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PAY FOR PERFORMANCE: SHOULD FANNIE AND

FREDDIE EXECUTIVES BE RECEIVING MILLIONS

IN BONUSES?

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

NOVEMBER 16, 2011

Serial No. 112–94

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform
(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director
(III)

C O N T E N T S

Page

Hearing held on November 16, 2011 ...................................................................... 1

Statement of:

Williams, Michael J., president and chief executive officer, Fannie Mae;

Charles E. ‘‘Ed’’ Haldeman, Jr., chief executive officer, Freddie Mac;

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

Agency ............................................................................................................ 9

DeMarco, Edward J. .................................................................................. 28

Haldeman, Charles E. ‘‘Ed’’, Jr. ............................................................... 17

Williams, Michael J. .................................................................................. 9

Letters, statements, etc., submitted for the record by:

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 7

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

prepared statement of ................................................................................... 30

Haldeman, Charles E. ‘‘Ed’’, Jr., chief executive officer, Freddie Mac,

prepared statement of ................................................................................... 19

Issa, Chairman Darrell E., a Representative in Congress from the State

of California:

Association of Corporate Counsels study ................................................ 70

Bloomberg News article ............................................................................ 42

Committee report ...................................................................................... 46

H.R. 3221 ................................................................................................... 66

Information concerning salaries ............................................................... 40

Prepared statement of ............................................................................... 4

McHenry, Hon. Patrick T., a Representative in Congress from the State

of North Carolina, Politico article dated August 31st ................................ 108

Williams, Michael J., president and chief executive officer, Fannie Mae,

prepared statement of ................................................................................... 11

(1)

PAY FOR PERFORMANCE: SHOULD FANNIE

AND FREDDIE EXECUTIVES BE RECEIVING

MILLIONS IN BONUSES?

WEDNESDAY, NOVEMBER 16, 2011

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10 a.m., in room 2154,

Rayburn House Office Building, Hon. Darrell E. Issa (chairman of

the committee) presiding.

Present: Representatives Issa, Burton, Mica, Platts, McHenry,

Walberg, Lankford, Amash, Buerkle, DesJarlais, Guinta,

Farenthold, Cummings, Towns, Maloney, Norton, Kucinich,

Tierney, Clay, Connolly, Quigley, Davis, Welch, Murphy, and

Speier.

Staff present: Alexia Ardolina, staff assistant; Kurt Bardella,

senior policy advisor; Michael R. Bebeau and Gwen D’Luzansky,

assistant clerks; Robert Borden, general counsel; Molly Boyl, parliamentarian; Lawrence J. Brady, staff director; David Brewer,

counsel; Katelyn E. Christ, research analyst; John Cuaderes, deputy staff director; Adam P. Fromm, director of Member services

and floor operations; Linda Good, chief clerk; Ryan M. Hambleton,

professional staff member; Frederick Hill, director of communications and senior policy advisor; Christopher Hixon, deputy chief

counsel, oversight; Mark D. Marin, director of oversight; Rebecca

Watkins, press secretary; Peter Warren, legislative policy director;

Jeff Wease, deputy CIO; Kevin Corbin, minority deputy clerk; Ashley Etienne, minority director of communications; Jennifer Hoffman, minority press secretary; Carla Hultberg, minority chief

clerk; Paul Kincaid, minority press secretary; Adam Koshkin, minority staff assistant; Lucinda Lessley, minority policy director;

Leah Perry, minority chief oversight counsel; and Dave Rapallo,

minority staff director.

Chairman ISSA. Good morning. The committee will come to order.

The Oversight Committee’s mission statement is that we exist to

secure two fundamental principles: first, Americans have a right to

know the money Washington takes from them is well spent; and,

second, Americans deserve an efficient, effective Government that

works for them. Our duty on the Oversight and Government Reform Committee is to protect these rights.

Our solemn responsibility is to hold Government accountable to

taxpayers, because taxpayers have a right to know what they get

from the Government. We will work tirelessly in partnership with
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citizen watchdogs to deliver the facts to the American people and

bring genuine reform to the Federal bureaucracy. This is our mission statement.

Go ahead and roll the President.

[Videotape played.]

Chairman ISSA. I now recognize myself for an opening statement. In March 2009, reports revealed that after receiving $170 billion taxpayer-funded bailout, AIG executives had awarded $121 million

in bonuses to top executives. As we have just seen, President

Obama called this obscene and shameful. He believed the taxpayers should be paid back in full before millions of dollars in bonuses were paid out.

Freddie and Fannie have become de facto arms of the Government and have received $169 billion from the Treasury Department. To this day, they still owe approximately $141 billion. Despite this outstanding balance, Freddie and Fannie’s top six executives received $35 million in compensation. Of that, $12.79 million

were bonuses awarded to Freddie and Fannie’s top 10 executives.

They have even gone as far as to pay someone a $1.7 million signing bonus. We certainly understand that signing bonus could be

partially because they left compensation elsewhere, but we also understand that there are plenty of talented people looking for jobs

off Wall Street here today.

The signing bonus was given with no correlation to performance,

but simply a recruiting tool financed by the American taxpayers.

These bonuses have come just as Freddie and Fannie have asked

for an additional $13 billion in handouts from the taxpayers. This

as they reported a third quarter loss of more than $10 billion. So

I think we all understand that we are not paying bonuses for profit.

Bonuses, under current law, to be tax deductible, in excess of $1

million compensation, must be tied to performance. Our committee

has asked for and received scant documents about performance required. None of the documents received to date would have qualified, when I was on the board of a public company, for a due diligence by the compensation committee. Vague assertions of what

one needs to do that can be met simply because you were there

does not pass the sniff test.

We are here today to ask simple questions on behalf of the American taxpayers, who are footing the bill for Freddie and Fannie.

Do you agree with President Obama’s sentiments that bonuses

should not be paid out to anyone until the American people have

been paid back in full?

Do you believe in the concept of pay for performance?

Do you believe your performance warrants this type of bonus?

Should you profit while the taxpayer is paying the bill?

Are there any measurable standards to even evaluate the performance within the documents we have received or do you have

other documents we have been denied pursuant to our request?

Are you any closer to unwinding Freddie and Fannie than you

were 3 years ago?

Are these bonuses being awarded for the efforts to minimize

losses to taxpayers or are they payouts to—I won’t read the rest

of that. Are they in fact payouts for other reasons? And if so, whose
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agenda are they on? Are they on the American taxpayers’ agenda

or are they political agendas that you are using taxpayer dollars

to achieve?

Let me make it clear. This committee believes that 2008 law requires you to minimize losses to the taxpayers. Business as usual

of simply taking more money from the taxpayers or underwritten

by the taxpayers fully and causing an agenda of getting more people into homes they cannot afford in fact has not been authorized

by Congress.

I now recognize the ranking member for his opening statement.

[The prepared statement of Chairman Darrell E. Issa follows:]
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Mr. CUMMINGS. Thank you very much, Mr. Chairman, for calling

today’s hearing and thank you for agreeing to my request to invite

Mr. DeMarco. Mr. DeMarco and I have been engaged in a series

of high level meetings over the past several months. Some of these

meetings have been heated, but others have been very constructive.

I appreciate his willingness to appear before us today and I look

forward to our continuing discussions.

Executive compensation is a worthwhile topic for this committee

to address. In my opinion, we should examine not only the compensation of executives at Fannie Mae and Freddie Mac, but also

at Wall Street firms that put the short-term financial interests of

their executives ahead of the long-term interests of company shareholders and the public.

In reviewing the compensation packages of Fannie Mae and

Freddie Mac executives, we will have tough questions for our witnesses about how they can claim credit and receive bonuses for

achieving performance goals they had nothing to do with, such as

supposedly increasing affordability in a housing market that has

been tanking for several years. More importantly, we will examine

why FHFA, Fannie Mae, and Freddie Mac have done so little to

fulfill the key goal of assisting homeowners in need.

In 2008, Congress passed the Emergency Economic Stabilization

Act and the President signed it on October 3, 2008. The act states

clearly that among other objectives, FHFA, Fannie Mae, and

Freddie Mac shall implement a plan that seeks to maximize assistance to homeowners. Chairman Issa and I do not agree on much,

but we do agree that, to date, efforts to assist homeowners have

been woefully inadequate.

The Home Affordable Modification Program, HAMP, was supposed to help up to 4 million homeowners modify their loans, but

to date it has helped fewer than 800,000. The Home Affordable Refinance Program, HARP, was supposed to help up to 5 million borrowers refinance at lower rates, but fewer than 900,000 have refinanced to date.

Where Chairman Issa and I part ways, however, is how we respond to this problem. The chairman and other Republicans, and

even Republican Presidential candidates, believe we should stop assisting homeowners, abandon efforts to address the housing crisis,

and allow millions of additional foreclosures so we can simply hit

bottom.

I come from a fundamentally different place. I believe that we

must redouble our efforts. We need to buckle down and do the hard

work necessary to develop solutions that will address this crisis effectively, comprehensively, efficiently, and definitively.

It is too easy to throw up our hands and blame this entire crisis

on individual homeowners who took out loans they could not afford.

Those individuals are certainly out there, but there are many more

who did absolutely nothing wrong; they paid their mortgages faithfully every month, but now they are under water through no fault

of their own. They owe more on their houses than they are worth,

and they cannot sell their homes and they cannot move to a new

city for a new job. They are in limbo, along with our entire economy.
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The foreclosure crisis does not affect only the individual foreclosed upon; it reduces the value of homes across entire neighborhoods; it lowers taxes, tax revenues for whole municipalities, resulting in the loss of more jobs; it degrades multiple levels of commerce across the country; and it affects each and every one of us,

whether we want to admit it or not.

Addressing the housing crisis is the key to our economic recovery

as a Nation. Mark Zandi, the chief economist at Moody’s Analytics,

agrees. He has stated that housing is ground zero for the economy’s

problems, high unemployment, and loss of jobs.

As Federal Reserve Chairman Ben Bernanke recently testified, it

will be almost impossible to resolve our economic situation when

people are losing their homes at the rate they are losing them.

Mr. Chairman, let me conclude by returning to the subject of today’s hearing. In 2008, Congress and the President passed the law

directing the FHFA, Fannie Mae, and Freddie Mac to maximize assistance to homeowners. This has not happened. I believe that we

are mired in a culture of mediocrity, and nobody should be receiving million dollar bonuses by claiming it has.

With that, Mr. Chairman, I yield back.

[The prepared statement of Hon. Elijah E. Cummings follows:]
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Chairman ISSA. I thank the gentleman.

All Members will have 5 days to include their opening statements and additional extraneous remarks.

We now recognize our first panel of witnesses. Mr. Michael J.

Williams is president and chief executive officer of Fannie Mae; Mr.

Charles E. Haldeman, Jr., is chief executive officer of Freddie Mac;

and Mr. Edward DeMarco is Acting Director of the Federal Housing Finance Agency.

Pursuant to the rules of the committee, I would ask you all to

rise to take the oath. Please raise your right hands.

[Witnesses sworn.]

Chairman ISSA. Let the record indicate all witnesses answered in

the affirmative.

Please be seated.

I won’t have the heaviest gavel in the world today, but I will tell

you that when the green light comes on you go; yellow light goes

on, try to summarize; and don’t let the red be on too long before

you conclude.

With that, I recognize Mr. Williams for 5 minutes.

STATEMENTS OF MICHAEL J. WILLIAMS, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, FANNIE MAE; CHARLES E. ‘‘ED’’

HALDEMAN, JR., CHIEF EXECUTIVE OFFICER, FREDDIE MAC;

AND EDWARD J. DEMARCO, ACTING DIRECTOR, FEDERAL

HOUSING FINANCE AGENCY

STATEMENT OF MICHAEL J. WILLIAMS

Mr. WILLIAMS. Chairman Issa, Ranking Minority Member

Cummings, members of the committee, I appreciate the opportunity to speak with you today about the important work that

Fannie Mae is undertaking and the compensation program that

was put in place for this executive team.

Fannie Mae has a dedicated team of talented professionals working to carry out the critical work that the company plays in the

housing finance market. We have immense responsibilities. The

complexity of the challenges we confront each day requires deep experience and expertise and seasoned leaders.

The executive management team in place today is different than

the team that ran the company prior to conservatorship. We are

working to fix the company and achieve the goals of conservatorship. Our employees are committed to Fannie Mae’s mission to provide funding to the market, help struggling homeowners, and reduce losses on loans originated prior to 2009.

Fannie Mae is the largest source of funding for the U.S. housing

market. Since January 2009, with the support of the Federal Government, the company has provided more than $2 trillion of funding to the market. The funding has enabled nearly 6 million households to refinance into safer, lower cost mortgages. We have helped

approximately 1.7 million homeowners purchase a home and we

have provided financing for nearly 1 million units of quality affordable rental housing.

Fannie Mae is also acquiring new loans with appropriately conservative underwriting standards to promote sustainable home

ownership. The mortgages purchased or guaranteed since 2009
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have strong credit quality and are performing well. The new loans

account for almost 50 percent of the loans owned or guaranteed by

Fannie Mae. These will be a valuable asset that we expect will reduce taxpayers losses.

Every day Fannie Mae employees work to mitigate losses on the

company’s 2005 through 2008 book of business. This book is significantly affected by continued weakness in the housing and mortgage

markets, which remain under pressure from high levels of unemployment and prolonged decline in home prices.

For distressed homeowners, home retention solutions keep families in their homes. We expect this will reduce Fannie Mae’s credit

losses over the long term. Since 2009, Fannie Mae employees have

helped approximately 1 million homeowners avoid foreclosure

through modifications and other work-out solutions.

Unfortunately, foreclosures are not always avoidable. When foreclosure is the only option, we help stabilize communities by properly maintaining and improving properties we acquire, and selling

them to new owners, giving preference to families who will live in

them.

Our employees believe in our mission and we are proud of the

work we are doing to serve the housing market. However, there is

great uncertainty for this company and its employees. As we know,

there will be GSE reform, but we don’t know when or what form

it will take. This uncertainty makes it very difficult to attract and

retain employees with highly specialized skills and experience.

This is particularly true as other financial institutions can offer

long-term career opportunities and, in many cases, substantially

more compensation. Attrition at our company this year has already

doubled our historical experience. If we are to continue to provide

the stability our housing finance system needs and protect the taxpayers’ investment in our company, we must retain and recruit

qualified executives and employees.

As CEO, I am responsible for ensuring that we effectively manage the resources we have received. To accomplish this, we have

employed talented professionals. These employees effectively manage 18 million loans.

In 2009, FHFA worked with our leadership, Fannie Mae’s board,

and the Treasury Department to develop a compensation program

for the company. Under this structure, compensation has been substantially reduced from pre-conservatorship levels. Target total

compensation for our executive management is down 50 percent or

more from levels prior to conservatorship, and we have reduced our

senior managers at the company by 30 percent.

In closing, I am proud of our team and of their dedication to our

important work serving the Nation’s housing market. Our ability

to attract and retain top talent remains a critical priority as we

continue to strengthen our business and deliver value to American

taxpayers.

Thank you, and I look forward to your questions.

[The prepared statement of Mr. Williams follows:]
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Chairman ISSA. Thank you, Mr. Williams.

Mr. Haldeman.

STATEMENT OF CHARLES E. ‘‘ED’’ HALDEMAN, JR.

Mr. HALDEMAN. Chairman Issa, Ranking Member Cummings,

and members of this committee, thank you for inviting me to appear today. My name is Ed Haldeman and I am CEO of Freddie

Mac. I joined Freddie Mac in August 2009, almost a year after the

company was placed into conservatorship by the Federal Housing

Finance Agency. I welcome the opportunity to be here today to address your questions and concerns about compensation for our executive team.

Let me begin by saying I understand why this hearing is necessary. I understand why the American people are outraged about

executive compensation in general. I understand totally why Congress and the American people are outraged about executive compensation at companies that have received Federal support, including Fannie and Freddie.

We have 9 percent unemployment in our country and there are

millions of families at risk of losing their homes. I understand the

outrage.

How, then, do I reconcile the compensation system at Freddie

Mac, given the suffering that so many families are living with? Let

me see if I can explain the dilemma I face.

My number one objective, since taking the job in the summer of

2009, was to keep the company functioning. I concluded that there

would be more families hurt, and the pain would last longer, if

there was a breakdown at Freddie Mac. So my focus was on keeping the machinery functioning well in order to do two things: first,

provide liquidity to the housing market and, second, help to implement programs that would keep more of our struggling families in

their homes.

With this guiding philosophy, it seemed to me that gradual

change would be preferable to radical change in the operations of

the company. So here is the strategy we followed with regard to

compensation and overall corporate expenses.

First, we eliminated some senior executive positions. For example, we no longer have a chief operating officer, which was the second highest paid position in our company.

Second, we consolidated some senior executive positions, which

allowed us to reduce the number of senior executives. For example,

we consolidated the credit and enterprise risk functions at the company.

Third, when a senior executive leaves the company, we try hard

in every instance to bring in a new executive at a lower compensation than their predecessor. As a result, the 15 highest paid people

at our company today receive about the same compensation as the

top 15 received a decade ago.

Another way to look at the reduction in executive compensation

is the reduction from peak levels. The compensation of our senior

team is down 40 percent from peak levels pre-conservatorship.

While we have sought to achieve major reductions in executive

compensation without disrupting the functions of the company, we

have put a big emphasis on bringing down overall expenses at our
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company. Our overall general and administrative spending in the

past year is down more than $120 million as compared to our

spending levels of 2009.

Let me summarize. I understand the reason for this hearing. I

understand the outrage. We have significantly reduced executive

compensation and overall spending at Freddie Mac, but we have

tried to do it in a way that does not risk disrupting the functioning

of the company. My belief is that disrupting the functioning of the

company would put those families who are suffering at even greater risk of deeper and more prolonged difficulty.

Thank you again for this opportunity to testify, and I look forward to addressing your questions.

[The prepared statement of Mr. Haldeman follows:]
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Chairman ISSA. Thank you.

Mr. DeMarco.

STATEMENT OF EDWARD J. DEMARCO

Mr. DEMARCO. Chairman Issa, Ranking Member Cummings,

members of the committee, I am pleased to be here today to discuss

the Federal Housing Finance Agency’s oversight of the executive

compensation structure for Fannie Mae and Freddie Mac, or the

Enterprises, as I will refer to them.

My written statement explains how the Enterprises’ executive

compensation program supports the statutory mandates of the Enterprises in conservatorship; how it was developed and how it is

structured.

In the few minutes I have, I would like to focus on two matters.

First, Fannie Mae and Freddie Mac have been in conservatorship

for more than 3 years. Draws from the Treasury now exceed $180

billion, reflecting the losses from mortgages originated during the

years leading up to conservatorship. Minimizing those losses as

much as possible, while maximizing assistance to homeowners, is

a key focus of FHFA and the Enterprises.

Since conservatorship, the Enterprises have completed more than

1.9 million foreclosure prevention actions, including nearly 1 million permanent loan modifications.

While in conservatorship, we are also seeking to ensure the country continues to have a reliable supply of mortgage finance. The

Enterprises have guaranteed roughly three out of four conforming

mortgages since conservatorship.

While we await congressional action on the future of housing finance, FHFA has initiated several projects to prepare for the future system of housing finance. These include standards for mortgage servicing, reconsideration of mortgage service and compensation, and establishing loan level disclosure for mortgage-backed securities.

Second, I recognize that there is a great deal of concern today

with the executive compensation at the Enterprises. I would like to

make just three observations here.

First, the executives most responsible for the poor business decisions that led the Enterprises into conservatorship and that led to

these taxpayer losses are long gone from the companies.

Second, the best way to address concerns with executive compensation is action by Congress to restructure the Nation’s housing

finance system and dissolve the conservatorships. Conservatorship

is not designed to be a multi-year holding state.

Third, as conservator, I need to ensure that the Enterprises have

people with the skills needed to manage $5 trillion worth of mortgage assets and $1 trillion of annual new business that the American taxpayer is supporting. Others may believe that this sort of

talent is easily and quickly hired at compensation far below that

of competing private firms, but I do not. Bottom line, this is a question of judgment, judgment exercised by balancing the need to limit

compensation as much as possible, while ensuring stable, continuous operations at the Enterprises in support of America’s housing

finance system.
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It has been FHFA’s judgment that taxpayers, who are providing financial support to the Enterprises and their guarantees on $5

trillion of mortgages, would not be better off if we provoke a rapid

turnover of senior management by further slashing compensation.

Indeed, such pay cuts would increase the risk of higher losses in

the future. Executive compensation was already reduced by 40 percent, on average, when the compensation program was put into

place.

I would also note the continued employment in an Enterprise

risks substantial career uncertainty. By working at Fannie Mae

and Freddie Mac, your work comes under a much higher degree of

scrutiny and criticism that exists at other private firms. Executives

who have spent a career developing their reputations risk tarnish

to their reputations under the highly charged environment in

which these companies operate today. This is true regardless of

how well they perform their duties or how great a financial sacrifice they may have made by forsaking other private sector opportunities in order to assist the country’s housing finance system.

There has been intense criticism launched at corporate executives not even employed by the companies when the bad loans leading to the majority of today’s losses were booked; people who arrived after conservatorship to try and make things better. I am trying to encourage these people to stay and continue to mitigate

losses and keep the current infrastructure of the country’s housing

finance system operating.

To repeat myself on one point, the only way to finally resolve this

question is for Congress to act to end the conservatorships and

chart a new course for the country’s housing finance system.

Mr. Chairman, thank you again for this opportunity, and I look

forward to responding to the committee’s questions.

[The prepared statement of Mr. DeMarco follows:]
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Chairman ISSA. Thank you, Mr. DeMarco.

I now ask unanimous consent that the salaries of the U.S. Government officials, various officials, going from the President of the

United States and Vice President down to yourself, Mr. DeMarco,

Mr. Haldeman, and Mr. Williams, be admitted in the record. Without objection, so ordered.

[The information referred to follows:]
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Chairman ISSA. Additionally, I would ask unanimous consent

that the article of yesterday in Bloomberg Newsweek, entitled

Uncle Sam Is A Reluctant Landlord of Foreclosed Homes, be placed

in the record. Without objection, so ordered.

[The information referred to follows:]
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Chairman ISSA. Last, and definitely not least, I would ask that

the committee report be placed in the record. Without objection, so

ordered.

[The information referred to follows:]
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Chairman ISSA. I now recognize myself for a first round of questioning.

Mr. Williams, you are a career employee, right? You came up

through the ranks?

Mr. WILLIAMS. Right.

Chairman ISSA. And what did you make in 2002, if you recall?

Mr. WILLIAMS. What did I make in 2002? I don’t know off the top

of my head. I would have to follow up with you.

Chairman ISSA. Give me a year more than 5 years ago what you

made.

Mr. WILLIAMS. Again, Congressman, off the top of my head, I

don’t have that.

Chairman ISSA. What was your starting pay when you came?

Mr. WILLIAMS. Congressman, I would imagine it was probably

around $115,000.

Chairman ISSA. Would you speak up a little, please?

Mr. WILLIAMS. Congressman, I would imagine it was around

$115,000 when I joined the company over 20 years ago.

Chairman ISSA. Okay. So 20 years ago you came with an organization that paid you $15,000 right?

Mr. WILLIAMS. I came——

Chairman ISSA. $115,000?

Mr. WILLIAMS. $115,000.

Chairman ISSA. $115,000. So they paid you more then than they

paid Congressmen. That hasn’t changed.

Mr. WILLIAMS. I would assume so.

Chairman ISSA. But less than the president; he was still making

$400,000 or $200,000, perhaps, back then. Let’s sort of go through

the numbers. You don’t remember what you made 10 years ago,

but you remember roughly $115,000 when you started. When did

you first make over $1 million? Everybody—let me rephrase that.

I had the luxury of making over $1 million. I exactly remember the

year I made over a million dollars. I am sure you do. What year

did you first have compensation, including bonus, that put you over

a million dollars?

Mr. WILLIAMS. Congressman, I am not sure what year that was.

Chairman ISSA. So money is not that important to you?

Mr. WILLIAMS. No, money is important to all of us who are here

today, sir, and it is important——

Chairman ISSA. Okay. But you are a career Government agency

employee. GSE is a Government agency, effectively.

Mr. WILLIAMS. Congressman, I have been an employee at Fannie

Mae for 20 years serving in a vast array of roles, beginning in technology all the way through to chief operating officer.

Chairman ISSA. Okay. Well, I don’t want to beat a dead horse,

but you came out at $115,000 to an organization backed by the

Government that had a pay scale. Did you ever have an expectation that you were going to make not just seven figures, but several

of them, that you would make $8 million or $9 million every 2

years?

Mr. WILLIAMS. Congressman, I think we all hope to aspire to advance in our careers and advance our compensation as we do.
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Chairman ISSA. Okay, but you made $9.3 million the last 2

years, while the President made $800,000. But you think that is

okay?

Mr. WILLIAMS. Congressman, I have been brought in and asked

to take on this role as CEO so that I can put in place a management team that can help achieve the goals of conservatorship,

which is stabilize the company, provide liquidity to the market, and

help struggling——

Chairman ISSA. Okay, but you are still losing money. You have

taken $90 billion and you are getting $9 million a year.

Let me go on to Mr. Haldeman. Now, Bloomberg and other organizations were concerned when you came on board because you

don’t come with a background like Mr. Williams does. Basically,

you are not qualified to run the organization, if one were to look

at your historic resume. That was a concern. But you did come out

of the private sector. Hopefully you remember. What did you make

the last year you were at Putnam?

Mr. HALDEMAN. I don’t recall.

Chairman ISSA. Did you make more than $1 million?

Mr. HALDEMAN. Yes, I did.

Chairman ISSA. Was your compensation tied to performance?

Mr. HALDEMAN. Yes, it was.

Chairman ISSA. Was it tied tightly to performance, in which you

could literally look at the yields of accounts or the profits of the organization in order to determine what your bonus would be?

Mr. HALDEMAN. It was tied to the performance of the funds, it

was tied to the economic performance of the company, and I had

equity participation, as well.

Chairman ISSA. Now, equity participation always assumes that

the stock goes up, right?

Mr. HALDEMAN. It doesn’t always, no. It happened to during my

tenure at Putnam.

Chairman ISSA. So your options were worthless if your stock

went down?

Mr. HALDEMAN. That would be correct.

Chairman ISSA. Okay. So at Freddie Mac has your stock gone

up?

Mr. HALDEMAN. In my tenure it has not.

Chairman ISSA. Okay. I just want to make sure that $7.8 million

over the last 2 years is based on a company who is not worth more

today. As a matter of fact, just for the record, if I were to look at

the net profits for Fannie Mae from 2003 to 2010, I would find the

net profits were a $11 billion loss. At Freddie Mac I would find a

$72 billion net loss over that same period of nearly a decade.

So including the time before you came in, in which the books

were being effectively cooked by taking in bad debt that was going

to go bad, but in fact putting it on, there were paper profits of $4

billion and $5 billion, but over that period of time you are on an

organization that certainly lost $14 billion in 2010 and is going to

lose equally or more this year. So that is the organization you are

running for $4 million a year, is that right?

Mr. HALDEMAN. Yes, we have lost money due to loans that were

put on the books during the period 2005 to——
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Chairman ISSA. Okay, my time has expired. I just want to get

one last thing in for the record.

Mr. DeMarco, from what I can tell, your $230,000 is all you get,

right?

Mr. DEMARCO. Yes, sir. All I get is my salary.

Chairman ISSA. And you do stay for that menial amount of

money, for some unknown reason, even though you could make

money elsewhere?

Mr. DEMARCO. I am still here, Mr. Chairman.

Chairman ISSA. Thank you, Mr. DeMarco.

I recognize the ranking member.

Mr. CUMMINGS. Thank you very much.

I must tell you, Mr. Haldeman and Mr. Williams, you all come

from a different world than the one I come from. If I had made a

million, I sure would know when I made it, that is for sure.

Mr. DeMarco, I want to just go to performance, because as I listened to Mr. Williams and Mr. Haldeman, I don’t remember hearing the word performance. I may have heard it, but I don’t remember hearing it. You said in your testimony that part of compensation these executives receive is based on their performance. But

with all due respect, their performance and yours, has been severely deficient, especially in the area of assisting homeowners.

In 2008, Congress and the President directed you to help homeowners in need. Congress passed the Emergency Economic Stabilization Act and the President signed it on October 3, 2008. The

act states clearly that FHFA, Freddie Mac, and Fannie Mae ‘‘shall

implement a plan that seeks to maximize assistance for homeowners.’’

In your testimony today you confirmed this is one of your three

goals, did you not?

Mr. DEMARCO. I did.

Mr. CUMMINGS. But I have seen no plan to do this. What I have

seen is an agency that basically has to be dragged to do its work

by the Congress.

Let’s look at performance. HAMP, the Home Affordable Modification Program, was supposed to help 3 to 4 million homeowners

modify their loans. So far, it has helped fewer than 800,000, is that

true?

Mr. DEMARCO. I believe that is correct for the HAMP program.

It is not a correct reflection of the loan modification activity at

Fannie Mae and Freddie Mac.

Mr. CUMMINGS. So with regard to HARP, the Home Affordable

Refinance Program, that was supposed to help between 4 and 5

million borrowers refinance at lower rates. So far, fewer than

900,000 have been refinanced, is that right?

Mr. DEMARCO. There have been over 900,00 HARP refinances to

date, and, as you know, Mr. Cummings, from the changes that we

have made to that program recently, we are expecting an uptick in

that of a meaningful amount.

Mr. CUMMINGS. Of course we are, but we are talking about what

we have done to date. These gentlemen, they are making this

money now. I am talking about today, so I am looking at performance now.
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Mr. DeMarco, it was not until President Obama made an address

to Congress on this topic that you started to revamp this program

in a serious way. Let’s look at FHFA——

Mr. DEMARCO. First, for the record, Mr. Cummings, I actually directed both companies to work with FHFA on a thorough reexamination of the HARP program several weeks before the President’s

address, so work was already underway.

Mr. CUMMINGS. Okay, but you could have started that a lot earlier, could you not?

Mr. DEMARCO. We did try it last winter and we made some

changes and I regret that—well, I don’t regret anything. What I

would say is that we redoubled our efforts in August and I am

pleased with the results.

Mr. CUMMINGS. Well, Mr. DeMarco, let me tell you, while you

may not have any regrets, I have regrets. I have regrets for the

people who are being put out of their houses and need help, and

would like for the goals that were stated to be manifested, and that

I do have regret about. And I understand your lack of regret and

I am so sorry to hear you have no regrets, because I wish you could

face some of the people who are out of their homes.

Mr. DEMARCO. Please don’t take my words out of context, Mr.

Cummings. I did not say that with regard to American homeowners. I believe that myself and everyone at FHFA and, frankly,

the gentlemen to my right have been working very hard to provide

assistance to American homeowners.

And with regard to the quotation from statute that you cited, it

is quite right. I actually cite it myself frequently. But the full

quotation includes that we were to undertake this maximizing assistance to homeowners in consideration of the net present value

to the taxpayers, and I believe that that makes what we are doing

in terms of providing relief to homeowners consistent with our

mandate as conservator to preserve and conserve the assets and

property of the company, and thereby minimize further losses to

the taxpayers.

Mr. CUMMINGS. And the mandate is that you shall implement a

plan that seeks to maximize assistance for homeowners and use

this authority to encourage the servicers of the underlying mortgages in considering net present value to the taxpayer to take advantage of the Hope for Homeowners Program, is that not correct?

Mr. DEMARCO. That is it, sir. In fact, I think you raise an excellent point here and I think it is actually one of the key accomplishments we have had this summer, which is the Service and Alignment Initiative that FHFA organized with Fannie Mae and Freddie

Mac to provide uniform mortgage servicing standards so that

servicers would know how to effectively, efficiently, and timely respond to troubled borrowers.

And I think we learned from some of the difficulties of the last

few years and we have put in place an identical set of servicing requirements that Fannie and Freddie each have for mortgage services so that the moment a borrower goes delinquent, the servicers

now have clear instructions and positive incentives to make early

and robust contact to borrowers to find out what their difficulty is.

We are placing a tremendous amount of emphasis on getting immediate contact with the borrower and trying to find an appro-
65

priate solution to their difficulty, because what we have learned is

the faster we do that, the greater the likelihood of success. And I

believe that our efforts in this way have been very much consistent

with fulfilling the Issa mandate that you quite rightly cite.

Mr. CUMMINGS. Mr. Chairman, just real quick.

Chairman ISSA. I ask unanimous consent the gentleman have an

additional minute.

Mr. CUMMINGS. Thank you very much.

Chairman ISSA. Without objection.

Mr. CUMMINGS. Thank you.

Mr. DeMarco, I have said this to you before. As I listen to your

defense, and I do consider that defense, and rightfully so, I said to

you and I begged you, do not mistake a comma for a period. We

can get so caught up in saying what we have achieved that we fail

to know that we can do better, and I think that is what troubles

me and that is what troubles many Members of Congress. And I

say it to you with all sincerity, I am not trying to hurt your feelings

or anything like that, but I have to tell you I am talking about

some people who are in pain, I mean big time. So I beg you do not

mistake a comma for a period.

Mr. DEMARCO. I appreciate that, Mr. Cummings. I have benefited from our discussions the last couple months and I remain

committed to making sure that Fannie Mae and Freddie Mac, in

conservatorship, are doing all full, robust, and appropriate things

to be able to help American homeowners that are troubled in their

mortgages. And we will continue in that effort and I am taking

under consideration all of the things that you have told me, sir,

and I do believe that we share a deep concern for the number of

American households that are troubled and we do share a desire

to provide appropriate assistance to them, and we will continue to

try to improve our efforts in that way, Mr. Cummings.

Mr. CUMMINGS. Thank you.

Thank you, Mr. Chairman, for your indulgence.

Chairman ISSA. No problem. Thank you.

I now ask unanimous consent that the entirety of the act, H.R.

3221, be placed in the record, and I particularly cite powers of the

conservatorship, the agency may, as conservator, take such actions

as may be necessary to regulate the entity in a sound and solvent

condition and appropriately to carry out the business of the regulated entity and preserve and conserve the assets and properties of

the regulated entity. I believe that is what the gentleman was referring to.

[The information referred to follows:]
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Chairman ISSA. With that, we recognize the gentleman from

Michigan, Mr. Walberg.

Mr. WALBERG. Thank you, Mr. Chairman.

And thank you, Mr. Williams, Haldeman, and DeMarco, for being

here. I heard you state that you appreciate us inviting you. Thanks

for your use of words there. I couldn’t have said that myself. However, this is a duty we have to do. Mr. DeMarco, the $12.79 million in bonus pay for 10 executives

that we are discussing today, bonuses that you approved, was for

providing ‘‘liquidity, stability, and affordability to the housing market.’’ My bankers, lenders, financial institutions back at home desire that, would agree with that, and would want that to continue,

but in light of that, what benchmarks are Fannie and Freddie

meeting that would allow such bonuses to kick in, especially in

light of the taxpayer losses of approximately $170 billion?

Mr. DEMARCO. So this is detailed in the annual securities filings

of the two companies, but, as reported in my written statement,

these losses that the taxpayers are absorbing are a result of business decisions made pre-conservatorship and mortgages that were

originated pre-conservatorship, and one of the focal points for the

executive compensation for the executives at Fannie and Freddie

are their efforts to try to minimize losses on that book of business.

They can’t undo mortgages that are made, but what they can do

is that they can take aggressive actions to mitigate those losses

through loan modifications and other foreclosure prevention activities, and I report monthly to the House Financial Services Committee and the Senate Banking Committee on the efforts that have

been undertaken to that end and the array of things on which they

are assessed and go to efforts to minimize losses, undertake homeowner assistance, ensure that there is ongoing liquidity in the market, and to be working with us on things such as the servicing improvements that I talked about in my exchange with Mr.

Cummings.

Mr. WALBERG. But in light of all that continues on, in light of

what Mr. Cummings mentioned also about his people, likewise in

my State of Michigan, you stated your opposition yesterday to putting these executives on par with the Federal pay scale, a position

that you continue to suggest today in comments, I believe. A legislative proposal that was passed out of the House Financial Services

yesterday to do just that. Why do you oppose that so aggressively?

Why do you oppose that and do you believe Federal agencies cannot perform their duties because they don’t offer Wall Street size

paychecks?

Mr. DEMARCO. I oppose it simply for the matter that I believe

enacting that and immediately putting all the employees at Fannie

and Freddie on a completely different pay scale is going to result

in the taxpayer losses to Fannie and Freddie going up, not down.

That is it, put simply. The chairman read the excerpt from the

HERA legislation regarding conservatorship, and an important aspect of that, what he read, is that I am preserving and conserving

the assets of a business entity. These remain business entities and

they remain regulated entities; they are not Government agencies.

If the Congress of the United States wants to take action to make

them Government agencies, make the employees Government em-
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ployees, that is a different story and legal structure than the one

that I am being held responsible for overseeing today.

What I am being responsible for overseeing today, the way the

law works today, Fannie Mae and Freddie Mac employees are not

Government employees. These are not Government agencies, they

remain private corporations undertaking trillions of dollars of business, participating in the marketplace. They continue to be subject

not just to FHFA regulation; they continue to be subject to other

laws and regulations that apply to similar private financial institutions, including——

Mr. WALBERG. I understand all of that, Mr. DeMarco.

Mr. DEMARCO [continuing]. The Securities and Exchange Commission rules and so forth.

Mr. WALBERG. I understand all of that; our citizens don’t. We are

in tough times and sometimes very difficult decisions have to be

made, and if indeed there is public service, like you indicated, that

you want to provide a service—and I think the two gentlemen seated next to you have indicated the same thing—there are challenges

to be faced.

Mr. Haldeman, in October you announced that you would be

stepping down from your position once a successor has been named.

Mr. HALDEMAN. That is correct.

Mr. WALBERG. Did compensation play any role in this decision?

Mr. HALDEMAN. No, it did not.

Mr. WALBERG. Mr. Williams, earlier this year you stated that you

would leave it to the FHFA to determine what your appropriate

compensation would be. If Mr. DeMarco changed course and decided that your compensation should be curtailed, would you be

fine with that?

Mr. WILLIAMS. Congressman, I would evaluate my own personal

options, but that would be the decision of the board and Director

DeMarco.

Chairman ISSA. I thank the gentleman.

I now ask unanimous consent to enter into the record a study of

2011 compensation done by the Association of Corporate Counsels,

Southern California Chapter, for 2011 and would note that in public companies the compensation in 2011 was approximately

$400,000 for general counsels. Well, the general counsels for

Freddie Mac received 2.9 million and Fannie Mae received 2.6 million, more than four times the compensation that at least the

Southern California Chapter of General Counsels believes is fair.

[The information referred to follows:]
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Chairman ISSA. With that, we go to——

Mr. DEMARCO. If I may, Mr. Chairman, I think that this is pretty important because of the theme of your hearing here regarding

protecting the American taxpayer. So with regard to the legal departments of Fannie Mae and Freddie Mac, I would like to point

out to the committee that Fannie Mae and Freddie Mac, with

FHFA, FHFA taking the lead on this as conservator, has filed lawsuits against 18 of the biggest financial institutions in the country

and even in the world to recover losses that we believe are the

legal responsibility of others. This is part of our activity to protect

the American taxpayer and to carry out our conservatorship responsibility.

But I will say, Mr. Chairman, that for us to be able to successfully execute on such complex litigation regarding complex financial

transactions and securities, I need to have qualified and experienced counsel to be working with us on that. So I believe that this

is an investment that we are making that is part of protecting the

American taxpayer.

So these are the sorts of things that if we fundamentally and

radically and immediately change the rules of the game with respect to how we perceive Fannie and Freddie, we may gain in

terms of compensation, but I would like the committee to know

that, from my perspective as conservator, I believe that we risk

other things that could harm the American taxpayer. I know that

that is—and to the Congressman’s point over here, I understand

that that is hard for the American people——

Chairman ISSA. I actually don’t have any time, so I don’t want

to cut you off, and I know that there will be further dialog, so I

certainly will seek time to have this dialog.

But at this time we recognize the gentleman from Ohio, Mr.

Kucinich, for 5 minutes.

Mr. KUCINICH. Thank you very much, Mr. Chairman, and thanks

for holding this hearing.

One of the things that is interesting about these hearings is that

occasionally you get some insight into how people think in a broader sense about those they are supposed to serve, and I have to say

that, of the witnesses, Mr. Haldeman was the only one who seemed

to understand the concerns that the American people have about

this issue that faces this committee today. So I want to thank you

for that.

I also want to say that, in listening to the testimony, my concern

is that there may not be enough sympathy for people who are losing their homes. And if there is a gap with tremendous pay being

given to people at the top and we don’t see enough sympathy for

people who are losing their homes, that may mean that you just

don’t get it, you are too far removed.

Now, Mr. DeMarco, on November 1st your general counsel wrote

a letter to Ranking Member Cummings. He disclosed that last year

Fannie Mae and Freddie Mac imposed $150 million in penalties

against banks for not foreclosing on homeowners fast enough. According to your general counsel’s letter, mortgage servicers were

charged daily fees by Fannie Mae and Freddie Mac if they failed

to process foreclosures within set deadlines. Here is what your general counsel wrote: ‘‘To date, the top 10 servicers account for the
80

bulk of the fees due. The total amount for all servicers after approving appeals and corrections is approximately $150 million for

2010.’’ And this is stunning with all the abuses going on with robosigning and the filing of false court documents, Fannie and Freddie

were charging massive fees against banks that failed to expedite

foreclosures.

Mr. DeMarco, were you aware of these penalties?

Mr. DEMARCO. I am aware of them, Congressman, and I can explain them. These penalties are a result of the failure of mortgage

servicers to perform under their servicing contracts with Fannie

Mae and Freddie Mac in a way that are driving up costs to the

American taxpayer. The servicers are under contractual obligations

to Fannie and Freddie to mitigate losses. In my exchange with Mr.

Cummings earlier, I went into some detail about the effort we have

undertaken to ensure that servicers are reaching out to troubled

borrowers from the moment there is evidence they are in trouble.

Mr. KUCINICH. Well, wait a minute, though. There is a point here

that you are missing, and that is there was an inspector general

finding, you are familiar with it, that FHFA ‘‘directed Fannie May

to impose compensatory fees against the servicers for violating foreclosure time line limits.’’ Now, is that true and did you actually direct Fannie or Freddie to impose those penalties in 2010?

Mr. DEMARCO. It is true, Congressman, because it is driving up

the cost to the American taxpayer.

Mr. KUCINICH. So you were aware of the abuses going on, but

you failed to address them in a timely manner? That is what the

inspector general reported.

Mr. DEMARCO. With all due respect, Congressman, these are two

different issues, and the compensatory fees that have been assessed

have been done so with recognition and allowance for the delays in

foreclosure processing either due to assisting the borrowers to try

to find a foreclosure alternative or because of foreclosure delays

that have been driven by things external to the servicers’ control.

Mr. KUCINICH. Well, this IG report concluded that ‘‘there were

multiple indicators of foreclosure abuse risk prior to 2010 that

could have led FHFA to identify and act earlier on the issue, including consumer complaints alleging improper foreclosures, contemporaneous media reports about foreclosure abuses by Fannie

Mae’s law firms and public court filings in Florida and elsewhere

highlighting such abuses.’’

Now, Mr. DeMarco, if you were aware of these abuses, why

would you order hundreds of millions of dollars in penalties to try

to speed up the process even further? Why would you do that?

Mr. DEMARCO. I would like to again try to separate the abuses

and the corrections that have been undertaken with regard to them

with servicers not performing adequately in foreclosing on properties that have gone multiple years without any payment, because

this is driving up the cost of the taxpayer. We are foreclosing on

properties that have had no payments for 2, 3 years or more, and

all this time the American taxpayer is funding those mortgages.

And it is also damaging local communities and it is damaging housing markets to have these properties sitting there with no action

being taken against them. Congressman, with all due respect, I believe that this is——
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Mr. KUCINICH. Well, with all due respect to you, sir, the IG report talked about supporting first and now overloaded with the volume of foreclosures, documentation problems were evident, they

said. You haven’t disputed that.

Members of the committee, what you have here is a situation

where they are focusing on accelerating foreclosures and diverting

our constituents. I am from Cleveland. We have more foreclosures

than in most areas.

Mr. MCHENRY [presiding]. The gentleman’s time has expired.

The gentleman’s time has expired.

Mr. Walsh of Illinois is recognized for 5 minutes.

Mr. WALSH. Thank you, Mr. Chairman, and thank you for being

with us here today.

A couple quick points and then an overall question. We talk in

trillions, billions, and millions around here. We are $15 trillion in

debt. Fannie and Freddie have been subsidized to the tune of about

$170 billion the last 3 years. Executive compensation last year, in

2009 and 2010, was about $35 million. Big numbers; they jump

out.

Just quickly, two smaller numbers jumped out at me. Fannie and

Freddie paid outside compensation consultants $655,000 in 2008

and $560,000 in 2009 to determine their own pay structure? We

paid outside consultants that much money to determine the pay

structure? Does that sound right, Mr. Williams and Mr. Haldeman?

Does that sound excessive?

Mr. WILLIAMS. Congressman, the company and the board of directors hired compensation consultants to help them structure our

compensation program format.

Mr. WALSH. A little closer.

Mr. WILLIAMS. Congressman, the board of directors hired compensation consultants to work with them to develop a compensation program at the request of FHFA, and they worked in partnership with FHFA and the Treasury Department to develop that

compensation program.

Mr. WALSH. So $655,000 in 1 year to help you determine your

pay structure. Mr. Haldeman, does that sound excessive?

Mr. HALDEMAN. It sounds like a lot of money, but there are compensation consultants that are required for the board in addition

to the company’s compensation consultant. So I think that number

would include four consultants, if I get it right, because I think you

were pointing out for both Enterprises. So that would be four in

total. But I agree it is a lot of money.

Mr. WALSH. And one other quick point on your testimony, Mr.

Haldeman. You said that the 15 highest executives today are paid

roughly the same as the top 5 a decade ago. I don’t know that that

is something to rave about. I mean, James Johnson, 1991 to 1998,

earned $100 million in pay with the company; Franklin Raines, we

remember that name, 1999 to 2005, earned more than $90 million

from 1998 to 2003. Daniel Mudd earned $12 million in 2005. I don’t

know that it furthers our topic here to compare what we are doing

today with what executives made 15 years ago.

Mr. Haldeman, I appreciate the tone you took, that you understand the outrage, certainly, that Congress feels and, in theory and

in practice, we reflect the outrage that is out there. But understand
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something. Many Members of Congress came here because this

country is broke. Big freshman class of Republican and Democrats,

most of whom left probably much higher paying positions to come

here and serve this country because this country is broke. I am not

unusual, there are other Members like myself who came here and

turned down my health benefits, turned down any pension benefits,

because we all have to do something pretty quickly or we are going

to be in a heap of trouble and future generations are going to be

in a lot of trouble.

So I appreciate that you understand the outrage, but are you

telling me that, unlike Congress and some other departments in

Government, we are fundamentally not able to find people who

need to do what they need to do at Fannie and Freddie for less

than the amount of money in base pay and bonuses that we are

paying folks? And, if so, do you understand how a lot of people

might find that hard to believe?

Mr. HALDEMAN. First of all, I think all of us appreciate the public

service of the entire Congress and realize that many have made a

personal sacrifice to take on those roles, and I commend Acting Director DeMarco for the public service that he has given the country. And there are many examples of people who have done that.

The dilemma I face—maybe I can bring the numbers down a little bit in size. One of the important functions we perform at

Freddie Mac is managing an investment portfolio. When I took over

my job in August 2009, that investment portfolio was $900 billion.

We have brought it down continuously; it is now about $680 billion

in size. There are people who are managing that portfolio.

What I worry about is if they make a 1-percent mistake, that

costs the taxpayer $6.8 billion. If they make a one-tenth of 1 percent mistake, it is $680 million. And the people that are required

to effectively manage that money, that investment portfolio, and

not make those mistakes are highly skilled, sophisticated, seasoned

people that have many, many opportunities for high-paying jobs,

and we need some of them at Freddie Mac to make sure we don’t

make those mistakes. That is the dilemma.

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

Mr. WALSH. Thank you, Mr. Chairman.

Mr. MCHENRY. Mr. Tierney for 5 minutes.

Mr. TIERNEY. Thank you, Mr. Chairman.

Let me change tack here a little bit, if I can. Mr. DeMarco, I

want to ask you about principal reductions. That will be no surprise to you, coming from our many previous discussions. But first

I want to share with you some comments. Neil Barofsky, who is the

former Special Inspector General for the TARP program, said

‘‘There needs to be a recognition that many borrowers will never

make the required payments on their underwater mortgages; that

the owners of these mortgages have already lost any meaningful

chance of obtaining a full recovery of the outstanding principal.

The sooner that this reality is recognized and addressed, the sooner

a recovery can take hold. As such, an aggressive principal reduction program is necessary.’’

Alan Binder, the former Vice Chair of the Federal Reserve Act,

said most economists see principal reductions as central to preventing foreclosures.
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Ben Bernanke, the Federal Reserve Chairman, said in this environment principal reductions that restore some equity for the

homeowner may be a relatively more effective means of avoiding

delinquency and foreclosure.

Mark Zandi, chief economist for Moody’s Analytics said a weaker

than anticipated housing market poses a serious threat to the economic expansion. He suggests a policy step: one of the best odds

of ending the housing crash quickly and definitively would have the

Government facilitate loan modifications with substantial principal

write-downs.

Now, when Congress passed the Emergency Economic Stabilization Act of 2008, we directed FHFA, Freddie, and Fannie to implement a plan that seeks to maximize a system for homeowners. We

have been through the language on that, but it does talk about

having the mortgage servicers and covering servicers to take advantage of programs to minimize foreclosures. There is nothing in

the law that I see or that anybody else advises sees that prevents

you from approving a program to reduce principal if it is in the taxpayers’ interest.

Now, Fannie Mae’s second quarter credit supplement says the

average return to Fannie Mae this year on foreclosed properties is

55 percent of unpaid principal balance. So you are going to lose 45

percent of any foreclosed property. If that is the case, but you

would only lose 5 percent, say, of a principal reduction program,

why not reduce the principal and keep the borrower in his or her

home?

Mr. DEMARCO. We have been through the analytics of the underwater borrowers of Fannie and Freddie and looked at the foreclosure alternative programs that are available, Mr. Tierney, and

we have concluded that the use of a principal reduction within the

context of a loan modification is not going to be the least cost approach for the taxpayer to allow this homeowner an opportunity to

stay in their home.

We are using aggressive loan modification activities that include

principal forbearance, which will zero out the interest rate charged

on the underwater portion of the mortgage without forgiving the

debt of the mortgage, and this is all designed to get the borrower

into an affordable monthly payment so that they can continue in

their home, and that has been the basic calculus that has guided

this decision.

As I have said before, I do not believe that I have been appropriated taxpayer funds for the purpose of providing this more general support to the housing market. We are supposed to undertake

our loss mitigation activities with regard to the cost to the taxpayer.

Mr. TIERNEY. But you have been empowered as conservators to

have the fiduciary responsibility of maximizing the value of the

taxpayers’ assets, and if it is less costly to modify the principal, to

modify the loan than it is to go to foreclosure, I would think you

would be breaking that fiduciary responsibility. What you are telling me flies in the face of Neil Barofsky, Alan Binder, Ben

Bernanke, Mark Zandi, and all these people. You just come up with

a different idea. And maybe you would share with us your calcula-
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tion so we can run it by some of these other people who see it quite

differently than you do.

Several of the banks are already doing principal reductions right

now. You have the example of Arquin, who has a program where

the servicer reduces the loan to 95 percent of the homeowner’s fair

market value. The excess principal is forgiven over 3 years as long

as the homeowner remains current. When the home is sold or refinanced, the borrower is required to pay 25 percent of the appreciated value and share that with Arquin. According to the company’s CEO, shared appreciation modifications help homeowners

avoid foreclosure and restore equity, providing a significant benefit

to the customer, the economy, and the housing market.

They are not doing that to be nice, you know that. It is in their

financial self-interest. And I still don’t think you have made a compelling argument why it is not in Fannie Mae’s and Freddie Mac’s

and the taxpayers’ financial self-interest to do that. JPMorgan

Chase is doing it, Allied Financial, Bank of America, Wells Fargo,

they have reduced an average of $51,000 off the balance of about

73,000 borrowers in 2009 and 2010. Is everybody else wrong, Mr.

DeMarco, and FHFA is right in this?

Mr. DEMARCO. Congressman, I believe that the decisions that we

have made with regard to principal forgiveness are consistent with

our statutory mandate. I do believe that we are taking all due effort to provide assistance to homeowners and I do not believe I

have been authorized to use taxpayer money for a general program

of principal forgiveness.

Mr. TIERNEY. Mr. Chairman, if I can have unanimous consent for

30 more seconds.

Mr. DeMarco, I would like you to do two things for the committee, if you would.

Mr. DEMARCO. Okay.

Mr. TIERNEY. First, I would want you to identify anywhere in the

statute that specifically prohibits you from developing principal reduction programs, because as I read the law you don’t have the authority to do that. So if you would do that and then share that with

the committee and me. Second, I would like you to submit whatever analysis you have done that shows why reducing the principal

of some mortgages is worse for the U.S. taxpayer than foreclosure.

If you would provide that analysis, because you talked about it, I

would appreciate it. Would you do that for us?

Mr. DEMARCO. We can provide that information as you suggested, Congressman.

Mr. TIERNEY. Thank you.

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

Mr. Farenthold from Texas.

Mr. FARENTHOLD. Thank you, Mr. Chairman.

Gentlemen, Mr. Williams, Mr. Haldeman, I would like to start

my questions with you. First off, I want to commend you for being

here. If I were taking a salary like you guys were in these times,

I would be reluctant to be up and facing the people. I admire you

for taking the heat on this.

But let me ask you a question. You compare your salaries, in justifying them, to those making and made in private sector companies. In those private sector companies very often the compensation
85

package is based on very specific design results in the performance

of the company, but you basically serve at the pleasure of the

shareholders through the board of directors. In Freddie and

Fannie, you guys basically are serving the taxpayers. We have invested a whole lot of money in your company and, really, this committee and Congress is about the total level of oversight we have.

From what I have heard from people back home is a pretty consistent wow. Why are you taking this much money performing so

poorly and having to come back. And I have heard today that you

have said, well, it would be doing worse if we weren’t doing what

we do. So let me ask you this. Would you all invest in Freddie and

Fannie? Would you put your own money in that and expect to see

a return or to see it level out? And I guess we will start with Mr.

Williams.

Mr. WILLIAMS. Congressman, let me start with a few points.

First of all, as we have all—to your comments, the losses that we

have been incurring are due to the loans that were booked prior

to 2009. Second, the management team that we have brought in is

a new management team to deal with the challenges that we are

facing and the specific issues that we have been asked to serve as

conservator: stabilize the company, to provide the necessary liquidity and support to the market, ensure there is adequate supply of

affordable rental housing, and help distressed homeowners wherever we can.

Mr. FARENTHOLD. Okay, I understand, but you started in this

company 20 years ago at, I think you testified earlier, well over

$100,000. So you have been there through this. Where were you

kicking and screaming? Again, tell me if you were, because I don’t

know. Where were you kicking and screaming, say, hey, we are

about to get in a lot of trouble?

Mr. WILLIAMS. Congressman, I am happy to discuss my role prior

to conservatorship. In the years leading up to conservatorship, I

served as chief operating officer of the company. I was responsible

for managing our regulatory agreements that were put in place

prior to conservatorship and making sure we achieved all the objectives under that; I was responsible for leading the company’s efforts to restate our financial statements and get current with the

SEC’s filings, which we did all that; and I oversaw the company’s

areas such as technology, human resources, as well as our——

Mr. FARENTHOLD. But from an executive level, didn’t you have to

see some of this coming?

Mr. WILLIAMS. Congressman, in hindsight, I am sure we all wish

that we could have made different decisions back in that time.

Mr. FARENTHOLD. All right. Well, let me just ask one more question. I think it would be fair to say that there are a lot of people

who take jobs for less money than they would make in other jobs

for reasons beyond compensation. Take the President. It doesn’t

pay all that well. The Supreme Court doesn’t pay nearly what a

good lawyer can make in the private sector. Certainly our teachers,

who are underpaid throughout this country, take jobs for reasons

beyond compensation. Vikram Pandit of Citigroup says he is not

going to take any compensation until the company turns a profit.
86

Don’t you think we could get qualified people to do your jobs and

the jobs of those other senior executives without having to pay millions of dollars?

Mr. WILLIAMS. Congressman, I am happy to address that question because, first of all, as I noted, this is a new team. We have

reduced executive compensation by 50 percent, we have reduced

the number of senior executives by 30 percent. But I can tell you

are these jobs competitive? Yes. In the course of 3 months I lost

five senior vice presidents out of the company to financial services

and other companies where I can assure you they were making

more money and had better career prospects as a result. These are

challenging jobs in challenging circumstances, and we need to pay

and reward the people who are doing the jobs.

Mr. FARENTHOLD. I see that my time is about to expire, and I

apologize for not getting to you, Mr. Haldeman. Thank you.

Mr. MCHENRY. Mr. Davis of Illinois is recognized for 5 minutes.

Mr. DAVIS. Thank you very much, Mr. Chairman.

Mr. DeMarco, let me ask. When you announced these compensation packages in 2009, you issued a press release explaining that

these million dollar salaries were necessary to ‘‘attract and retain

the talent needed’’ for Fannie Mae and Freddie Mac to perform

their roles. In a recent letter to Congress you wrote that you were

also concerned about a rapid turnover of management and staff replaced with people lacking the institutional, technical, operational,

and risk management knowledge requisite to the running of corporations with thousands of employees and more than $2 trillion

in financial obligations.

Let me ask what kind of analysis did you do prior to making

these conclusions? Did you survey the current staff that was

present? And do you have some kind of document that you could

share with us that would demonstrate the potential effects of lower

salaries on the work force, on the agencies, and ultimately on the

homeowners who had mortgages to pay?

Mr. DEMARCO. Congressman, with regard to the announcements

of the pay structure that took place in 2009, the background for

that was developed over the course of time by my predecessor, and

then when I became acting director I assumed completion of that

work. It was done in consultation with other Government agencies;

it was done in consultation with pay consultants; it was done in a

lot of consultation with the Special Master for Compensation at the

Treasury Department to assess what was the market like for compensation in troubled but large and complex financial institutions,

and what was the right structure and balance to weigh between

the need to have competent, skilled professionals running these

complex financial institutions against market conditions at the

time and the market opportunities that they had. That was all part

of the determinations that went into the announcement in 2009.

Mr. DAVIS. Well, let me ask——

Mr. DEMARCO. Since then——

Mr. DAVIS. Let me just ask, because time is going to expire. Earlier this year the Inspector General for the Federal Housing Finance Agency issued a report evaluating your oversight of executive compensation at Fannie Mae and Freddie Mac. The IG report

stated that ‘‘you never seriously considered’’ comparing compensa-
87

tion at Fannie and Freddie to compensation at other housing agencies. Is that true?

Mr. DEMARCO. We did not consider the FHA commission or the

head of Ginnie Mae to be market comparables to private companies

that operated with all the liabilities and responsibilities of a private company. We certainly, being Government employees, are well

aware of the compensation that those executives have.

Mr. DAVIS. So you are saying that you did not make a comparative analysis of other housing agencies that might have some of the

same responsibility, although certainly not as much and certainly

not of exactly the same type.

Mr. DEMARCO. That is right, I am saying that we did not find

that to be comparable to two private companies that were operating in the marketplace with all the legal responsibilities and liabilities of private, complex financial institutions.

Mr. DAVIS. Do you think that the Federal Housing Administration, Ginnie Mae, and other agencies, who seemingly were doing

much better, did not take into consideration the same factors and

the same market and the overall conditions of the economic climate?

Mr. DEMARCO. I am not sure I followed the question, but certainly Government employees have a completely different set of

benefits and, frankly, personal liabilities, or lack thereof, when it

comes to their engagement. And I do believe, and I have a great

deal of respect for people who come into political positions in Government, they take a huge cut in compensation for the opportunity

to be direct players in assisting the country and in guiding policymaking in the country. These are temporary positions that they fill

before going back out into the private sector, and I do believe that

the leadership of a company that has $2 trillion worth of obligations needs to have competent people.

Mr. DAVIS. Bottom line, you think that the salaries are necessary

and we couldn’t do it any other way?

Mr. DEMARCO. I believe that what we have in place, sir, is what

is the best to minimize the losses to the taxpayer in terms of the

overall situation that we have as long as Fannie and Freddie are

in conservatorship, and it is why I said in my written statement,

oral remarks, I really wish that we could have the administration

and the Congress of the United States get together and come up

with legislation that would bring these conservatorships to an end

and to build an appropriate housing finance system for the future.

Mr. DAVIS. Thank you very much, Mr. Chairman. I yield back.

Mr. MCHENRY. I thank my colleague.

Mr. Burton for 5 minutes.

Mr. BURTON. First of all, let me just say that the problem started

in 1994, when you loosened up—and you weren’t here, none of you

were here—when we loosened up the underwriting standards. To

give loans to people who cannot afford to make the payments is

crazy. I was an underwriter for an insurance company for a long

time and I know how that system works. You just don’t do it. And

it is not rocket science. The minute you give a loan to somebody

who doesn’t have the capability to make the payments, then you

have created a mess that is inevitably going to end in disaster, and

that is what you inherited.
88

Now, you, Mr. Williams, was there for 20 years. I don’t know

how you didn’t see part of this, but, nevertheless, the problem was

pretty apparent to somebody who has any idea how finances work.

Let me just ask a couple questions. You had an outside entity

make a recommendation on compensation and then you, as conservator, Mr. DeMarco, made a recommendation to the board and that

was pretty much approved. Is that the way it works?

Mr. DEMARCO. I had responsibility for the final decision, Mr.

Burton.

Mr. BURTON. So you made the decision on compensation.

Mr. DEMARCO. Ultimately. This work was well underway before

I became acting director, but ultimately, yes.

Mr. BURTON. I know, but you were the one. Well, we have talked

a little bit about this before. For legal counsel for public companies—and I heard what you said about the expertise of these

guys—the 2010 salary for public companies was averaging about

$266,000 and with a bonus it was about $104,000, so it was around

$400,000. For a private company the salary was $204,000 and the

bonus was around $100,000.

Now, under Freddie Mac, Robert Bostrom, the general counsel,

got $2.9 million in 2010 and Timothy Mayopoulos, the general

counsel, got $2.6 million in total compensation in 2010.

I understand that they had the expertise and I understand that

they had to have a good staff in order to make sure that the litigation was processed and pursued in a very rapid way, but that just

seems very excessive to me. And Mr. Williams and Mr. Haldeman,

I am sure, are competent in many ways. I don’t have the time nor

the inclination to go into their qualifications, but when you look at

the salaries and you realize the problems that the country faces,

it is just excessive. I don’t think anybody that looks at this would

disagree with that.

And I am very disappointed. You talk about being very cognizant

of the taxpayers’ money. I am very disappointed that this kind of

pay is being given, with the bonuses and everything, when it is far

in excess of the private sector in most cases.

And you inherited a lot of the problem. Don’t misunderstand. I

understand that. And the underwriting was terrible before, and I

don’t know how in the world we are going to get out of this quagmire, but the fact of the matter is it is excessive and I think it

needs to be corrected. We have to have competent people, we have

to make sure we have competent people that can do the job, but

I think that when you start giving these salaries out to these people, you have to make absolutely sure you are not being excessive.

Mr. DeMarco, I am sure you are trying to do the job to the best

of your ability, but I hope you will try a little bit harder as long

as you are the conservator. And if you have recommendations on

what Congress can do to help deal with this problem, I sure would

like to see it. I would like to see Fannie Mae and Freddie Mac be

done away with and go back to the private market, where sound

business principles are applied to make sure the qualified people

are buying these houses, instead of trying to help everybody out,

especially those who can’t afford them. You just dig a bigger and

bigger hole, and that is why this country is in the mess that it is

right now.
89

Mr. Chairman, I yield back.

Mr. MCHENRY. From former chairman to former chairman, Mr.

Towns is recognized for 5 minutes.

Mr. TOWNS. Thank you very much, Mr. Chairman.

Let me begin by saying that I want you to help me be able to

determine in terms of how you arrive at these bonuses. I know

that, in education, if you are able to lower the dropout rate, teachers are able to improve the reading scores, have great retention in

terms of students graduating on time or staying in school, and then

based on that the teacher gets a bonus, which I think that makes

sense. They have done something outstanding; now they are rewarded.

Tell me how you arrived at the bonuses, Mr. DeMarco.

Mr. DEMARCO. So FHFA, in consultation with the boards of directors of each company, developed corporate scorecards for each

company outlining an array of areas of performance regarding

minimizing losses to the taxpayer, remediating operational and

risk management weaknesses of the company, and ensuring that

the businesses operated effectively and efficiently.

So there was an array of items that were put into the corporate

scorecard. These are then scored by management at the end of the

year, reviewed by internal audits of the companies, then reviewed

by the board of directors and finally by my staff in terms of assessing the performance, and that becomes the key input into the determination of these bonuses.

The structure for the employees’ compensation, the executive

compensation, has the following components: We set a target compensation for each executive that is aligned to be at or below the

median of a comparable position in a comparable firm, and from

that target compensation a third of it is set aside to be paid in the

form of a target incentive opportunity, or what you all would refer

to as a bonus, and that gets paid out over a 2-year period after the

performance year.

Then the rest is salary. A portion of it is paid during the course

of the year; the majority of it is held off as deferred salary to be

paid the following year, and that is done for retention purposes.

Furthermore, to incentivize performance there, a portion of that deferred salary is itself tied to the corporate performance, allowing

for a reduction in the actual amount of deferred salary that is paid

if performance doesn’t measure up.

As is detailed in my written statement, in each of the years we

have done these assessments, we have not awarded full amounts

for either the deferred salary or for the target incentive opportunities; we have awarded less than the targeted amounts.

Mr. TOWNS. Let me just say that I notice, in terms of my good

friend and colleague, Congressman Burton indicated in terms of

what happened in terms of 1994, but I think there is one thing that

we are not considering, is the fact that, in many families, one person has lost his or her job, and that has created a lot of problems

along the way. And when I walk the streets in my district and I

listen to the people that are losing their homes, and then you look

at these salaries, one would say, wait a minute, why don’t we take

these salaries and save a whole block. And this is what you are
90

hearing from people back in the district that I represent in Brooklyn, New York.

Do you hear people talking about excessive salaries?

Mr. DEMARCO. I do. I get correspondence on this as well. I certainly hear from Members of Congress and so forth, and all I can

say, Congressman, is I believe that we are trying to strike a difficult balance between ensuring that these multi-trillion dollar

companies have the appropriate expertise running them and that

we are keeping these salaries as low as possible, while ensuring

that we have capable people and that the people that are there,

from the CEOs on down, are focused on helping homeowners. We

are very committed to trying to help troubled homeowners and to

provide alternatives to them when they get in trouble.

Mr. TOWNS. But if we are not successful, I am not sure that we

should—let me just ask one quick one before my time is expired.

The IG report concluded that your agency failed to act on foreclosure abuse issues until the middle of 2010, even though there

were multiple indicators prior to that time which would have led

you to act earlier. Are you familiar with this report?

Mr. DEMARCO. I am.

Mr. TOWNS. Let me ask you about one of the foreclosure firms,

the law firm of Steven J. Baums in New York. Over the past week,

both Freddie Mac and Fannie Mae instructed servicers not to refer

any new foreclosure cases to the firm. Why did Freddie and Fannie

just now drop this law firm? Why did it take so long? I just want

to find out as to why. Yes, please. Why did it take so long, Mr. Williams?

Mr. WILLIAMS. Congressman, we are constantly looking at our

law firms and we find, when they are not performing or, in this

case, I concur with your concern about their behavior, we take action as quickly as possible. It is also important for us to prudently

move the cases so that we don’t incur additional losses to the taxpayer.

Mr. TOWNS. That should be considered in your evaluation as well

to determine whether the person gets that extra compensation.

Thank you.

Mr. MCHENRY. I thank the former chairman.

Recognize Mr. Kelly.

Mr. KELLY. Thank you, Mr. Chairman. I would yield back my

time to the Chair.

Mr. MCHENRY. Well, thank you. I certainly appreciate the gentleman yielding.

Mr. DeMarco, I know you are familiar with the Office of Inspector General, but to Mr. Williams—because of your service in Government, Mr. DeMarco, I know you are very familiar with that

process, but, Mr. Williams, Mr. Haldeman, are you both aware that

Federal IGs have the right to request information and assistance

from their regulated entities?

Mr. WILLIAMS. Yes, I am.

Mr. HALDEMAN. I am aware as well.

Mr. MCHENRY. Now, it was brought to the committee’s attention

that employees at the Enterprises have resisted document requests

made by the FHFA Office of Inspector General, arguing that these
91

requests must go through the FHFA. Were you aware of this, Mr.

Williams?

Mr. WILLIAMS. Congressman, we are fully cooperating with the

IG on all matters and coordinating with FHFA.

Mr. HALDEMAN. It was my understanding that we were cooperating with any requests from the IG and coordinating it with our

counterparts at FHFA.

Mr. MCHENRY. Okay. Will you both commit full compliance with

all requests of information from the Office of Inspector General?

Mr. Williams.

Mr. WILLIAMS. Congressman, we work with the IG cooperatively.

Mr. MCHENRY. Will you commit? It is a question. And I understand you want to give a different answer, but will you commit to

providing the documents and information the Office of Inspector

General requests of your entity?

Mr. WILLIAMS. We have been, Congressman, and will continue to

do so.

Mr. MCHENRY. You will continue to do so. Is that correct?

Mr. WILLIAMS. That is correct.

Mr. MCHENRY. Thank you.

Mr. Haldeman.

Mr. HALDEMAN. Yes. The only caveat I would add is that we do

coordinate that activity with our regulator, FHFA.

Mr. MCHENRY. Okay. So, to be clear, to you, Mr. DeMarco, so the

oversight, Office of Inspector General, who is to oversee you, they

must request from you, in order to request from the entities that

you are regulating in order to get information.

Mr. DEMARCO. The IG’s responsibility is to oversee the economy

and efficiency and effectiveness of FHFA, and that is done to get

the effect of some of FHFA’s activities, they will request information from the regulated entities, and I believe we have worked out

a very efficient process for dealing with that and I believe both

companies have been responsive to the IG. But the IG’s oversight

is of FHFA and FHFA’s oversight is of Fannie and Freddie.

Mr. MCHENRY. Right. But in order to get that information, for

instance, the TARP oversight, Office of Inspector General requests

information of the banks that got money, and they don’t have to

go to the Treasury in order to ask for that.

Mr. DEMARCO. Right. It is not being—I don’t believe it is being

passed through.

Mr. MCHENRY. Would you commit to letting the Office of Inspector General directly request of Fannie and Freddie the documents

and information that they need?

Mr. DEMARCO. Pursuant to audits and evaluations being undertaken by the IG, certainly.

Mr. MCHENRY. Okay. Thank you.

With that, I would like to yield the balance of the time back to

Dr. DesJarlais.

Mr. DESJARLAIS. Thank you, Mr. Chairman, and thank you all

for appearing before us today.

The title of our hearing today, as you well know, is Pay for Performance: Should Fannie and Freddie Executives Be Receiving Millions in Bonuses? With the little time we have, I will go to each

of you and let you answer that question directly.
92

Mr. Williams.

Mr. WILLIAMS. Yes, Congressman. Should we be paid for performance? Yes, we should. And are we being evaluated on the performance of the executives? Yes, we are. And we have been given

some very complex challenges to deal with in this market.

Mr. DESJARLAIS. Mr. Haldeman.

Mr. HALDEMAN. Yes, we should be paid based on performance.

The difficulty is that, in contrast to my years in the private sector,

where all the companies were profitable and it was easier to identify performance and tie it to profitability, much more difficult to

tie pay to performance in the kind of situation we have at Freddie

Mac, where there are so many embedded losses that we are dealing

with that continue to come through the financial statements.

Mr. DESJARLAIS. Okay. And again the title Pay for Performance:

Should Fannie and Freddie Executives Be Receiving Millions in Bonuses, Mr. DeMarco, let’s address the millions in bonuses.

Mr. DEMARCO. I believe they should be being compensated at a

market rate that allows FHFA’s conservator to ensure that we can

attract and retain suitable executives to run these companies.

Mr. DESJARLAIS. Thank you. I will have some more questions. I

yield back.

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

Mr. Clay for 5 minutes.

Mr. CLAY. Thank you, Mr. Chairman. Mr. Chairman, the witnesses have testified that part of their compensation is based on

how Fannie and Freddie perform, but I have serious questions

about some of their so-called achievements. Let me give you an example.

Fannie Mae’s 10-K filing states that credit losses were actually

lower than expected in 2010. It sounds like good news, however,

the reason for these lower credit losses is that many servicers were

caught up in the robo-signing scandal and were forced to halt their

foreclosures during the fourth quarter of 2010.

Mr. DeMarco, how can you take credit for fewer losses if they resulted from the robo-signing scandal? And that is not a basis for

bonus, is it?

Mr. DEMARCO. Congressman, the performance over the last year

that was better than FHFA itself had projected in a published report in October 2010 is reflective only in part by delays in foreclosures; in fact, reflects that we have had better performance of

underwater mortgages that had been projected, we have had a better performance of loan modifications and other foreclosure alternatives than had been projected. So, in fact, I think it is reflective

of the fact that the steps that have been taken at these companies

are actually bearing fruit and have resulted in performance that

was better than was modeled and publicly reported in projections

by FHFA last year.

Mr. CLAY. Okay, let me give you another example. Part of the executive compensation was based on this factor, whether Fannie

Mae was able to issue at least 37.5 percent of all new mortgage

backed security issuances. According to Fannie Mae, they exceeded

this goal. However, as the IG pointed out, the main purchaser was

the Government. In a report issued earlier this year, the IG said

this, it seems unlikely that Fannie Mae could have commanded
93

such a large share of the market without the Federal Reserve purchase of its MBS.

Mr. DeMarco, you can’t really take credit for meeting this goal

if it was due to deliberate support from the Federal Reserve, can

you?

Mr. DEMARCO. These were not coordinated actions, Congressman. The Federal Reserve’s purchase of mortgage backed securities

was designed to affect mortgage interest rates and rates in the

marketplace. These are separate things.

Mr. CLAY. Okay, let me ask you about another example. One of

the measures for determining performance bonuses for Freddie and

Fannie executives was whether they provided more affordability to

the housing market. They claim they met this goal, arguing that

affordability has improved dramatically. Do you know why? Because housing prices have tanked.

Mr. DeMarco, are you seriously paying million dollar bonuses for

achievements in this area?

Mr. DEMARCO. That particular element, sir, is reflective of the

companies’ responsibility for meeting various affordable housing

goals. Without regard to the fact that they are in conservatorship,

they remain subject to these kinds of responsibilities, and that is

what they were being looked at, to make sure that in conservatorship they weren’t stepping back from certain parts of the market,

including those that are generally referred to as affordable housing

sector in the marketplace. It was designed to make sure that they

stayed active in purchasing mortgages in all parts of the marketplace.

Mr. CLAY. Okay, so that was the benchmark, affordability. But

are you actually awarding bonuses because housing prices are continuing to plummet?

Mr. DEMARCO. No, sir.

Mr. CLAY. Okay, what is the benchmark, then?

Mr. DEMARCO. The benchmark is the housing goals that are in

place and that we report on to the Congress.

Mr. CLAY. You know, I am mystified as to why these so-called

achievements should entitle executives to million dollar bonuses,

and they either had nothing to do with the actions of Fannie and

Freddie or they appear to reward a continuing downward spiral in

our housing market. I can’t figure out which one it is. Can you help

me?

Mr. DEMARCO. Congressman, I appreciate how difficult this is.

Clearly, we are all affected by the conditions in the country’s housing market and its economy. We are trying, as conservator of

Fannie and Freddie, to ensure that those companies remain active

in the marketplace so that the country has a functioning secondary

mortgage market, to make sure that they are taking all appropriate action to assist borrowers in troubled mortgages, and that

the $5 trillion worth of mortgages that the American taxpayer is

now supporting are being overseen and managed by competent professionals that can prudently manage the risk of such an enormous

portfolio.

As I have said at the outset and in my written statement, it is

not our goal to be keeping this going, and I really would welcome

working with the Congress of the United States to get on with the
94

hard work of having finance reform so that we can bring the

conservatorships themselves to an end, which would end this compensation issue and the much larger exposure to the taxpayer.

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

I would encourage you to also work with the President on housing finance reform.

Dr. DesJarlais from Tennessee is recognized for 5 minutes.

Mr. DESJARLAIS. Thank you, Mr. Chairman.

Mr. Williams, CEO of Fannie Mae, correct?

Mr. WILLIAMS. Correct.

Mr. DESJARLAIS. Okay. Do you think that Fannie Mae is a success, the enterprise is succeeding doing well?

Mr. WILLIAMS. Congressman, we have been given some very

challenging goals, as I have articulated. We have needed to stabilize the company, to provide critical support to the marketplace

as we have provided our liquidity and funding for both single-family and multi-family, while helping to reduce long-term credit losses

and helping——

Mr. DESJARLAIS. Is it meeting your expectations as a CEO?

Mr. WILLIAMS. I think the team has done an extraordinary job

under very difficult circumstances, sir.

Mr. DESJARLAIS. Okay.

And, Mr. Haldeman, as far as Freddie Mac, you are the CEO. Do

you think it is a success? Are you proud of the company? Do you

feel good about where you are going?

Mr. HALDEMAN. I would divide the company into two parts, and

this is in part a reference to an earlier question of whether I would

invest in Freddie Mac, and that is a relevant issue because I have

been an investment person for most of my life. And if I could divide

Freddie Mac into two parts, I would definitely invest in the company from 2009 on. I am incredibly proud of the work of our employees from 2009 on. We have a very, very high quality book. Our

people are entirely committed to making sure we participate in responsible lending going forward.

Mr. DESJARLAIS. Okay. I mean, as CEOs, that is the answer I

had hoped to hear, that you are both proud of your companies and

you have high expectations for them. Since entering conservatorship, Fannie Mae and Freddie Mac, or the Enterprises, have taken

$169 billion from the Treasury and still owe taxpayers $141 billion,

so Government ownership of Fannie and Freddie is now the most

expensive bailout of the 2008 financial crisis, which sets you on a

different level than private sector companies who, if they are profitable, that is good; if they get big bonuses, that is fine; the taxpayers aren’t paying for those, so they are not as concerned. But

right now the taxpayers are paying for these and they are very concerned, and that is why we are having this hearing.

Mr. DeMarco, getting back to the beginning of the hearing when

Chairman Issa was talking about salaries, according to reports, Mr.

Williams and Mr. Haldeman made about $4.7 million and $5.1 million, respectively, last year, and I think Mr. Williams’ base salary

was $900,000 and Mr. Haldeman was similar to that, so obviously

big bonuses involved to reach that $4.7 million and $5.1 million.

And as was mentioned several times, President Obama makes

$400,000, Members of Congress make $174,000, and I think you
95

made about $240,000. Do you think that the work that Mr. Williams and Mr. Haldeman warrants eight times as much pay as the

President of the United States?

Mr. DEMARCO. As an economist, sir, I believe that what is perceived as the total compensation value and benefit of various positions goes beyond just the salary that is there, so I don’t find it

fruitful to measure the compensation of the President of the United

States with those of CEOs of major corporations.

Mr. DESJARLAIS. Well, how about Members of Congress? Right

now the disapproval rating for Congress is pretty high, and even

though I think all of our colleagues here feel that we work very

hard, I think people feel we get paid too much, and our deficit is

$14.3 trillion and rising. I think that if Congress felt that they

should get a bonus because we are doing a good job right now, we

would all be voted out of office, and should be, because clearly the

deficit continues. You all owe the taxpayers $141 billion, so when

taxpayers are seeing millions of dollars in bonuses going to the executives, I understand their outrage, and, Mr. Haldeman, you said

you understood that too.

So, Mr. DeMarco, as the conservator of Fannie and Freddie, you

are nominally the boss of Mr. Williams and Mr. Haldeman. They

can’t do much without talking to you first. Do you think that their

work is 10 times harder or 10 times more complex than yours and

maybe Members of Congress? Is their salary difference justified?

Mr. DEMARCO. I don’t think anyone is going to agree, including

me, that anyone is working 10 times harder than I am right now,

Congressman.

Mr. DESJARLAIS. Okay. Well, are they justified, then? I mean,

should they be getting——

Mr. DEMARCO. I believe that given the framework that was put

in place, they are justified, because the framework was designed in

consultation with the Special Master of Treasury, looking at large

financial institutions that operate as private companies, not as government agencies, to develop a compensation structure and

amount. I believe that what we struck here was an appropriate balance cognizant of what the marketplace looks like.

Mr. DESJARLAIS. Well, again, bonuses should be based on performance, and clearly I think it is dubious that the performance is

there to warrant million dollars of bonuses with that type of debt

to the American taxpayers. I understand why they are upset. I am

upset. But I do thank you all for appearing here.

Mr. DEMARCO. Thank you.

Mr. MCHENRY. Mrs. Maloney from New York is recognized for 5

minutes.

Mrs. MALONEY. Thank you.

I would like to continue on this line and ask about the bizarre

situation with bonuses. When things are going well for a company,

bonuses are awarded for positive performance. But when things are

going poorly, we hear the argument today that bonuses are necessary for recruitment and retention. In other words, it always

seems like a good time for an executive bonus.

When you announced, Mr. DeMarco, these new compensation

packages in 2009, you issued a press release defending the high

salaries, even though Fannie and Freddie were going into con-
96

servatorship after major losses, and they have continued to lose

money. They have been bailed out to the tune of $169 billion in

taxpayers’ money and I am told that Fannie has asked for an additional $7.8 billion and Freddie for an additional $6 billion.

And the compensation plan that I looked at—I agree with my

friend on the other side of the aisle, but the compensation plan

here that I have looked at both Fannie and Freddie, and I would

like to put it in the record, consists of approximately $6 million for

each executive, and I would like to place that in the record. And

your basic argument that you have given to both sides of the aisle

today is that it is necessary to attract and retain talent.

So my question is is there ever a wrong time to award lucrative

bonuses, Mr. DeMarco?

Mr. DEMARCO. There are, Congresswoman, and we have. When

these companies were placed into conservatorship, all bonuses were

eliminated at the company. We had a number of senior executives

leave the company. There were no severance or golden parachute

payments made to them. The folks that were most responsible for

the companies ending up in conservatorship left without anything

taken. In fact, the collapse of their stock price did much to reduce

the value of compensation it earned prior.

The difficulty that we have at FHFA as conservator of Fannie

and Freddie is that the country still needs to have a functioning

secondary mortgage market. I have two GSEs here that needed

Government assistance in order to continue to function in the marketplace. We replaced the leadership of those companies that led

to the conservatorship, but now I have to be able to attract people

in to run multi-trillion dollar companies knowing that there is

going to be this flow of losses from business decisions they had

nothing to do with.

Mrs. MALONEY. But let me say that a lot f your comments today

sound very much like AIG. And I would like to place AIG’s statement in defense of their bonuses in the record. In their statement

they said that they had asked their employees who received retention payments or bonuses or stocks, or any type of pay in any form,

of $100,000 or more to return at least half of those payments. And

I would like to put AIG’s statement in the record, too.

And my question, Mr. DeMarco, did you at least do as much as

AIG did? Will you ask executives at Fannie and Freddie to return

half of their retention payments, their retention bonuses, their retention payments?

Mr. DEMARCO. I will not, Congresswoman. I believe that would

be a breach of faith with the agreement that I have struck with the

employees of these two companies. And I believe that trying to take

such action at this point would be detrimental to the taxpayers’ interest. I know how difficult this is and how frustrating it is, but

I believe that to take such actions would not help the American

taxpayer at this point and it would not help the country’s housing

market.

Mrs. MALONEY. Earlier, you spoke rather movingly about public

service, about people who take a job to give back to the community,

to help their country, and Fannie and Freddie are no longer answering to shareholders; they are answering to taxpayers. They are

not only answering to taxpayers for their salary and the bonuses,
97

which I believe they don’t deserve, but they are answering to the

taxpayer for the continued bailout that continues for these two entities. So you are in a very different structure now, and I would say

you should look for employees who want to give back to their country with their talent.

In fact, yesterday, as the chairman knows, we had a bill pass out

of Financial Services that will treat AIG like every other Government agency and be on the pay scale of every other Government

agency, and will not include bonuses. So Congress is acting to move

in a way that is more appropriate for an agency that continues to

be bailed out, is no longer answering to shareholders, but answering to the American taxpayer, and the American taxpayer, 14 million of them, are without jobs and struggling. It is hard for them

to understand how executives get $6 million in pay for a failing entity. Surely there are talented people that can handle these jobs

and do it in a way and a pay scale appropriate with Government

agencies.

I yield back. My time has expired. I have a lot more to say, but

my time has expired.

Mr. MCHENRY. I thank my colleague.

Mr. DeMarco, I just want to take a moment. We are approaching

the noon hour. We have a few more Members that want to ask

questions, but I just want to take a moment of personal privilege

and say thank you for serving as a human shield this morning. I

know it has been tough, but we certainly thank you for your service.

With that, Mr. Gowdy, the subcommittee chairman, Mr. Gowdy,

is recognized for 5 minutes.

Mr. GOWDY. Thank you, Mr. Chairman.

Mr. Haldeman, why did the Enterprise enter a conservatorship?

Mr. HALDEMAN. The Enterprise entered a conservatorship in

September 2008 because of the severe economic stress our company

was under and, in the words of Secretary Paulson, felt a timeout

was necessary.

Mr. GOWDY. Well, do you agree with Mr. DeMarco? Because in

his testimony he said it was a series of poor business decisions that

led to the conservatorship. Do you agree with that or disagree with

that?

Mr. HALDEMAN. In my tenure at Freddie Mac, I have tried very

hard to——

Mr. GOWDY. I am not asking about that. I am asking about decisions that led up to the entering of a conservatorship. It is a very

simple question. Were there poor business decisions that led to

that? The answer is obviously yes. I mean, we can have this exercise as long as you want to have it, but the answer has to be yes,

right? Or else there wouldn’t have been a conservatorship.

Mr. HALDEMAN. It is difficult for me to say that because I don’t

want to second-guess my predecessors.

Mr. GOWDY. Well, we are paying you a handsome salary because

you are supposed to be an expert in the field. And you are not

going to second-guess your predecessors?

Mr. HALDEMAN. Because it is very difficult to say what one would

have done at that point in time given those circumstances and

pressures that they were under.
98

Mr. GOWDY. So you can’t think of a single poor business decision

that was made prior to 2008?

Mr. HALDEMAN. I can talk about some decisions that were made

that I hope I would do differently, but I would prefer not to characterize them as poor business decisions.

Mr. GOWDY. Well, Mr. DeMarco, it is your language, poor business decisions. What specifically did you mean by poor business decisions by his predecessors? He is obviously reluctant to go into

that; hopefully you will not be as reluctant.

Mr. DEMARCO. Mr. Gowdy, both Fannie Mae and Freddie Mac

reduced their underwriting standards, allowed much greater risk in

terms of the mortgages they purchased, they reduced the guaranty

fees, the insurance that they were charging for this, and they made

investment in private label mortgage backed securities that while

at the time were all rated by private credit rating agencies as AAA

rated securities, clearly we have seen that there was substantial

risk in those instruments. So these are business decisions made.

The executives of those companies at the time can make these

decisions——

Mr. GOWDY. During what time?

Mr. DEMARCO. This is largely occurring in the period from 2005

to the first half of 2008.

Mr. GOWDY. Who is Daniel Mudd?

Mr. DEMARCO. He was the CEO of Fannie Mae during this period.

Mr. GOWDY. What was his total compensation?

Mr. DEMARCO. I don’t know off the top of my head, sir.

Mr. GOWDY. So you wouldn’t disagree if it were $12 million.

Mr. DEMARCO. That could be right.

Mr. GOWDY. How about Richard Syron?

Mr. DEMARCO. He was the CEO of Freddie Mac.

Mr. GOWDY. During what time period?

Mr. DEMARCO. I am not sure, but it ended at the time of conservatorship.

Mr. GOWDY. Exactly, 2003 to 2008. Now, what was his total compensation for that time?

Mr. DEMARCO. Again, I am sorry, sir, I don’t know that.

Mr. GOWDY. Would you disagree with me if I told you it was more than $38 million?

Mr. DEMARCO. I could believe that.

Mr. GOWDY. All right. So surely you can understand the frustration of taxpayers who were paying bonuses while the bus is driven

through the gates of hell. And then you want us to pay bonuses

while the people change the tires.

Mr. DEMARCO. I can certainly understand the frustration. This

committee doesn’t know me very well, but I have been a career civil

servant my entire life and most of that career service has been in

policy positions in which I have tried to advise policymakers, including numerous congresses, of the risks to the taxpayer in the

Fannie Mae and Freddie Mac model.

It gives me no satisfaction or pleasure to be sitting here at conservator of these companies at this point, seeing the devastation to

the American taxpayer that has resulted. When I spent the better

part of my career trying to warn policymakers of the risks that
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were inherent in the structure that was in place pre-conservatorship, and that is why I would like to end this hearing with the

same plea that I began at the beginning. FHFA is ready to work

with the Congress and the administration to bring these

conservatorships to an end and to build a more robust, sound housing finance——

Mr. GOWDY. Well, I want to ask you about that. Who is James

Johnson?

Mr. DEMARCO. James Johnson was the CEO of Fannie Mae prior

to Dan Mudd, back in the 1990’s.

Mr. GOWDY. And what was his total compensation during that

time period?

Mr. DEMARCO. It was substantial, sir.

Mr. GOWDY. One hundred million dollars. Now, he had a good

working relationship with Congress, right?

Mr. DEMARCO. Yes, he did.

Mr. GOWDY. Okay. Now, Franklin Raines, what was his total

compensation?

Mr. DEMARCO. I don’t know, sir.

Mr. GOWDY. Would you disagree if it were more than $90 million?

Mr. DEMARCO. I would agree with that.

Mr. GOWDY. And he had a good working relationship with Congress. So sitting here simply saying that we need a better working

relationship with Congress, one could argue that is what got us

into this abyss.

Mr. DEMARCO. I am sorry, I don’t recall saying having a better

working relationship with Congress. I thought I said——

Mr. GOWDY. I have heard you mention the word Congress a half

dozen times.

Mr. Chairman, if I could have 30 more seconds.

The graveyard is full of people who are waiting on Federal judgeships that never came, and I have heard the argument time and

time again that we have to raise compensation levels for Federal

judges so we can attract the right kind of people. And, yet, every

time there is an opening there are 100 folks that are vying for it.

They will take a tremendous cut in pay. I find it literally ironic

that the total compensation for the U.S. Supreme Court justices is

less than either of these two men made.

Thank you, Mr. Chairman.

Mr. MCHENRY. Mr. Connolly for 5 minutes.

Mr. CONNOLLY. Thank you, Mr. Chairman.

And thank you to our witnesses for being here today. I know you

would like to do nothing better than be here today before this committee.

Mr. DeMarco, if I understood your testimony, you make the argument that putting aside histrionics, putting aside public opinion,

even putting aside the opinion here in the Congress, the problem,

the challenge you face is that a substantial number of the mortgages of the United States are tied up in these two organizations

and you have to find competent, highly qualified, skilled managers

willing to manage a Freddie Mac and Fannie Mae and, therefore,

you have to give a nod toward sort of what the marketplace offers
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in terms of skilled managerial leadership and thus the compensation we are looking at.

Mr. DEMARCO. That is correct, Congressman.

Mr. CONNOLLY. Would you agree, though, that given the fact that

these are GSEs, given the fact that the taxpayer has invested very

heavily now directly in trying to straighten the ship of state for

both Freddie and Fannie, that transparency rules might be a little

different for these two organizations than for a private commercial

entity on Wall Street?

Mr. DEMARCO. I think that there can be allowance for greater

transparency, yes, sir.

Mr. CONNOLLY. Well, allowance for. As a public servant, as a fellow public servant, what, in your view, where is that line? I mean,

presumably, that line is different than a private entity, a purely

private entity on Wall Street. So what do we as policymakers here

on the Hill and what, more importantly, does the public have a

right to expect by way of transparency in compensation packages

and policy?

Mr. DEMARCO. I believe these companies are continuing to operate as private companies, as SEC registrants, and the public is certainly entitled to have the same disclosures of the compensation of

the executives of other firms, and that is done. Furthermore, we

have detailed, the FHFA has detailed the executive compensation

program and structure that is in place for these companies. But we

go beyond that with respect to disclosure and we provide numerous

reports to the Congress on the conservatorship operations both in

terms of detailing the sources of losses that have led to these taxpayer draws and detailing the activities that are underway at both

companies to assist homeowners.

Mr. CONNOLLY. Mr. DeMarco, you are familiar with the Inspector

General report that was actually critical with the compensation

system: ‘‘FHFA has neither developed written procedures to evaluate the Enterprises’ recommended compensation,’’ the Enterprises

referring to Fannie and Freddie, ‘‘each year, nor required agency

staff to verify and test the means by which the Enterprises calculate their recommended compensation levels.’’

Do you disagree with that finding?

Mr. DEMARCO. I am familiar with the finding and I can explain

it. Yes, sir, I am familiar with it and we have agreed to take their

recommended remediation that the IG had in its report.

Mr. CONNOLLY. So you are going to have written procedures.

Mr. DEMARCO. We will have written procedures.

Mr. CONNOLLY. When might we see such written procedures?

Mr. DEMARCO. I have assured the Inspector General we will

have those in place by the end of this year, in time for the review

of the coming year’s performance.

Mr. CONNOLLY. Given the ostensible inadequacies identified by

the IG, why wouldn’t we have a little bit less confidence that the

compensation programs, bonuses and other compensation, given

the lack of transparency, lack of clear criteria and policies, lack of

written policy, why should we have faith that that is just the ticket, that is what we need to make sure we are getting the right people to manage Fannie and Freddie?
101

Mr. DEMARCO. It is a fair question, Congressman, but the companies themselves have disclosed the scorecards and the ratings on

them. What the IG was referring to is, within FHFA, the FHFA internal review process of these scorecards did not have written procedures as to how that should be done. The IG did not say we

didn’t have a process, it said we did not have one documented. And

he is quite right about that and I believe that that is a proper control system, and we have agreed to put that in place.

With regard to the calculations themselves, this is the IG saying

that well you have delegated to the companies to undertake normal

day-to-day operations, including calculating pay, but we think with

regard to these executives, you ought to send an FHFA examiner

in there to re-check the calculations that have been done to determine the pay. We have agreed to do that.

Mr. CONNOLLY. One final question, Mr. Chairman.

This committee, Mr. Cummings specifically, on behalf of the minority, at least, requested copies of compensation agreements from

your office. We received recently heavily redacted copies of documents. Is it your position that this committee is not entitled to see

the actual unredacted compensation agreements involved with

Fannie and Freddie?

Mr. DEMARCO. Sir, this has to do with distinguishing people who

are named executive officers and those that are not, and it is trying

to respect the privacy rights of those people. But we have provided

the committee, I believe, with a great deal of information detailing

the individual executives at the company and the compensation

that is being paid.

Chairman ISSA [presiding]. Would the gentleman yield?

Mr. CONNOLLY. Of course, Mr. Chairman.

Chairman ISSA. Mr. DeMarco, the majority feels that you have

been generally forthcoming, but we would ask would you be willing

to provide all compensation packages that include bonuses with the

names redacted, however, with, if you will, numbers that could be

referenced when we are going through the skill set? So that the

gentleman, although you are very right, we don’t need to know the

names of every individual, we want that respected, we would appreciate it if we could go to compensation levels far below our normal 10-K level, and I think that is what the gentleman would like

to see.

Mr. CONNOLLY. Quite correct.

Mr. DEMARCO. We will provide that.

Chairman ISSA. Thank you.

Mr. CONNOLLY. I thank the Chair.

Chairman ISSA. You are very welcome.

We now recognize the gentlelady from New York, Ms. Buerkle,

for 5 minutes.

Ms. BUERKLE. Thank you, Mr. Chairman.

And thank you to our panelists, in particular Mr. DeMarco, for

being here and for lasting this long. I just have a few questions,

mostly follow-up to some of the testimony that I have heard this

morning.

You mentioned in your testimony, Mr. DeMarco, and my colleague, who has since left, from New York, talked about the need
102

to retain or the need to attract quality employees, so that was the

justification for these incredible salaries and bonuses.

But then you talked about in many instances salaries, what we

pay people, is almost irrelevant; maybe they have a passion for it,

maybe they have an interest in it, maybe they are just interested

in doing the greater good. So which is it? I mean, which one do you

think should be the motivation here for these salaries?

Mr. DEMARCO. I believe those motivations are personal, and I

think that I am looking at in terms of overseeing two companies

with 12,000 people is I have to be concerned about that most of

those people are concerned about what their compensation is.

But one other difference here that I think makes this sort of not

just a clean this or that is that to work at Fannie Mae or Freddie

Mac today leaves the employees, whether they are an executive or

they are a secretary, with the fundamental risk of I don’t know

how long this company is going to be around and I don’t know what

I am working for long-term. And I think that that is also a very

tricky thing for us as conservators, tricky for the two CEOs in trying to encourage people to stay engaged at their companies.

Ms. BUERKLE. Well, I would agree with that except for Fannie

and Freddie have the ability and now we are talking about third

quarter losses. They have now gone back to the Treasury and made

huge requests for additional money. But anyway, I guess my

thought is maybe we need to reconsider if it is performance. These

third quarter losses should be a concern to everyone, and in particular the American taxpayer.

Mr. DEMARCO. Congresswoman, I certainly agree with that. If I

may, I would say that, and this is in my written statement, that

we are, for the next year, certainly looking again at the corporate

scorecards and we are looking at the condition of the company, as

well as the gradual shrinkage taking place at the company, and we

are trying to reduce compensation. Every time a position comes

open, we are making serious effort to be filling it at a lower compensation.

Ms. BUERKLE. Okay. Speaking of the corporate scorecard, you

mentioned earlier you assess performance. What do you base that

corporate scorecard on? Is that based on the HAMP program?

Mr. DEMARCO. That is only one component. And HAMP is reflective of the loan modifications generally, which is the critical loss

mitigation activity taking place at Fannie and Freddie for the benefit of not just helping homeowners that are troubled in their mortgages, but also to the huge losses to the taxpayer on troubled mortgages. That is an important element to be assessed.

Ms. BUERKLE. I am sure, though, you are aware of the issues

with HAMP, the HAMP program, that it is a failed program, and

maybe that isn’t what we should be basing the standard on what

the Inspector General has brought out about that HAMP program.

Mr. DEMARCO. Yes, Congresswoman. I am aware that there is a

lot of concern and criticism of the HAMP program, and certainly

the number of HAMP modifications is not what the administration

projected it initially would be.

But I would point out that Fannie Mae and Freddie Mac have

not just undertaken HAMP modifications, but in fact they are

going much further, and we have been collectively working on a ray
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of loan modification opportunities for homeowners that go well beyond HAMP, which is why it has been reported HAMP has done

whatever it is, 800,000 loan modifications. Fannie and Freddie

alone have done just under 1 million permanent loan modifications,

and the performance of those modifications has been quite good

and it has led to a reduction in taxpayer losses. So we are trying

to go beyond HAMP, go beyond the limits of HAMP, to offer homeowners a good opportunity respective of the taxpayer.

Ms. BUERKLE. And I would respectfully request that you provide—there must be a standard, compilations of all of these standards that you are using, and if you could submit that to the committee, I would appreciate that.

Mr. DEMARCO. Certainly, Congresswoman, we would be glad to

do that.

Ms. BUERKLE. Now, in my few seconds that are left, many would

argue that the housing market was the primary reason that there

was such a financial crisis in 2008. So in response to that, the

knee-jerk reaction was to pass Dodd-Frank, which we are hearing

from our financial institutions, the community banks, banks in

general what a difficult and onerous and regulatory, unreasonable

bill this is.

And yet Fannie and Freddie are not included or covered by DoddFrank. Probably one of the biggest reasons that this whole crisis

occurred was the housing market. Can anyone on the panel explain

that to me? Why were Fannie and Freddie left out of the DoddFrank bill?

Mr. DEMARCO. I can’t explain it, but I certainly, as conservator,

point to some argument during the development and debate regarding Dodd-Frank. I believe the administration and the leadership that was pushing the Dodd-Frank legislation through felt like

the housing market was too unstable and that they wanted a different vehicle to focus on housing finance. I say that not to be for

it or agin it, just to say that there were certainly plenty in Congress that wanted to see Fannie and Freddie be part of the legislation. That is now how the legislative process worked out.

Ms. BUERKLE. Thank you very much, Mr. DeMarco.

I yield back, Mr. Chairman.

Chairman ISSA. I thank the gentlelady.

We now recognize the gentlelady from the District of Columbia,

Ms. Holmes Norton.

Ms. NORTON. Thank you very much, Mr. Chairman. I certainly

appreciate this hearing.

Mr. DeMarco, in my own profession, that is to say, the profession

before I came to the Congress, already had a bad name, I was a

lawyer. And I must say I think that Fannie and Freddie have given

home ownership a bad name. That is why I am interested in your

oversight of your own lawyers.

I was particularly struck by the law firm, currently a major law

firm, the Baum law firm, which a New York district court judge—

and this is really unusual for a judge to—it may even be a call for

someone to go before the ethics committee of the bar—talked about

finding falsities contained in 5 paragraphs out of only 10 in an entire petition that the Baum firm had submitted. This was a foreclosure case. The case was Federal Home Loan Mortgage Corpora-
104

tion v. Raya. And the judge went on to say that the misrepresentation ‘‘of the material statement was outrageous and the firm has

imputed the proper administration of justice.’’

What struck me is that the judge said this was not the first time

that the Baum firm had been unethical. How could a law firm operate on behalf of Fannie and Freddie after being sanctioned like

that if this was not the first time?

Mr. DEMARCO. Congresswoman, forgive me, I am not familiar

with the particular case that you are citing. I can report to you

that both Fannie Mae and Freddie Mac have ceased doing new

business with this particular law firm. When issues regarding it

certainly came to our collective attention, each——

Ms. NORTON. Why was this law firm kept on after being sanctioned? Is this firm considered such an outstanding firm for Fannie

and Freddie that you had to have its services?

Mr. DEMARCO. I can’t speak to the timing here, Ms. Norton. I do

know that when this information regarding the firm came to our

attention——

Ms. NORTON. Are you following the conduct of the firms that you

have——

Mr. DEMARCO. We have gone further than that, Congresswoman.

FHFA just very recently directed Fannie Mae and Freddie Mac to

begin the wind-down of their retained attorney networks, their list

of law firms around the country that are used to process foreclosures. So this whole approach to doing business this way, and

the direct engagement between Fannie Mae and Freddie Mac and

individual law firms is on a path to cease. We are stopping this

entire——

Ms. NORTON. That is good news. We understand that you have

said that firms would now have to meet ‘‘certain minimum uniform

criteria.’’ What are those criteria?

Mr. DEMARCO. Those are in the process of being developed.

Ms. NORTON. Well, could I ask that you submit to the chairman

and the ranking member a draft of those criteria when they are

completed? When will they be completed?

Mr. DEMARCO. I know that the work is actively going on. I can’t

tell you exactly, but I think over the next couple months we are

looking to have this wrapped up. We are working not just with

Fannie and Freddie on this, but we are working with the primary

Federal banking agencies because the banking agencies, as you

know, have been involved in oversight of what the banks, as mortgage servicers, have been doing in this area, and the law firm actually works for the mortgage servicers.

So we are trying to get alignment between the standards that we

believe are appropriate here, get the bank regulators aligned with

us on that so that there is uniformity in the mortgage market with

regard to the performance expectations and standards for which we

are going to hold law firms accountable. So this work is actively

underway and what we are hoping for here is, rather than a disparate set of standards, that we can come to one set of standards

in which there is going to be better accountability for law firms

that are going foreclosure processing.
105

Ms. NORTON. The last thing that Freddie and Fannie need are

law firms to drive them into further trouble than the American

people already hold them accountable for. Thank you very much.

Chairman ISSA. Would the gentlelady yield?

Ms. NORTON. I would be glad to yield.

Chairman ISSA. I just want to understand. General counsels that you pay effectively over $1,000 an hour, $2.6 million and $2.9 million, respectively, they are working to try to figure out how to manage outside law firms, but that is why we had to pay, instead of

$300,000 or $400,000 for general counsel, we had to pay nearly $3

million, right, so that they would not know better than this, but

after the fact they would begin working on standards to do better?

Mr. DEMARCO. They had standards. They had standards written

into the contract; they were not identical. And certainly with the

foreclosure abuses that have been identified and the problems that

just as few firms have done to tarnish an entire industry, we believe that we are taking appropriate action to try to remediate that.

And that as a matter of simplifying Fannie Mae and Freddie Mac

and as part of the sort of gradual stepping back of the size and

complexity of those companies, it was my judgment that the appropriate step to take was to not have Fannie and Freddie continue

to maintain this separate relationship with individual law firms,

but that that was better done and would get better execution on

mortgage servicing if it was done all through the existing mortgage

servicer.

Chairman ISSA. Well, I thank the gentlelady for yielding and I

certainly share with you the concern that maybe they have reached

a better conclusion, but it is interesting that it was Government officials who interceded, people who make less than a quarter of a

million dollars a year because of the failure of multiple nearly $3

million a year general counsels in this so-called private sector. I

thank the lady for bringing this up.

Ms. NORTON. Mr. Chairman, and the draft that the gentleman

has said would be submitted to you and the ranking member seems

to me is important.

Chairman ISSA. We look forward to seeing it expeditiously.

We now recognize the chairman of the subcommittee, Patrick

McHenry, the gentleman from Hickory, North Carolina.

Mr. MCHENRY. I thank the chairman.

Mr. DeMarco, has FHFA ever rejected a compensation package

presented to you?

Mr. DEMARCO. Yes, we have had proposals made that we have

said, no, that is not acceptable, let’s go back and redo it.

Mr. MCHENRY. Would you be willing to submit that for the

record once you can gather the documents?

Mr. DEMARCO. I will try to find something appropriate to submit

for the record here, Congressman. These are done as proposals that

are made from the board, and I look at them and I make determinations based upon the comparables and——

Mr. MCHENRY. I understand. I understand. So I would ask you,

Mr. DeMarco, has the White House ever been in contact with you

about compensation issues?

Mr. DEMARCO. We, under the senior preferred stock purchase

agreement that provides the Treasury support to Fannie and
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Freddie, part of that agreement is written into it that the FHFA

shall consult with the Treasury Department on executive compensation. So this is done as a consultation. With every executive

compensation package that I have to approve, it is sent to the

Treasury Department for their review. We request a consultation

with the Treasury on this. This area was obviously most active in

2009, when we were working with Ken Feinberg, who was the Special Master for Executive Compensation.

Mr. MCHENRY. Has the White House ever reached out to you?

Mr. DEMARCO. I have not had any conversation with the White

House regarding executive compensation.

Mr. MCHENRY. Okay.

Mr. Haldeman, has the White House contacted you regarding executive compensation, your firm?

Mr. HALDEMAN. They have not contacted me in any way.

Mr. MCHENRY. Thank you. Has the Treasury?

Mr. HALDEMAN. No.

Mr. MCHENRY. Okay.

Mr. Williams, has the White House ever contacted you regarding

executive compensation at your firm?

Mr. WILLIAMS. No, they have not, Congressman.

Mr. MCHENRY. Has the Treasury?

Mr. WILLIAMS. No, they have not.

Mr. MCHENRY. Okay.

Now, okay, this is interesting because there has been a hew and

cry from the President in particular about executive compensation

and it is somewhat strange to me that, in an area where he could

exert influence, he has chosen not to.

Additionally, Mr. Williams, Mr. Haldeman, it has been mentioned in the press that part of your bonus compensation is tied to

your relationship with the HAMP program, the Home Affordable

Mortgage Program that the administration has put on, mortgage

modifications. But it has been reported in Politico that 35 percent

of your compensation is tied to what you connect and actually get

modified through the HAMP program. Is that correct?

Mr. WILLIAMS. Congressman, we look at an array of goals under

our total loss mitigation efforts, so we not only look at HAMP modifications, but also our own modifications, as well as short sales,

deeds in lieu, and activities around our REO, including activities

we have done to open up mortgage help centers in many districts

and provide counseling to neighbors. So HAMP is one of many

metrics that fit into the overall——

Mr. MCHENRY. But that is not—is that an individual metric or

is mortgage modifications one of your metrics and HAMP is within

that?

Mr. WILLIAMS. HAMP is one goal within a series of metrics that

we are looking at.

Mr. MCHENRY. And what percentage of your bonus structure is

tied to that?

Mr. WILLIAMS. Congressman, the board looks at the totality of

our——

Mr. MCHENRY. I understand the board actually laid out these

metrics for how you would be compensated. Beyond your normal
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day-to-day compensation, if you hit these metrics, they would reward you financially. I understand the board created this.

Mr. WILLIAMS. Right.

Mr. MCHENRY. But you are aware of what those goals are, are

you not?

Mr. WILLIAMS. Correct.

Mr. MCHENRY. Okay. So what percentage of your bonus compensation deals with mortgage modifications?

Mr. WILLIAMS. Congressman, that is what I was trying to say.

The board evaluates my performance based on the totality of the

scorecard. Our efforts in credit loss mitigation are an important

component of that; they look at the totality of the scorecard.

Mr. MCHENRY. Mr. Chairman, I ask unanimous consent for an

additional minute.

Chairman ISSA. Without objection.

Mr. MCHENRY. Thank you.

You are not answering my question, Mr. Williams. What percentage of your compensation is tied to mortgage modifications?

Mr. WILLIAMS. Congressman, I am answering your question. Our

compensation, my compensation is tied to our performance against

all the goals and objectives, and we are evaluated based—and I am

evaluated based on how the company does against each of those

metrics. The board doesn’t assign a specific weighting to each individual metric.

Mr. MCHENRY. So it is more of a feeling, right? I mean, if you

are laying out this metric, in your 2009 to 2010 10-K, goal number

one is your performance to help in the housing recovery, including

mortgage modifications. Goal number two, interestingly enough, is

to protect taxpayers. This is your 10-K. Goal number three was to

measure, manage, and reduce enterprise risk more effectively. Interesting order of how this is to be done with the intent that you

repay the taxpayers.

So there is no weighting to this? So if you had zero mortgage

modification, but you were able to save the taxpayers a few more

dollars, you could get the same bonus that you currently get?

Mr. WILLIAMS. If I had not performed on all the goals, then I

would be held accountable for that, Congressman.

Chairman ISSA. The Chair would like to inform the gentleman

we are going to have a second round.

Mr. MCHENRY. Fantastic. This is very important and I ask unanimous consent to submit for the record the August 31st Politico article Fannie, Freddie Dole Out Big Bonuses.

Chairman ISSA. Without objection, so ordered.

Mr. MCHENRY. Thank you.

[The information referred to follows:]
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Chairman ISSA. We now will start our second round.

Oh, I am sorry. Jackie, I am getting new glasses, I promise. Before I recognize the gentlelady from California, it is the intent of

the Chair to finish including a second round by 1 sharp. So if Members start showing up here, I assure you I will attempt to reach

them all, but I will not keep you past 1. You have been very patient.

We now recognize the gentlelady, my friend from California, way

far down there, Ms. Speier.

Ms. SPEIER. Thank you, Mr. Chairman.

Thank you, witnesses, for appearing here today. We have been

talking about accountability and it is my understanding that Mr.

DeMarco makes determinations on the salaries of the CEO of

Fannie and Freddie based on performance. Would you agree with

that, Mr DeMarco?

Mr. DEMARCO. Yes.

Ms. SPEIER. All right.

Let me ask you, Mr. Williams, at a Senate hearing yesterday it

was disclosed that Fannie failed to contact nearly 60 percent of all

borrowers for loan modifications. How would you score, how would

you grade your performance on that?

Mr. WILLIAMS. Congresswoman, I am not specifically familiar

with the fact, but what I will tell you is that we manage our

servicers and our servicers are held responsible for reaching out to

the borrowers. We have undertaken a number of efforts to ensure

that our servicers are held accountable. We have increased our

incentives——

Ms. SPEIER. All right, Mr. Williams, 60 percent is not accountable. So what I am asking you to do, and through the Chair, is go

back and determine whether or not it is accurate to say that 60

percent of your borrowers have not been contacted for loan modifications.

Mr. Haldeman, it was disclosed yesterday at the Senate hearing

that 80 percent of your borrowers, not 60 percent, but 80 percent

of your borrowers were not contacted for loan modifications. Are

you familiar with that?

Mr. HALDEMAN. What period of time was that statistic?

Ms. SPEIER. I don’t think it matters. I think the fact that 80 percent of the borrowers have not been notified is an F.

Mr. HALDEMAN. For any period of time. The reason for me inquiring about time period was to see how far in the past that was

and whether we are making progress in terms of more right party

contact over time. I believe we are.

Ms. SPEIER. I think it is within this year.

Mr. HALDEMAN. Then I would——

Mr. DEMARCO. Congresswoman, I am sorry, I am not personally

familiar with what was reported in the Senate yesterday, but I

would find these numbers a bit hard to believe.

Ms. SPEIER. Okay. Would you, upon reviewing that, provide this

information to the committee so that we can assess your performance based on that kind of information?

Mr. HALDEMAN. Absolutely.

Ms. SPEIER. Now, to you, Mr. DeMarco, you have been at a number of meetings that have been scheduled with the gentleman from
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Maryland, Mr. Cummings, and I thought we made great progress

at the last meeting. We already know that the HARP program has

only reached about 800,000 homeowners, that there are some 11

million homeowners who are underwater with their loans, and you

had provided us with information that would suggest, if I remember correctly, about 3 million of those homeowners fall under

Fannie or Freddie.

And based on the proposal that the President suggested, where,

if these are homeowners who have been paying their mortgages on

time, with the exception of maybe one in the last year, that they

could in fact refinance their loans for whatever the percentage is

now, which is probably close to 6 percent to maybe as low as 4 percent. And that looked all very good, but we haven’t heard a peep

from you since. So I would like to know what is happening with

that program.

Mr. DEMARCO. Certainly. I am pleased to answer that, Congresswoman. First of all, Fannie Mae and Freddie Mac don’t have 3 million underwater mortgages, that is referencing something closer to

the HARP eligible universe. But you are quite right, we have had

some very healthy discussions regarding the HARP program and

its opportunity to assist borrowers that have a mortgage owned or

guaranteed by Fannie Mae or Freddie Mac to be able to refinance.

When I made the announcement regarding the changes to the

HARP program, we said that we would have the directives out to

the seller servicers, that is, the people that actually service mortgages and originate them for Fannie and Freddie, we would have

the detailed guidance regarding HARP out to them by November

15th. That was yesterday. That went out yesterday afternoon.

So now the mortgage community, the lenders out there now have

the updated guidance with regard to how the HARP program is

working, what the changes are, what that means operationally for

them. So as of today they have that information and they should

be gearing up to be implementing the changes to the HARP program.

Ms. SPEIER. So I can say to my constituents you can go to any

bank, any of the big five right now, all of whom are in the HARP

program, and ask them to refinance your loan, and if one won’t do

it, another one will because the servicers are just going to make

money off of this, correct?

Mr. DEMARCO. Well, we are trying to encourage servicers to

reach out to borrowers to let them know that this opportunity is

available to them. Different institutions are going to need different

amounts of time to actually make the operational changes to implement the new program, but they have known it was coming and

the big ones have certainly been all geared up for it and are looking forward to participating. So they may all be ready at slightly

different time periods, but I would expect in the very near future

all of them are up and running with it.

Ms. SPEIER. Thank you.

I yield back.

Chairman ISSA. I thank the gentlelady.

I will now recognize myself for a second round.
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Earlier I brought up the subject of general counsels. Mr.

DeMarco—well, actually, I will do it this way. Mr. Williams, what

were your legal fees in 2010, outside legal fees?

Mr. WILLIAMS. Congressman, I will have to check on that and get

back to you.

Chairman ISSA. Mr. Haldeman, what were your outside legal

fees, approximately?

Mr. HALDEMAN. I will have to get back to you with a good number on that.

Chairman ISSA. Mr. DeMarco, do you know how much they are

spending in outside counsel of all sort?

Mr. DEMARCO. Not off the top of my head, sir.

Chairman ISSA. But is it fair to say that all these lawsuits that

you earlier justified, a $2.9 million compensation package for Mr.

Bostrom, was because you needed somebody that could manage

these various lawsuits? So the question is are these lawsuits being

done by his observation or are they basically being done by outside

counsel? And do you need to spend $2.9 million, or roughly $1,000

an hour if he works 3,000 billable hours a year, do you need to

spend that much to get somebody to hire outside counsel?

Mr. DEMARCO. It is a team effort in pursuing this litigation.

Chairman ISSA. Well, then how much is the entire team paid?

Mr. DEMARCO. Mr. Bostrom is no longer employed by Freddie

Mac.

Chairman ISSA. Okay, well, then Mr. Mayopoulos, the general

counsel over at Fannie Mae, at $2.6 million. It isn’t a whole lot different. When I hear team effort, I say great. I go to baseball and

football games. I am not asking what the whole roster got paid; I

am asking about—I don’t know whether he is the quarterback or

the coach. But the question is if I go to major Fortune 500 corporations that have huge patent portfolios and they are suing constantly, and they pay a quarter as much this or half this amount,

including stock bonuses, very seldom are they going to get to $2.6

million.

But, more importantly, I see some sort of a direct relation. What

I heard earlier is, jeez, you guys kind of got swamped in how to

administer the job because this was so unique. Two point nine million dollars is a pretty good chunk of money. Isn’t it enough to get

some of the finest former U.S. attorneys, who make $160,000 a

year, who know about suits and litigation? We have a former U.S.

attorney who is a member of this committee, and I believe when

he went from being a U.S. attorney to being a Congressman he actually got a small pay raise, getting to $174,000.

Your salary seems to be sufficient to keep you overseeing people

who make more than 10 times what you make.

Mr. DEMARCO. We are putting that to the test on a daily basis.

Chairman ISSA. Touche.

I would like to move to another one. Although executive compensation and performance is the subject here, this is tangentially

involved. Yesterday, when I read Uncle Sam is a reluctant landlord

of foreclosed homes, a quarter of a million, 248,000, they reported

homes are currently for sale or rent. They have a number further

down in the article that is closer to a million.
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Mr. Williams, have you done everything you can do to quickly

sell and get back in the hands of people who will maintain homes

or to rent to people who can afford to pay the rent on their homes,

even if they are the existing current debtor?

Mr. WILLIAMS. Congressman, we have an expansive REO operation that we run. We are constantly looking to move properties.

We first rehabilitate the property; we look to preserve the community through the execution; we also work with community groups;

and, more importantly, we focus on people who want to come in

and own the home, because that is the best thing that you can do

for the neighborhood.

Chairman ISSA. But isn’t it true that by the time you actually do

a liquidation sale of a home, it has typically been in foreclosure and

often unoccupied, or even occupied by not the original owners, but

by somebody they sublet to or somebody that simply squatted for

a year or more, and the home is devalued considerably because of

that intervening period?

Mr. WILLIAMS. Congressman, we try to take over the properties

as quickly as possible when they go through foreclosure. Much of

what we are all dealing with today is the fact that properties are

staying in foreclosure for extended periods of time, which ends up

adversely affecting the properties.

Chairman ISSA. Have you come to Congress for relief so that you

can foreclose more expeditiously or, in fact, even convert a homeowner who clearly cannot and is not making payments into a tenant?

Mr. WILLIAMS. Congressman, we actually do have a tenant-inplace program, which we are renting back properties to about

10,000 borrowers.

Chairman ISSA. Ten thousand out of millions?

Mr. WILLIAMS. Out of millions.

Chairman ISSA. So the question I asked you, and maybe I will

go to Mr. Haldeman because you guys are slightly different in your

organizations, do you need, can Congress give you greater authority so that in fact these sort of expeditious conversions will cause

less loss of asset to the community? Because Mr. Cummings and

I come from very different communities; mine is more suburban,

his is more urban. The one thing we know, though, is no matter

where a foreclosed property is, the entire neighborhood suffers during that entire period; it is not just the asset that the taxpayer is

losing on. Do you have all the tools? Ten thousand rentals into a

million homes doesn’t sound like the tool is working very well.

Mr. Haldeman, do you have all the tools you need so these homes

are occupied, maintained, and as productive as possible, regardless

of whether or not the current debtor is able to make payments?

Mr. HALDEMAN. Mr. Chairman, we have worked with Fannie and

with FHFA on a servicer alignment initiative which I think is

going to allow us to more effectively deal with the problem that you

are talking about, that is, have increased pressure on our servicers

to do some of the things you are speaking of.

Chairman ISSA. Mr. Williams.

Mr. WILLIAMS. Congressman——

Chairman ISSA. I didn’t mean to cut you off, but I wanted to give

you both——
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Mr. WILLIAMS. That is quite all right. Two other points. One, the

foreclosure laws are State laws, so if Congress is willing to act to

take responsibility for what are currently State laws, that would be

one thing. A second thing that I would highlight is we are working

with both FHFA and Freddie Mac on opportunities to further expand REO opportunities for rental.

Chairman ISSA. Mr. DeMarco? You don’t get paid as much, but

you are welcome to give full answers.

Mr. DEMARCO. Thank you, Mr. Chairman. It has been a challenge for me as conservator to look at the difficulties that you were

talking about, properties that are unoccupied or where there is a

squatter.

To Mr. Williams’ point, part of the difficulty here is that these

are governed by State laws, and there are some States that have

foreclosure processes and foreclosure requirements that are designed to protect the borrower, but at the same token that is imposing greater losses on the investor in these mortgages because it

is such a time-consuming and costly process to move these properties through foreclosure.

Even if the property has been abandoned or has a squatter sitting in it, it still, in some States, is an enormous length of time to

move that thing through foreclosure, to get that property back into

the marketplace to help that local community, and I do believe that

that is a problem and it is not being addressed.

Chairman ISSA. Well, I am going to be cognizant I have overused

my time even on the second round. But what I will tell you on behalf of this committee is that if you will bring to us, if you will,

the bad actors, the ones that you believe the States that are hurting you, not helping you, and thus hurting the taxpayer, I am a

very strong believer in the 10th Amendment, but when it comes to

Federal preemption, look, we hand these States a lot of money, and

if we are looking at the various Federal programs that are helping

their citizens, we have every right to say this money will not be

as available to—and I will take North Carolina because I have a

Member present—North Carolina, we can say, look, this program

is not going to be available in North Carolina unless North Carolina gives us the tools to get a reasonable opportunity to in fact rehabilitate these.

And I would say, for one, even my home State of California,

given a choice of not getting the Federal dollars or making changes

as to Freddie and Fannie and FHA underwritten homes, they

would make changes necessary to help. We have never been asked.

So I would hope that you would really look, use your general counsels, some of those 3,000 hours, and please give to us where the

problems are, because we are the committee that happens to also

own intergovernment relations. All of those States, all of those cities are in fact within our portfolio to try to help them help you and

help all of us.

Mr. DEMARCO. Thank you, Mr. Chairman. I will have the team

follow up with you. I will say the State of California has one of the

faster processes, and I believe that has actually helped certain

markets in California to recover better and faster.

Chairman ISSA. Thank you.

Recognize the ranking member.
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Mr. CUMMINGS. Just one clarification. The chairman had asked

for agreements with regard to compensation agreements and certain information, and I just want to make sure that we are talking

about those executives named in the SEC filings. Is that right?

Mr. DEMARCO. I believe that is what we are talking about.

Mr. CUMMINGS. Okay. All right.

Mr. DEMARCO. But if it is more, we will certainly clarify.

Mr. CUMMINGS. All right. Number two, you mentioned, with regard to those law firms dealing with foreclosures, I think you said

two firms had given the rest of them a bad name. Is that what you

said?

Mr. DEMARCO. I said a few.

Mr. CUMMINGS. Oh.

Mr. DEMARCO. I said a few.

Mr. CUMMINGS. I was going to say it was a lot more than two.

Mr. DEMARCO. No, I understand. No, I did not say two. I said

that a few firms in the industry have given the entire industry a

bad name.

Mr. CUMMINGS. And what, other than changing the lawyer network system, has anything been done to bring any kind of punishment to these guys? In my other life I used to represent lawyers,

and for some of the stuff that these lawyers did our lawyers would

be suspended from the practice of law, if not disbarred. And I find

it interesting how they keep working for us. I just don’t understand

it and I just wonder whether we underestimate what they have

been doing. This whole robo-signing stuff, we create a ‘‘normal’’ and

that is not normal, it is not supposed to be normal. I could go on

and on and on.

I was just wondering has there been any efforts to punish these

folks.

Mr. DEMARCO. Well, Mr. Cummings, I am not an expert in this,

but my general awareness is that this would be something that

would be done by a State bar association.

Mr. CUMMINGS. Right. That is correct.

Mr. DEMARCO. It should be done in the State. And what has

been puzzling to me is I am not aware of hardly any debarment

or State disciplinary action that has been taken against law firms.

Now, there may be people behind me that know more, but that is

in their realm. We have certainly been working with State attorney

generals on this issue and, as you well know, State attorney generals have been taking an awful close and long look at foreclosure

processing issues both by servicers and by law firms.

Mr. CUMMINGS. Did you have something on that, Mr. Williams?

Mr. WILLIAMS. I was going to echo that point, Congressman, that

we have been cooperating whenever we find these situations with

State attorney generals and local counsel on these matters.

Mr. CUMMINGS. Did you have something, Mr. Haldeman?

Mr. HALDEMAN. I have nothing to add.

Mr. CUMMINGS. Last, but not least, let me say this. I know that

there have been some that have said that you all probably felt a

little uncomfortable being here, but I have to tell you I don’t have

any sympathy, because of the people that I face every night when

I go home in my block in Baltimore. I have, probably in my block,
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out of about 30 houses, 7 or 8 of them in foreclosure, and those

were my neighbors, and we see it over and over again.

I just think that there is more we can do. I just believe it. And

I really wonder sometimes whether the President even knows how

significant this problem is. And I say that with all due respect.

Sometimes I wonder whether he even has the information available

to understand how many Americans are drowning. We just had

NAKA in Baltimore, and they tell me some 16,000 people came out

trying to get their mortgages modified, 16,000 in 4 days.

So I just hope that when you go back to your drawing boards,

you know, I kind of wish I could just hang out in the boardroom

and just whisper in your ears constantly, reminding you about the

people who are suffering and who need some urgency, and they

don’t feel like they are getting it.

And I know what you are saying, but when you have people like

the man that I talked to yesterday, who comes home and all his

stuff is out on the corner, and it is about Christmas time and

Thanksgiving, and he doesn’t know where he is going to go, listening to people who make $7 million in 2 years, who are supposed

to have something to do with his plight and helping him out of it,

doesn’t give him much relief. You know, he can’t afford a house; he

can’t even afford a turkey.

So I hope that you will keep that human element in mind. And

we are going to be meeting with you again, not the committee, but

our group of legislators, Mr. DeMarco, hopefully within the next 2

to 3 weeks.

Mr. DEMARCO. Okay.

Mr. CUMMINGS. Thank you very much.

Mr. DEMARCO. Thank you, Mr. Cummings.

Mr. MCHENRY [presiding]. I thank the ranking member.

I recognize myself.

Now, Mr. Williams, I ended with you and how your deferred compensation is calculated, and reading the Politico article on this, it

is not clear if it is Fannie or Freddie where this compensation

package works this way, so, Mr. Haldeman?

Mr. HALDEMAN. So we have a scorecard, which is weighted into

broad categories, broad categories such as financial results, mission, technology and infrastructure, and there are weightings attached to those large categories, and they are on the order of four

or five of them and a category weighting is typically 20 to 30 percent. And HAMP would be a subpoint under one of those larger

categories, and there are not weightings attached to a subpoint. So

it is a little bit difficult to be too precise about the percentage

weighting for just HAMP modifications.

Mr. MCHENRY. But is one of the broader sections mortgage modifications?

Mr. HALDEMAN. It would be mission or supporting the housing

market, that kind of language. And subpoints under that would be

all of the tools that we have to try to be supportive of the housing

market, including modification.

Mr. MCHENRY. What other than modifications would be in that

subcategory?

Mr. HALDEMAN. It would be refinancings, and within that HARP

refinancings and traditional refinancings; there would be tradi-
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tional modifications and HAMP modifications; it could be affordable

housing goals. Those all could be subpoints.

Mr. MCHENRY. But largely that mission, that piece is largely

modifications?

Mr. HALDEMAN. That would be a big piece of it. It certainly

would be a significant piece of it that our board would be looking

at. It is not precisely weighted, but because of the attention afforded that in the press, I am sure that our board looks very closely

at the numbers of modifications that are done.

Mr. MCHENRY. So that mission piece, what percentage of your

deferred compensation comes from that, your bonus?

Mr. HALDEMAN. I don’t recall the precise number, and it does

vary from year to year, but it would typically be a number like 25

percent.

Mr. MCHENRY. But you know at the beginning of the year that

the board is going to measure you against this scorecard?

Mr. HALDEMAN. Yes.

Mr. MCHENRY. Okay.

Is that similar for your organization, Mr. Williams?

Mr. WILLIAMS. Yes, it is, Congressman.

Mr. MCHENRY. Okay. And in a similar form as Mr. Haldeman

described his scorecard? Is your scorecard similar?

Mr. WILLIAMS. I have not looked at Freddie Mac’s scorecard, but

we do have a scorecard——

Mr. MCHENRY. If you listened to the gentleman—I have never

seen the scorecard.

Mr. WILLIAMS. We look at very similar sets of priorities, providing liquidity and stability and support for the market, ensuring

that we are doing everything we can to manage credit losses and

all the other activities related to our financial results that we control, and then also making sure that we continue to improve the

operational and risk areas of the company.

Mr. MCHENRY. And are mortgage modifications a part of that

scorecard?

Mr. WILLIAMS. Yes, they are a part of that.

Mr. MCHENRY. Okay. Is HAMP a part of that as well?

Mr. WILLIAMS. HAMP modifications and administering the program for Treasury are one piece of the scorecard.

Mr. MCHENRY. Okay, thank you. That is much more forthcoming

than the last exchange we had, and I appreciate that.

Mr. DeMarco, you outline this in your written statement about

the scorecards, corporate scorecards.

Mr. DEMARCO. Yes.

Mr. MCHENRY. Back in March, the IG said that FHFA didn’t

have a written policy on how to handle that. With your testimony

today, it sounds like that critique you have incorporated and now

there are some solid policies by which to judge these scorecards.

Mr. DEMARCO. To clarify, I committed to the IG that this will be

completed by the end of this calendar year. The work is actively

going on now.

Mr. MCHENRY. Okay, thank you, and thank you for clarifying. I

do appreciate that.

Now, the additional question would be will you make public that

policy?
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Mr. DEMARCO. Well, I certainly could. This is what the IG was

requesting.

Mr. MCHENRY. Well, the question is not——

Mr. DEMARCO. Yes.

Mr. MCHENRY. Do or do not. There is no try.

Mr. DEMARCO. I will make it public. I will make it public. It is

a written internal procedure for how we would go about the internal review.

Mr. MCHENRY. Okay.

Mr. Haldeman, will you make your scorecard public for your institution?

Mr. HALDEMAN. I can see no reason why——

Mr. DEMARCO. This has to be reported in the 10-Ks anyway.

These are publicly disclosed.

Mr. MCHENRY. Right, but in a user-friendly format. I have the

Fannie 10-K and it is with three broad goals. I have now lost it

in my stack of paper. Here it is. And it is very unclear in the couple

of pages in the 10-K. Would you make this——

Mr. DEMARCO. If I may, I will work to make sure that we have

greater clarity and transparency with regard to the scorecards

going forward.

Mr. MCHENRY. Okay. I appreciate that, but since we do have the

heads of the two institutions you are overseeing, I mentioned you

as a human shield earlier today, my intention is not, in this questioning, for you to throw yourself in front of this questioning. I appreciate your willingness to do this. It is more of a soldier-like sacrifice. I appreciate it. But with massive losses we want to be able

to understand at the beginning of the year how you will be judged

and what success looks like.

Mr. Haldeman, would you——

Mr. HALDEMAN. It is a reasonable request and I am happy to do

it, subject to the approval of our regulator. We are a regulated organization and I like to check most things with the regulator before

doing it or committing.

Mr. MCHENRY. Nicely done. Who says there is just politics on the

Hill?

Mr. Williams.

Mr. WILLIAMS. Congressman, we disclose our goals in accordance

with the SEC rules. We also disclose in accordance with SEC rules

how individuals have performed. We provide the scorecards to Mr.

DeMarco and we will work with him on how he wants to handle

this going forward.

Mr. MCHENRY. Okay. Okay. Well, Mr. DeMarco has outlined that

he would like to see housing finance reform, as would I, and I have

been in Congress since 2005 trying to articulate that, and it still

has not happened. The administration has not taken the lead; the

President has not taken a lead. The President has complained

about executive compensation packages, but two large entities

where he could have a larger and direct say, he tends to make

speeches rather than actual consultation.

Mr. Williams, Mr. Haldeman, there are discussions about Fannie

and Freddie’s losses going forward. Mr. Williams, at what point

will your institution be able to repay the taxpayers for this extraordinary support?
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Mr. WILLIAMS. Congressman, I do not venture a timeframe in

which we would do that. We are very focused on our credit losses.

As you have seen probably from the conservator’s report, the activities we have undertaken are reducing future expectations around

this area. We will continue to focus on this, but bear in mind much

of what we are dealing with is also driven by the state of the economy, unemployment, and declining home prices.

Mr. MCHENRY. Mr. Haldeman.

Mr. HALDEMAN. Yes. As you know, Congressman, we do pay a 10

percent preferred dividend on our outstanding draw, which, for

Freddie Mac, is now approximately $70 billion, so our annual preferred dividend is $7 billion. And I think the best place to go to get

an answer to your question is detailed analysis put out by FHFA

which looks at both Enterprises going forward and under different

scenarios makes a projection as to the amount of draw that will be

required going forward.

Mr. MCHENRY. So you don’t have any planning purposes in your

institution that outlines when this would happen?

Mr. HALDEMAN. We do, and the numbers——

Mr. MCHENRY. What year would that be?

Mr. HALDEMAN [continuing]. And our numbers in planning were

submitted to FHFA and made part of the document that they put

out.

Mr. MCHENRY. So you are not willing to say what year it is?

Mr. HALDEMAN. I can’t recall from the document——

Mr. MCHENRY. Mr. Williams, what year will Fannie have repaid

the Treasury?

Mr. WILLIAMS. Congressman, as you know, with a 10 percent dividend on the amount that is drawn, we will never fully be able to

pay back the amount that is due to the Treasury. This is why the

director has highlighted the need to move forward.

Mr. MCHENRY. Mr. DeMarco, what year will the GSEs be able

to repay the taxpayers for this extraordinary support?

Mr. DEMARCO. I do not believe they will repay the taxpayer in

full.

Mr. MCHENRY. Ever?

Mr. DEMARCO. Well, unless we keep this conservatorship going

to my children and beyond, no. I would hope that the

conservatorships end before then.

Mr. MCHENRY. Okay. At what point—Mr. Haldeman wouldn’t

venture a guess, but at what point will Freddie be able to repay

the extraordinary support?

Mr. DEMARCO. Mr. Chairman, I don’t believe either company will

repay the extraordinary support in full. I have said that before. I

look at the current financials of the company, the fact that we are

shrinking the retained portfolios of the company, looking at the expenses that are there, including the dividend, which is paid to the

Treasury Department for that which is already borrowed, and I

don’t have a time line looking forward that I can point to and say

by this year this will be repaid. And I do hope that we have moved

beyond the conservatorships in the relatively near future, so we are

not going to get them repaid before then.

Mr. MCHENRY. So if we just left this as it is currently structured,

we could be back here having this same hearing in 5 years.
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Mr. DEMARCO. No, I think we will look quite different in 5 years,

and I believe that the book of business that we have been taking

on since conservatorship is a profitable book of business to the taxpayer and I believe that as we finish washing through these bad

mortgages that were originated in the 2005 to 2008 period, that

will eventually we will move passed that and the remaining book

of business, the new book of business will be profitable to the companies. So I believe that that is one of our fundamental obligations

with the companies in conservatorship, is to ensure the new business we are doing is profitable, and I believe it is, but that is not

going to be profitable enough to be repaying this amount of money

in the near future.

Mr. MCHENRY. And what year do you think that would be?

Mr. DEMARCO. I believe our projections—well, it is going to depend upon house prices and employment.

Mr. MCHENRY. Sure. It depends on a lot of different things.

Mr. DEMARCO. But we believe that by the end of next year we

will have moved through a good chunk of most of what is left with

the previous book.

Mr. MCHENRY. Okay. I certainly appreciate that and I appreciate

your willingness to answer questions today.

Mr. DeMarco, I have referred to you as a human shield a number

of times. I sit on both Financial Services and this committee. You

have been very forthright. We understand the difficult situation

that has been thrust upon you. We do appreciate your career service to the Federal Government.

Mr. Haldeman, Mr. Williams, we certainly appreciate your willingness to head up very challenging institutions. We do. The concern here today is the extraordinary taxpayer support and the fact

that, in essence, we have two nationalized entities, and we also

have AIG, for instance, but we have two nationalized entities here,

and that is where your compensation becomes a question for the

taxpayers. Otherwise, if you are private institutions, we have had

these hearings before with private institutions. That is not the

proper purview of those, me, for instance, that is a taxpayer fiduciary. However, because of the nature of your entities, that is

where this concern comes.

And we understand you are patriotic Americans. We are not

questioning your patriotism by any means, but we are questioning

whether or not this is an appropriate type of compensation, level

of compensation with two nationalized entities.

Thank you for being here today. I certainly appreciate your willingness and your time.

With that, this committee stands adjourned.

[Whereupon, at 1:03 p.m., the committee was adjourned.]

[Additional information submitted for the hearing record follows:]
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