

to do? 

I am just trying to figure out what it is that is going to happen with that $700 billion, whether it affects a Fannie Mae or a 

Freddie Mac or if it is purely Goldman Sachs and Bank of America. 

I don’t know who it is. And I don’t know if you have thought about 

it, because we are sort of doing this on the fly as we speak. 

Mr. ALLISON. Well, we, first of all, have to determine what we 

believe the economic value to—let’s say, maturity of those assets 

are. And then we have to compare that to the market price of the 

asset out on the open market and the liquidity of the market, the 

market’s ability to absorb large volumes of those securities. 

And so we have a lot of judgment calls to make down the road, 

and we haven’t yet. Until we value these portfolios, we will not be 

52 

in a position to have an asset disposition planned. But that is 

something we are going to have to develop in the months to come. 

I can assure you that we are working extremely hard to understand this portfolio and to begin developing strategies going forward. 

Mr. PERLMUTTER. Okay. Is it the same for you, Mr. Moffett? 

Mr. MOFFETT. Yes, I think, just to add to that, I think one of the 

assessments will need to be should we sell them, or, as Mr. Allison 

discussed, maybe we will realize the value over the long haul and 

maybe it is not in the best interest to sell the assets. 

So that is why this asset valuation process is so important, not 

just for the capital considerations that we are dealing with today, 

but also real value, should we keep the assets, work through them, 

and over time realize that value. 

Mr. PERLMUTTER. Sort of, on the positive side—I know my time 

is up—in this conservatorship you actually have time to do that. 

Mr. MOFFETT. That is right. 

Mr. PERLMUTTER. Thank you. 

I yield back. 

Mr. LYNCH. Okay, we thank the gentleman. I want to thank you 

both for attending the hearing and for helping the committee with 

its work. 

I do want to, before we close, just ask you the same question I 

asked of Mr. Lockhart when he was here before. Back in the day 

when the taxpayer was not a shareholder as they are now, and 

back in the day when the taxpayer did not have any skin in the 

game, it wasn’t necessary for the members of this committee to understand in such minute detail the conduct of and the details of 

these complex securities. 

However, now the game has changed. And so we need both 

Democrats and Republicans on this committee, we need—exactly as 

I asked Mr. Lockhart—we need your folks who are trying to do this 

work pulling these securities apart, valuing them, to give that 

same instruction to us and let us observe that practice. 

So either we have some of your folks come up to the Hill and 

demonstrate that to the members, or we arrange something for us 

to go over to Fannie and Freddie and observe that practice as it 

is going on, without disrupting things, obviously. 

But we now need to know in this level of detail what we have 

here. Because we have some pretty important decisions to make, 

and I think it will help the members enormously if they can actually reduce this down to a degree where they can actually understand it. 

I think that is where much of the weakness in the market was, 

lack of transparency. People didn’t know what they had, so fear 

struck because of the unknown. If we can remove some of that unknown, at least in the minds of the Members of Congress, it would 

greatly help our ability to find a cogent solution in all of this. 

So I will ask you both on the record, if you will be willing to do 

that? 

Mr. MOFFETT. We will do that, and we look forward to it. 

Mr. ALLISON. We will absolutely do that. 

And, furthermore, we are looking at how we can communicate 

these issues in our public disclosure in a way that is as underVerDate Aug 31 2005 17:34 Jan 16, 2009 Jkt 045626 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\45626.TXT TERRIE
53 

standable as possible and as clear as possible. These are very complex subjects, as you well know. Reducing them to simple, understandable concepts for the public is very important, I am sure to 

both of us. 

But in the meantime, we want to be as open as possible with 

you. And please call on us any time, and we will be happy to respond. 

Mr. LYNCH. Thank you. I appreciate that. 

I know that we have a lot going on today. There are members 

in various committees right now in meetings on some other matters 

that are very important. So I note that some members may have 

additional questions for this panel which they may wish to submit 

in writing. So, without objection, I would ask that the hearing 

record remain open for 30 days for members to submit written 

questions to the witnesses here and to place their responses in the 

record. 

With that, this meeting is now adjourned. 

[Whereupon, at 4:28 p.m., the hearing was adjurned.] 

(55) 

A P P E N D I X 

September 25, 2008 

56 


45626.001
57 


45626.002
58 


45626.003
59 


45626.004
60 


45626.005
61 


45626.006
62 


45626.007
63 


45626.008
64 


45626.009
65 


45626.010
66 


45626.011
67 


45626.012
68 


45626.013
69 


45626.014
70 


45626.015
71 


45626.016
72 


45626.017
73 


45626.018
74 


45626.019
75 


45626.020
76 


45626.021
77 


45626.022
78 


45626.023
79 


45626.024
80 


45626.025
81 


45626.026
82 


45626.027
83 


45626.028
84 


45626.029
85 


45626.030
86 


45626.031
87 


45626.032
88 


45626.033
89 


45626.034
90 


45626.035
91 


45626.036
92 


45626.037
93 


45626.038
94 


45626.039
95 


45626.040