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[Senate Hearing 113-15]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 113-15

 
    OVERSIGHT OF FEDERAL HOUSING FINANCE AGENCY: EVALUATING FHFA AS 
                       REGULATOR AND CONSERVATOR

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

   EXAMINING THE OPERATIONS AND REGULATORY PRACTICES AT THE FEDERAL 
                         HOUSING FINANCE AGENCY

                               __________

                             APRIL 18, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

                 Available at: http: //www.fdsys.gov /

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

              Erin Barry Fuhrer, Professional Staff Member

                 William Fields, Legislative Assistant

                  Greg Dean, Republican Chief Counsel

               Mike Piwowar, Republican Senior Economist

            Chad Davis, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                        THURSDAY, APRIL 18, 2013

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2
    Senator Shelby...............................................     4
        Prepared statement.......................................    28
    Senator Vitter...............................................     4
    Senator Tester...............................................     4

                               WITNESSES

Edward J. DeMarco, Acting Director, Federal Housing Finance 
  Agency.........................................................     5
    Prepared statement...........................................    28
    Responses to written questions of:
        Senator Crapo............................................    47
        Senator Reed.............................................    48
        Senator Menendez.........................................    50
        Senator Hagan............................................    57
        Senator Shelby...........................................    58
        Senator Vitter...........................................    59
Steve A. Linick, Inspector General, Federal Housing Finance 
  Agency.........................................................    22
    Prepared statement...........................................    39
    Responses to written questions of:
        Senator Reed.............................................    60
        Senator Menendez.........................................    61

                                 (iii)

    OVERSIGHT OF FEDERAL HOUSING FINANCE AGENCY: EVALUATING FHFA AS 
                       REGULATOR AND CONSERVATOR

                              ----------                              

                        THURSDAY, APRIL 18, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order.
    Before we turn to the hearing, I would like to express my 
condolences to the people of Boston and to Senator Warren. Our 
thoughts and prayers are with you all.
    As Members of this Committee on both sides of the aisle 
noted during the debate of the Housing and Economic Recovery 
Act of 2008, one of the most important aspects of this bill was 
the establishment of the Federal Housing Finance Agency as an 
independent regulator. This ensures that it can operate without 
undue political interference and that the appropriations 
process cannot be used as a road block for regulations.
    With this independence, the Banking Committee must exercise 
Congressional oversight to ensure that the agency is properly 
balancing its attention among the entities it regulates and its 
role as conservator of Fannie Mae and Freddie Mac. HERA also 
established the FHFA Office of Inspector General, and I am 
pleased that we have both Acting Director DeMarco and Inspector 
General Linick before the Committee today.
    As we turn again to housing finance reform, let me be clear 
that a never-ending conservatorship of Fannie Mae and Freddie 
Mac is not an option. To help remove obstacles to housing 
financing reform, Senator Crapo and I, along with every Member 
of this Committee, offered an amendment that was unanimously 
adopted by the Senate to the budget resolution to prevent the 
GSEs from being used as a piggy bank. I will continue working 
with Ranking Member Crapo to find a bipartisan path forward on 
sensible long-term reforms. So, it is important we understand 
the current status of the conservatorships and how FHFA's 
proposed changes will expand or limit our options for reforming 
the housing finance system.
    The FHFA has a large and important role in the housing 
market, regulating two of the largest entities in the market, 
Fannie Mae and Freddie Mac, as well as acting as their 
conservator to oversee business and management decisions to 
ensure stability in the housing market. I am concerned about 
continued reports that FHFA does not have adequate staff to 
perform examinations of the entities under its supervision and 
follow up on enforcement directives.
    Under Mr. DeMarco's leadership, the FHFA has made 
significant changes to the operations of the GSEs by 
standardizing some of their operations and now seeking to 
streamline their securitization platforms. I look forward to 
hearing more about this proposal and other priorities described 
in the Conservatorship Strategic Plan as well as how the 
current enforcement challenges raised by the IG are being 
addressed. If the FHFA is going to undertake such a massive 
effort as streamlining the securitization platforms of the 
GSEs, we should be sure that it will also be able to supervise 
the new platform once it is operating.
    I look forward to hearing from our witnesses on these 
issues, and with that, I will turn to Ranking Member Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman.
    This September will mark the 5-year anniversary of the 
Federal Housing Finance Agency taking Fannie Mae and Freddie 
Mac into conservatorship, and Mr. Chairman, I again appreciate 
working with you on this and particularly appreciate your 
comments just now that leaving Fannie Mae and Freddie Mac in 
conservatorship is not an option.
    As I noted in a previous hearing, when FHFA Director James 
Lockhart and Treasury Secretary Henry Paulson announced this 
action, Secretary Paulson described the situation as a time out 
and stated, ``We will make a grave error if we do not use this 
time out to permanently address the structural issues presented 
by the GSEs.'' In the weeks to come, I will describe my views 
on long-term reform. I look forward to engaging in that timely 
and necessary debate.
    Instead of a time out, these conservatorships have been 
more akin to a perpetual state of limbo, which has no doubt 
created extraordinary challenges for their management.
    Director DeMarco, you are to be commended for your 
performance in the extraordinarily difficult and complex role 
that you were given by President Obama nearly 4 years ago. Your 
success in leading FHFA to preserve the assets of Fannie Mae 
and Freddie Mac has put us into a position to begin making the 
hard decisions of what to do with these entities. You have 
developed a knowledge and expertise that is shared by very few 
people, having been involved in the conservatorships of these 
highly complex institutions from the very beginning. You have 
further proven yourself to be a technical policy expert rather 
than a political advocate. And for all of these reasons, I can 
think of no one more qualified and better situated than you to 
manage these conservatorships and assist the Congress in making 
the hard decisions that lie ahead of us.
    Unfortunately, as we approach the 5-year mark of these 
conservatorships, they are beginning to report profits. I say 
unfortunately, not that they are beginning to report profits. 
That is good. But I fear that we may be in the midst of a 
closing window to make those decisions and enact a meaningful 
housing reform. Because of that, I thank you for your continued 
service during this pivotal moment, despite the many challenges 
that you continue to face.
    Returning to the issue at hand for this hearing, there are 
a few areas that I would like to highlight for our continued 
oversight. The Annual Scorecard released by the FHFA indicates 
a focus on the creation of a single securitization platform, as 
the Chairman has mentioned. I look forward to hearing more 
details about this undertaking. Specifically, how does this 
platform fit with future entities in a financial world post-
reform of our housing finance system?
    The Scorecard also created a goal for the continued 
shrinking of the current footprint within the market for Fannie 
and Freddie. As I noted in a previous hearing, the FHFA's 
latest Conservator's Report showed that the Federal Government, 
through Fannie and Freddie and Ginnie Mae, accounted for an 
astounding 100 percent of the mortgage-backed securities issued 
during the first three quarters of last year. Obviously, this 
is extremely troubling. So I am interested to hear more details 
about how FHFA plans to address the domination of our mortgage 
market by the Federal Government.
    The recent profits reported by Fannie and Freddie also 
present new questions. For example, do the profits help with 
challenges such as personnel recruitment and retention, or do 
they present new challenges given that the companies will 
remain in conservatorship no matter how they perform absent 
Congressional action?
    I look forward to learning the answers to these and other 
questions during this hearing. However, I must reiterate that 
the most pressing question in this space is how will we reform 
our Nation's housing finance system? The greatest aid that we 
can give both prospective and current homeowners is to provide 
clarity for market participants in regard to future mortgage 
finance, and for that reason, I am hopeful that the 
Administration will engage with us on this important topic in 
the coming months to shed further light on their positions 
moving forward.
    Mr. Chairman, I believe our work together during the recent 
budget process that you have mentioned showed that we have the 
ability to find common ground. Every one of us on this 
Committee came together and agreed that we needed to end the 
practice of using the GSEs as piggy banks to fund other parts 
of the Federal Government. In doing so, we were able to pass a 
budget point of order against it with unanimous support from 
this Committee. I am very glad that we are working together on 
these important issues and look forward to working with you and 
all of my colleagues on this Committee once again on a robust, 
bipartisan process to finally bring about an end to these 
conservatorships.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Crapo.
    Are there any other Members who wish to make a brief 
opening statement?
    Senator Shelby. Mr. Chairman.
    Chairman Johnson. Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Mr. Chairman, I would ask that my written 
statement be made part of the record in its entirety and I just 
have a few brief remarks.
    I think I would be remiss if I did not thank you, Mr. 
DeMarco, for your outstanding service. I applaud your work. You 
have been an extraordinary person in this job, despite what 
some people would say. You were given a tough job, a very tough 
job, during a critical time in our Nation's housing market. But 
your commitment to protecting both taxpayers and homeowners, I 
believe, have served our Nation well, and I look forward to 
hearing from you today. Again, I thank you for your work.
    Mr. DeMarco. Thank you, Senator.
    Chairman Johnson. Anybody else?
    Senator Vitter. Mr. Chairman.
    Chairman Johnson. Yes.

               STATEMENT OF SENATOR DAVID VITTER

    Senator Vitter. Very briefly, I just want to thank Director 
DeMarco, as well, for his work, and it has been very, very able 
in very tough times.
    And, Mr. Chairman, I want to echo your thoughts and thank 
you for the clear statement, which I think is a clear 
bipartisan consensus, that significant reform does have to 
happen to GSEs and now is really the time to focus on that.
    And in that regard, I would just encourage all of us, 
again, there is an obvious place to start, I think, and that is 
with the solid bipartisan Jumpstart GSE Reform Act, which has 
very broad support in this Committee. And I would like to 
continue to encourage a markup of that. It could be the same 
day as a markup of the Menendez-Boxer bill. They could be on 
the same agenda. I think that would work fine. And I think that 
would be an important jumpstart, as the name of the bill 
implies, to this effort. We have not had a markup in this 
Committee since September 8, 2011. That is over a year and a 
half ago. And I think this would be a very, very appropriate 
and timely and solid markup to get us on this path.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you.
    Senator Tester.

                STATEMENT OF SENATOR JON TESTER

    Senator Tester. Thank you, Mr. Chairman.
    I want to thank Mr. DeMarco, too. I appreciate your work. 
It has been stellar.
    I want to express my appreciation for you holding this 
hearing today. I think that there are a lot of good signs. 
Property values are rising. The Enterprises are making some 
money, turning some profits. These are all good signs. But I 
appreciate the statement made by both the Chairman and the 
Ranking Member. I believe now is the time to move forward with 
solutions to restructure the finance system, housing finance 
system, long-term, to provide stability for the long haul. And 
I would hope that--I would hope that, because I think it is so 
critically important for our economy--I would hope that this 
becomes a top priority for this Committee to get this done, to 
get this out of conservatorship and get a program that is going 
to work for this country for the next generation.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you.
    I want to remind my colleagues that the record will be open 
for the next 7 days for opening statements and any other 
materials you would like to submit.
    Now, I would like to introduce our first witness. Mr. 
Edward DeMarco is the Acting Director of the Federal Housing 
Finance Agency. Mr. DeMarco has served in this capacity since 
2009.
    Mr. DeMarco, please begin your testimony.

   STATEMENT OF EDWARD J. DEMARCO, ACTING DIRECTOR, FEDERAL 
                     HOUSING FINANCE AGENCY

    Mr. DeMarco. Thank you, Mr. Chairman. Chairman Johnson, 
Ranking Member Crapo, Committee Members, I am honored to be 
here and I am also grateful for the remarks in your opening 
statements.
    September 2008 was one of the darkest months in our 
country's financial history. On September 7, FHFA placed Fannie 
Mae and Freddie Mac into conservatorship supported with 
financial agreements with the Treasury Department. Markets 
opened the next day and we held our breath to see how the 
employees, the country, and global investors would respond. Our 
first concern was ensuring ongoing liquidity in the mortgage 
market by ensuring Fannie and Freddie kept operating. They did, 
and the market kept functioning, but with a much-needed 
reassessment of risk.
    As the depth of the housing downturn fully materialized, it 
was imperative to expand foreclosure prevention actions. We 
needed to limit losses to Fannie and Freddie by addressing the 
daunting challenge of homeowners' financial distress, 
compounded by declining house prices in a deep and prolonged 
recession. The Obama administration and FHFA and Fannie and 
Freddie worked to develop and implement what became known as 
HAMP. While HAMP brought some consistency to the loan 
modification process, we recognized that it was not going to 
help everyone in distress.
    Experimenting with other ideas led to the Servicing 
Alignment Initiative and the development of the Standard 
Modification Program, where we simplified and aligned the loan 
mod protocols for Fannie and Freddie, making eligibility 
easier, payments lower, and the process simpler than those 
governing HAMP.
    We kept working. Through a series of steps, we improved and 
lengthened forbearance programs for unemployed homeowners and 
others facing temporary setbacks. We simplified, expanded, and 
expedited short sales. We kept testing. We kept learning. Our 
focus was two-fold: Keep it simple and get the monthly payment 
down. The latest enhancement to our suite of programs, 
announced last month, adds a streamlined modification option 
that addresses the key remaining impediment, the challenges of 
the documentation process.
    Economic distress did not always mean default, but it did 
produce hardship for families and greater risk to taxpayers. We 
developed a refinance program called HARP to assist homeowners 
with little or no equity who are unable to refinance. It was 
not perfect, so we talked with the industry, consumer groups, 
and Treasury, and we reinvented the program, dubbed HARP 2.0. 
Today, it is working so well and has so much potential to 
reduce losses and assist borrowers that I announced last week I 
was extending it for 2 more years.
    Although we have not been able to help every homeowner, we 
have completed 1.3 million loan modifications and a total of 
2.2 million foreclosure prevention transactions that have 
allowed delinquent borrowers to stay in their homes. We have 
helped nearly half-a-million families exit their homes 
gracefully without foreclosure. That is a total of 2.7 million 
foreclosure prevention actions.
    We have also completed 2.3 million HARP refinances. 
Including HARP and all other re-fis, Fannie and Freddie have 
acquired 16 million refinance loans since 2009.
    Along the way, we have been relentless in evaluating these 
programs, in reinventing them to fix design flaws. As you would 
expect for any complex operation of this scale, operational 
challenges abounded, servicers made mistakes, and borrowers did 
not always respond to offers of assistance. But when you add 
the foreclosure prevention actions we completed and the HARP 
refinances since conservatorship, that totals to some five 
million delinquent or at-risk families that have received help 
from these efforts.
    The companies themselves have also made great progress. The 
need to draw more than $180 billion from taxpayers tells me the 
GSE model is broken beyond repair. But the people of the two 
companies, many of whom joined after the conservatorships, have 
worked hard to restore the market and their companies. Today, 
as a result of their efforts and improvements in the housing 
market, both companies have generated positive net income, 
which as taxpayers we should all applaud.
    The first time I appeared before this Committee as Acting 
Director, Senator Corker asked me a question I could not 
answer. How do we transition away from this mess to a better 
system? Over the past 3\1/2\ years, I have thought about that 
question. My prepared statement provides my answer. Our 
strategic plan for the Enterprise conservatorships and the 
specific plans in the 2013 Scorecard set forth a transition 
path and FHFA's efforts to date to get that transition going.
    But we cannot complete the transition until we know the 
final destination, and for that, the country needs the Congress 
to set that destination. I am thankful for recent action by 
this Committee toward that end, particularly the budget 
resolution that prevents further use of guarantee fees to fund 
the Government, and I am supportive of the bipartisan Jumpstart 
GSE Reform Act. But much more remains to be done.
    Thank you for having me again and I look forward to our 
discussion this morning.
    Chairman Johnson. Thank you, Mr. DeMarco, for your 
testimony.
    As we begin questions, I will ask the Clerk to put 5 
minutes on the clock for each Member.
    Mr. DeMarco, one of your strategic plan's goals for 2013 
includes developing risk transfer transactions that would share 
risk with private capital, such as Private Mortgage Insurance. 
During the recent housing crisis, was PMI able to cover all 
claims associated with loans purchased by the GSEs? If a 
mortgage insurer were not able to cover all of a claim, how 
would this impact the GSEs?
    Mr. DeMarco. Mr. Chairman, mortgage insurance did not 
cover--make good on all of the coverage that Fannie and Freddie 
thought they had, but they have made good on most of it. So 
when a mortgage insurance company fails to make good on an 
insurance claim, that loss, then, is accruing to Fannie and 
Freddie, which means it is accrued to the American taxpayer.
    There have been a couple of mortgage insurance companies 
that have failed and they are now in runoff or some other kind 
of management by their State Insurance Commissioner in which we 
are getting partial payment of claims made to us. The final 
resolution of those insurance claims and how much we actually 
recover, whether it is 100 percent or something less, only time 
will tell. But the majority of the mortgage insurance companies 
have actually remained solvent and operating and are continuing 
to make good on their claims, and that certainly has reduced 
loss to Fannie and Freddie as a result of having that private 
capital protection standing in front of them.
    Chairman Johnson. Since insurance is regulated at the State 
level, how do the GSEs and FHFA ensure that Private Mortgage 
Insurers are operating soundly, and would that oversight need 
to change if a mortgage insurer participates in the Risk 
Transfer Transaction Program?
    Mr. DeMarco. So, even if we do not have mortgage insurers 
participating in risk transfer, the system and mechanisms you 
mentioned do have to change. We are changing them, and we put 
that in our 2013 Scorecard as one of our priorities for this 
year. We are reexamining and reestablishing eligibility 
standards for mortgage insurers to be eligible to provide that 
sort of first loss coverage for loans Fannie and Freddie 
purchase. So we are reestablishing those. We are also updating 
the master policy under which mortgage insurance companies 
provide this protection to Fannie and Freddie. So those changes 
or improvements in the marketplace are being developed right 
now and those changes will be out there shortly.
    With regard to your question about mortgage insurance being 
a participant in the sort of risk transfer transactions we are 
envisioning, yes, I do believe that there is a role for them 
and I look forward to their participation as one source of 
getting private capital more into the game in the mortgage 
credit risk area. But we want to make sure that the mortgage 
insurance companies that participate in that are, in fact, 
financially sound and capable of providing the credit 
protection that we are seeking to acquire.
    Chairman Johnson. Mr. DeMarco, the FHFA recently announced 
its Streamlined Modification Program for borrowers that are 90 
days delinquent. Under this program, would a borrower need to 
verify their income, receive an appraisal on the property, or 
provide other documentation for the modification? How does this 
benefit borrowers, taxpayers, and the GSEs?
    Mr. DeMarco. Under the Streamlined Program, they would not 
have to provide any of those things, Mr. Chairman. We have 
developed this after a good bit of learning from the challenges 
we have had getting borrowers successfully into loan 
modification programs. It has been a persistent aspect of the 
loan modification story that getting borrowers to be able to 
fully document their income and circumstances to qualify for a 
HAMP modification or a standard modification has been a 
challenge.
    What we are now doing is this is sort of the last chance 
before the borrower gets referred to foreclosure, and in the 
communication to the borrower, we are making clear that if they 
would provide documentation, they would be assessed for what 
could be a better loan modification option for them. But at 
this point, we are looking at borrowers who are seriously 
delinquent, and we have learned from experience over these past 
several years, if you do not get a borrower into some kind of 
an assistance program in those first 3 or 4 months, the 
likelihood that you are going to get them into some kind of 
successful program goes down substantially.
    And we have found that borrowers have responded positively 
to this request. It is simply: sign, agree that this is your 
new payment, and begin submitting the payment. So we believe, 
based upon the testing and work we have done, the experience we 
have developed, that this, in fact, will lower the losses to 
taxpayers and will help further enhance our efforts to help 
consumers avoid foreclosure.
    Chairman Johnson. One last question. With these recently 
announced changes to the modification program, would you now 
support the income verification changes that Senators Boxer and 
Menendez are trying to implement in the Responsible 
Homeownership Refinancing Act for borrowers who are paying 
their mortgages and trying to refinance?
    Mr. DeMarco. I believe--so, slightly two different things 
here, Mr. Chairman. The Boxer-Menendez bill is referring to 
income verification having to do with refinances for HARP and 
it really goes to a particular point regarding how to get a 
cross-servicer to be able to do a HARP loan. I believe that we 
have addressed the issues that Senator Menendez has as I 
understand them. And I think that, in fact, the evidence is 
showing we are getting a good bit of cross-servicer 
participation in the HARP program. We are using the income 
collected there as much to make the underwriting system work 
and be able to transfer the information to the new servicer. It 
is the way the systems are set up, and we have spent time 
explaining that to Senator Menendez.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    Mr. DeMarco, last fall, the FHFA and the Treasury 
Department agreed to a change in the structure of the dividend 
calculation, and as a part of that, under the new agreement, 
all profits except for a small amount retained for capital are 
remitted to the Treasury. Some have argued that this may have 
created incentives for Fannie and Freddie to assume either more 
or less risk in a given transaction because they do not possess 
normal business incentives.
    You have been dealing with the unintended incentives within 
the GSE space since even before the conservatorships began, but 
are you anticipating any new steps that may be needed to ensure 
that the taxpayers remain protected?
    Mr. DeMarco. I am not, Senator. I am not concerned about 
that particular risk. I think that the management team and the 
boards at Fannie Mae and Freddie Mac are quite anxious to 
demonstrate to the American taxpayer that they have made great 
strides at each company and that they are operating these 
companies in conservatorship profitably and safely. They 
recognize their responsibility to the American taxpayer and I 
think they take that responsibility quite seriously. I do not 
think that they anticipate or have any vision of increasing the 
risk taking. And in any event, I have got a solid supervision 
team at FHFA monitoring the activities at each company, and we 
would be quite mindful of any increase in risk-taking activity 
at the companies.
    Senator Crapo. Well, thank you, and I appreciate your 
attention to that.
    On another issue, in my opening statement, I reiterated 
concern about the massive stake the Federal Government has and 
continues to have within our mortgage markets. The obvious 
solution for this is for Congress to act on reform. In the 
absence of Congressional action, you have established a 
reduction in the footprint of the GSEs as a fundamental goal 
over the next year and I am very happy to see that. Please 
describe to us in more detail the risk sharing and portfolio 
reductions targets that you are establishing.
    Mr. DeMarco. Certainly. Fannie Mae and Freddie Mac have 
three principal lines of business: The single-family mortgage 
guarantee business, a multifamily business, and a retained 
portfolio in which they buy and hold mortgages and mortgage-
related assets. What we have done in the 2013 Scorecard is set 
objective measures for each of these lines of business to 
fulfill the strategic goal of gradually shrinking their 
footprint in the mortgage market.
    So with regard to single-family mortgages, what we have 
described is a goal of having $30 billion worth of unpaid 
principal balance of mortgages to see some kind of risk sharing 
or risk transfer transaction between Fannie and Freddie and 
private capital. This could be done on--accomplished a number 
of ways.
    The Chairman asked about mortgage insurance, so one way to 
do it is to have mortgage insurance companies provide an 
insurance wrap on a mortgage-backed security.
    Another way to do it is to issue something called a credit-
linked note, some kind of credit-linked security in which there 
is a reference pool of mortgages and investors pay in money and 
that serves as sort of real equity backing the credit risk 
there. And they get a return on that from the guarantee fee, 
but that money sits there in trust to absorb losses in the 
mortgages.
    And the third principal way is through a Senior 
Subordinated Security Structure. This is pretty standard in the 
asset-backed securities market. It is how Freddie Mac operates 
its multifamily business. And what you do is you issue--you 
take the pool of mortgage securities and you break it up into 
two separate pieces. One piece is unsecured, or, I am sorry, it 
is unguaranteed by Fannie or Freddie, and so if there are 
credit losses, those are absorbed by the holder of that 
security. So that is what we are doing in the single-family 
space.
    In the multifamily space, Fannie and Freddie already do 
virtually all of their lending on a risk shared basis with 
private capital. So our approach to gradually stepping back 
their footprint there is to say, we want to see your size in 
the marketplace in 2013 be 10 percent smaller than it was in 
2012. We actually expect the multifamily market to be a bit 
smaller in 2013 than in 2012, but I do not want to see their 
market share growing at a time that we are shrinking the 
companies and the market itself is shrinking.
    The third area is the retained portfolio. With the retained 
portfolio, the Treasury agreement already calls for a reduction 
of 15 percent year over year in the retained portfolio. What we 
have done is said, look, we are going to be able to meet that 
target the next couple of years just through normal runoff. We 
can do more than that. So we are looking at the illiquid 
portion, the nonagency security portion of that portfolio, and 
we gave each company a target that they must sell 5 percent of 
the nonliquid assets that they had at the start of the year. 
They have to do that over the course of the year. How they do 
it, when they do it, which assets they do it, that is for 
management's judgment to make good business decisions in light 
of the market circumstances.
    Senator Crapo. Thank you.
    Chairman Johnson. Senator Reed.
    Senator Reed. Mr. Chairman, thank you very much. Thank you, 
Mr. Director.
    Last year, you declined to participate in Treasury's 
Principal Reduction Alternative Program, and you communicated 
to Congress. In part of the letter, you did indicate that FHFA 
has allowed the Enterprises to conduct short sales, deeds-in-
lieu, which resulted in principal forgiveness, essentially, for 
the homes. And then in another part of the letter, you said 
that we cannot do any principal forgiveness--and I am 
paraphrasing--because it would be inconsistent with the 
mandate, it would promote, or fail to promote the stability and 
liquidity of the marketplace, and several other reasons.
    So you seem to be saying that you have allowed the 
Enterprises to do it, but that it is contrary to your mandate 
and you could never allow them to do it. Can you try to 
reconcile those two positions?
    Mr. DeMarco. I will do my best, Senator. Not having the 
letter in front of me, my guess is it is all about context, 
because, in fact, short sales and deeds-in-lieu, to your point, 
result in principal forgiveness to the borrower. In a short 
sale, you are allowing the borrower to sell the house for 
whatever the market price is that they can get and you are 
writing off the rest of it after an assessment of whether the 
borrower has other assets that can be used to help pay the 
mortgage.
    What we did in--but I did say, and my conclusion in that 
letter was that we carefully analyzed the HAMP Principal 
Reduction Alternative that the Treasury Department had as part 
of the HAMP program, and I concluded after careful analysis by 
the FHFA team that pursuing that program of principal 
forgiveness, in which you are doing a loan modification, 
writing down principal, and the borrower keeps the house, was 
inconsistent with our mandate as conservator. And I think we 
went to some good length to try to explain the analysis we did 
and how we came to that difficult judgment.
    Senator Reed. Well, one of the things I find troubling is 
that part of the HAMP was actually providing some resources to 
the Enterprises for undertaking this, that it would not be a 
complete write-down of their investment or their obligation, 
but, in fact, given HAMP resources, they would be receiving--I 
think you get up to a high of 60 cents on the dollar of 
forgiveness, which seemed to be the policy of the Treasury 
Department, which would be consistent with the law, which would 
be----
    Mr. DeMarco. Right.
    Senator Reed. ----there might be a conflict between your 
view, but it seemed to be, one, a decision inconsistent with 
what you have already admitted that you did, which is allow 
short sales and allow people to forgive principal.
    So as a legal restriction, you seem to have violated that 
in the short sales. But more importantly, I think, in terms of 
what one expects and what I think you try to do, many private 
financial institutions have, without any assistance from the 
Federal Government directly, have undertaken loan modifications 
because it has been in the best interest of their shareholders 
and they are not fearful of some systemic reaction, even though 
they would be the first victims of such reaction if it took 
place.
    So how do you reconcile the fact that this seems to be a 
commercially reasonable approach, together with the fact that 
it was substantially subsidized by legislation and policy 
approved by the Congress?
    Mr. DeMarco. I believe that the mandate the Congress gave 
me, and I tried to spell this out in my response to Congress 
last summer, I have a responsibility to consider the overall 
cost to the taxpayer as well as the benefit to the taxpayer and 
to the market. And the fact that some of these funds were 
coming from the Treasury Department still meant they were 
coming from the American taxpayer. And we were actually very 
careful in delineating our analysis to show where these 
different costs were coming from.
    I did not say--I have never said that it is illegal for 
FHFA as conservator to allow principal forgiveness. What I have 
said is we have a mandate to balance the responsibility to 
prevent foreclosure with the mandate of doing so in a way that 
minimizes the cost to the taxpayer, and we went through in 
great detail how we came to the conclusion and judgment that we 
drew.
    So it really--the other thing, Senator, is I really do 
think there is a difference between an individual financial 
institution doing this and Fannie Mae and Freddie Mac doing 
this in terms of the systemic market impact, because when an 
individual financial institution undertakes this for even the 
largest ones, they are getting to select who they do it for. 
They do not have to announce it to anybody else. They do not 
have to publish rules that a thousand or two thousand mortgage 
servicers all have to follow. When Fannie Mae and Freddie Mac 
undertake any of these kinds of programs, all these rules need 
to be spelled out publicly and there needs to be a compliance 
regime that goes along with it and I think that it is 
fundamentally different to have Fannie and Freddie doing it.
    Senator Reed. Well, I think there is a significant 
difference, and it may be a very positive difference, that very 
systematic and thoughtful loan modifications could have 
dramatically improved the overall market sooner rather than 
later, could have led longer term to savings to taxpayers, 
because properties that were foreclosed and with a loss to the 
investor and a terrible loss to the homeowner could have been 
avoided, and that did not seem to be part of your--at least a 
relevant part of your calculation. So we will agree to disagree 
on this issue. Thank you.
    Mr. DeMarco. I am afraid so, Senator, but I must say, as I 
tried to go through in my opening remarks, I am actually quite 
proud of the work that FHFA and the people at Fannie and 
Freddie have done to pursue loan modifications and to come up 
with constructive, effective tools to help borrowers in 
distress. And I went through the totals of this and I think 
that, in fact, over these last several years, we have 
demonstrated both a commitment and a leadership role with 
regard to pursuing loan modifications, with regard to trying to 
new things, trying to make the system work better.
    We have a policy disagreement, I guess, on a particular 
tool, but it is not reflective of my lack of concern or desire 
to get effective loan modifications done to help people stay in 
their homes.
    Senator Reed. Well, just a final point. This is not just a 
particular tool. This is probably the most significant Federal 
initiative that the Treasury Department initiated to try to 
help people who were facing mortgage. Billions of dollars that 
were paid, authorized by Congress, directed by Congress----
    Mr. DeMarco. Right.
    Senator Reed. So this is, I do not think, sort of a 
disagreement on sort of a technical approach. This was a 
fundamental rejection of what we all thought was going to be 
one of the most significant--and potentially could have been--
significant improvements not only to the housing market, but to 
the overall economy. So thank you very much.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you. Mr. Chairman, I have a number of 
questions I would like to submit for the record, if I could, 
and then I have a few that I would like to engage with Mr. 
DeMarco.
    Chairman Johnson. Without objection.
    Senator Shelby. Mr. DeMarco, I think you rightly point out 
that there is a difference between a private financial 
institution and Fannie Mae and Freddie Mac right now. Freddie 
Mac and Fannie Mae are under a conservatorship of the U.S. 
Government, is that right?
    Mr. DeMarco. Yes, Senator.
    Senator Shelby. And so, in other words, they are sitting in 
the lap of the taxpayer.
    Mr. DeMarco. Yes, sir.
    Senator Shelby. As opposed to, say, JPMorgan Chase or any 
of these others that are stockholder-owned, which is good. 
Thank you for doing that.
    Let us talk about securitization and the lack of it in the 
private sector. How do we get that jump started? I am not a 
securitizer, but I could see if you packaged a number of 
quality loans, and there was transparency there----
    Mr. DeMarco. Right.
    Senator Shelby. ----either single-family or multifamily, 
and people knew what they were getting, they would be rated 
very high. There would be a market there with no taxpayer 
guarantee. They would stand on their own. Is that not what we 
really want to do as much as we can in the country?
    Mr. DeMarco. That is my sense that that is what most people 
would like to do, Senator. Yes. I think that is achievable.
    Senator Shelby. Absolutely. But it seems to me that it 
makes no sense for Fannie and Freddie, in other words, the 
implied guarantee of the taxpayer, to have 100 percent, or 
close to it, of the mortgages in today's market. So that seems 
to be our number one challenge as far as getting the private 
sector back in the market. And would that entail, as I said, 
transparency, a different attitude and maybe a lot more due 
diligence by the buyer of the securities, due diligence that we 
have not seen in a long time by the rating agencies, all of 
those?
    Mr. DeMarco. I think we need all of that, yes, sir.
    Senator Shelby. All three. Now, how do we get to the first 
big tranche there? You know, we have got to go measured step by 
step.
    Mr. DeMarco. Right.
    Senator Shelby. I think that is important----
    Mr. DeMarco. Right.
    Senator Shelby. ----as far as Fannie and Freddie are 
concerned.
    Mr. DeMarco. Yes. Yes, sir, it is. And I think one of the 
ways we can start to draw this capital back in and start to 
demonstrate how this can work better is, in fact, through some 
of the steps that we are taking, both in terms of the Risk 
Transfer Transactions, where we say, look, private capital out 
there, here we come. Here are some mortgages. We would like you 
to take on this risk. We want you to partner with us in these 
transactions, and we think it is an economically viable 
opportunity for you to come in.
    And we are going to also, in that process, demonstrate with 
much greater clarity than the markets saw before, especially 
out of Fannie and Freddie, much greater clarity about here is 
the loan level details about what it is you are buying. Here is 
clarity about the legal structure in which this trust will be 
managed and how your interests as an investor are going to be 
protected over the life of this security. So we are trying to 
develop that right now.
    Senator Shelby. Is it true--we have a record here--that 
there are fewer and fewer foreclosures in multifamily 
apartments as opposed to single----
    Mr. DeMarco. Yes, sir.
    Senator Shelby. Is that because there is more skin in the 
game, generally? Even loans that Freddie Mac or Fannie Mae buy, 
they want substantial equity in those loans, is that correct?
    Mr. DeMarco. That is certainly part of it, Senator.
    Senator Shelby. But I suppose there is a role out there for 
multifamily loans that do not have as much skin in the game, 
but should be made for different reasons.
    Mr. DeMarco. Or that may be a hard market to----
    Senator Shelby. Right.
    Mr. DeMarco. ----bring credit into that market and so 
forth. Yes, sir, I do believe there are roles to consider 
opportunities where the market may not work----
    Senator Shelby. Give us the shorthand rendition of where 
Fannie Mae and Freddie Mac are today compared to where they 
were, considering the loans you have put on the books, or 
actually they put on the books, in the last 4 years, and Ginnie 
Mae, too, as opposed to a lot of the other portfolio. How are 
the new loans doing as opposed to the old?
    Mr. DeMarco. The performance of the new loans is 
substantially better. The credit characteristics of the 
borrower are better. The downpayments are better. The insurance 
premium that they are charging for this is much more 
appropriate to the risk that is being undertaken. So in all 
aspects, I believe that the quality of the book is much 
sounder, which is very important in these since the American 
taxpayer is the one right now providing the capital to support 
those mortgage credit guarantees.
    Senator Shelby. And is your challenge, your basic 
challenge, among others, at Fannie and Freddie, as you look at 
it, in the old portfolio?
    Mr. DeMarco. Yes, sir.
    Senator Shelby. And how are you going to surmount that? I 
know rising housing prices and more payments into it help, 
but----
    Mr. DeMarco. Right. So, we are continuing to work through 
the legacy book. We are now starting to make some meaningful 
progress through the preconservatorship book of business.
    One of the things that I set forth in the 2013 Scorecard is 
that by the end of this year, I want the loan quality reviews 
of that book examined and I want all repurchase requests to be 
made under those contracts, those requests to be made by the 
end of this year. And we are continuing with all our loss 
mitigation efforts on that book, as I described in my opening 
statement.
    Senator Shelby. Keep doing what you are doing. Thank you.
    Mr. DeMarco. Thank you, Senator.
    Chairman Johnson. Senator Tester.
    Senator Tester. Yes. Thank you, Mr. Chairman, and thank 
you, once again, Mr. DeMarco.
    I am going to follow up with initially some of the 
questions that the Ranking Member asked about the risk sharing, 
specifically in single-family. You talked about three different 
areas that you are going to be looking for capital, and I guess 
the question I would have is are you going to be evaluating how 
these work as they move forward, I would assume, on each 
approach----
    Mr. DeMarco. Absolutely.
    Senator Tester. And what kind of--do you have specific 
metrics in mind when doing the evaluation?
    Mr. DeMarco. First of all, the market is a wonderful thing, 
because, you know, in doing these sorts of transactions, you 
get clarity on how the market is pricing mortgage credit risk. 
So that is the first thing we are going to get, is we are going 
to get actual market signals about mortgage credit risk.
    We will also be able to begin discerning market appetite or 
preference for one structure over another structure, which is 
why I have encouraged Fannie and Freddie in the Scorecard to 
try multiple approaches to doing these Risk Transfer 
Transactions, so that we can start to demonstrate to the market 
how we think about it and how we are going ahead with it, but 
then also be able to then get that market response of we prefer 
this structure over that structure or whatever the case may be. 
But those are the sorts of things we would be looking for.
    Senator Tester. OK. And so over the long haul, can you 
predict what successful risk sharing will look like?
    Mr. DeMarco. I believe that what I am looking for over the 
long haul is to demonstrate--to develop the mechanisms and to 
demonstrate the concept in 2013 with these various things, and 
in 2014 and beyond, as long as the companies are still 
operating in conservatorship, to have the Scorecard show an 
increasing share of business in the single-family space be 
transacted this way, because this is the other thing the market 
is going to want to know. If we are going to invest in learning 
what it is you are offering, we want to know that it is going 
to keep coming. So we expect to--consistent with the goal of 
gradually shrinking the footprint, I would envision gradually 
increasing the portion of the new mortgage flow for which we 
engaged in risk-sharing transactions.
    Senator Tester. Thank you. I want to talk about the single 
platform and the impacts of that. How do you envision community 
banks being able to access the single platform, once 
established?
    Mr. DeMarco. I think this is a really important area, 
because this is something I care a lot about, Senator Tester, 
is making sure that the country's mortgage market now and into 
the future remains something in which local lenders, whether it 
is a bank or a credit union or whatever it is, remains a viable 
option for a borrower to go to and get a mortgage to buy a home 
for their family.
    And so I think that one of the key things--one of the real 
building blocks of what we are doing with the platform--it even 
started before the platform--and that is with data and with 
getting data standards and electronic reporting standards in 
place that would work for the whole marketplace. Because when 
you do it just one way, you develop an industry standard, it is 
far easier for a community bank to be able to acquire that 
technology from a vendor and be able to put it in their 
institution, even if they are a small institution.
    And so that is what I think is really important and what we 
are doing, with the platform and with our data work, is to 
build a set of mortgage industry standards that the industry 
itself helps us develop, but you make it a set of single 
standards everybody works on, because that will lower cost and 
improve the ability of small institutions to----
    Senator Tester. So, not to put words in your mouth, do you 
think once a single platform is established, it is actually 
going to be easier for community banks to be able to access?
    Mr. DeMarco. That is my goal.
    Senator Tester. Good. What is the timing?
    Mr. DeMarco. I get that question. We are building as fast 
as we can. Let me put it this way. In response to a similar 
series of questions on the House side last month, I said that I 
thought that we needed to have this developed, up and running, 
working, over the course of the next 5 years. But I will say 
that I also appreciate that this is a big lift that we are 
doing. It is a big technology lift. It has got things that are 
going to be developed. We will roll it out incrementally. I am 
not trying to build a Cadillac as the first thing that drives 
off the lot. But we are going to develop this so it will be 
functional for some things initially and it will expand over 
time.
    Senator Tester. And not to put words in your mouth, but 
what I heard you say is fully functional in 5 years?
    Mr. DeMarco. I think that we want to have this thing up and 
running and working over that time period, is what it is we are 
doing to develop that. I do not know whether we will be done 
faster than that or slower than that. I am trying to give a 
sense of that this is a several-year project to be able to 
develop this and get it going, and that gives, in terms of a 
range of time, some order of magnitude, Senator. It is not 
really a specific timeline.
    Senator Tester. OK. Thank you. Thank you, Mr. DeMarco. 
Thank you, Mr. Chairman.
    Just a real quick close, and that is that I am going to go 
back to my opening statement. I think the time is ripe to 
address this issue and move it forward. I think there are folks 
on both sides of the aisle that want to quit playing with this 
like a political football and get the job done. I would 
encourage you to move forward in that way. Thank you.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman.
    I especially liked Mr. Tester's comments. Thank you. I 
agree with many of those.
    Mr. DeMarco, I want to thank you for your tremendous public 
service. Of the people that I have met here in Washington in 
the last 6 years and 3 months, I do not know of anybody who has 
been a more stellar public servant. And I think you have been 
in the middle of a political football game that has been taking 
place. I think you have handled yourself extraordinarily well 
and I think you are creating this circuitry to really 
transition away from the system that we have now. So I just 
want to thank you for that. I want to thank you, the way you 
have worked with people on both sides of the aisle to come up 
with solutions.
    I know you were sandbagging Senator Tester there, talking 
about 5 years. I hope you can do that in the next year-and-a-
half.
    [Laughter.]
    Senator Corker. In the next year-and-a-half, maximum, you 
could have this fully implemented if we would do what we need 
to do here, so I look forward to a much-shortened timeframe.
    I do want to say, if--I know there have been discussions 
about a permanent replacement of some kind for you. I do not 
know why anybody would want to change something that is working 
so well. But I think that if that were to be the case, we 
certainly should hear from the Administration explicitly about 
what they want to happen with Fannie and Freddie before that 
occurs, and, hopefully, the Senate and House will take action 
to make that explicit, even very quickly, as Senator Tester was 
just mentioning.
    Let us talk a little bit about what you are creating. I 
know there are three ways of getting some private sector 
cushion, if you will, in front of any kind of governmental 
guarantee. There is a credit-linked note, and I know we have 
discussed that extensively.
    There is an A and B piece, subordinated piece. In both 
those cases, you have real capital, if you will, in front of 
losses.
    I know the insurance piece is the third, and I know that is 
the easiest to do because it is very liquid right now. But 
would you agree, in a systemic failure like we have had in the 
past, if you have insurance, and these are monolines and they 
are under stress, you end up in a situation where you likely 
have no real capital up front, is that not true?
    Mr. DeMarco. Well, it is certainly true that the capital 
that was behind it in an insurance company is not sitting in a 
trust fund that you control or can direct, and that there are 
competing potential claims on that capital. So, yes, Senator, I 
take your point that it is a different--it has some differences 
in terms of how much you rely on that.
    Senator Corker. Well, if you had a systemic crisis like we 
have had and you did not have real money, like you would have 
with a senior subcomponent or credit-linked note, typically, I 
mean, a systemic failure, these entities and monolines would 
likely fail, too, or have extreme stress, and so you would end 
up in a situation where you think you have capital up front, 
but you may really not have capital up front, is that correct?
    Mr. DeMarco. That is correct. You certainly have a 
counterparty risk there that would have to be carefully managed 
in a systemic event that could be a concern.
    Senator Corker. So let me ask you this question. I mean, at 
a maximum, you would want to limit exposure to that piece, is 
that not correct?
    Mr. DeMarco. You would certainly want to manage it very 
carefully as a key counterparty credit risk.
    Senator Corker. So moving on down to some of the questions 
Senator Shelby asked, you know, there have been discussions 
about whether there should be any governmental piece. I know 
that I do think with a transparent TBA market and standards 
set, you could probably issue securities. But there is an issue 
of what happens when the market contracts and you have stress 
and all of those kinds of things and keeping liquidity there.
    I do not think you are advocating that there be no 
Government role in housing, is that correct, from the 
standpoint----
    Mr. DeMarco. Yes. That is correct.
    Senator Corker. Would you expand on that a little bit? I 
would like for everybody to hear this.
    Mr. DeMarco. Yes. Well, I think that in a $10 trillion 
single-family mortgage market, the Government does not belong 
at zero or at ten. It belongs somewhere in between. Really, the 
Government can play a key role in terms of standards, rules, 
transparency, fairness in terms of how the market operates. 
That can go an awful long way to facilitating the effective 
role of private capital in funding and in bearing the credit 
risk in the mortgage market.
    But in any event, I have no reason to believe that the FHA 
program, the VA program, Rural Housing are not going to be 
still an important part of the fabric of the country's housing 
finance system. Those are explicit Government guarantee 
programs. And what we do with the Fannie, Freddie part of the 
market is up to you all, and there are ways of having some 
amount of Government support for it----
    Senator Corker. And I think when you say ``Government 
support,'' you are saying some Government guarantee at some low 
level to keep liquidity, is that correct?
    Mr. DeMarco. Yes, Senator. That is certainly a viable 
option. I believe that could work.
    Senator Corker. OK. So just in my last question--I see the 
Chairman reaching for the button--Senator Tester's comments 
about the community banking industry accessing, I think is very 
important, and we have had numbers of people in our office that 
question, let us say, if you had a 10-percent private sector 
component up front, whether it was senior sub or whether it was 
credit-linked note, some people are questioning, with $5 
trillion today at Freddie and Fannie, whether you could 
actually have $500 billion worth of private capital and 
question what stress that might create for community banks. Of 
course, this would buildup over time, right? It would not 
happen overnight.
    Mr. DeMarco. Right.
    Senator Corker. And so it would not actually be $500 
billion overnight. You have no concerns about, over time, 
having plenty of private capital up front and for some system 
to be accessed where the community banking system could 
actually basically link up to that private capital to make it 
easy for them to be a part of the market, do you?
    Mr. DeMarco. That is right. I have no concern with 
gradually moving in that direction and having that amount of 
capital come in, and I have no concern with community 
institutions having access to it and being real competitors in 
that marketplace going forward.
    Senator Corker. Well, thank you for outstanding public 
service. I hope that you are around to see this through, to 
work with all of us to continue to create the circuitry to 
create the right kind of residential mortgage finance in our 
country. And thank you for your extraordinary efforts.
    Mr. DeMarco. Thank you, Senator. I appreciate that. And if 
I just may, while I am very grateful for those remarks and that 
kindness, I would like to take a moment here and thank the 
staff at FHFA. I am really blessed to have 600 career employees 
at FHFA who are working incredibly hard as a team to accomplish 
the things that you were talking about. So thank you, Senator.
    Chairman Johnson. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and thank you, Mr. 
DeMarco, for being here and your service.
    I also want to pick up on something you mentioned in your 
opening comments, the fact that there are an awful lot of good 
folks at Fannie and Freddie still, both some who have stayed 
on--there were clear excesses, but a lot of the fact that there 
are a lot of new teams there that are performing quite well----
    Mr. DeMarco. I appreciate it.
    Senator Warner. ----and I appreciate your recognition of 
their activities, as well.
    I am not going to relitigate the point that Senator Reed 
issued, but I do think there may have been a moment in time 
when the macro effect to the overall housing market of having a 
more aggressive standpoint in terms of principal reduction 
could have jumpstarted the housing recovery quicker. I mean, we 
can debate it back and forth----
    Mr. DeMarco. That is the point of view, Senator.
    Senator Warner. ----but I just want to try to express that. 
It would have had to have been targeted. It would have had to 
have been limited. Because I think for a while, we had this 
sense of, after the immediate crisis, that we, in a sense, 
said, do no more harm as legislators, and candidly, I think it 
took a lot longer for this issue to work through the system 
than any of us had hoped or anticipated, probably you, 
yourself, as well.
    Mr. DeMarco. Yes, we agree on that, Senator.
    Senator Warner. But I do want to really commend you, 
building on what Senator Tester and Senator Corker have said 
and our conversations, the lack of uniform servicing and 
pooling agreements, and this whole system was a series of--our 
whole housing finance is a series of contracts that were a 
complete mishmash----
    Mr. DeMarco. Right.
    Senator Warner. ----and I really want to commend you on 
your efforts there. And I do think, as well--I will echo 
Senator Corker's comment that you were sandbagging Senator 
Tester. Five years is way too long and we need--this is--and I 
think, again, I know Senator Tester has a great concern about 
our community banks. I think if we do this portal the right 
way, it can actually be an asset for community banks, and I 
hope----
    Mr. DeMarco. I agree.
    Senator Warner. ----as you look at those resource 
allocations, that you can keep us informed to make sure that we 
are giving you the tools you need.
    I do want to get a couple questions in. One is on 
multifamily. I understand the need to shrink the portfolio, but 
the multifamily book really did not cause the crisis in the 
first place.
    Mr. DeMarco. Right.
    Senator Warner. And I do wonder whether this cutback right 
now on the 10 percent, whether you feel that may affect 
liquidity in the CMBS market.
    Mr. DeMarco. I do not have a particular concern about that, 
Senator. As I said, I think that the multifamily market is 
actually performing quite well. I think Fannie and Freddie did 
provide some added support to it back in 2009, 2010, when 
financial markets were pretty disrupted. It is a competitive 
market. It is one in which there is a great deal of private 
capital competing in that space and I think that it is--what we 
have outlined in our Scorecard is consistent with the theme set 
forth in the strategic plan of trying to undertake a 
responsible gradual shrinkage of the footprint of Fannie and 
Freddie. They will still have a substantial role to play in the 
multifamily market this year.
    Senator Warner. I just think it is--I think that we do need 
to remember, this is not where the problem originated.
    Mr. DeMarco. Right.
    Senator Warner. Having a healthy multifamily business is 
important.
    I know there was one thing you had thought about, too, that 
you were at least, in terms of your 2012 Strategic Plan, 
looking at an analysis of multifamily to see what would happen 
if you could do a piece of this business, a larger piece of 
this business without any Government backstop. Have you 
finished that analysis and are you----
    Mr. DeMarco. We are actually completing our review of what 
was submitted to us and I will look forward to sharing it with 
you.
    Senator Warner. Yes. I look forward to seeing that.
    One of the things that we have seen come up in the last--
recently a lot is investor-owned purchases, some of these REOs. 
Some concerns, we continue to hear that we are glad to get 
these properties kind of out of the foreclosure process, but 
they are actually maybe retarding the neighborhoods' ability to 
come back and homeowners' ability to get back into the market 
in their neighborhoods. Can you give us kind of--I know it is a 
broad issue, but can you give us your sense on the good, the 
bad, the ugly, and what we should be conscious of in terms of 
some of these great movement back of investor purchases?
    Mr. DeMarco. Right. This is a tough issue, because, for one 
thing, you have got sort of different economic situations in 
different markets. Two, you have got anecdotes that are kind of 
driving sort of a sense of a larger picture thing, and the 
anecdotes can be very well true and there could be a good 
number of them, but when we are dealing with hundreds of 
thousands of REO, they still remain anecdotes.
    I do believe that--you know, what we have tried from the 
beginning of the conservatorships, almost, with regard to REO 
disposition was to provide an opportunity in the initial 
marketing of REO properties to target local community groups 
and local housing authorities and purchase of homeowners, 
people who are going to live in the house, not investors. And 
so the properties were initially marketed just to that group, 
so there is a waiting period before an investor can purchase 
our REO properties.
    Nonetheless, we are selling an awful lot to investors. 
Whether these things that we design, is this is the protocol 
and so forth, is in individual markets and circumstances not 
working exactly as planned or whether it is simply because the 
bids that we get are really much stronger from the investor and 
that is the way I am protecting the taxpayer, is something that 
we are still--I mean, we are doing REO disposition evaluations 
this year to look into some of this to see if we can get a 
better handle on these stories. But I think--my guess is, it is 
going to end up being a pretty complicated answer.
    Senator Warner. And I know my time is up. I just want to 
make two quick comments. One is, I think REOs have got to be 
one of your tools in the tool kit. But as we start to hear more 
and more concerns with the market coming back, trying to get us 
as much information and data as possible, and if there are bad 
actors, sorting through that, I think it is very important.
    And I just want to add one more voice to the Chairman and 
the Ranking Member that we have got a window to get this done 
and I think there is much broader bipartisan consensus on this 
issue than many would suspect and look forward to continuing to 
work with you, Mr. DeMarco, to get it right.
    Mr. DeMarco. Thank you, Senator.
    Senator Warner. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman, and thank you, Mr. 
Administrator, very much again for all your work. And I think 
that work has been excellent, again, as most Members of the 
Committee do.
    I want to really focus on our needed work here in Congress. 
In that regard, thank you for your very positive words for the 
Jumpstart GSE Reform Act. My question about that is pretty 
basic. What sort of signal do you think it would send the 
market if the Senate were able to pass a broad, bipartisan bill 
that clearly indicates Congress will take up mortgage finance 
reform?
    Mr. DeMarco. I think that is it right there, Senator. By 
indicating that the Congress of the United States has agreed it 
does not want to use Fannie and Freddie to be funding part of 
the Government, it then removes that as an issue or a barrier 
to actually doing something to bring these conservatorships to 
an end and rebuild the housing finance system. I think the 
markets would take that very seriously.
    Senator Vitter. Great. And my second question is really on 
the other end of the spectrum. You know, hedge funds have been 
lobbying Congress to encourage the sale of Treasury's preferred 
shares, and to some extent, investors are already speculating 
that the companies will be returned to the marketplace. The 
price of the preferreds has doubled this year for Fannie. What 
do you think the consequences would be of Treasury selling the 
preferred shares before Congress acts in any way regarding 
mortgage finance reform?
    Mr. DeMarco. I am not even sure how that would work, 
Senator, but I think the Treasury, both in the previous 
Administration and in this Administration, as well as FHFA, 
have been clear and consistent that we view the way out of 
conservatorship is for the Congress of the United States and 
the Administration to get together on legislation that 
determines what the future looks like. I am not aware of any 
plan to sell the preferred, and again, I am not even sure how 
that would work in the market. That money--there is $180 
billion owed back to the American taxpayer, and then you have 
to completely recapitalize the companies after that.
    Senator Vitter. Well, let me restate it. What do you think 
the message would be or the reaction would be if the Congress 
were to propose some movement in that direction or allow some 
movement in that direction without significant reform like we 
are discussing?
    Mr. DeMarco. I think it would certainly generate confusion 
and question in the mortgage market about the role private 
capital would have in the future if there was a thought that 
there was some sort of reconstituting of Fannie and Freddie as 
they had been with the charters they had. It would certainly 
conflict with the notion that we are trying to bring private 
capital back into this marketplace.
    Senator Vitter. OK. Well, again, I just want to end by 
thanking you again for your service, and in particular your 
refusal to bend to, quite frankly, political pressure to use 
Fannie and Freddie as a piggy bank for things that would be 
popular in some forums short-term but very, very expensive and 
counterproductive, including for the taxpayer. But thank you 
for your work.
    Mr. DeMarco. Thank you, Senator.
    Chairman Johnson. I would like to thank Acting Director 
DeMarco for his testimony--Senator Corker.
    Senator Corker. Are you ready to go to the other panel?
    Chairman Johnson. Yes.
    Senator Corker. May I ask one question?
    Chairman Johnson. Just one.
    Senator Corker. OK.
    [Laughter.]
    Senator Corker. I have a six-part question I would like to 
ask.
    [Laughter.]
    Senator Corker. I will ask just one. There have been 
discussions about having private capital up top, and I know a 
number of our offices have been working together to try to have 
a bill to actually take action, and I think, candidly, we may 
be at a place to do that very, very soon. It sounds like 
everyone here that has spoken has said the timing is really 
good for that to occur, and I think you agree.
    But there is--one of the components has been to get capital 
up front, say at the 10 percent level through credit-linked 
notes, senior sub, or other, but then, also, to have an FDIC-
like mechanism where, in the event all of that fails, and the 
underwriting, which will be very stringent, would be in place 
first. What are your thoughts about having an FDIC-like 
structure for those involved in the mortgage industry to have 
as a catastrophic insurance fund at this time?
    Mr. DeMarco. I think that that could work, Senator. I would 
hope that if Congress legislated something like that, my 
thoughts would be to make sure that the law charges whatever 
Federal entity was responsible for the fund that, A, the entity 
was independent, had a clear mandate to set appropriate pricing 
for the risk it was taking and not to have that be set in law, 
but, in fact, give the entity a real mandate and responsibility 
to be appropriately charging for risk in managing that reserve 
fund, because some day, it will get called upon and it needs to 
be there and it needs to be sufficient if it got called upon.
    Senator Corker. Thank you, Mr. Chairman, and thank you.
    Chairman Johnson. I would like to thank Acting Director 
DeMarco for his testimony and for being here with us today.
    With that, I would like to call forward the second panel, 
Inspector General Linick, for this hearing.
    [Pause.]
    Chairman Johnson. I would now like to welcome our second 
witness for our hearing today. The Honorable Steve A. Linick is 
Inspector General of the Federal Housing Finance Agency. He has 
served in this position since September 2010.
    Inspector General Linick, you may proceed with your 
testimony.

   STATEMENT OF STEVE A. LINICK, INSPECTOR GENERAL, FEDERAL 
                     HOUSING FINANCE AGENCY

    Mr. Linick. Thank you, Chairman Johnson, Ranking Member 
Crapo, and Committee Members for inviting me here to testify 
today. I appreciate the opportunity to update the Committee on 
the work of the Federal Housing Finance Agency Office of 
Inspector General.
    We began operations in October of 2010 in the midst of an 
unprecedented housing and financial crisis of historic 
proportions. Since our beginning, we have published 49 reports 
and have commenced multiple criminal and civil investigations 
leading to 156 indictments and 62 convictions.
    Let me begin by noting that FHFA has made progress in its 
role as conservator and regulator. FHFA has launched a number 
of significant initiatives intended to address key objectives, 
such as aligning Enterprise practices, improving service to 
borrowers, and conserving and preserving Enterprise assets. 
FHFA has also accepted and begun to implement the vast majority 
of our recommendations and we continue to monitor their 
progress.
    Although the agency has made progress, our work continues 
to show that FHFA can improve its role as regulator and 
conservator. We have identified instances in which FHFA has 
displayed undue deference to Enterprise decision making in its 
capacity as conservator. In its capacity as regulator, we have 
identified instances in which FHFA could be more proactive in 
risk management. We have observed that FHFA has had 
difficulties identifying new and emerging risks potentially 
affecting the GSEs, issuing guidance governing risk management 
at the GSEs, and providing consistent enforcement for policy 
violations. For example, in a recent report on consumer 
protection, we found that FHFA does not examine how the 
Enterprises monitor compliance with consumer protection laws.
    Second, we determined that the Enterprises do not ensure 
that their counterparties from which they purchase loans comply 
with such laws. Similarly, in a report on consumer complaints, 
we found that mortgage servicers, Freddie Mac, and FHFA have 
not adequately fulfilled their respective responsibilities to 
address and resolve escalated cases, which are a type of more 
serious complaint.
    The evidence suggests that most of Freddie Mac's servicers 
are not complying with the reporting requirements. Ninety-eight 
percent of Freddie Mac's servicers had not reported on any 
escalated cases, even though they manage 6.6 million mortgages 
for Freddie Mac. Of Freddie Mac's eight largest servicers, four 
did not report any escalated cases despite handling more than 
20,000 of them.
    Second, Freddie Mac's oversight of servicer compliance has 
been inadequate. It has not implemented procedures for testing 
servicer compliance, and Freddie Mac has neglected to establish 
penalties for servicers that do not report escalated cases.
    Third, FHFA did not identify the problems through its own 
examination. Rather than independently testing servicers' 
compliance, the FHFA examination team relied exclusively on 
Freddie Mac's reports, which did not mention the problems.
    In addition, in a 2011 report, we found that the agency had 
too few examiners to oversee the GSEs. As a result, FHFA had 
scaled back planned work during its examinations and 
examinations took much longer than expected to complete. 
Additionally, we identified shortfalls in the agency's 
examination coverage, particularly in the crucial area of Real 
Estate Owned property.
    Although the agency has made progress since we issued this 
initial report, it is not clear that FHFA has achieved the 
examination resources necessary to address this issue. Many of 
our subsequent reports continue to recommend expanded or 
improved examination coverage, and we have initiated follow-up 
work in this area.
    We are mindful that FHFA's long-term success is necessarily 
affected by the uncertainty surrounding the fate of the 
Enterprises and the housing finance system in general. In other 
words, FHFA must effectively direct the Enterprises' operations 
while fundamental questions about its role and theirs remain 
unanswered.
    Given the Committee's interest, I also want to highlight 
some of our current projects. First, we are assessing a number 
of FHFA's new or expanded initiatives, including the Servicing 
Alignment Initiative, the Securitization Platform, the REO 
Pilot, and HARP 2. Additionally, we are conducting follow-up 
work on the consumer protection report I just mentioned.
    My staff and I look forward to continuing to work with your 
Committee to provide independent, relevant, and objective 
assessments of FHFA's operations and programs, and I am happy 
to answer any questions that you may have at this time. Thank 
you.
    Chairman Johnson. Thank you, Mr. Linick.
    During your last appearance before this Committee, we 
discussed the inconsistent enforcement of directives by the 
FHFA. Is this still a problem? If so, does this lack of follow-
through pose greater risk to the conservatorship and taxpayer 
dollars, in your opinion? What should the FHFA do to improve 
its enforcement?
    Mr. Linick. I am concerned about implementation and follow-
through, especially of many of these initiatives that have been 
launched. We found in earlier reports that FHFA deferred a lot 
to the Enterprises for decision making in crucial areas, and 
FHFA is going to require strong involvement in these new 
initiatives. We are concerned that there may be crucial 
decision making by the Enterprises and not by the agency.
    Second, a lot of the new initiatives going forward are 
going to require strong regulatory oversight and they will 
require the agency to effectively identify risk, manage risk, 
issue guidelines and directives to the Enterprises, and as you 
mentioned, enforcement when policies are not being followed. 
Yet we continue to identify shortfalls in all three of these 
areas and remain concerned that these may present a problem in 
the future.
    Also, going forward these new initiatives will require 
examiners, and as I said in my opening remarks, we have 
concerns about FHFA's examination resources and their ability 
to engage in robust oversight of these complex programs.
    Chairman Johnson. Could you put a number on that in terms 
of what is enough examiners?
    Mr. Linick. That is a difficult question, and I do not have 
a number for you. In our report, we found that examination 
teams for Fannie and Freddie were staffed at about half of what 
they needed to be. They scaled back planned work. They were not 
getting a lot of examinations done.
    Since then, it is my understanding that the agency has 
beefed up its examination capacity somewhat. They have strong 
leadership. They have imposed discipline in their examination 
programs. But we continue to issue reports that suggest their 
examination coverage is still lacking and it is unclear to us 
whether that is a result of a lack of examiners. We have 
ongoing work now to find out exactly where we stand, and we are 
monitoring the issue and will report back to the Committee as 
soon as we get those reports done.
    Chairman Johnson. Given the problems in enforcement, should 
the Committee be concerned about the FHFA's ability to 
implement and oversee programs that would expand the role of 
servicers and mortgage insurers? Without enhanced exams and 
additional examiners, would these programs pose a risk to the 
GSEs and potentially the taxpayers, in your opinion?
    Mr. Linick. Well, I can only speak from our work to date. 
We have done limited work in this area. We have about six 
reports covering the servicing area. By way of an example, the 
Servicing Alignment Initiative in concept is a good initiative 
because it aligns servicing standards, helps borrowers, and 
also increases borrower contact with servicers. In that 
instance, we recently did a report on consumer complaints. The 
Servicing Alignment Initiative, which was unfolded about a 
year-and-a-half ago, requires that servicers report complaints, 
serious complaints--improper foreclosure, for example, or if a 
borrower is not getting foreclosure options and they are not 
able to get the servicer to consider other alternatives apart 
from foreclosure, things like that. Servicers are also required 
to resolve these complaints within 30 days.
    In our report, we found that while the Servicing Alignment 
Initiative is a good one, there was a lack of implementation of 
the initiative, and that is where our concern lies. Servicers 
were not reporting complaints as required by the rules. There 
were also instances when they were not resolving cases within 
the required 30 days. We also saw problems with Freddie Mac. 
They were not testing servicers' compliance and they pretty 
much missed the problem. And then on the FHFA side, FHFA's 
examinations relied on Freddie Mac's reports, which did not 
really describe the problem, and therefore FHFA's examinations 
did not catch the problem.
    I use this by way of example to show how these initiatives 
are going to require a lot of oversight, and implementation and 
follow-through are going to be key.
    Chairman Johnson. One last question. Mr. Linick, your 
office has been up and running for over 2 years. In that time, 
has the FHFA made progress implementing your recommendations?
    Mr. Linick. FHFA has made substantial progress implementing 
our recommendations. They have accepted the majority of our 
recommendations. We have about 140 at this point. About half of 
them are implemented and the other half are in various stages. 
And I commend the agency for the progress that they made.
    We started our work looking at a variety of controls across 
a number of fronts at FHFA, and now having been at OIG for more 
than 2 years, we are starting to go back, like we are with 
examination capacity, to see where things stand, and that will 
be a part of our work going forward.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    I just had a couple of quick questions. First of all, I 
want to thank you for your work, Mr. Linick. We appreciate the 
oversight that you provide and the assistance you provide in 
making sure that the FHFA operates properly.
    My first question relates to the money paid to the Treasury 
by the GSEs. The recent news reports surrounding the profits 
made by Fannie and Freddie and then subsequently remitted to 
the taxpayer seem to present conflicting information 
surrounding these payments and the debt owed by Fannie and 
Freddie. Based upon your knowledge of the situation, I am 
hoping you can help to clarify this.
    My question is, do these payments reduce the $187 billion 
figure owed under the Preferred Stock Purchase Agreement?
    Mr. Linick. The short answer is no. They do not pay down 
what is called the liquidation preference or Treasury's 
investments, and the way Treasury structured this is like an 
interest-only loan. In other words, the payments to Treasury 
are like interest payments, but they do not pay down the 
principal, the $187.5 billion. So the Enterprises could pay 
$200 billion in interest and that $187.5 billion would still 
not be paid down. This was set up by Treasury through the 
PSPAs, the Senior Preferred Stock Purchase Agreements.
    Senator Crapo. And if the amount that is remitted by the 
agency exceeds the amount of interest that has accrued, what 
happens in that circumstance?
    Mr. Linick. Again, it does not pay down the liquidation 
preference.
    Senator Crapo. It is just a deposit----
    Mr. Linick. It is just a deposit. It goes to Treasury. It 
goes to taxpayers. Ultimately, it is up to the Treasury, FHFA, 
and Congress to figure out what is going to happen in the 
future.
    Senator Crapo. And in what way could they pay down the 
outstanding principal obligation? Is there just no provision 
for that to happen----
    Mr. Linick. I am not aware of a provision like that in the 
PSPAs, but I would ask Treasury, obviously, how that would 
work. But based on my knowledge of it, there is no provision to 
pay that down.
    Senator Crapo. All right. Thank you.
    My last question is really kind of an open-ended question. 
Both you and Director DeMarco have previously noted that the 
continued open-ended nature of the conservatorships creates 
challenges for the management of both FHFA and the 
conservatorships for Fannie and Freddie. And this is just a 
general question. Based upon your observations and your 
analysis, what do you see as the biggest challenges that are 
faced to date?
    Mr. Linick. There is no doubt that uncertainty is the 
single most important challenge. I think this has an effect on 
oversight, which is obviously my role. It affects the agency, 
the Enterprises, and from what I have heard, the market.
    On the agency side, it affects the agency's ability to 
recruit examiners and others, retain staff, and also develop 
long-term resource allocations. We do not know the fate of the 
Enterprises and that makes it very difficult. The 
conservatorship, as you mentioned, was meant to be a time out, 
temporary, and no one anticipated--including the agency--that 
it would last this long. It also affects morale for the agency.
    On the Enterprise side, it certainly affects morale for 
them, and I have heard from the marketplace that without a set 
of rules, people do not want to dip their toe into the water.
    Senator Crapo. So the lesson from that would seem to be 
that the sooner Congress can act, the better it would be in 
terms of the overall success for both the Enterprises and FHFA.
    Mr. Linick. I would agree with that.
    Senator Crapo. My last question related to this is are 
there any new challenges that you think might develop, or will 
the existing ones just continue to languish if we continue to--
if Congress continues to linger in terms of resolving these 
issues?
    Mr. Linick. Well, I think, as I mentioned before, the other 
major challenges as we continue to linger are shortfalls in 
oversight. Taxpayers, at the end of the day, could suffer if 
things just go on the way they are. I have mentioned that there 
are shortfalls in the conservatorship oversight and there are 
shortfalls in the regulatory oversight with respect to 
identification of risk, management of risk, and enforcement. I 
see these things as problems going forward.
    Senator Crapo. All right. Thank you.
    I have no further questions, Mr. Chairman.
    Chairman Johnson. I would like to thank Inspector General 
Linick and Acting Director DeMarco for being here with us 
today. Oversight of the FHFA will continue to be a top priority 
of this Committee and we appreciate your insights.
    This hearing is adjourned.
    [Whereupon, at 11:31 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

            PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY

    Mr. DeMarco, I would like to start out today by thanking you for 
your strong leadership at FHFA.
    You were given a tough job during a critical time for our Nation's 
housing market, and you should commended for your service.
    Your commitment to protecting both taxpayers and homeowners has 
served our Nation well, and we are finally beginning to see signs of 
recovery.
    Unfortunately, while you have done a superb job at FHFA, Congress 
has failed its task of reforming the GSEs.
    We are more than 4\1/2\ years into the conservatorships for Fannie 
and Freddie.
    These conservatorships were never intended to last this long, yet 
there is still no end in sight.
    It is my hope that this Committee will work together to pass 
bipartisan legislation that reforms our GSEs and prevents taxpayers 
from footing the bill for future housing bailouts.
                                 ______
                                 
                PREPARED STATEMENT OF EDWARD J. DEMARCO
            Acting Director, Federal Housing Finance Agency
                             April 18, 2013

    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, I am pleased to be invited here today to discuss the Federal 
Housing Finance Agency's (FHFA) oversight of Fannie Mae, Freddie Mac, 
and the Federal Home Loan Banks (FHLBanks).
    In my testimony today I will focus mainly on FHFA's role as the 
conservator and regulator of Fannie Mae and Freddie Mac (together, the 
``Enterprises''). As this Committee is well aware, the Enterprises have 
been in conservatorship for more than 4\1/2\ years. These have been the 
largest and most complex conservatorships in history. Throughout this 
time FHFA has explained its approach to the conservatorships in light 
of the statutory responsibilities Congress placed on the agency as 
conservator. I have reported to Congress numerous times regarding 
FHFA's actions in light of these responsibilities, recognizing that the 
prolonged time in conservatorship has required us to adapt to changing 
circumstances, while remaining consistent with the fundamental 
responsibilities given us as regulator and conservator. I am pleased to 
provide you today with an update on what we have accomplished and where 
we are headed.
    I would first like to take a moment to thank the Chairman and 
Ranking Member for their introduction of an amendment to the 2014 
budget resolution that would prevent any additional Enterprise 
guarantee fees from being used to fund other budget items. And I would 
like to thank all the Members of the Committee for supporting that 
amendment, which the Senate adopted by unanimous consent. I was also 
glad to see the introduction by Senators Corker, Warner, Vitter, and 
Warren of S.563, the Jumpstart GSE Reform Act. I share the views of the 
sponsors of S.563 that now is the time to address reform of the housing 
finance system. I look forward to working with all of you as you move 
forward on that effort.
    I will begin this prepared statement with a brief review of the 
goals of FHFA as Conservator. Then I will review FHFA's approach to 
preparing for increased private market participation in housing finance 
and describe the significant activities that FHFA has undertaken during 
the past year to further our conservatorship goals. Next I will touch 
on the financial condition and performance of Fannie Mae, Freddie Mac, 
and the Federal Home Loan Banks. And finally, I will close with some 
thoughts on the role of Government in housing finance.

Goals of Conservatorship
    With the financial crisis unfolding, and after substantial 
consultation with the Department of the Treasury and the Federal 
Reserve, FHFA placed the Enterprises into conservatorship on September 
6, 2008. The Housing and Economic Recovery Act of 2008 (HERA), which 
created FHFA, specified two conservator powers, stating that the Agency 
should ``take such action as may be:

  1.  necessary to put the regulated entity in a sound and solvent 
        condition; and

  2.  appropriate to carry on the business of the regulated entity and 
        preserve and conserve the assets and property of the regulated 
        entity.''

    From the outset, FHFA stated that the goals of the conservatorships 
were to help restore confidence in the companies, enhance their 
capacity to fulfill their mission, and mitigate the systemic risk that 
contributed directly to instability in financial markets. As 
supervisor, we have also taken steps to strengthen risk management, 
internal controls, and establish proper governance over all of the 
Enterprise's activities.
    As the private mortgage securitization market had already vanished 
and there were no other effective secondary market mechanisms in place, 
the initial phase of the conservatorships was focused on stabilizing 
the Enterprises' operations to ensure the continued functioning of the 
mortgage market during the crisis. This phase has been successful; 
operations of the two Enterprises have largely stabilized and the 
origination market and secondary market for mortgage has continued to 
function throughout the financial crisis.
    The second phase of the conservatorships has focused on foreclosure 
prevention efforts, which have been critical for helping homeowners in 
distress and essential to meeting the conservatorship mandate to 
preserve and conserve the Enterprises' assets. These continuing efforts 
also are consistent with FHFA's statutory responsibility under the 
Emergency Economic Stabilization Act to provide assistance to 
homeowners and minimize foreclosures. Nearly 2.7 million ``foreclosure 
prevention'' actions evidence the success of that effort to date.
    FHFA also clarified that the Enterprises would be limited to 
continuing their existing core business activities. This type of 
limitation on new business activities is consistent with the standard 
regulatory approach for addressing companies that are financially 
troubled. And it is even more pertinent for the Enterprises given their 
uncertain future and reliance on taxpayer funds. While there still is 
legacy credit exposure to work through, the second phase of the 
conservatorships put in place the loss mitigation infrastructure to 
help borrowers and protect taxpayers. At the same time, the 
Enterprises' new books of business are much stronger than their old 
ones.
    Today we have a mortgage market that relies heavily on taxpayer 
support, with very little private capital standing in front of the 
Federal Government's risk exposure. There seems to be broad consensus 
that Fannie Mae and Freddie Mac will not return to their previous 
corporate forms. The Administration has made clear that its preferred 
course of action is to wind down the Enterprises. Of the various 
legislative proposals that have been introduced in Congress, none of 
them envisions the Enterprises exiting conservatorship in their current 
corporate form. In addition, recent changes to the Preferred Stock 
Purchase Agreements (PSPAs), replacing the 10 percent dividend with a 
net worth sweep, reinforce the notion that the Enterprises will not be 
building capital as a potential step to regaining their former 
corporate status. The amount of funding, essentially the Enterprises' 
capital base, available under the PSPAs also has become fixed as the 
Enterprises recently reported year-end 2012 financial results.
    Against this backdrop, FHFA has moved into a third phase of 
Enterprise conservatorship, embodied in its Strategic Plan for the 
Operation of the Enterprise Conservatorships.

FHFA's 2012 Strategic Plan for the Operation of the Enterprise 
        Conservatorships
    In early 2012, recognizing that the conservatorships were over 3 
years along and not likely to end soon, FHFA developed and formally 
communicated to Congress a strategic plan for the companies to pursue 
while in conservatorship, pending legislative action. This Strategic 
Plan has three goals:

  1.  Build. Build a new infrastructure for the secondary mortgage 
        market.

  2.  Contract. Gradually contract the Enterprises' dominant presence 
        in the marketplace while simplifying and shrinking their 
        operations.

  3.  Maintain. Maintain foreclosure prevention activities and credit 
        availability for new and refinanced mortgages.

    These goals satisfy our statutory mandate as conservator, are 
consistent with the Administration's call for a gradual wind down of 
the Enterprises, and preserve all options for Congress while 
establishing a stronger foundation on which Congress and market 
participants can build to replace the preconservatorship Government 
sponsored enterprise (GSE) model.
    With a focus on transitioning to a more secure, sustainable and 
competitive model for the secondary mortgage market, FHFA established 
the 2012 Conservatorship Scorecard to provide a roadmap for the 
Enterprises to implement the Strategic Plan. The Scorecard had four 
focus areas all tied to the Strategic Plan and great progress has been 
made in all areas.
    Building upon the 2012 Scorecard, last month FHFA published the 
Conservator's Scorecard for 2013, again setting forth annual 
performance targets adhering to the strategic goals of build, contract, 
and maintain. I would like to walk through each of these with you now 
while also highlighting some of the successes of 2012.

Maintain
    Although it is the third strategic goal, I would like to start with 
Maintain. Maintaining foreclosure prevention activities and promoting 
market stability and liquidity so that there is credit availability for 
new and refinanced mortgages is an important aspect of our work as 
conservator. Foreclosure prevention efforts were extensive in 2012 as 
FHFA and the Enterprises continued to simplify, streamline, and improve 
existing programs. More than 540,000 foreclosure prevention actions 
were completed last year alone, bringing the total to nearly 2.7 
million since the start of conservatorship in 2008.
    Since the start of conservatorship, Fannie Mae and Freddie Mac's 
management teams have completed over 1.3 million permanent loan 
modifications, more than 665,000 repayment plans, and nearly 150,000 
forbearance plans. Together they have enabled the Enterprises to help 
more than 2.2 million families who were having trouble paying their 
mortgages remain in their homes. Additionally, the Enterprises have 
made it possible for more than 445,000 other families to gracefully 
exit their home without going through a painful foreclosure process by 
facilitating short sales and deeds-in-lieu of foreclosure.
    Last year the Enterprises also implemented changes to the Home 
Affordable Refinance Program (HARP) that we announced late in 2011. 
Those changes included: expanding the program to include homeowners 
with greater than 125 percent loan-to-value ratio; clarifying 
representation and warranty exposure; and incenting shorter-term 
refinance opportunities through reduced pricing. The results have been 
impressive:

    The nearly 1.1 million HARP refinances in 2012, almost 
        equaled the number of HARP refinances over the prior 3 years. 
        An additional 97,000 HARP refinances were completed in January 
        of this year.

    HARP refinances with greater than 105 loan-to-value ratios 
        made up 43 percent of total HARP refinances in 2012, compared 
        to 15 percent in 2011. In January of this year, 47 percent of 
        HARP refinances were for borrowers with a greater than 105 
        loan-to-value ratio.

    HARP refinances with greater than 125 percent loan-to-value 
        ratios made up 21 percent of total HARP refinances in 2012 and 
        nearly 25 percent of total refinances in January of this year.

    HARP refinances into a shorter-term mortgage made up 18 
        percent of total HARP refinances in 2012 for underwater 
        borrowers, compared to 10 percent in 2011, and stand at 18 
        percent of total HARP refinances in January 2013.

    We are very pleased with the success of HARP thus far and look 
forward to building on this success in 2013. We will soon be 
implementing a nationwide public relations campaign to educate 
consumers about HARP and its eligibility requirements. The goal of this 
campaign is to reach as many eligible homeowners as possible and 
educate them on HARP eligibility criteria and the value of refinancing 
under HARP, and motivate them to explore their options and utilize HARP 
before the program expires. HARP is a valuable risk reduction tool for 
the Enterprises, and I announced last week that we will be extending 
the HARP deadline by 2 years through December 2015. I feel confident 
that with the changes made to HARP in 2011, the increased consumer 
awareness through the HARP consumer education campaign and the 
extension of the HARP deadline, every eligible homeowner who wants to 
refinance through the HARP program will have the opportunity.
    For those homeowners who are seeking a modification we also 
recently announced that the Enterprises will soon be offering a new, 
streamlined loan modification initiative to minimize Enterprise losses 
and help troubled homeowners avoid foreclosure and stay in their homes. 
Starting this July, servicers will be required to offer eligible 
homeowners who are at least 90 days delinquent on their mortgage an 
easy way to lower their monthly payments and modify their mortgage. 
This new option supplements our existing suite of loan modifications, 
including the Home Affordable Modification Program (HAMP) and the 
Enterprise's standard modification program.
    A key element of this new program is that it is essentially 
automatic and seriously delinquent homeowners are eligible for the 
program even if they have not provided complete documentation. Since 
the beginning of the financial crisis a consistent hindrance to 
assisting troubled borrowers has involved documentation requirements. 
The Streamlined Modification Initiative should be especially helpful to 
those who are self-employed, part of a multigenerational household, or 
are simply overwhelmed with the document collection burden. All 
borrowers have to do to take advantage of the modification offer is 
make three on-time trial payments, after which their loan will be 
permanently modified. Servicers will continue to work with borrowers 
throughout the trial period to evaluate all their foreclosure 
prevention options, as documenting income and financial hardship could 
result in a modification with additional savings for the borrower. This 
program also fits within our safety and soundness goals.
    This new program builds on the principles embodied in the Servicing 
Alignment Initiative that was launched in 2011. The Servicing Alignment 
Initiative was designed to establish consistent policies and processes 
for the servicing of delinquent loans owned or guaranteed by the 
Enterprises to make it easier for servicers to reach borrowers as early 
in the delinquency as possible. Early, effective borrower outreach and 
engagement is critical for successful modification solutions. We are 
excited about the prospects of this new program and look forward to 
tracking and reporting on its progress.
    A priority since the onset of conservatorship and enumerated under 
the ``maintain'' goal is to continue to strengthen the credit risk 
management practices of the Enterprises, and provide more certainty and 
timely feedback to originators as they make decisions on extending 
credit. Pursuant to this end, last September FHFA and the Enterprises 
announced the start of fundamental changes to the representation and 
warranty framework for conventional loans sold or delivered on or after 
January 1, 2013. The objective of the new framework is to clarify 
lenders' repurchase exposure and liability and inject greater up-front 
monitoring by moving the focus of quality control reviews forward to 
the time the loan is delivered to the Enterprises instead of when it 
has defaulted. The priorities for 2013 are enhancing the post-delivery 
quality control practices and transparency associated with the new rep 
and warranty framework, and FHFA's on-site supervisory teams will 
continue to review the effectiveness of the new framework.
    In addition to the efforts of FHFA, the progress that I have just 
discussed on foreclosure prevention, refinancing, and maintaining 
credit availability would not have been possible without the commitment 
of the boards, management, and employees of Fannie Mae and Freddie Mac. 
I am gratified that the leadership and staff at both companies remain 
committed to fixing what is broken and creatively addressing the 
challenging issues we face. I would add that other such examples of 
their commitment abound. For example, Fannie Mae undertook an important 
effort to develop a bulk approach to selling properties in their real 
estate owned portfolio, and Freddie Mac has been leading efforts to 
expand loan level disclosures.

Build
    The first strategic goal is to build a new infrastructure for the 
secondary mortgage market. The Enterprises' existing proprietary 
infrastructures are not effective at adapting to market changes, 
issuing securities that attract private capital, aggregating data, or 
lowering barriers to market entry. These outmoded infrastructures must 
be maintained and updated. An investment of capital--capital that would 
come from taxpayers through the PSPAs--will be necessary for this 
effort. But to the extent possible, we should invest taxpayer dollars 
to this end once, not twice.
    Hence, updating the Enterprises' outmoded infrastructures should 
provide enhanced value to the mortgage market with a common and more 
efficient securitization model. The ultimate goal is to develop a new 
securitization model that will have benefits beyond the current 
Enterprise business model. To achieve this, the new infrastructure must 
be operable across many platforms and operate in a cost effective 
manner so that it can be used by any issuer, servicer, agent, or other 
party that decides to participate.
    In October 2012, FHFA issued a white paper designed to gather input 
from the industry and move this effort forward. The white paper 
discusses development of a common securitization platform, including 
the important issue of its scope and functionality. One approach we 
outlined is that the focus of the platform could be on functions that 
are routinely repeated across the secondary mortgage market, such as 
issuing securities, providing disclosures, paying investors, and 
disseminating data. These are all functions where standardization could 
have clear benefits to market participants.
    Last month I announced as part of the 2013 Scorecard that a new 
business entity will be established between Fannie Mae and Freddie Mac. 
This does not mean we are consolidating the two Enterprises, but we 
believe that setting up a new structure, separate from the two 
companies, is important for building a new secondary mortgage market 
infrastructure. Our objective, as we stated last year, is for the 
platform to be able to function like a market utility, as opposed to 
rebuilding the proprietary infrastructures of Fannie Mae and Freddie 
Mac. To make this clear, I expect that the new venture will be headed 
by a CEO and Chairman of the Board that are independent from Fannie Mae 
and Freddie Mac. It will be physically located separate from Fannie Mae 
and Freddie Mac and will be overseen by FHFA. Importantly, we plan on 
instituting a formal structure to allow for input from industry 
participants.
    What I have just described is the governance and ownership 
structure for the near-term phase of the platform. It will be initially 
owned and funded by Fannie Mae and Freddie Mac, and its functions are 
designed to operate as a replacement for some of their legacy 
infrastructure. However, the overarching goal is to create something of 
value that would be a foundational element of the mortgage market of 
the future. We are designing the platform to be flexible so that the 
long-term ownership structure can be adjusted to meet the goals and 
direction that policy makers may set forth for housing finance reform.
    The white paper issued last October also puts forth some broad 
ideas on creating a model contractual framework. Similar to the 
securitization infrastructure effort, the focus of this effort is to 
identify areas where greater standardization in the contractual 
framework would be valuable to the mortgage market of the future.
    This is an optimal time to consider how best to address contractual 
shortcomings identified during the past few years. A great deal of work 
has already been done in this area by market participants and 
additional input will be exceptionally valuable. As the Enterprises 
move forward with risk sharing transactions such as those I will 
describe shortly, the development of transactional documents will 
provide a real time test of a new standardized contractual framework 
for transactions where the private sector is absorbing credit risk.
    Another aspect of the build goal is the Uniform Mortgage Data 
Program or UMDP. This effort may get overlooked at times, but a solid 
foundation of data standards is vitally important regardless of the 
future direction of housing finance reform. I am very encouraged by 
this effort as the Enterprises have worked through an industry process 
set up through MISMO--the Mortgage Industry Standards Maintenance 
Organization--to move this process forward. Much has already been 
accomplished through the development of a Uniform Loan Delivery Dataset 
and a Uniform Appraisal Dataset. Work is beginning on the Uniform 
Mortgage Servicing Dataset. This latter effort will take time, but 
working through the process with a broad-based coalition of industry 
participants in MISMO should serve as a model for future efforts as we 
seek to rebuild the foundation of the mortgage market. In the end, the 
benefits are immense. Developing standard terms, definitions, and 
industry standard data reporting protocols will decrease costs for 
originators, servicers, and appraisers and reduce repurchase risk.
Contract
    The second strategic goal is to contract the Enterprises' dominant 
presence in the marketplace while simplifying and shrinking their 
operations, thus de-risking both Fannie Mae and Freddie Mac's 
activities. With an uncertain future, limited capital resources, and a 
general desire for private capital to re-enter the market, the 
Enterprises' market presence should be reduced gradually over time.
    To move the ``contract'' goal forward, we set forth three 
priorities in the 2013 Scorecard.
    First, the 2013 Scorecard sets a target of $30 billion of unpaid 
principal balance in credit risk sharing transactions in the single-
family credit guarantee business for both Fannie Mae and Freddie Mac. A 
considerable amount of preparatory work was done in 2012 to lay the 
groundwork for executing on risk sharing transactions this year, and we 
have specified that each Enterprise must conduct multiple types of risk 
sharing transactions to meet the 2013 target. The Scorecard encourages 
the Enterprises to consider transactions involving: expanded mortgage 
insurance with qualified counterparties; credit-linked securities; 
senior/subordinated securities; and perhaps other structures. The goal 
for 2013 is to move forward with these transactions and to evaluate the 
pricing and the potential for further execution in scale. What we learn 
in 2013 will set the stage for the targets for 2014, and I fully expect 
to move from a dollar target to a percentage of business target at some 
point in the future.
    Also, while it is not a Scorecard item, we expect to continue 
increasing guarantee fees in 2013, and the execution of the single-
family risk sharing transactions I just described should provide 
valuable information as to how market participants are pricing mortgage 
credit risk. As we have noted before, the financial crisis demonstrated 
that the Enterprises had not fully priced their credit risk. In 2012, 
guarantee fees were increased twice, bringing the average guarantee fee 
on new mortgages to around 50 basis points, approximately double what 
guarantee fees were prior to conservatorship. A key motivation behind 
increasing Enterprise guarantee fees is to bring their credit risk 
pricing closer to what would be required by private sector providers. 
However, I feel it is important to note that increasing guarantee fees 
is part of the goal of contracting the Enterprises' dominant presence 
in the marketplace. It is not designed primarily to increase their 
revenue. The hope is that at some point the increases in guarantee fees 
will encourage private capital back into the market. We are not there 
yet, but in conversations with market participants, I think we are 
getting closer.
    Second, we are setting a target of a 10 percent reduction in new 
multifamily business acquisitions from 2012 levels. We expect that this 
reduction will be achieved through some combination of increased 
pricing, more limited product offerings, and tighter overall 
underwriting standards. The multifamily business differs significantly 
from the single-family credit guarantee business. The Enterprises have 
a smaller share of the multifamily market and there are other providers 
of credit in the market. The Enterprises' market share of new 
multifamily originations did increase during the financial downturn, 
but in 2012 it returned to a more normal position.
    Another difference from the single-family business is that each 
Enterprise's multifamily business has weathered the housing crisis and 
generated positive cash flow. In contrast to their common approach to 
their single-family businesses, Fannie Mae and Freddie Mac do not take 
the same approach to their individual multifamily businesses. Each 
approach also already embeds some type of risk sharing. For a 
significant portion of its business, Fannie Mae shares multifamily 
credit risk with loan originators through its delegated underwriting 
program. Likewise, for a significant and increasing portion of its 
business, Freddie Mac shares multifamily credit risk with investors by 
issuing classes of securities backed by multifamily mortgages where the 
investor bears the credit risk.
    Given that the multifamily market's reliance on the Enterprises has 
moved to a more normal range, reducing the Enterprises' footprint in 
this market is appropriate and aligns with the overall goal of 
contracting their dominant market presence.
    Finally, we are setting a target of selling an additional 5 percent 
of the less liquid portion of the Enterprises' retained portfolios--
primarily their retained portfolios excluding agency securities. The 
retained portfolios of Fannie Mae and Freddie Mac have been declining 
since 2009. The initial PSPAs required a 10 percent annual reduction, 
and the most recent changes to the PSPAs increased the annual reduction 
to 15 percent. The composition of the Enterprises' retained portfolios 
has also changed significantly since the establishment of the 
conservatorships. Prior to conservatorship, the retained portfolios 
were dominated by their own mortgage-backed securities and performing 
whole loans. As those securities have been paid down, and as the need 
to work through delinquent loans increased, the retained portfolios 
changed from being relatively liquid to being less liquid.
    Given that natural run-off in the retained portfolios would have 
likely satisfied the PSPA reduction targets in the next few years, and 
that the Enterprises are not actively purchasing new assets for their 
retained portfolios, requiring them to sell from the less liquid 
portions of their retained portfolios should lead to an even faster 
reduction than is required under the PSPAs.

Additional Priorities for 2013
    Let me close this review of the conservatorship strategic plan by 
highlighting a couple of other priorities we are working towards in 
2013. One will be the near-term efforts regarding mortgage insurance. 
To better protect the interests of the Enterprises, we are updating 
mortgage insurance master policies by clarifying the role and 
responsibilities of insurance carriers, particularly when servicers 
pursue loss mitigation to help delinquent borrowers. Further, we intend 
to formulate new mortgage insurance eligibility standards, to ensure 
that all insurance carriers doing business with the Enterprises have 
the appropriate financial, operational, and management capacity to 
fulfill their obligations, particularly in the event of additional 
stress to the housing markets. These efforts will be an important and 
critical step for mortgage insurance to remain a viable risk transfer 
mechanism in the future.
    Another policy project of note is the development of an aligned set 
of standards for so-called force placed, or lender-placed, insurance. 
The various concerns with lender-placed insurance are well-known, 
including the costs, limitations on coverage, and consumer protections. 
FHFA recently sent a Notice to the Federal Register setting forth an 
approach to address certain practices relating to lender-placed 
insurance that we consider contrary to prudent business practices, 
contrary to appropriate administration of Enterprise guaranteed loans, 
and which expose the Enterprises to potential losses and safety and 
soundness risks.
    These practices include sales commissions received by sellers and 
servicers when placing coverage or maintaining placement with 
particular insurance providers, and remuneration received by sellers 
and servicers from insurance providers that cede premiums to a 
reinsurer that is owned by, affiliated with or controlled by the seller 
or servicer. After receiving input during the 60 day period provided 
for in the Federal Register Notice and after FHFA review, we would 
anticipate the Enterprises putting these change in practices into place 
over a several month period.
    We also plan to pursue a broader approach to lender-placed 
insurance, bringing together both public and private sector parties to 
participate in a dialogue with us and with a wide range of 
stakeholders. Our goal is to establish a set of standards that could be 
adopted by a broader set of mortgage market participants, similar to 
what was done with the Servicing Alignment Initiative. This broadened 
approach will also enable greater regulatory coordination in an effort 
to consider the various issues associated with lender-placed insurance.

FHFA as Supervisor
    While FHFA has outlined a plan for the next phase of 
conservatorship, we continue to fulfill our supervisory 
responsibilities at both the Enterprises and the Federal Home Loan 
Banks. Since FHFA was created in 2008, we have added more than 200 
employees. Over the past 2 years, we have undertaken substantial 
restructuring, particularly with regard to our supervision program and 
have hired experienced examiners at the executive and staff levels. I 
anticipate a modest amount of additional hiring, but believe that FHFA 
now has the executive management team, the organizational structure, 
and the staff necessary to carry out our safety and soundness mission.
    With respect to Fannie Mae and Freddie Mac, we have strengthened 
our supervision and oversight of their activities, including how they 
implement and comply with conservatorship and FHFA policies. FHFA has 
in the past year implemented several changes that will enable us to 
quickly and effectively respond to emerging risks and developments, and 
to put in place a framework for supervising the secondary housing 
market not only today but for the future. This includes issuing 
supervisory guidance, governing regulations, and establishing a new 
risk-based supervisory framework. FHFA's 2013 supervisory objectives 
include:

    Assess the risks posed by new initiatives to ensure that 
        they are being implemented under a sound control framework. 
        These initiatives include SAI, the common securitization 
        platform, the contract harmonization project, multifamily bulk 
        loan sales, and REO disposition programs.

    Maintain a full understanding of the Enterprise's overall 
        risk profile, particularly for the incremental risk created by 
        implementing the new initiatives while maintaining and 
        upgrading information systems and internal controls.

    Determine if the board and management are taking 
        appropriate steps to comply with conservatorship and 
        supervisory directives.

    Develop a formalized process for the ongoing monitoring 
        program.

    Implement the CAMELSO rating system.

Financial Condition and Performance of the Enterprises and FHLBanks
    Before turning to options for the future, I will first address 
current market conditions and the financial condition and performance 
of the Enterprises and of the FHLBanks, which are also important 
components of the U.S. housing finance system.
Housing Market Conditions
    We are seeing signs of recovery in the housing market 
        across a number of dimensions and, while the marketplace is by 
        no means ``normalized,'' conditions are promising in many ways.

    According to the latest data from the National Association 
        of Realtors, the inventory of homes available for sale was only 
        1.9 million units in February. Given that the annualized rate 
        of home sales during that month was nearly 5 million 
        properties, this represented only about 4.7 months' worth of 
        supply. Just a year earlier, the relative supply was a still 
        modest 6.4 months. And at its peak--in July 2010--the supply 
        was 12.1 months.

    According to the FHFA index, national home prices grew 5.5 
        percent between the fourth quarters of 2011 and 2012. For the 
        12 month period ending in January, home prices rose 6.5 
        percent.

    Census data from December 2011 estimated the seasonally 
        adjusted annualized rate of housing starts to be about 700,000 
        units. By September 2012, that rate had grown to roughly 
        840,000 units and, in March, the rate was estimated at 
        1,036,000 units. This compares to a low of about 480,000 units 
        in April 2009, and is 71 percent of the long-run average.

    The latest CoreLogic information, which includes data for 
        October, indicates that shadow inventory dropped roughly 12.3 
        percent between October 2011 and October 2012. This decline 
        represented a reduction in the shadow inventory pool of about 
        300,000 units.

Freddie Mac
    Net income for the fourth quarter of 2012 totaled $4.5 
        billion, and represented the fifth consecutive quarter of 
        positive earnings. Annual net income of $11 billion represented 
        a record level of earnings for Freddie Mac and compares to a 
        net loss of $5.3 billion in 2011.

    In 2012 Freddie Mac required $19 million of funding from 
        Treasury bringing the cumulative Treasury draw to $71.3 
        billion. Through December 31, 2012, Freddie Mac has paid $23.8 
        billion in cash dividends to Treasury on the company's senior 
        preferred stock. Under the PSPAs, the payment of dividends 
        cannot be used to offset prior Treasury draws. This provision 
        has remained unchanged since the PSPAs were established. So 
        while $23.8 billion has been paid to Treasury in dividends, 
        Treasury still maintains a liquidation preference of $72.3 
        billion on its senior preferred stock. Freddie Mac has $140.5 
        billion remaining in available support from Treasury.

    The credit quality of new single-family acquisitions 
        remained high in the fourth quarter of 2012, with a weighted 
        average FICO score of 756. The average loan-to-value (LTV) 
        ratio for new business was 75 percent. This higher LTV ratio is 
        due to the expansion of HARP eligibility to borrowers whose 
        mortgages have LTV ratios above 125 percent and to relief 
        provided to lenders for borrowers with LTV ratios above 105 
        percent. These high LTV refinances represented 43 percent of 
        HARP loans in 2012.

Fannie Mae
    Net income for the fourth quarter of 2012 totaled $7.6 
        billion, and represented the fourth consecutive quarter of 
        positive earnings. Annual net income of $17.2 billion 
        represented a record level of earnings for Fannie Mae and 
        compares with a net loss of $16.9 billion for 2011.

    Fannie Mae did not require funding from Treasury in 2012. 
        Fannie Mae's cumulative Treasury draw remains at $116.1 
        billion. Through 2012, Fannie Mae has paid $35.6 billion in 
        cash dividends to Treasury on the company's senior preferred 
        stock. Under the PSPAs, the payment of dividends cannot be used 
        to offset prior Treasury draws. This provision has remained 
        unchanged since the PSPAs were established. So while $36.5 
        billion has been paid to Treasury in dividends, Treasury still 
        maintains a liquidation preference of $117.1 billion on its 
        senior preferred stock. Fannie Mae has $117.6 billion remaining 
        in available support from Treasury.

    The credit quality of new single-family acquisitions was 
        strong in 2012, with a weighted average FICO score of 761. The 
        average LTV for new business was 75 percent in 2012, compared 
        with 69 percent in 2011. The year-over-year increase in average 
        LTV ratios is due to the expansion of HARP to borrowers with 
        high LTV mortgages.

Federal Home Loan Banks
    The FHLBanks have emerged from the financial crisis in 
        generally good condition. They are profitable and have 
        strengthened capital positions. The FHLBank System reported net 
        income of $2.6 billion in 2012, the highest annual earnings 
        since 2007.

    Retained earnings have grown significantly in recent years 
        and totaled $10.4 billion, or 1.37 percent of assets, as of 
        year-end 2012. Retained earnings are at their highest level 
        ever, and will continue to grow as a result of provisions 
        included in each FHLBank's capital plan. The FHLBank System 
        regulatory capital ratio of 6.8 percent exceeds the regulatory 
        requirement of 4.0 percent. The market value of the FHLBanks is 
        124 percent of the par value of capital stock, the highest 
        ratio in at least 11 years.

    The aggregate balance sheet of the FHLBanks has shrunk 
        considerably in recent years, led primarily by declining 
        advance volumes due to market liquidity and sluggish economic 
        growth. Advances totaled $426 billion as of year-end 2012, down 
        58 percent from a peak of $1.01 trillion in the third quarter 
        of 2008.

    Viewed over the past business cycle, the FHLBanks carried 
        out their public purpose of providing credit when needed to 
        support the mortgage investments of their members.

Role of the Government in Housing Finance
    The key question in housing finance reform is what, and how large, 
should the role of the Federal Government be? While it is ultimately up 
to lawmakers to provide an answer, in my opinion the main purpose in 
addressing housing finance reform should be to promote the efficient 
provision of credit to finance mortgages for single-family and 
multifamily housing. An efficient market system for providing mortgage 
credit to people that want to buy a house should have certain core 
characteristics: (1) it should provide consumer choice, (2) it should 
provide consumer protections, (3) it should allow for innovation by 
market participants, and (4) it should facilitate transparency.
    As lawmakers consider the extent of the Government's role in 
housing finance, it is useful to start with some basic market facts. As 
of the fourth quarter of 2012, there was about $9.9 trillion in single 
family mortgage debt outstanding. About 13 percent was guaranteed 
through direct Government programs, roughly 52 percent was guaranteed 
by Fannie Mae and Freddie Mac, and the remainder not guaranteed by the 
Federal Government.
    On a flow basis, Inside Mortgage Finance reports that in the third 
quarter of 2012 new single family mortgage originations totaled 
approximately $510 billion. Of that total roughly 18 percent was 
guaranteed through direct Government programs, 66 percent through 
Fannie Mae and Freddie Mac, and 16 percent not guaranteed by the 
Federal Government.
    Measured by securities issuance, the proportion supported by the 
Government is over 90 percent.
    However measured, it should be clear that today's housing finance 
market is dominated by Government support.
    The relevant question then appears to be more in the line of how we 
move from the housing finance market of today, where almost all new 
single-family mortgage originations have some type of Government 
support, to a future market far more reliant on the private provision 
of mortgage credit? And in particular, of the $5 trillion portion of 
the mortgage market currently served by the Enterprises, what share, if 
any, should have Government credit support in the future?
    From the point of view of an economist, the answer to this 
question, and to the general question of how great a role the 
Government should ultimately play in the housing finance sector, begins 
with consideration of a potential market failure. A market failure may 
lead the private market to produce less of, or more of, a particular 
good than would be economically optimal. Broadly speaking, in housing 
finance there are at least two potential market failures that are often 
considered; each may lead to an under-provision of mortgage credit.
    A potential market failure could arise in housing finance if market 
participants have undue or unnecessary concerns about the ongoing 
stability and liquidity of mortgage credit in a purely private market 
across various economic environments. If this view prevails in the 
housing market, less credit will be provided than would be the case in 
the absence of this type of uncertainty. The Government response to 
this type of potential market failure could take a number of 
approaches, ranging from establishing standards and greater 
transparency for the market; providing liquidity or credit support 
under certain market conditions; to providing a Government guarantee to 
largely eliminate uncertainty.
    Another potential market failure is what is often thought of as the 
positive externality associated with home ownership. In this view, the 
benefits of home ownership extend beyond the individual household to 
the broader aspects of society, hence if left solely to the market the 
number of homeowners will be less than optimal. The broader societal 
benefits of home ownership that are often highlighted include things 
such as the propensity for homeowners to engage more in civic and 
political action; stronger neighborhood and social ties that accompany 
home ownership; the opportunity to build family wealth through home 
equity; and the willingness of homeowners to make improvements to their 
property, thereby increasing the value of their home and neighborhood. 
A common Government approach to increase market demand is to provide 
some type of subsidy or other assistance to encourage or facilitate 
such consumption. Direct subsidies to lower the cost of mortgage credit 
or easing the eligibility terms for a mortgage are methods of 
delivering subsidies through the housing finance market. Government 
policies beyond the housing finance market are also used to promote 
housing demand. Prominent among these is the mortgage interest tax 
deduction.
    These policies demonstrate that as a Nation we are committed to 
providing opportunities for home ownership, and there may be other 
social goals where it is decided that Government support is warranted. 
The Federal Housing Administration (FHA) and other traditional 
Government credit programs are typically used to address credit market 
failures or to achieve public policy goals. If policy makers begin by 
defining the role FHA and other Government mortgage credit programs 
should play in the future in terms of which borrowers should have 
access to these programs, then it should be easier to consider the 
Government's role, if any, in the remainder of the mortgage market.
    This is not dissimilar to the approach taken in other credit 
markets. Take business lending as an example. The Government provides 
support to address potential market failures or achieve other public 
policy goals through the Small Business Administration and through 
direct Government credit programs. The rest of the small business loan 
market is generally left to the private sector, and credit for larger 
businesses is generally provided without direct Government credit 
support. Other consumer credit markets, like auto loans, have little if 
any direct Government credit involvement at all.
    However, a very important difference separates the single-family 
mortgage market from other consumer credit markets--the size of the 
overall market. As I mentioned earlier, there is currently around $9.9 
trillion in single-family mortgage debt outstanding. A market of this 
size needs to draw on broader sources of capital to fund this level of 
activity. The single-family mortgage market has come to rely on the 
Enterprises as the mechanism for attracting capital.
    With their statutory public mission of supporting a stable and 
liquid mortgage market, along with their low capital requirements, the 
Enterprises were long able to guarantee mortgage credit risk at a 
volume and price at which other market participants could not compete. 
They were also seen as having a public mission to promote the 
availability of mortgage credit, especially to support affordable 
housing.
    Still, there seems to be relatively broad agreement that this 
Government-sponsored enterprise model of the past, where private sector 
companies were provided certain benefits and charged with achieving 
certain public policy goals, did not work. That model relied on 
investors providing funding for housing at preferential rates based on 
a perception of Government support, which ultimately turned out to be 
correct and has resulted in Enterprises' drawing $187.5 billion in 
funds from Treasury as of December 31, 2012.
    Determining how to replace this flawed model--and developing an 
efficient secondary market that can access capital markets in order to 
serve that part of the single-family mortgage market that is not 
covered by traditional Government credit programs--is central to 
congressional consideration of ending the conservatorships of the 
Enterprises.
    The options for consideration range from a market-oriented approach 
that would ensure broad minimum standards, to establishing a Federal 
backstop to provide liquidity when needed, to developing a Government 
guarantee structure to ensure stability in the flow of mortgage credit 
and limit market uncertainty. These options are not novel. They are 
essentially the three options that the Administration set forth in its 
white paper more than 2 years ago. Let me offer some thoughts on these 
three options.

Standard-Setting
    This approach would replace some of the standard-setting that the 
Enterprises undertake today with a regulatory regime or a market 
utility that sets those standards and that are subject to rigorous 
supervision. This model would not rely on a Government guarantee to 
attract funding to the mortgage market, but would look to 
standardization and rules for enforcing contracts to provide a degree 
of certainty to investors. The focus in such an approach could be on 
setting standards around key features that investors need to know to be 
willing to price credit risk in the mortgage market. These include 
standards associated with underwriting, pooling and servicing, and 
disclosures.
    Clearly, a standard-setting framework is much different than a 
framework that has a Government guarantee. Investors would be required 
to price the credit risk of mortgages. They also would be responsible 
for enforcing their rights under the standard contracts developed under 
this framework. Those requirements are consistent with the way that a 
private market functions. Arguably, this is part of the market 
oversight and investor protection regime that is already established in 
various securities laws overseen by the Securities and Exchange 
Commission.
    Part of the question here is, given the size of the single family 
mortgage, and the unique characteristics of today's agency securities 
market, in particular the To-Be-Announced market, would additional 
standard-setting measures enhance liquidity and provide further 
structure to the market? An important question to consider is whether 
there are other areas in terms of monitoring or compliance that could 
potentially broaden the investor base while still achieving the primary 
function of having private markets price credit risk?
    To establish a liquid non- government-guaranteed market there would 
seem to be a need to have greater homogeneity in borrower 
characteristics. I would think such a market would broadly cover the 
bulk of the business that the Enterprises undertake today, but such a 
market might not be available to all borrowers currently served by the 
Enterprises. With greater transparency in requirements, it would give 
borrowers a clear sense of the qualification requirements. Traditional 
Government guarantee programs would still exist to meet various policy 
goals. And finally, for borrower characteristics that do not fit neatly 
into the secondary market, we need to find a way to get banks, thrifts, 
and credit unions back into the business of funding mortgages. 
Understanding individual borrowers and special circumstances is at the 
heart of the financial intermediation function of insured depository 
institutions. Whatever changes are made to the secondary market, I hope 
we preserve the option for local banks to make mortgages in their 
communities, and hold those mortgages on the bank's balance sheet. I 
would also note that the Federal Home Loan Banks give banks and other 
depository institutions access to credit across the maturity spectrum 
to assist in funding such mortgages on depository institution balance 
sheets.

Federal Backstop
    In a standard-setting approach without a Government guarantee, it 
would be important to consider how such a market would operate in a 
time of stress. Having clear standards and greater transparency would 
certainly improve market operations, but there still could be cyclical 
swings that could broadly be of concern to the Government. Two 
potential concerns are:

    Preserving the availability of credit in times of stress is 
        an important function. Is there a role for the Government, 
        perhaps through the Federal Housing Administration to take on 
        this role if necessary? Or alternatively, with a more 
        standardized market and infrastructure, would it be possible 
        for an existing guarantor, like Ginnie Mae, to play such a 
        temporary guarantee function?

    Preserving liquidity in the market and the financial system 
        in this framework would be an important function. Is there a 
        need for a backstop source of funding when financial markets 
        become temporarily illiquid? For example, could the Treasury 
        Department, the Federal Reserve, or the Federal Home Loan Banks 
        play a role in a market that had this type of standardized 
        structure?

Government Guarantee
    Finally, the third option is a secondary mortgage market operating 
with some type of Government guarantee. This is somewhat similar to 
what we have today. Clearly if the securities offered in a reformed 
housing finance market have a Government guarantee, those securities 
will be priced favorably and have a high degree of liquidity to reflect 
that guarantee. However, pricing for those securities would not provide 
the benefit of market pricing for credit risk of the underlying 
mortgages. In such a structure, private sector capital through equity 
investment would stand in a first loss position, with a Government 
guarantee that was funded through an insurance premium being available 
to cover other losses (much like with deposit insurance in the banking 
system). This type of structure requires a significant amount of 
regulatory safety and soundness oversight to protect against the moral 
hazard associated with providing a Government guarantee.
    While such an outcome has certain merit and some attractive 
features, the potential costs and risks associated with this type of 
framework should be fully explored. Simply put, replacing the 
Enterprises' implicit guarantee with an explicit one does not resolve 
all the shortcomings and inherent conflicts in that model, and it may 
produce its own problems. As I have in past testimony, I offer three 
observations in this regard.
    First, the presumption behind the need for an explicit Federal 
guarantee is that the market cannot evaluate and price the tail risk of 
mortgage default, at least at any price that most would consider 
reasonable, or it cannot manage that amount of mortgage credit risk on 
its own. But we might ask whether there is reason to believe that the 
Government will do better? If the Government backstop is underpriced, 
taxpayers eventually may foot the bill again.
    Second, if the Government provides explicit credit support for the 
vast majority of mortgages in this country, it would likely want a say 
with regard to the allocation or pricing of mortgage credit for 
particular groups or geographic areas. The potential for Government 
involvement to distort the pricing of credit risk may subject taxpayers 
to further involvement if things do not work out as planned.
    Third, regardless of any particular Government allocation or 
pricing initiatives, explicit credit support for all but a small 
portion of mortgages, on top of the existing tax deductibility of 
mortgage interest, would further direct our Nation's investment dollars 
toward housing. It would also drive up the price of housing, other 
things being equal. A task for lawmakers is to weigh such incentives 
and outcomes against the alternative uses of such funds.
    Fourth, what will be the breadth and depth of regulatory authority 
and how is it exercised? For example, just how much capital should be 
maintained by a major mortgage market enterprise.
    Finally, what I have just discussed relates to the single-family 
mortgage market. A similar type of analysis could be performed for the 
multifamily market.

Conclusion
    Few of us could have imagined in 2008 that we would be approaching 
the fifth anniversary of placing Fannie Mae and Freddie Mac in 
conservatorship and that we have made little meaningful progress to 
bring these Government conservatorships to an end. The conservatorships 
were never intended to be a long-term solution. They were meant 
primarily as a ``time out'' for the rapidly eroding mortgage market--an 
opportunity to provide some stability while Congress and the 
Administration could figure out how best to address future reforms to 
the housing finance system.
    The U.S. housing finance system cannot really get going again until 
we remove this cloud of uncertainty and it will take legislation to do 
it. Fannie Mae and Freddie Mac were chartered by Congress and by law, 
only Congress can abolish or modify their charters and set forth a 
vision for a new secondary market structure. While FHFA is doing what 
it can to encourage private capital to return to the marketplace, so 
long as there are two Government-supported firms occupying this space, 
full private sector competition will be difficult, if not impossible, 
to achieve.
    I have been observing a developing ``consensus'' among private 
market participants that the conforming conventional mortgage market 
cannot operate without the American taxpayer providing the ultimate 
credit guarantee for most of the market. As I have noted, that clearly 
is one policy outcome, but I do not believe it is the only outcome to 
be considered that can give our country a strong housing finance 
system. I believe that our country and our financial system are 
stronger than that. I believe it is possible to rebuild a secondary 
mortgage market that is deep, liquid, and competitive; that is subject 
to appropriate supervision and regulation, and will operate without an 
ongoing reliance on taxpayers or, at least, a greatly reduced reliance 
on taxpayers, if that is what we set our minds to accomplishing.
    Where lawmakers identify particular market failures requiring 
direct Government involvement, there may be more targeted approaches to 
addressing those issues than a broad subsidy to credit. For example, if 
certain borrowers or communities are of concern, taxpayer support could 
be targeted directly to support the building or purchasing of housing 
rather than indirectly through credit subsidies. Individual communities 
have already undertaken this approach, developing their own 
comprehensive list of challenges and potential solutions and bringing 
these to all parties involved with their communities.
    I have said before, however, that these choices are for elected 
officials to make, not me. I am committed to working with this 
Committee, its counterpart in the House, and the Administration to make 
these policy determinations and then set about ending these 
conservatorships and transitioning to a future housing finance system 
that can serve our children, grandchildren, and beyond.
    Thank you again for inviting me here today. I look forward to 
discussing these important matters with all of you.
                                 ______
                                 
                 PREPARED STATEMENT OF STEVE A. LINICK
           Inspector General, Federal Housing Finance Agency
                             April 18, 2013

    Thank you, Chairman Johnson and Ranking Member Crapo and Members of 
the Committee on Banking, Housing, and Urban Affairs, for inviting me 
to testify here today. I appreciate the opportunity to update the 
Committee on the work of the Federal Housing Finance Agency Office of 
Inspector General (OIG).
    OIG began operations in October 2010, in the midst of an 
unprecedented housing and financial crisis of historic proportions. 
Since our beginning, we have published 49 reports and have commenced 
multiple criminal and civil investigations.
    Today, I will discuss emerging trends based on our work to date, 
discuss the challenges associated with ongoing uncertainty about the 
future of Fannie Mae and Freddie Mac, describe our operations, and 
answer the Committee's questions.

About OIG
    OIG oversees FHFA's operations and programs. This oversight 
includes the Agency's regulation of the housing Government-sponsored 
enterprises (GSEs)--Fannie Mae, Freddie Mac, and the 12 Federal Home 
Loan Banks (FHLBanks); the GSEs' approximately 12,000 employees; as 
well as the conservatorships of Fannie Mae and Freddie Mac. Fannie Mae 
and Freddie Mac currently own or guarantee $5 trillion in mortgages. To 
date, they have received $187.5 billion in taxpayer money in order to 
ensure their continuing solvency.
    OIG's mission is to promote the economy, efficiency, and 
effectiveness of FHFA's programs and operations. To carry out its 
mission, OIG conducts and coordinates audits and evaluations of FHFA's 
programs and operations. OIG also works to prevent and detect fraud, 
waste, and abuse in those programs and operations through 
investigations involving FHFA, Fannie Mae, Freddie Mac, and the 
FHLBanks. Important features of OIG's work are the promotion of 
transparency in FHFA programs and GSE oversight, as well as public 
understanding of matters affecting FHFA, the GSEs, and housing policy.

A. Emerging Trends
    Since I last testified, we have seen a turnaround in the 
profitability of the Enterprises. This is the first period since 2008 
in which the Enterprises, still under FHFA conservatorships, have 
returned to profitability; in 2012, they earned record profits of more 
than $28 billion.
            1. FHFA Is Making Progress
    FHFA has made progress in its role as conservator and regulator of 
the Enterprises across a variety of fronts. For example, FHFA has 
launched a number of initiatives intended to address key objectives, 
such as aligning Enterprise practices, improving service to borrowers, 
and conserving and preserving Enterprise assets. These initiatives 
include the Servicing Alignment Initiative, Uniform Mortgage Data 
Program, Joint Servicing Initiative, and lawsuits that FHFA has filed 
against 18 investment banks to recover investment losses incurred on 
residential mortgage-backed securities issued by those firms.
    FHFA has also accepted and begun to implement the vast majority of 
our audit and evaluation report recommendations. For example:

    In December 2010, FHFA approved a buyback settlement with 
        Bank of America in which the bank agreed to pay $1.35 billion 
        to settle loan repurchase claims asserted by Freddie Mac. A 
        subsequent OIG report raised concerns about the adequacy of the 
        review of nonperforming loans for repurchase claims. Freddie 
        Mac has since acted on our concerns and expanded its loan 
        review process; it now believes that the expanded process may 
        produce additional revenues ranging from $2.2 to $3.4 billion 
        over 3 years.

    Since OIG's March 2011 report, FHFA has taken action to 
        enhance its oversight and control of executive compensation. 
        For instance, FHFA revised certain aspects of the compensation 
        program, which, in the case of the Fannie Mae and Freddie Mac 
        CEOs, significantly reduced their annual pay.

    In the aftermath of reports that the LIBOR rate affecting 
        financial transactions was improperly manipulated, OIG began 
        examining the potential impact of this manipulation on Fannie 
        Mae and Freddie Mac. We concluded in a memorandum to FHFA that 
        it was possible the Enterprises had suffered sizable losses, 
        and we offered recommendations for Agency action to recover any 
        such losses on behalf of the Enterprises. Subsequently, Freddie 
        Mac has sued to recover its losses.
            2. As Conservator FHFA Needs To Be More Involved in 
                    Enterprise Decision Making
    Although the Agency has made progress, our work continues to show 
that FHFA can improve its role as conservator and regulator. As 
conservator of the Enterprises, FHFA's mission is to preserve and 
conserve Enterprise assets. Throughout our body of work we have 
identified instances in which FHFA has displayed undue deference to 
Enterprise decision making in its capacity as conservator. Without 
adequately testing or validating data, FHFA has at times deferred to 
the Enterprises regarding key matters under the conservatorships. We 
believe the Agency's actions in these cases reflect its approach as 
conservator to delegate most business decisions to the Enterprises. In 
each case, it relied upon review and corporate governance processes 
already in place at the Enterprises. However, we have concluded that 
some matters are sufficiently important to warrant greater involvement 
and scrutiny by the Agency. In some cases, the deficiencies have been 
remediated, but in other cases they still persist. For example:

    Conservatorship decision making. In a September 2012 
        report, we found that FHFA unduly relied on information 
        provided by Fannie Mae when it issued a ``no objection'' 
        response to Fannie Mae's last minute request to make a 
        financial investment of between $55 and $70 million. Fannie Mae 
        requested the Agency's approval as conservator to make the 
        investment; FHFA approved the request that same day but stated 
        that given the complex nature of the transaction and the short 
        time frame for its decision, the Agency could not assess the 
        reasonableness of the proposal.

    Conservatorship decision making. In the same report, we 
        also found that over a 3-year period Fannie Mae took over 4,500 
        actions to increase the Enterprise's counterparty risk limits 
        without first obtaining conservator approval, even though such 
        approval was required and Freddie Mac had submitted such 
        counterparty risk limit increases for conservator approval. We 
        also found that FHFA had not discovered Fannie Mae's lapses. 
        FHFA has subsequently revised its policies and procedures 
        surrounding requests for conservatorship approval.

    Underwriting. In a March 2012 audit, we found that the 
        Agency's oversight of underwriting, along with the accompanying 
        variances that effectively further loosen underwriting 
        standards, was limited; FHFA relied on the Enterprises to 
        oversee and establish underwriting standards and to grant 
        variances. Subsequent to our audit recommendations, FHFA 
        established a formal process to review the Enterprises' 
        underwriting standards and variances.

    Transaction testing/exam capacity. Transaction testing 
        includes reviewing files to test the veracity of statements 
        made by the Enterprises to examiners. In a September 2011 
        evaluation of FHFA's capacity to examine the GSEs, we found 
        that examiners too often accept assertions made by Enterprise 
        managers rather than independently validating such assertions 
        through appropriate transaction testing.

    Buybacks. In approving the buybacks settlement discussed 
        above, FHFA relied on Freddie Mac's analysis of the settlement 
        without testing the assumptions underlying the Enterprise's 
        existing loan review process. OIG found in a subsequent report 
        that implementation of our changes may generate additional 
        recoveries of $2.2 to $3.4 billion.
            3. As Regulator FHFA Can Be More Proactive in Managing Risk
    In multiple reports we identified instances in which FHFA was not 
proactive in risk management. In general, we have observed that FHFA 
has difficulties identifying new and emerging risks potentially 
affecting the GSEs, issuing guidance and regulations governing risk 
management at the GSEs, and providing strong and consistent enforcement 
for violations of policy. Some instances of risk management shortfalls 
identified by OIG have been addressed, nevertheless, FHFA still needs 
to do more to identify and manage risks and take enforcement action 
where warranted.

Identification of Risk
    Our work has shown that the Agency's ability to identify new and 
emerging risks has been limited. Here are some examples:

    Advances to Insurance Companies. In a March 2013 report, we 
        found that during the past 8 years, FHLBanks' advances to 
        insurance companies who are FHLBank members have more than 
        quadrupled--from $11.5 billion in 2005 to $52.4 billion in 
        2012. Lending to insurance companies may present unique risks 
        compared with lending to other FHLBank members. Yet, neither 
        FHFA nor the FHLBanks obtain confidential supervisory or other 
        regulatory information relating to insurance company members 
        from State regulators or the National Association of Insurance 
        Commissioners.

    Default-Related Legal Services. In a September 2011 report, 
        we found that there were indicators as early as 2006 that could 
        have led FHFA (and its predecessor) to identify the heightened 
        risk posed by foreclosure abuses associated with Fannie Mae's 
        default-related legal services network. The indicators included 
        the rise in foreclosures accompanying the deterioration of the 
        housing market, increased consumer complaints alleging improper 
        foreclosures, contemporaneous media reports of foreclosure 
        abuses, and public court filings in Florida and elsewhere 
        critical of such abuses. Notwithstanding these indicators, FHFA 
        did not devote attention to the foreclosure abuse issues until 
        August 2010. The Agency is now implementing changes intended to 
        rectify that oversight.

    REO. In a July 2012 report, we found that since 2008, FHFA 
        has consistently listed the Enterprises' large inventories of 
        real-estate owned (REO) properties acquired in the foreclosure 
        process as contributing to ``critical concern'' ratings in 
        their quarterly risk assessments. FHFA did not conduct targeted 
        examinations or focused reviews of REO until 2011. FHFA's 
        eventual targeted examinations in 2012 were positive 
        supervisory steps, but expanding the scope of the assessments 
        to evaluate more risks can help the Agency improve its 
        supervision of real-estate owned.

Risk Management
    The Agency has not always managed identified risks by establishing 
sufficient regulations or guidance.

    Servicing. In a September 2012 report, we found that FHFA 
        has not timely addressed known risks presented by mortgage 
        servicing contractors. For example, FHFA has not developed 
        sufficient regulations or guidance governing the Enterprises' 
        oversight and risk management of counterparties, such as 
        servicers. Specifically, FHFA had not established and 
        implemented effective Enterprise regulations or guidance for 
        controlling the reporting of critical servicer information and 
        establishing baseline requirements for mortgage servicing. 
        Instead, FHFA relied on the Enterprises to monitor counterparty 
        risk as part of their ongoing risk management activities. 
        Although FHFA has made progress in this area, servicing remains 
        an ongoing challenge.
    High-Risk Seller/Servicers. In a September 2012 report, we 
        found that FHFA has not addressed known risks presented by 
        mortgage seller/servicers by developing sufficient regulations 
        or guidance governing the Enterprises' oversight and risk 
        management of such counterparties. The Enterprises work with 
        numerous seller/servicers for post-origination mortgage work, 
        such as collecting mortgage payments. These seller/servicers 
        represent a significant risk to the Enterprises. Specifically, 
        FHFA has not published standards for the development of 
        contingency plans related to failing or failed high-risk 
        counterparties. Counterparty contingency plans will not 
        eliminate losses, but they can serve as a road map to help 
        reduce the Enterprises' risk exposure. Managing such seller/
        servicer risk is important, as the Enterprises have incurred 
        losses of $6.1 billion from failures at just four of their 
        counterparties since 2008. FHFA recently issued an advisory 
        bulletin containing guidance and outlining criteria on written 
        contingency plans.

Enforcement
    Even when FHFA has identified risks and taken steps to manage those 
risks, the Agency has not consistently enforced its directives to 
ensure that identified risks are adequately addressed. As conservator 
and regulator, FHFA's authority over the Enterprises is broad and 
includes the ability to discipline or remove Enterprise personnel in 
order to ensure compliance with Agency mandates. OIG has reported that 
FHFA's supervision and regulation of the GSEs is strengthened by 
exercising this authority where warranted.

    Operational Risk at Fannie Mae. In a September 2011 report, 
        we found that FHFA had not compelled Fannie Mae's compliance 
        with directives requiring it to establish an effective 
        operational risk management program. Fannie Mae's lack of an 
        acceptable and effective program may have resulted in missed 
        opportunities to strengthen oversight of law firms with which 
        it contracts to process foreclosures.

    Troubled FHLBanks. Benefit of stronger FHFA enforcement 
        also extends to FHLBanks. For example, since 2008 at least four 
        FHLBanks have faced significant financial and operational 
        difficulties which classified them as institutions with 
        ``supervisory concerns.'' In a January 2012 report, we 
        determined that FHFA had not established a consistent and 
        transparent written enforcement policy for troubled FHLBanks 
        having such a classification. This contributed to instances in 
        which FHFA may not have held such banks and their officers 
        sufficiently accountable for engaging in questionable risk 
        taking.

    Unsecured FHLBank Lending. In a June 2012 report, we 
        identified FHFA's current regulation governing unsecured 
        lending by the FHLBanks as possibly outdated and overly 
        permissive, as well as noncompliant with the Agency's existing 
        regulation. More specifically, FHFA did not initially pursue 
        potential evidence of FHLBanks' violations of the existing 
        regulatory limits and take supervisory and enforcement actions 
        as warranted. OIG is currently conducting a follow-up report on 
        this topic.

Recent Examples
    Two recent OIG reports exemplify multiple aspects of FHFA's 
shortfalls in risk management:

    Consumer Protection. The Enterprises' seller/servicer 
        counterparties contractually agree to comply with all Federal 
        and State laws and regulations (including consumer protection 
        statutes) applicable to originating, selling, and servicing 
        loans. If a counterparty does not comply, the Enterprises can 
        require it to repurchase the noncompliant loan. We found in a 
        March 2013 report that FHFA does not examine how the 
        Enterprises monitor compliance with consumer protection laws, 
        and the Enterprises do not ensure that their counterparties 
        from which they purchase loans comply with such laws. Because 
        FHFA has not identified compliance as a risk, it has not issued 
        any guidance to the Enterprises. Further, FHFA has not 
        attempted to enforce compliance with contractual provisions. We 
        recommended that FHFA develop a risk-based plan to monitor the 
        Enterprises' oversight of their counterparties' contractual 
        compliance with applicable laws and regulations. FHFA agreed 
        with our recommendation.

    Consumer Complaints. The Enterprises pay mortgage servicers 
        to collect payments, interact with borrowers, and handle their 
        complaints. The more serious complaints are called ``escalated 
        cases'' and include foreclosure actions that violate the 
        Enterprises' guidelines, complaints that the borrower was not 
        appropriately evaluated for a foreclosure alternative, and 
        violations of the Enterprises' time frames for borrower 
        outreach.

    We found in another March 2013 report that between October 2011 and 
November 2012, Freddie Mac and its eight largest servicers received 
over 34,000 complaints that became escalated cases. A servicer's 
failure to quickly and accurately resolve these escalated cases can 
prevent foreclosure alternatives from being adequately explored with 
borrowers and may result in losses to the Enterprise.
    In early 2011, FHFA announced its Servicing Alignment Initiative, 
which requires servicers to report on escalated cases they receive and 
resolve cases within 30 days of receiving them. We found that FHFA, 
Freddie Mac, and its servicers did not fulfill their respective 
responsibilities to address and resolve escalated cases. First, 
evidence suggests that most of Freddie Mac's servicers are not 
complying with reporting requirements for escalated cases. As of 
December 2012, 1,179 or 98 percent of Freddie Mac's servicers had not 
reported on any escalated cases even though they managed 6.6 million 
mortgages for Freddie Mac. Of Freddie Mac's eight largest servicers--
which serviced nearly 70 percent of its loans--four did not report any 
information about escalated cases despite handling more than 20,000 
such cases during the 14-month period between October 2011 and November 
2012.
    Further, of the 25,528 escalated cases resolved by the eight 
largest servicers during the 14-month period between October 2011 and 
November 2012, 5,372 or 21 percent were not timely resolved within 30 
days. Additionally, Freddie Mac did identify this as a risk area yet 
did not implement independent testing procedures during its operational 
reviews of its largest national and regional servicers. As a result, it 
had findings related to escalated cases in only 1 of 38 reviews of its 
largest national and regional servicers that it conducted in 2012. 
Freddie Mac has also neglected to establish penalties (such as fines) 
for servicers that do not report escalated cases.
    Finally, FHFA did not identify the foregoing problems through its 
own examination of Freddie Mac's implementation of the Servicing 
Alignment Initiative. Rather than independently testing servicers' 
compliance with complaint reporting requirements, the FHFA examination 
team relied exclusively on Freddie Mac's on-site operational review 
reports, which did not mention problems with servicer reporting. Thus, 
FHFA's examination of Freddie Mac's implementation of the Servicing 
Alignment Initiative did not identify servicers' failures to report 
escalated cases or resolve them in 30 days. Additionally, FHFA lacks 
guidance for examination teams to use when testing the implementation 
of directives, such as its Servicing Alignment Initiative.
    To address and resolve escalated consumer complaints in a timely 
and consistent manner, we recommended that the Agency ensure Freddie 
Mac requires its servicers to report, timely resolve, and accurately 
categorize escalated cases; ensure that Freddie Mac enhances its 
oversight of the servicers through testing servicer performance and 
establishing fines for noncompliance; and improve its oversight of 
Freddie Mac by developing and implementing effective examination 
guidance. FHFA agreed with our recommendations.
            4. FHFA May Not Have Enough Examiners
    FHFA has critical regulatory responsibilities with respect to the 
GSEs and conservator responsibilities regarding the Enterprises. 
Nonetheless, in a 2011 report we found that the Agency had too few 
examiners to ensure the efficiency and effectiveness of its GSE 
oversight program; due to examiner shortages, FHFA had scaled back 
planned work during examinations, and examinations often took much 
longer than expected to complete. Additionally, we identified 
shortfalls in the Agency's examination coverage, particularly in the 
crucial area of REO. We also found that the majority of the Agency's 
examiners lacked the certification that is required at other Federal 
financial regulatory examination divisions. Although the Agency has 
made progress since we issued this initial report by reorganizing the 
examination function and hiring new staff, it is not clear that FHFA 
has achieved adequate resources. Many of our subsequent reports 
continue to recommend expanded or improved examination coverage. We 
have initiated follow-up work to determine FHFA's progress in staffing 
its examination teams.

B. Challenges Associated With Ongoing Uncertainty
    We are mindful that FHFA's long-term success--and our ability to 
assess the enduring effectiveness, efficiency, and economy of the 
Agency's actions--is necessarily affected by the uncertainty 
surrounding the fate of the Enterprises and that of the housing finance 
system. In other words, FHFA must effectively direct the Enterprises' 
operations while fundamental questions about its role and theirs remain 
unanswered.
    In September 2008, when Fannie Mae and Freddie Mac entered into 
conservatorships overseen by FHFA, it was generally assumed that FHFA's 
role as conservator would be temporary and short-lived. Yet, nearly 5 
years later, Fannie Mae and Freddie Mac are still in conservatorships 
with no clear end in sight. Indeed, no one is sure how long the 
Enterprises will continue to exist in their current form or what their 
future roles, if any, will be. Thus, human resource issues have been 
and will remain a challenge for FHFA and the Enterprises. Not only does 
the uncertain future present a challenge in recruiting and retaining 
employees, the Agency and the Enterprises are hampered in making 
longer-term staffing allocations because their future roles remain 
uncertain.
    Until the uncertainty is resolved, we will continue to focus on 
housing finance matters, such as managing risks and repaying taxpayers.

C. OIG Operations
            1. OIG Audits and Evaluations
    In addition to monitoring and reporting on FHFA's progress in 
implementing report recommendations, my office will continue to release 
new audits and evaluations covering key areas. OIG maintains an Audit 
and Evaluation Plan focused on the areas of FHFA's operations posing 
the greatest risks and providing the greatest potential benefits to 
FHFA, Congress, and the public. Originally developed with input from an 
independent, third-party risk assessment, the Audit and Evaluation Plan 
also takes into account the feedback we receive about our work from 
FHFA officials, members of Congress, and others. Broadly, OIG's audit 
and evaluation strategies include reviews of the following FHFA 
activities:

    Regulatory efforts and its management of the Fannie Mae and 
        Freddie Mac conservatorships. The Enterprise conservatorships 
        are particularly high-risk areas in which taxpayers have 
        invested $187.5 billion to date. As conservator, FHFA must 
        regulate and oversee the Enterprises in an efficient, 
        effective, and transparent manner so as to minimize taxpayer 
        costs, conserve and preserve Enterprise assets, and meet all 
        statutory mandates.

    Oversight of the FHLBanks and their associated risks, 
        including investment portfolio management and concentrations, 
        credit underwriting, and administration.

    FHFA and GSE internal operations involving issues that 
        relate to information security as well as allegations of fraud, 
        waste, or abuse.

    Given the Committee's interest, I want to highlight some of our 
projects that are currently underway. First, we are assessing a number 
of FHFA's new or expanded initiatives, including the Servicing 
Alignment Initiative, the proposed Common Securitization Platform for 
the Enterprises, the Fannie Mae REO pilot program, and HARP 2.0. 
Additionally, we are conducting further work to follow up on our 
December 2012 consumer protection report entitled ``FHFA Should Develop 
and Implement a Risk-Based Plan to Monitor the Enterprises' Oversight 
of Their Counterparties' Compliance with Contractual Requirements 
Including Consumer Protection Laws''. There, we assessed FHFA's 
oversight of the Enterprises' monitoring of seller/servicer compliance 
with their contractual agreements, with an emphasis on their compliance 
with Federal consumer protection laws. The next phase of our work will 
move from the Agency's oversight of the Enterprises to the Agency's 
oversight of servicers. However, I look forward to working with you and 
reporting our findings and recommendations in the coming months.
            2. Investigations
    Within OIG, the Office of Investigations is actively engaged in 
combating fraud, waste, and abuse. Thus far in FY2013 alone, the Office 
of Investigations' activities have led to 53 indictments and 26 
convictions; since our work began the Office of Investigations' 
activities have led to 156 indictments and 62 convictions.
    OIG works with law enforcement partners across the Nation, 
including other Federal agencies, U.S. Attorneys' Offices, and State 
and local agencies. While many cases remain confidential, we have 
released details about mortgage fraud investigations once public 
charges have been filed, as is the case with the prosecutions of 
Colonial Bank and Taylor, Bean & Whitaker Mortgage Corporation, 
American Mortgage Field Services LLC, and Home Owners Protection 
Economics, Inc.
    The Office of Investigations currently has a variety of open 
criminal and civil investigations involving a wide variety of 
allegations of wrongdoing. The Office of Investigations focuses on FHFA 
and the GSEs, both internally and externally, concentrating on those 
individuals and organizations that have victimized either FHFA or the 
GSEs or borrowers with GSE loans. Many of the cases fall into one or 
more of the following seven categories:

    Fraud involving residential mortgage-backed securities

    Mortgage origination related frauds

    Mortgage modification frauds

    Fraud involving REO transactions

    Builder bailouts and condo conversions

    Fraud involving mortgage servicing contractors

    FHFA or GSE employee misconduct

    Fraud involving mortgage-backed securities is a key area of focus. 
During the housing boom, the GSEs purchased and guaranteed hundreds of 
billions of dollars of residential mortgage-backed securities. Since 
the collapse of the housing market in 2007, those investments have 
declined precipitously in value. The GSEs may have been victims of 
fraud in instances when the quality and value of the underlying assets 
they purchased or guaranteed was misrepresented to them. OIG is an 
active member of the Mortgage Fraud Working Group formed last year, and 
has assisted in civil cases filed in the second half of 2012 against 
JPMorgan Chase and Credit Suisse.
    Mortgage origination fraud includes cases when the GSEs have been 
defrauded as a result of misrepresentations relating to the quality of 
the loans sold. These misrepresentations occur at the time the loan is 
originated. For instance, OIG is assisting in a Federal civil case 
alleging that Countrywide in 2008 implemented a new loan origination 
process called the ``Hustle,'' which was intentionally designed to 
process loans at high speed and without quality checkpoints, and which 
generated thousands of fraudulent and otherwise defective residential 
mortgage loans sold to Fannie Mae and Freddie Mac that later defaulted, 
causing over $1 billion dollars in losses and countless foreclosures.
    Mortgage modification fraud targets financially distressed 
homeowners who are underwater or have fallen behind on their mortgage 
payments. Some frauds involve advance fee schemes that require the 
homeowner to pay a fee for participating in supposedly ``official'' 
programs that are in fact completely fictitious or improperly imply 
participation in a U.S. Government housing relief program. Other 
schemes are designed to force a distressed homeowner into default 
sooner than would otherwise be the case.
    REO fraud may involve individuals connected to the foreclosure and 
subsequent resale of a property. For example, the Enterprises contract 
with asset managers to maintain and prepare the property for sale. But 
the asset managers may not maintain the properties and bill for 
fictitious maintenance expenses. REO fraud can also involve realtors 
who collude with investors or other realtors and appraisers to drive 
down the price of properties they are selling on behalf of the 
Enterprises.
    Builder bailouts and condo conversions usually occur when a builder 
who obtained loans to build homes is unable to sell all the homes when 
built. To get rid of those unsold homes quickly, the builder may use a 
variety of illegal schemes, including using straw-buyers, paying 
undisclosed concessions to the buyer, or paying undisclosed marketing 
fees to brokers or real estate agents.
    Fraud involving mortgage servicing contractors can include 
instances when a mortgage servicing contractor defrauds an Enterprise. 
For instance American Mortgage Field Services LLC was a property 
inspection company. From at least 2009 through March 2012, the 
president of American Mortgage Field Services and some of his employees 
submitted fraudulent reports describing numerous inspections of 
foreclosed properties that were paid for but never actually performed. 
Recently, American Mortgage Field Services' president was sentenced in 
Federal court to over 8 years in prison and ordered to pay over $12.7 
million in restitution.
    FHFA or GSE employee misconduct involves cases alleging misconduct 
by FHFA or GSE employees or contractors. For instance, in a recently 
filed Federal case, a Fannie Mae foreclosure specialist allegedly 
solicited $11,000 in payments from realtors in exchange for taking 
favorable actions.
    Finally, I want to mention that the Office of Investigations 
operates the OIG Hotline, which allows concerned parties to report 
information directly and in confidence regarding possible fraud, waste, 
or abuse related to FHFA or the GSEs. OIG honors all applicable 
whistleblower protections. If anyone wishes to report allegations of 
fraud, waste, or abuse, the Hotline can be reached at 1-800-793-7724, 
by fax at (202) 318-0358, or through our Web site at www.fhfaoig.gov.

Conclusion
    My staff and I look forward to continuing to work with your 
Committee to provide independent, relevant, and objective assessments 
of FHFA's operations and programs. The continuing fragility of our 
Nation's housing market remains a significant source of ongoing 
concern. Further, Fannie Mae, Freddie Mac, and the FHLBanks continue to 
be key market participants, and FHFA continues to face significant 
challenges. We are hopeful that our work will be of assistance in 
meeting those challenges.

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                     FROM EDWARD J. DEMARCO

Q.1. You have begun building a securitization platform that 
will be jointly owned by Fannie Mae and Freddie Mac. Upon its 
completion you have stated that this platform will be built so 
that it may be used by not only Fannie and Freddie, but other 
entities wishing to securitize mortgages.
    Please describe the circumstances that necessitated this 
project be undertaken at this time and the reasons why you 
believe it must be completed in a timely fashion.

A.1. The mortgage market today relies heavily on taxpayer 
support, with little private capital standing in front of the 
Government's risk exposure. Any transition from conservatorship 
will require a multiyear period, yet the Enterprises' outmoded 
proprietary infrastructures are in immediate need of being 
upgraded and maintained. An investment of capital--capital that 
would come from taxpayers through the Preferred Stock Purchase 
Agreements with the Department of Treasury--will be needed for 
this effort. To the extent possible, we are trying to ensure 
that taxpayer dollars are invested to this end once, not twice. 
The common securitization platform will allow the Enterprises 
to better adapt to market changes, issue nonguaranteed or 
partially guaranteed securities in scale that attract private 
capital (helping to reduce the Enterprises' dominant position 
in the market), more efficiently aggregate data, and lower 
barriers to market entry. Timely completion will facilitate the 
Enterprises' ability to meet critical goals outlined in FHFA's 
Strategic Plan for the Conservatorships, consistent with the 
Administration's call for a gradual wind down of the 
Enterprises. It will preserve policy options for Congress, 
while establishing a stronger foundation on which Congress and 
market participants can build to replace the preconservatorship 
GSE model.

Q.2. What is the legal authority under which this project was 
undertaken and under what statutory obligations must FHFA 
operate in completing the project?

A.2. This project is undertaken in FHFA's role as conservator 
for each enterprise; 12 U.S.C. section 4617.

Q.3. You have stated that the securitization platform will be 
owned by a company outside of Fannie Mae and Freddie Mac, but 
jointly owned by the two companies.
    Please further describe the legal structure under which 
this company will be organized and ultimately operational.

A.3. The agency is considering a range of structures that would 
operate now as well as be available for future sale or other 
structural or operational changes.

Q.4. Did your legal obligations as Conservator play any role in 
determining how this entity would be constructed? If so, how 
and which obligations?

A.4. FHFA's role as conservator played a role. As the platform 
will be owned and operated by a company that is jointly held by 
the Enterprises, the company will be an asset of each 
enterprise and remain under the ongoing oversight of the FHFA.

Q.5. What other factors did you consider in determining this 
structure to be the best construct for the new platform?

A.5. We believe that setting up a new structure that is 
separate from the Enterprises is important for building a new 
secondary mortgage market infrastructure. Our objective is for 
the platform to be able to function like a market utility, as 
opposed to rebuilding the proprietary infrastructures of Fannie 
Mae and Freddie Mac. While the common securitization platform 
will serve initially as a replacement for some of the 
Enterprises' legacy infrastructure, its focus is on functions 
that are routinely repeated across the secondary mortgage 
market, where standardization has clear benefits to market 
participants. Being physically separate from the Enterprises, 
with an independent CEO and Chairman of the Board and a formal 
structure allowing for input from industry participants, should 
facilitate the platform's independence. This will help to meet 
the overarching goal of creating something of value that could 
either be sold or used by policy makers as a foundational 
element of the mortgage market of the future. In terms of the 
mechanics of how the common securitization platform will be 
built, we are using industry-standard data definitions and 
protocols and industry-standard technologies, leveraging 
existing industry software to the extent feasible.

Q.6. You have given a ballpark estimate of about 5 years for 
ultimate completion of the securitization platform project. You 
and I have both stated that we need to reform our housing 
finance markets and end the conservatorships of Fannie and 
Freddie long before that time.
    If, however, Fannie, Freddie, and this new company remain 
in conservatorships after ultimate completion of the 
securitization platform project, what are the legal obligations 
of FHFA in the operation of the platform and the company who 
owns it?

A.6. The structure would continue to operate to the benefit of 
the enterprises and FHFA would continue its oversight.
                                ------                                

         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                     FROM EDWARD J. DEMARCO

Q.1. The Inspector General's report noted that the ``FHFA has 
displayed undue deference to Enterprise decision making . . . 
without adequately testing or validating data.'' You also 
stated in written testimony provided to the Senate Banking 
Committee on April 18, 2013, ``that FHFA now has the executive 
management team, the organizational structure, and the staff 
necessary to carry out our safety and soundness mission.'' Is 
FHFA now in a position to test and verify enterprise reports 
and data so that it can spot issues before the IG brings them 
to FHFA's attention? Why or why not?

A.1. During 2012, we completed a realignment of our examination 
resources to strengthen our dedicated examination staff and to 
build upon our team of professionals who provide significant 
contribution to our examinations of the regulated entities. At 
the end of the March 2013, FHFA had a total of 194 employees 
who are devoted to the examination process at Fannie Mae, 
Freddie Mac (Enterprises), and the Federal Home Loan Banks and 
120 of those examiners are dedicated full-time safety and 
soundness examiners.
    FHFA is accomplishing its supervisory mission at the 
regulated entities, but is still evaluating the sufficiency of 
our staffing given the dynamic environment, and the significant 
amount of work that the Enterprises are doing to remediate 
their critical safety and soundness ratings as well as meet 
FHFA's expectations to meet our strategic goals. FHFA is 
continuing to attract and hire highly qualified examiners with 
the expertise needed to fill knowledge gaps.
    FHFA has implemented a risk-based approach to examination 
planning to ensure that the regulated entities are identifying 
and mitigating key enterprise-wide business risks inherent in 
their business operations. We also modified our supervisory 
model to allow more flexibility for the examination teams to 
focus on key risk areas by requiring on-site examination teams 
at each Enterprise, and by implementing an ongoing monitoring 
approach to certain areas that require heightened supervisory 
attention throughout the examination cycle. While we cannot be 
certain that we will spot all issues, including some that the 
Inspector General may bring to FHFA's attention, we firmly 
believe that our supervisory program is focused on those risks 
that are critical to the safe and sound operations of the 
Enterprises.

Q.2. The IG noted in his testimony that: ``Rather than 
independently testing servicers' compliance with complaint 
reporting requirements, the FHFA examination team relied 
exclusively on Freddie Mac's on-site operational review 
reports, which did not mention problems with servicer 
reporting. Thus, FHFA's examination of Freddie Mac's 
implementation of the Servicing Alignment Initiative did not 
identify servicers' failures to report escalated cases or 
resolve them in 30 days. Additionally, FHFA lacks guidance for 
examination teams to use when testing the implementation of 
directives, such as its Servicing Alignment Initiative.''
    Although the FHFA has agreed to the IG's recommendations to 
address these issues, what assurance can FHFA provide that when 
the recommendations are implemented, all major servicing issues 
will be sufficiently addressed at the enterprises?

A.2. FHFA is developing examination guidance for evaluating the 
Enterprises' compliance with FHFA-mandated initiatives such the 
Servicing Alignment Initiative. The guidance will provide 
instruction to plan and complete the independent examination 
work necessary to determine compliance with FHFA requirements 
that are the subject of examination activity. The guidance will 
also address steps to be taken should examiners identify 
instances of noncompliance.
    FHFA's examination and supervisory efforts include on-site 
examinations at nonbank specialty servicers targeted to those 
with significantly sized loan portfolios that present higher 
risk to the regulated entities. The examinations are 
comprehensive and include evaluation of the compliance, audit, 
and risk management programs, including servicer eligibility, 
performance, and reporting.
    Further, during 2012, FHFA directed the regulated entities 
to define new representations and warranties frameworks that 
include an enhanced quality control review process and 
enforcement of violations to credit policy. The representations 
and warranties framework sets forth clear and consistent 
standards and practices for the regulated entities to pursue 
certain remedies and, among other things, assigning remedy 
types and usage, including remedies for noncompliance. Mortgage 
servicers are critical counterparties and servicing activity, 
including the implementation of the new representations and 
warranties framework, is a priority focus of FHFA's examination 
program.
                                ------                                

               RESPONSES TO WRITTEN QUESTIONS OF
            SENATOR MENENDEZ FROM EDWARD J. DEMARCO

Q.1. On HARP and Menendez-Boxer Refi: With the extension of 
HARP for an additional 2 years, which I applaud, is it not also 
time to reconsider administrative extension beyond the June 
2009 borrower eligibility deadline? The deadline has already 
been changed once from March 2009 back to June 2009, and if you 
can indulge me, I would say that the program extension from 
2012 to 2015, itself represents a substantive change that 
nullifies any perceived ``Covenant with Investors.'' And to the 
extent there is a covenant, isn't your role within it to 
facilitate the best interest not only of investors, but of 
borrowers? Leaving the cut-off date as is, makes it appear that 
you weigh investors' interests above borrowers, who 
contractually are equals are they not?

A.1. FHFA has a strong commitment to keeping borrowers in their 
homes when possible. The overall intent of the Home Affordable 
Refinance Program (HARP) is to provide affordable refinancing 
opportunities for current eligible borrowers.
    HARP has embedded certain programmatic flexibilities that 
are intended to benefit the borrower. For example, if a 
borrower has a loan-to-value ratio above 80 percent, the HARP 
flexibilities related to mortgage insurance (MI) allow the 
transfer of existing mortgage insurance to the newly refinanced 
loan or the servicer can waive the MI coverage requirement on 
the new loan when coverage was not placed on the original loan. 
Since program inception, these flexibilities have allowed more 
than 2 million borrowers the ability to refinance their loans 
(See May 2013 FHFA Refinance Report at www.fhfa.gov/webfiles/
25375/May2013RefiReport.pdf). Absent these flexibilities, a 
borrower would be required to make a downpayment, often 
significant, in order to cure their negative equity position 
before refinancing or to pay for new MI coverage.
    While FHFA recently extended HARP through 2015, this action 
does not increase the eligible population, but rather provides 
eligible borrowers with additional time to take advantage of 
historically low interest rates through refinance. The minor 
adjustment made earlier to the cut-off date was done to align 
Fannie Mae's and Freddie Mac's practices in order to reduce 
confusion among lenders. The fixed date is consistent with the 
Administration's and FHFA's intent that HARP reduce credit risk 
in the Enterprises' books of business. By mid-2009, house price 
declines were widespread and had already reached or were near 
their ultimate bottom in most markets. Furthermore, interest 
rate declines, facilitated by central bank actions, were 
already well underway. Therefore, we currently do not have 
plans to extend the borrower eligibility date beyond loans 
acquired by the Enterprises before May 31, 2009. Such an action 
would generate a fairly small increase in the number of 
eligible borrowers. Our position in keeping the borrower 
eligibility date at May 31, 2009, is a function of balancing 
the impact on the borrower and the taxpayer, market and 
investor. The current May 31, 2009, eligibility deadline 
provides a clear cut-off point which contributes to investor 
confidence. This level of certainty allows investors to 
estimate the likelihood of prepayment. If the May 31, 2009, 
eligibility date were to change, and prepayment confidence was 
reduced, investors may react in a way that results in higher 
borrowing costs to all future borrowers. Therefore, given the 
small size of the additional population that could be served, 
we do not believe that expanding the eligibility is in the best 
interest of homeowners in general or the taxpayer.

Q.2. Let me further enquire about the extension of the program 
eligibility. And maybe you can clear a few things up for me . . 
. but aren't borrowers who took out loans after June 2009, who 
had sufficient equity when they took out their loans, given a 
contractual option to prepay or refinance that due to this 
eligibility rule--they cannot now exercise? It would seem also 
that any savings they may have enjoyed through a HARP refinance 
are instead being transferred directly to investors through 
higher interest payments. Is it not true then, if the date is 
not extended, those investors bear neither credit nor 
prepayment risk, and the GSEs are left with all of the risk? 
Again, I must point out that the optics of the situation is one 
where investors are enriched while borrowers are diminished and 
taxpayers are exposed to unnecessarily high risk. What are your 
thoughts?

A.2. The program eligibility date of May 31, 2009, was 
originally established with President Obama's initial 
announcement of HARP as a component of the Making Home 
Affordable Program in February 2009. The program was designed 
as an exceptional response to exceptional circumstances. The 
program has not removed or restricted any contractual rights of 
borrowers, but has, on the contrary, provided them with 
unprecedented benefits by making it possible for millions of 
homeowners to refinance without new or additional mortgage 
insurance. The exceptional circumstances were that both 
interest rates and house prices had fallen sharply and housing 
markets were in crisis. Currently, markets have begun to 
recover and borrowers with loans originated in the past 4 years 
are much less vulnerable to market fluctuations with much lower 
interest rates than those with precrisis loans and have 
suffered relatively small house price declines or in some cases 
benefited from appreciation. Government-aided refinance in this 
environment risks investor alienation with long-run costs to 
borrowers outweighing short term benefits. In short, there 
appears to be no meaningful market-based obstacles to borrowers 
who first obtained their mortgages after May 31, 2009, from 
refinancing in the normal course.

Q.3. On Principal Reduction: As part of the Emergency Economic 
Stabilization Act of 2008, Congress directed FHFA to ``maximize 
assistance for homeowners'' and ``to minimize foreclosures,'' 
and it granted explicit authority to modify mortgage loans 
through the ``reduction of loan principal.'' Given this 
mandate, why has FHFA repeatedly decided against principal 
reduction? Why wouldn't you at least consider this policy for 
GSE portfolio loans?

A.3. FHFA has considered principal forgiveness in the context 
of loan modifications several times. We conducted and publicly 
posted thorough analyses that are available on the agency Web 
site, and which showed small savings to taxpayers in comparison 
to the significant cost of implementing a principal forgiveness 
program. These analyses did not specifically target portfolio 
loans versus those that were securitized. All of the Enterprise 
delinquent loans are serviced by the same set of servicers who 
would be expected to apply a new modification program in a 
unique manner. That said, FHFA and the Enterprises have spent a 
great deal of time developing standard loss mitigation 
solutions to ensure consistency for all struggling homeowners. 
A policy that provides a specific loss mitigation tool or 
strategy for borrowers based on whether a loan is held in 
portfolio or in a security creates disparate treatment based on 
factors outside a borrower's control and would be complicated 
for servicers to manage.
    Separately, the Enterprises regularly forgive principal 
indebtedness in the context of short sales and deeds-in-lieu of 
foreclosure.

Q.4. One factor you have cited for your rejection of principal 
reduction modifications was ``implementation costs,'' saying 
the modifications would present ``operational challenges'' and 
would be ``costly and time consuming to implement.'' Those are 
germane managerial concerns, but can you provide Congress with 
the documentation supporting this analysis? If I enquire with 
GAO to substantially investigate the methodology used to come 
to your conclusion, would you be able to provide them with this 
documentation?

A.4. In conducting the latest analysis, FHFA took into 
consideration: current loss mitigation tools; costs and 
benefits of using principal forgiveness, including the economic 
benefit or costs to the Enterprises as well as to taxpayers; 
the impact on borrower behavior; direct and indirect 
implementation costs; and, the overall impact on the mortgage 
market. Included below is a link to the latest analysis 
conducted by FHFA, as well as links to the analysis performed 
by each of the Enterprises on the cost and time to implement 
such a program.

    www.fhfa.gov/Default.aspx?Page=403

    www.fhfa.gov/webfiles/24107/PF_FannieMae71312.pdf

    www.fhfa.gov/webfiles/24109/PF_FreddieMac73112.pdf

Q.5. On Forced Place Insurance: How and when does the FHFA 
expect its ban on insurer to bank commissions to translate to 
lower rates, since your plan only amends the current process? 
Wouldn't Fannie Mae's plan that was denied by the FHFA a few 
months ago, have done away with the issue by directly 
contracting for the insurance itself?

A.5. On March 29, 2013, FHFA published a notice in the Federal 
Register expressing the agency's reservation with these 
practices and solicited public input to expand our 
understanding. Forty-two comments were received on the notice 
from a broad range of stakeholders. FHFA has reviewed these 
comments and plans to take action by the end of the year. In 
fact, Fannie Mae's proposal would not have done away with the 
issue. One of the reasons that FHFA did not approve Fannie 
Mae's plan is because Fannie Mae lacked the infrastructure to 
execute that proposal.
    It is important to understand that issues involving LPI 
extend well beyond Fannie Mae and Freddie Mac. By taking a more 
inclusive and comprehensive approach to these issues, FHFA 
hopes to provide leadership in reaching a broader set of 
solutions and best practices that may be adopted by other State 
and Federal regulators and more broadly by market participants 
than simply a Fannie Mae-only approach.
    To address the concerns with LPI more broadly, in April, 
FHFA convened a regulatory working group composed of various 
Federal and State regulators. The working group recently met 
with stakeholders to discuss concerns and possible solutions 
about the force-placed insurance market. We are also exploring 
whether the Enterprises' should have access to contractual 
documents between the mortgage loan servicers and the force-
placed insurance carriers, which would provide a better 
understanding of the various fees charged and paid and the 
contractual relationships between the parties. These projects 
are in their early stages and the regulatory working group is 
expected to complete its tasks in the third quarter of 2013.

Q.6. Would banks still be able to accept free tracking of 
services from insurers? As I understand it, insurers generally 
monitor bank loan portfolios for both lapses in property 
insurance coverage and other things, such as unpaid taxes--at a 
considerable subsidy for the banks. How might you deal with 
this issue?

A.6. FHFA is concerned that current industry practices may 
include a number of inappropriate financial incentives based on 
relationships between servicers and carriers that result in 
excessive premiums being charged to the borrower or investor. 
This issue is under discussion by the regulatory working group 
and may be subject to data reporting requirements now under 
development.

Q.7. It has been shown that within the bank-insurer business 
loop; that sometimes banks own the mortgage insurers they 
contract with, or reinsure them, potentially allowing them to 
make even more money off of inflated insurance premium 
commissions. What are you specifically doing about this? Why 
hasn't there been greater scrutiny and demand from the FHFA for 
more transparent insurance procurement and invoicing, something 
we understand the GSEs currently have no say or ability to 
manage?

A.7. FHFA is concerned that such reinsurance practices 
involving conflicts of interest pose risks to the Enterprises 
or run contrary to the duties of the conservator. Accordingly, 
on March 29, 2013, FHFA published a notice in the Federal 
Register expressing the agency's reservation with these 
practices and solicited public input to expand our 
understanding. Forty-two comments were received on the notice 
from a broad range of stakeholders. FHFA has reviewed these 
comments and plans to take action by the end of the year.

Q.8. What has the FHFA specifically done to concretely explore 
other changes to force-placed insurance? Who is guiding that 
process? When will they come up with conclusions?

A.8. As described above in response to other questions, FHFA is 
taking a multipronged approach to addressing the issues 
presented by LPI. The steps we are taking, led by our Office of 
Housing and Regulatory Policy in the Division of Housing 
Mission and Goals, include:

    Assessing and analyzing the costs and risks 
        associated with LPI.

    Establishing an interagency working group of 
        Federal financial institution regulators and State 
        insurance regulators to learn from each other's 
        experience on LPI and identify, align, and act on 
        needed reforms and protections for taxpayers and 
        borrowers.

    Publishing a Federal Register Notice requesting 
        comments by May 28, 2013, on whether FHFA should direct 
        the Enterprises to cease reimbursing lenders for two 
        LPI practices, broker commissions and captive 
        reinsurance.

    Reviewing of contracts between mortgage loan 
        servicers and LPI carriers, to better understand fees 
        charged and paid and the contractual relationships 
        between the parties.

    FHFA expects to have conclusions and next steps from all of 
these activities by the third quarter of this year.

Q.9. On State-Level Guarantee Fee Adjustments: Many servicers 
and third-party law firms were allowed to robo-sign 
foreclosures on GSE-guaranteed loans because they were being 
inadequately overseen by the Enterprises, and, in turn, FHFA as 
their regulator. Because these abuses occurred, many States 
passed reasonable laws to crack down on fraud. Rather than 
punishing new borrowers in these States by increasing g-fees, 
wouldn't it make more sense for the Enterprises, under your 
direction, to properly supervise servicers? If consumer 
protections are not your end goal, which is an assertion I do 
not support, but if they aren't--isn't it still your duty as a 
conservator to work with State and Federal regulators to ensure 
that consumer protections are adequately in place rather than 
shouldering that burden on future borrowers without a full 
review of the total costs versus benefits to taxpayers?

A.9. Serving consumer needs and providing appropriate consumer 
protections are essential to well-functioning mortgage markets. 
FHFA has required the Enterprises to take a lead role in 
ensuring major changes in servicing standards and practice. For 
example, FHFA and the Enterprises led the way in directing 
servicers to stop taking foreclosure actions at the same time 
that they were actively considering loan modifications and in 
penalizing servicers that don't seek early modifications where 
possible. We continue to work closely with other Federal 
regulators to make the servicing process work better. We also 
recognize that States have important roles and interests in 
consumer protection and in foreclosure processes. In some 
cases, the States make difficult decisions about what 
protections make sense and work well, and what measures raise 
costs without much corresponding benefit, as well as how much 
money to spend on courts with crowded calendars.
    Foreclosure costs vary widely across States. As credit risk 
takers, the Enterprises incur those costs on the loans they own 
or guarantee. Under conservatorship, those costs are passed on 
to taxpayers unless the Enterprise prices reflect them. If the 
fees are the same in all States, consumers in some States are 
paying for the effects of laws and practices in other States. 
And while poor servicing practices may contribute to costs in 
all States, we have not seen evidence that servicing is 
systematically worse in some States than others.

Q.10. Primary factors cited in FHFA's proposal as increasing 
State foreclosure timelines are ``regulatory or judicial 
actions,'' and ``legal and operational expenses.'' Yet your 
Notice contained no analysis of whether the laws and ordinances 
in place in various States are actually causing the longer 
foreclosure timelines. What about the study and reduction in 
fees where State and local laws actually reduce investor and 
guarantor costs?

A.10. The fees discussed in the Notice are based on the actual 
costs experienced by the Enterprises, mainly because of longer 
foreclosure times. The fees were designed to offset unusually 
high costs in States that exceed the nationwide norms by large 
margins. They were not designed to target any particular 
actions or practices, just to insulate consumers in most States 
from the exceptional costs in a few other States. To put this 
in perspective, consider that four States that together have 19 
percent of Enterprise loans and 20 percent of loans with 
relatively less serious delinquencies of between 30 and 89 
days, have 52 percent of Enterprise loans delinquent more than 
a year. Many of those extend to multiple years. Whatever the 
particular configuration of consumer protection and investor 
protection laws in those States, there is no denying that those 
States are statistical outliers that are driving up credit 
losses for Federal taxpayers.

Q.11. On the National Housing Trust Fund and GSE Profitability: 
The National Housing Trust Fund was authorized by the Housing 
and Economic Recovery Act of 2008 (HERA). The law called for 
the Housing Trust Fund to be funded by contributions from the 
Government sponsored enterprises (GSEs) Fannie Mae and Freddie 
Mac. However, the GSEs went into conservatorship shortly after 
the Trust Fund was authorized, and FHFA temporarily suspended 
the contributions due to the financial conditions experienced 
by the GSEs at the time. The GSEs have reported profits for 
several consecutive quarters. Given this return to 
profitability, will FHFA be directing the GSEs to start making 
contributions to the National Housing Trust Fund? If not, why 
not? Do you have the legal authority to continue suspending the 
payments considering that the GSEs are now profitable?

A.11. The trust funds and other requirements of the Housing and 
Economic Recovery Act contemplate action by FHFA in line with 
all conservatorship policies. The conservatorship authorities 
of the Act authorize extraordinary actions by the Director and 
any activity undertaken under normal circumstances falls within 
the ambit of the Director for modification, suspension or other 
direction in line with the conservatorship goals and 
obligations of the Director.
    FHFA as conservator has plenary authority to make all 
business decisions for each Enterprise, including whether to 
fund the Housing Trust Fund and Capital Magnet Fund set asides. 
Decisions of the Director as conservator not to set aside money 
for the funds are consistent with the obligations of the 
conservator to preserve and conserve enterprise assets, to 
protect the investments of the taxpayers and to stabilize the 
Enterprises and maintain their market presence.
    The Enterprises are sustained only by the backstop provided 
by the taxpayers pursuant to the Preferred Stock Purchase 
Agreements with the Treasury Department. The Enterprises are 
required, in exchange for the backstop that keeps them out of 
receivership and operating as businesses, to pay to the 
taxpayers, through the Treasury Department, a quarterly 
dividend, initially computed as a percentage return on the 
amount invested. The dividend requirement has never changed, 
but because the computation of the dividend resulted in a 
perverse circular pattern of requiring more investment just to 
pay the dividend, the computation of the dividend changed. It 
now is computed as all net worth reported quarterly. The new 
method of computing the dividend payment is more in line with 
traditional dividends--contingent on positive earnings and 
determined by the amount of earnings. It does not change the 
fundamental situation facing the Enterprise. Further, if an 
Enterprise does not earn a profit or if an Enterprise suffers a 
loss, no dividend will be paid for that quarter and a draw on 
Treasury may be required.
    The financial condition of the Enterprises remains poor and 
a matter of ``critical concern.'' The statute governing the 
trust funds provides for nonpayment when such a transfer would 
lead an Enterprise to fall within the ``undercapitalized'' 
status. Today, both Enterprises will be ``critically 
undercapitalized'' immediately following their next dividend 
payments, a classification that would require receivership, and 
each would be seriously insolvent without massive taxpayer 
investments. Their current status is well below 
undercapitalized, the statutory standard for suspension of 
payments.
    Conditions requiring conservatorship have continued and the 
capital weakness is readily apparent by Enterprise dependency 
on the taxpayers to avoid liquidation through receivership. 
Suspension of the set asides is expressly anticipated in these 
circumstances and the conservator's decision not to fund the 
set asides is fully consistent with the Director's obligations 
under the law. Because of the all of the above considerations, 
no change in FHFA policy on the Trust Fund has been made.

Q.12. How might the forthcoming ``Jumpstart the GSE'' reform 
bill being offered by my colleague Senator Corker, affect the 
current Senior Preferred Stock Purchase Agreements with 
Treasury? How does it affect any potential payments to the 
Housing Trust Fund?

A.12. S.563, ``Jumpstart GSE Reform'', does not have any effect 
on the current state of conservatorship or the terms of the 
Preferred Stock Purchase Agreements (PSPAs). The bill will 
ensure that the returns on investment that the taxpayers funded 
through the PSPAs with each Enterprise continue to benefit the 
taxpayers at least until and unless both the Legislative and 
Executive branches agree on reform of the secondary housing 
finance market and the role of Government support for that 
market. It will also require that the reform debate include 
discussion of whether and how to terminate the support provided 
by that investment and the agreements.
    This bill does not appear to have any effect on payments to 
the Housing Trust Fund.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN
                     FROM EDWARD J. DEMARCO

Q.1. Since conservatorship began, the FHFA, Fannie Mae, and 
Freddie Mac have proposed or implemented several policy 
initiatives that could have short-term market implications and 
longer-term implications for secondary market reform. As 
conservator for Fannie Mae and Freddie Mac, and in light of 
their market dominance, what steps are being taken to ensure 
adequate transparency in the development and implementation of 
major policy initiatives at FHFA, Fannie Mae, and Freddie Mac?

A.1. FHFA considers transparency and public input an important 
element in developing policy that impacts the housing finance 
system and the stakeholders within it. When considering major 
policy initiatives, FHFA has made extensive use of industry 
outreach and formal requests for public input through Federal 
Register notices and other means. FHFA also meets with various 
industry participants as it develops and deploys new policy 
initiatives. For example, FHFA met with a large number of 
market and Government entities in working towards its servicing 
alignment initiative, in discussions around new mortgage 
insurance standards to enhance the quality of such coverage, 
and in developing a common securitization platform. FHFA 
continues to reach out to industry participants in meetings at 
the agency or at industry meetings to provide outlines of 
agency directions and plans with community groups and other 
interested parties.
    FHFA also continues to make extensive use of Federal 
Register publications to alert interested parties in actions it 
anticipates taking. Through these notices, FHFA both explains 
its direction and the rationales and provides an opportunity 
for public input. By providing a clear direction, the public is 
better able to focus its input, rather than seeing a general 
set of options that might be considered. This improves the 
nature and quality of public input and generates better 
discussion of alternatives for agency consideration. Two major 
examples have been a notice relating to proposed increases in 
Enterprise guarantee fees and a notice on proposed actions 
regarding lender placed insurance.
    Finally, FHFA has used public communications to Congress 
(letters, reports, testimonies), speeches, and public documents 
such as the Strategic Plan for Enterprise Conservatorships, to 
inform the public of the goals and priorities of the 
conservatorships.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                     FROM EDWARD J. DEMARCO

Q.1. Mr. DeMarco, one of the three pillars of the FHFA's 
strategic plan and a large component of 2013 Conservatorship 
Scorecard focuses on contracting the GSEs' dominant presence in 
the market.
    What progress have Fannie and Freddie made in meeting this 
year's goals established in the Conservatorship Scorecard to 
shrink their presence?

A.1. Both Enterprises are on track or exceeding the targets for 
portfolio reduction that were accelerated by the amendments to 
the Treasury agreement late last summer. Further, the 
Enterprises have been working on deal structures and 
contractual framework for multiple avenues of credit risk 
transfer through the capital markets and insurance companies. 
To increase transparency and facilitate market analysis both 
Enterprises have released significant loan level historical 
data that would be of use to prospective investors. We will 
continue to monitor this activity closely and can provide an 
update later in the year if you would like.

Q.2. The $30 billion target you set in the Conservatorship 
Scorecard for risk-sharing of single-family guarantees is a 
small amount compared to the overall holdings of Fannie and 
Freddie.
    What process do you hope this will initiate at the GSEs?

A.2. Currently, taxpayers bear the risk of default on roughly 
90 percent of all new mortgages, with Fannie Mae and Freddie 
Mac accounting for most of that amount. The risk-sharing 
initiatives being undertaken at the Enterprises are designed to 
explore mechanisms that transfer some of that risk to the 
private sector. More experience with alternative transaction 
types likely will make possible improvements in transaction 
structures, while the private sector will be stimulated to 
expand its capacity to absorb such risk.
    Gradually, the Enterprises should be able to transfer 
increasing portions of the credit risk away from taxpayers.

Q.3. What steps can be taken to ensure the risk-sharing 
practices that are prevalent in the multifamily housing are 
utilized in single-family housing?

A.3. Some of the mechanisms the Enterprises are exploring are 
similar to those used in multifamily transactions, but they are 
looking at others as well. The goal is to find those that work 
best in the single-family market.

Q.4. How do you anticipate growing this $30 billion target for 
next year?

A.4. With the experience gained this year, the Enterprises 
should be able to make improvements in both the products they 
offer and in their internal processes. Perhaps more 
importantly, as financial markets and institutions become more 
accustomed to such products, they will likely build capacity to 
absorb them. We intend to expand beyond the $30 billion target 
in 2014 but do not anticipate establishing those targets until 
later this year, after we review our initial results.

Q.5. You intended for the unified securitization platform to be 
built separately from the two companies so that it can utilized 
by both the GSEs and the private sector. Historically, however, 
the Government has a dismal track record in containing costs 
for technological improvements.
    What measures are being implemented to ensure the 
development costs will be contained?

A.5. This project is not a Government technology project. We 
are currently leveraging the Enterprises as the ``general 
contractor'' on this project, and they in turn are using both 
subject matter experts from within their firms and third party 
specialist contractors to run the project. We are undertaking 
careful monitoring of the project schedule, scope, and budget 
to ensure it is executed successfully. In due course we plan to 
house the technology project in a joint venture to further 
ensure its independence, and it will operate as a ``private 
sector'' firm but with Federal oversight.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                     FROM EDWARD J. DEMARCO

Q.1. Mr. DeMarco, at the hearing you described to the Chairman 
that the FHFA has developed a streamlined modification program 
that does not require verification of employment or income. As 
you know Senators Menendez and Boxer are considering 
legislation to change FHFA's streamlined refinance program. Do 
you believe eliminating the income and employment verification 
for refinances makes sense also and please explain your 
reasoning?

A.1. The streamlined modification program targets delinquent 
borrowers (90 days or more). Servicers have learned from 
experience that it is difficult to connect with homeowners that 
far behind on payments to work out a modification. In these 
cases, the current servicer already has borrower information, 
including payment history. The servicer can send an offer for a 
modification directly to the homeowner if he or she qualifies 
for a streamlined modification.
    In contrast, the Home Affordable Refinance Program (HARP) 
is available only to homeowners who are current on their 
mortgage and creates a brand new mortgage loan. HARP refinances 
can be completed by the current servicer or any lender who 
participates in the program (called cross-servicers).
    I believe FHFA's recent changes to the HARP program have 
addressed the concerns Senator Menendez has about cross-
servicer participation. Current HARP program data show more 
cross-servicer participation in HARP than in traditional 
refinances. To date, about 30 percent of HARP originations have 
been cross-servicer transactions. During the same time period, 
about 20 percent of non-HARP refinances were cross-servicer 
transactions.
    All servicers--current servicers and cross-servicers--have 
the same requirements for income and employment verification. 
Only the process differs. The current servicer has access to 
borrower information in its own databases, including payment 
history, and completes employment and income verification using 
a verbal verification of employment. Cross-servicers do not 
have access to the same information, so they must verify 
employment and income with a pay stub. We believe it benefits 
consumers to have lenders verify that a borrower does have some 
income to make mortgage payments. If a borrower has no income 
or assets he or she may be better served through a 
modification.
    More importantly, cross-servicers must have the borrower's 
income to use Fannie Mae's or Freddie Mac's automated 
underwriting systems (AUS), which simplify the loan origination 
process but require an income figure. The AUS tools transmit 
key eligibility data to cross-servicers, including: borrower 
payment history, loan delivery date, property value, and 
mortgage insurance coverage. Without the benefit of these AUS 
tools, cross-servicers would be required to collect this 
eligibility information elsewhere.
    It would take at least 6 months of information technology 
development time to modify the automated underwriting tools to 
accommodate the changes the Menendez-Boxer bill would require. 
Servicers will also have to receive clear information about 
those new statutory requirements and implement the new system.
    All of this would happen at a point in time when there is 
tremendous momentum with the HARP program. I am very concerned 
about impeding the substantial progress we are making through 
HARP if the bill should pass, because I do not believe the 
changes specified in the bill will increase the number of 
people we can help.
                                ------                                

         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                      FROM STEVE A. LINICK

Q.1. There were several trends identified in your reports 
relating to deficiencies at the FHFA, most of which appear to 
fall within the category of the FHFA giving undue deference to 
the Enterprises' decision making in a variety of areas. What 
changes, if any, have been implemented by the FHFA that are 
geared towards breaking the cycle of reliance on the 
Enterprises' decision making? What additional changes need to 
be made?

A.1. As I noted in my testimony, although the Agency has made 
progress, throughout our body of work, we have identified 
instances in which FHFA has displayed undue deference to 
Enterprise decision making in its capacity as conservator. For 
example, without adequately testing or validating data, FHFA 
has at times deferred to the Enterprises regarding key matters 
under the conservatorships, and we have concluded that some 
matters are sufficiently important to warrant greater 
involvement and scrutiny by the Agency.
    In September 2012, we released a report that found that 
FHFA can better accomplish its oversight mission by proactively 
exerting greater control over its conservator approval process. 
In that report we recommended that FHFA:

    Revisit the nondelegated authorities to ensure that 
        significant Enterprise business decisions are sent to 
        the conservator for approval;

    Guide the Enterprises to establish processes to 
        ensure that actions requiring conservator approval are 
        properly submitted for consideration;

    Properly analyze, document, and support conservator 
        decisions; and

    Confirm compliance by the Enterprises with 
        conservator decisions.

    In response, FHFA reassessed and issued revised 
nondelegated authorities, expanding the number and type of 
actions that require conservatorship approval. FHFA also issued 
revised conservatorship policies and procedures covering a 
number of areas, including submitting items in a timely manner 
to allow sufficient time for FHFA review, using Acting Director 
recommendation memoranda to establish business case analyses 
and substantiate decisions, and requiring notification of 
material deviation from conservator decisions or important new 
information. FHFA has work underway to implement the remaining 
recommendations from the audit.
    Overall, FHFA continues to make progress on a number of 
specific recommendations from our body of work, including other 
reports in which we have observed examples of undue deference. 
In some cases, recommendations have already been closed as 
completed, and in other cases, the Agency continues to work on 
implementation. In general, though, we continue to encourage 
FHFA to embrace more fully the philosophy behind our 
recommendations, which is that as conservator the Agency should 
engage in greater involvement with and scrutiny of matters that 
go to the heart of the conservatorships.
                                ------                                

               RESPONSES TO WRITTEN QUESTIONS OF
             SENATOR MENENDEZ FROM STEVE A. LINICK

Q.1. On Forced Place Insurance: Fannie Mae recently approached 
the FHFA with a well-researched and well-defined proposal for 
taking over the solicitation and procurement of hazard 
insurance on its portfolio properties. This proposal, on its 
face, would have saved taxpayers and borrowers money while 
protecting the property assets. On what basis was this proposal 
rejected? How long did the FHFA consider this issue before 
making its determination?

A.1. As Acting Director DeMarco noted in his testimony, FHFA is 
currently working on a project to develop an aligned set of 
standards for lender-placed insurance to address certain 
practices. I would defer to Acting Director DeMarco to explain 
FHFA's ongoing project, as well as the basis for rejecting 
Fannie Mae's proposal and the consideration that went into 
making that determination.

Q.2. On the Housing Trust Fund Payments From GSEs: To the 
extent you are aware, can you discuss what your office has 
found to be administrative or legislative roadblocks to meeting 
the Section 1337 HERA requirements that the Housing Trust Fund 
be funded from new business at Fannie and Freddie Mac?

A.2. At this time, we have not undertaken work related to the 
housing trust fund, therefore I am unable to respond.

Q.3. The FHFA Director, outlined in Section 1337(b) of HERA, is 
only allowed to temporarily suspend payments to the HTF if the 
Director finds that three conditions are met: that the 
contributions would undermine the financial stability of the 
Enterprises, they would cause the Enterprises to be 
undercapitalized, or would prevent the Enterprises from 
completing a capital restoration plan.
    Has your office explored this issue and if so, has it found 
that payments to the HTF would violate these provisions? With 
the Enterprises' financial support of the new Single 
Securitization Platform, and their new found profitability--I 
suspect that they wouldn't.

A.3. At this time, we have not undertaken work related to the 
housing trust fund, therefore I am unable to respond.

Q.4. A report from your office on March 20th, 2013, that 
analyzed the amendments to the Senior Preferred Stock Purchase 
Agreements between Treasury and FHFA, claimed that ``the 
changes to the PSPAs help to safeguard policy makers' options 
to reform the role of the Enterprises in the Nation's secondary 
mortgage market.'' Could you elaborate on that opinion?

A.4. As we noted in our report, the announcement of the 2012 
PSPA Amendments emphasized three overarching themes: (1) 
benefits to taxpayers; (2) the continued flow of mortgage 
credit; and (3) winding down the Enterprises.
    To some extent, the 2012 Amendments provide the mechanisms 
to achieve these goals. For example, the replacement of the 10 
percent dividend with the sweep of quarterly net worth may 
result in more money being returned to Treasury and hence to 
taxpayers. The elimination of the circularity of financing the 
dividend also reduces the erosion of Treasury's remaining 
commitment level, thus shoring up its reassurance to investors 
and promoting the continued flow of mortgage credit.
    Additionally, the 2012 Amendments accelerate the wind down 
of the Enterprises' retained mortgage investment portfolios. 
However, they do not wind down the Enterprises' securitization 
business. Indeed, that side of their businesses may continue to 
prosper, at least in the near term, as a result of improvements 
in the mortgage markets and recent increases in guarantee fees.
    Fundamentally, the 2012 Amendments position the Enterprises 
to function in a holding pattern, awaiting major policy 
decisions in the future. And because of that, policy makers 
continue to have open options.

Q.5. On FHFA Commitment to Supporting Protection of Consumer 
Laws: While from a purely legal basis, I can see the FHFA's 
perspective that they are not regulator of consumer 
protections, from a practical sense, they are part of the new 
consumer regulatory nexus that has been spawned in part by the 
Dodd-Frank Act. Can you describe your offices recommendations 
to FHFA on oversight of consumer protection laws? How will they 
work with the CFPB?

A.5. In our March 26, 2013, report on this matter, we found 
that FHFA does not thoroughly oversee how the Enterprises 
monitor counterparties' contractual compliance. Specifically, 
FHFA does not examine how the Enterprises monitor compliance 
with consumer protection laws, and, indeed, we determined that 
the Enterprises do not ensure that their counterparties' 
business practices follow all Federal and State laws and 
regulations designed to protect consumers from unlawful 
activities such as discrimination.
    According to FHFA officials, the Agency relies upon other 
Federal regulators who are responsible for enforcing laws that 
protect mortgage borrowers. This reliance on other Federal 
regulators, such as CFPB, without active coordination or 
collaboration has meant that FHFA is not assured its interests 
and obligations, such as ensuring Enterprise contractual 
obligations are met by their sellers and servicers, are 
necessarily being fulfilled and protected by the other 
regulators. FHFA should become more involved in ensuring 
compliance with consumer protection laws and regulations, not 
to usurp the compliance and enforcement functions of CFPB and 
other regulators, but rather to ensure that:

  1.  The Enterprises preserve and conserve assets by 
        exercising repurchase requests for nonperforming loans 
        that do not comply with all contractual provisions. 
        Both Enterprises have written selling and servicing 
        guides that their counterparties contractually commit 
        to follow. Among other things, the contractual 
        agreements and the guides require counterparties to 
        comply with all Federal and State laws and 
        regulations--including consumer protection statutes--
        applicable to originating, selling, and servicing 
        mortgage loans. If the Enterprises discover that a 
        counterparty has not complied with any provision, then 
        they can require the original lender to repurchase 
        noncompliant loans, thereby mitigating credit losses. 
        However, unlike limits on repurchases related to other 
        forms of noncompliance, the Enterprises' authority to 
        request repurchase extends over the life of the loan 
        for violations of Federal, State, and local laws and 
        regulations.

  2.  The Enterprises have confidence that the loans they 
        bundle and sell as mortgage-backed securities do not 
        have defects. Currently, both Enterprises rely 
        primarily on counterparty self-certifications of 
        contractual compliance and do not review the loans they 
        buy at the time of purchase to assess whether 
        counterparties are complying with applicable laws and 
        regulations intended to protect consumers. Such 
        noncompliance can reduce the value of the securities to 
        investors.

  3.  Consumers are protected. FHFA has a statutory 
        responsibility--under the Housing and Economic Recovery 
        Act of 2008--to protect the public interest, which in 
        this instance is at least partially defined by Federal 
        and State consumer protection laws.

    By becoming more involved at the beginning of the loan 
origination process, particularly by confirming that the 
Enterprises conduct appropriate quality assurance, FHFA can 
ensure that the Enterprises are not accepting loans with 
consumer protection defects. Therefore, we recommend that FHFA 
develop and implement a risk-based plan to monitor the 
Enterprises' oversight of their counterparties' compliance with 
contractual representations and warranties, including those 
related to Federal consumer protection laws. By ``risk-based,'' 
we mean the avoidance of duplication of Federal oversight 
efforts and the implementation of cost-effective identification 
of noncompliant loans. For example, an element of FHFA's plan 
could include detailed agreements with other Federal 
regulators, such as CFPB, delineating what roles FHFA and the 
Enterprises will play in the identification of loans originated 
in violation of consumer protection laws and how violations 
will be communicated to the appropriate Federal regulator. The 
Agency's role in fostering compliance with consumer protection 
laws should complement that of other Federal regulators who 
share responsibilities for oversight of the lenders and 
servicers doing business with the Enterprises.
    FHFA provided comments to our report stating the Agency is 
committed to the fair treatment of consumers and agreeing with 
our recommendation and stated that it would develop a specific 
plan focused on the effectiveness of the Enterprises' 
monitoring of the sellers' and servicers' compliance with 
consumer protection laws under the existing contractual terms.

Q.6. On FHFA as a Steward of Taxpayer Funds When Acting as a 
Conservator: Your written testimony recounts of how a review of 
the FHFA's buyback policy on troubled loans, yielded weak 
controls that could have materialized or will materialize into 
around $2.2 to $3.4 billion. How is that reconciled with the 
stringent actions the FHFA has taken in terms of issues such as 
principal reductions that have routinely been characterized as 
a vehicle toward taxpayer losses? Why hasn't this same 
rationale been applied to internal management attitudes and 
oversight over the GSEs? This level of overpayment on loans 
could have funded the Housing Trust Fund for 2-3 years, so how 
can the FHFA ignore its legal obligations to fund the Trust 
Fund when it can ostensibly afford to just ``throw away'' 
billions of dollars due to weak internal controls?

A.6. In its capacity as conservator, FHFA has various tools at 
its disposal to mitigate credit losses, thereby conserving and 
preserving assets. Loan modifications represent a key method of 
loss mitigation on troubled loans. Repurchase requests offer 
another important means for the reduction of credit losses. If 
a homeowner defaults on any loan that Fannie Mae or Freddie Mac 
owns or guarantees, the Enterprise is obligated to absorb or 
reimburse the unpaid balance of the mortgage. If, however, the 
seller of the mortgage loan in question violated 
representations and warranties provided to the Enterprise at 
the time of the loan sale, then Fannie Mae or Freddie Mac has 
the contractual right to demand that the loan seller buy back 
or repurchase the mortgage loan. For determining whether 
representations and warranties have been violated, Fannie Mae 
and Freddie Mac examine some, but not all, mortgages they own 
or guarantee once they have become seriously delinquent.
    On September 27, 2011, we issued a report that highlighted 
a potentially significant flaw in Freddie Mac's process for 
reviewing defaulted loans for repurchase claims and noted that 
the flaw could be costing Freddie Mac a significant amount of 
money. Specifically, Freddie Mac's process primarily reviewed 
only those loans defaulting in the first 2 years after 
origination rather than in subsequent years--when many housing 
boom loans defaulted. Subsequently, Freddie Mac expanded its 
loan review methodology to look at additional years for 
possible repurchase requests. In a subsequent report, we 
estimated that the expanded loan review methodology could 
result in an additional $2.2 to $3.4 billion in repurchase 
requests, and we continue to monitor the matter.
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