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	<title> - GSE REFORM: IMMEDIATE STEPS TO PROTECT TAXPAYERS AND END THE BAILOUT</title>
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	[House Hearing, 112 Congress]
	[From the U.S. Government Publishing Office]




	GSE REFORM: IMMEDIATE STEPS TO PROTECT
	TAXPAYERS AND END THE BAILOUT

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

	HEARING

	BEFORE THE

	SUBCOMMITTEE ON CAPITAL MARKETS AND

	GOVERNMENT SPONSORED ENTERPRISES

	OF THE

	COMMITTEE ON FINANCIAL SERVICES

	U.S. HOUSE OF REPRESENTATIVES

	ONE HUNDRED TWELFTH CONGRESS

	FIRST SESSION

	__________

	FEBRUARY 9, 2011

	__________

	Printed for the use of the Committee on Financial Services

	Serial No. 112-2





	U.S. GOVERNMENT PRINTING OFFICE
	64-551 WASHINGTON : 2011
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	HOUSE COMMITTEE ON FINANCIAL SERVICES

	SPENCER BACHUS, Alabama, Chairman

	JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
	Chairman Ranking Member
	PETER T. KING, New York MAXINE WATERS, California
	EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
	FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
	RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
	DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
	WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
	JUDY BIGGERT, Illinois BRAD SHERMAN, California
	GARY G. MILLER, California GREGORY W. MEEKS, New York
	SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
	SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
	RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
	PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
	JOHN CAMPBELL, California JOE BACA, California
	MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
	KENNY MARCHANT, Texas BRAD MILLER, North Carolina
	THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
	KEVIN McCARTHY, California AL GREEN, Texas
	STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
	BILL POSEY, Florida GWEN MOORE, Wisconsin
	MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
	Pennsylvania ED PERLMUTTER, Colorado
	LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
	BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
	BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
	SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
	NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
	JAMES B. RENACCI, Ohio
	ROBERT HURT, Virginia
	ROBERT J. DOLD, Illinois
	DAVID SCHWEIKERT, Arizona
	MICHAEL G. GRIMM, New York
	FRANCISCO R. CANSECO, Texas
	STEVE STIVERS, Ohio

	Larry C. Lavender, Chief of Staff
	Subcommittee on Capital Markets and Government Sponsored Enterprises

	SCOTT GARRETT, New Jersey, Chairman

	DAVID SCHWEIKERT, Arizona, Vice MAXINE WATERS, California, Ranking
	Chairman Member
	PETER T. KING, New York GARY L. ACKERMAN, New York
	EDWARD R. ROYCE, California BRAD SHERMAN, California
	FRANK D. LUCAS, Oklahoma RUBEN HINOJOSA, Texas
	DONALD A. MANZULLO, Illinois STEPHEN F. LYNCH, Massachusetts
	JUDY BIGGERT, Illinois BRAD MILLER, North Carolina
	JEB HENSARLING, Texas CAROLYN B. MALONEY, New York
	RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin
	JOHN CAMPBELL, California ED PERLMUTTER, Colorado
	THADDEUS G. McCOTTER, Michigan JOE DONNELLY, Indiana
	KEVIN McCARTHY, California ANDRE CARSON, Indiana
	STEVAN PEARCE, New Mexico JAMES A. HIMES, Connecticut
	BILL POSEY, Florida GARY C. PETERS, Michigan
	MICHAEL G. FITZPATRICK, AL GREEN, Texas
	Pennsylvania KEITH ELLISON, Minnesota
	NAN A. S. HAYWORTH, New York
	ROBERT HURT, Virginia
	MICHAEL G. GRIMM, New York
	STEVE STIVERS, Ohio


	C O N T E N T S

	----------
	Page
	Hearing held on:
	February 9, 2011............................................. 1
	Appendix:
	February 9, 2011............................................. 55

	WITNESSES
	Wednesday, February 9, 2011

	Calabria, Mark A., Director of Financial Regulation Studies, Cato
	Institute...................................................... 13
	Pollock, Alex J., Resident Fellow, American Enterprise Institute. 17
	Randazzo, Anthony, Director of Economic Research, Reason
	Foundation..................................................... 15
	Wartell, Sarah Rosen, Executive Vice President, Center for
	American Progress Action Fund.................................. 19

	APPENDIX

	Prepared statements:
	Calabria, Mark A............................................. 56
	Pollock, Alex J.............................................. 63
	Randazzo, Anthony............................................ 70
	Wartell, Sarah Rosen......................................... 86

	Additional Material Submitted for the Record

	Garrett, Hon. Scott:
	Letter to Hon. Timothy Geithner, Secretary of the Treasury,
	and Hon. Shaun Donovan, Secretary of HUD, from the American
	Bankers Association (ABA), dated February 9, 2011.......... 105
	Letter from the National Association of Federal Credit Unions
	(NAFCU), dated February 8, 2011............................ 109
	Written statement of the National Association of Realtors
	(NAR)...................................................... 112
	Written statement of the National Multi Housing Council
	(NMHC) and the National Apartment Association (NAA)........ 117
	Schweikert, Hon. David:
	``Taking the Government Out of Housing Finance: Principles
	for Reforming the Housing Finance Market,'' An American
	Enterprise Institute Policy White Paper, by Peter J.
	Wallison, Alex J. Pollock, and Edward J. Pinto, Preliminary
	draft dated January 20, 2011............................... 122


	GSE REFORM: IMMEDIATE STEPS TO
	PROTECT TAXPAYERS AND
	END THE BAILOUT

	----------


	Wednesday, February 9, 2011

	U.S. House of Representatives,
	Subcommittee on Capital Markets and
	Government Sponsored Enterprises,
	Committee on Financial Services,
	Washington, D.C.
	The subcommittee met, pursuant to notice, at 2:12 p.m., in
	room 2128, Rayburn House Office Building, Hon. Scott Garrett
	[chairman of the subcommittee] presiding.
	Members present: Representatives Garrett, Schweikert,
	Royce, Lucas, Manzullo, Biggert, Hensarling, Neugebauer,
	Campbell, Marchant, McCotter, Pearce, Posey, Fitzpatrick,
	Hayworth, Hurt, Grimm, Stivers; Waters, Ackerman, Sherman,
	Miller of North Carolina, Maloney, Moore, Perlmutter, Donnelly,
	Carson, Himes, Peters, Green, and Ellison.
	Ex officio present: Representative Frank.
	Also present: Representatives Gary Miller of California and
	Carney.
	Chairman Garrett. Greetings. This hearing of the
	Subcommittee on Capital Markets and Government Sponsored
	Enterprises will now come to order.
	And we have just conferred with the other side. Maxine is
	on her way, but we thought that since we have the panel here,
	and a number of esteemed Members from both sides of the aisle,
	we would begin the proceedings. So we will begin, without
	objection.
	Also, without objection, all Members' opening statements
	will be made a part of the record.
	And so we begin with opening statements.
	It was on September 7, 2008, that Fannie Mae and Freddie
	Mac were put into conservatorship by the Federal Government.
	Over $150 billion and 885 days later, the government-backed
	mortgage twins remain in conservatorship. The Federal
	Government now underwrites 95 percent of the housing market.
	And still the American taxpayer continues to hemorrhage
	billions of dollars every quarter to keep them afloat.
	So I am pleased to hear that the Department of the Treasury
	is getting closer with their much anticipated reform proposal,
	which I understand can be out here now. If I had known that
	simply scheduling a GSE reform hearing would facilitate such a
	swift response, we would have held one even sooner.
	While I know a lot of attention has been given to the
	Treasury's proposal and what the future of U.S. housing finance
	will look like, I believe that there are other areas of this
	debate that we can focus on right now.
	In particular, I believe the question we need to be asking
	ourselves is this: What are the immediate steps that Congress
	can take right now, this very instant, to protect taxpayers, to
	end the bailout, to get private capital off the sidelines, and
	to reduce the government exposures to the housing market? I
	believe it is these four objectives that should be the driving
	force behind our immediate reform efforts.
	And so I look forward to discussing a number of reform
	proposals in greater detail with our esteemed panel. As I can
	see from their written testimony, there are many ways to
	protect taxpayers and begin the end of the bailouts.
	Now, I say that on one hand. It is also unfortunate that
	some of my colleagues on the other side of the aisle have
	resisted any attempts, at least in the last Congress, to
	address the most expensive and explosive component of the
	Federal Government's intervention during the financial crisis.
	But I assure you, it will be a top priority of mine, as
	chairman of this subcommittee.
	The Federal Government's housing policy has been a
	monumental disaster, and we must find new ways forward.
	Secretary Geithner said just the other day that the new policy
	should leave us with a system that will not be vulnerable to
	the really tragic colossal failures of the past. I couldn't
	agree with him more.
	Even in The Washington Post, they are on board, too, with
	wholesale changes to Fannie Mae and Freddie Mac. In an
	editorial this Monday, the Post wrote, ``Homeownership does
	help instill thrifty habits and solidify communities, but it
	can be taken too far.'' They said the national homeownership
	rate slipped back to 1998 levels, according to the Census
	Bureau.
	So, in terms of building a community, etc., it is as if the
	last 13 years have never happened, except, of course, for the
	catastrophic losses to the taxpayers and also to the home
	buyers. They conclude by saying, ``It might be more accurate to
	say that the Federal housing policy has helped to destroy
	communities.''
	It will be the goal of this subcommittee to ensure that we
	put an end to this destructive and costly housing finance
	policy and then replace it with a system, going forward, that
	protects taxpayers and actually strengthens communities instead
	of, as the Post says, destroying them.
	I thank the witnesses for being here today, and I look
	forward to their testimony.
	And, with that, I recognize Mr. Miller.
	Mr. Miller of North Carolina. I think Ms. Waters had
	allocated 2 minutes to me. So I will now take 2 minutes.
	Thank you, Mr. Chairman.
	The wrong lesson to draw from the financial crisis is that
	homeownership should not be a goal, a public policy goal. It
	undoubtedly can be taken too far, but the financial crisis was
	by no means caused by the goal of homeownership. Seventy
	percent of the people who got subprime mortgages were not
	getting those mortgages to buy a home. They already owned their
	home, but they needed to borrow money.
	More than half, well more than half--the Wall Street
	Journal estimated 55 percent; other estimates have been much
	higher than that--of the people who got subprime mortgages
	qualified for prime mortgages. So it was not about making
	mortgages available to people who would not have qualified in
	ordinary circumstances. It was entirely about making as much
	money as possible as quickly as possible without regard to the
	consequences.
	Fannie and Freddie were certainly guilty of that, to some
	extent, but the private-label securitizers, their competitors,
	were also guilty of that and probably even more guilty of that.
	We do need to recreate, to reinvent our housing finance
	system. But a principal goal should still be to make
	homeownership available, on reasonable terms, for middle-class
	families. We got away from that in the last decade. And as we
	reinvent our housing finance system, that is what we need to
	get back to.
	I yield back my time.
	Chairman Garrett. The gentleman yields back.
	The gentleman from California, Mr. Royce, for 1 minute.
	Mr. Royce. Thank you, Mr. Chairman.
	It appears, after months of preparing, we finally got to
	the point here where Treasury is set to release their proposal
	for GSE reform. But I think, for us, the vexing part is,
	instead of coming out with one definitive plan, they are going
	to provide three options: no government role in the secondary
	mortgage market will be their first option; government support
	only sometimes looks like their second; and permanent
	government support as their third.
	Unfortunately, three options doesn't equal one plan. And I
	think the time for debating the merits of options is long past.
	Now is the time to act.
	A permanent government guarantee will inevitably lead to
	politicians and bureaucrats putting their proverbial thumb on
	the scale. Human nature is not going to change here.
	Politicians will insist that underwriting standards be relaxed,
	guaranteeing fees being lowered, and downpayments being waived,
	so just one more group can get into homes they otherwise could
	not afford if you were depending on the market.
	So this scenario has happened before, and it will happen
	again. And when it does, we will again face a boom-bust cycle
	in our financial markets, followed by a massive taxpayer
	bailout.
	I think we can do better. I think we should confront the
	reality of not putting in place that type of permanent
	government guarantee in the future.
	I yield back.
	Chairman Garrett. The gentleman yields back.
	And before I yield the microphone to the gentlelady from
	California, I am pleased to be joined by her today and pleased
	to see her beside me as a ranking member, and I look forward to
	working with her on so many very important issues, issues that
	we worked on collaboratively in the past, in the area of
	housing finance and the area of FHA reform. So, obviously,
	there are commonalities in our interest in making sure that we
	can get the economy back on track again. I look forward to your
	comments, but also our collegiality moving forward, as well.
	Ms. Waters. Thank you very much, Mr. Chairman--
	Chairman Garrett. I yield you 4 minutes.
	Ms. Waters. --first, for organizing this first hearing of
	the Subcommittee on Capital Markets and Government Sponsored
	Enterprises for the 112th Congress. I, too, look forward to
	working with you. You are absolutely correct; we have worked
	together on issues in the past, and I think we can do that for
	the future.
	Today's hearing is an opportunity to address one of the
	most critical questions facing our economy: How do we continue
	to move forward from the crisis and organize a secondary
	mortgage market that ensures access to sustainable
	homeownership at affordable rates for the American middle
	class? And how do we do this while protecting all taxpayers?
	For many years, we did a fairly good job of providing the
	opportunity for homeownership to the average American who
	worked hard and acted responsibly. But over the course of the
	last decade, we saw the creation and evolution of toxic
	financial products that pulled Americans further and further
	away from the mortgages that we grew up with--30-year, fixed-
	rate loans with sensible downpayments for homes we could
	reasonably afford.
	Now, what caused these products to develop was the subject
	of many fights in this committee during the last Congress. I
	continue to believe that an unregulated shadow banking system
	created the crisis and that casino-style betting magnified and
	lengthened it. Unfortunately, Fannie Mae and Freddie Mac,
	hungry for profits and market share, hopped on the bandwagon,
	albeit late. The result has been enormously consequential for
	American taxpayers.
	Our objective, moving forward, should not be to continue
	arguing over the facts that led us to this point. I sincerely
	want to begin the next phase, negotiating a plan for the
	future.
	I have not committed yet to any one proposal, and I am open
	to any plan coming from any Member or group or institution that
	can advance the following goals: Can the plan preserve the 30-
	year, fixed-rate mortgage, whose availability I believe is
	vital for American borrowers? Does the plan provide for
	stability and liquidity, particularly in times of severe credit
	constriction, as we experienced over the last few years? Are
	there features in the plan that allow for access for all
	qualified borrowers, as well as the small and community banks
	that seek liquidity? Does the plan ensure that there is a
	secondary market for multifamily loans and a market for
	individuals who seek affordable rental housing? Is there
	transparency for investors and regulators? Does the plan
	protect taxpayers and ensure that a small number of
	institutions don't again become ``too-big-to-fail?''
	So these are the criteria by which I will evaluate
	proposals, moving forward.
	I understand that some details of the Administration's
	options paper were released to reporters last night. I am
	looking forward to reading the full report and studying the
	options they propose. But what I am more interested in hearing
	about are the principles the Administration thinks are
	important for GSE reform, such as whether they think the
	preservation of the 30-year, fixed-rate mortgage is essential.
	While it is important that we get the technical details
	right as we develop a new housing finance system, I think it is
	more important that we make clear what values underpin our
	vision for the future.
	I look forward to working with the Administration and all
	of my colleagues in Congress on developing a plan that best
	meets the needs of all market participants. I believe that all
	of us need to seriously consider every option on the table.
	And, Mr. Chairman, I do thank you. And I yield back the
	balance of my time.
	Chairman Garrett. I thank the gentlelady.
	And now, I yield 1 minute to the gentleman from Arizona.
	Mr. Schweikert. Thank you, Mr. Chairman and fellow Members
	and, obviously, our witnesses.
	I know there is a certain frustration here because the
	Administration had an obligation to provide us their proposal,
	what was it, last week, and something for to us discuss and
	build around, and here we are blind once again.
	Having read much of the literature that is out there in
	regards to Fannie and Freddie and some of the distortions they
	may have created in the price of money and also the amount of
	debt and nonperforming assets they are currently holding, Mr.
	Chairman, witnesses, I desperately hope, as you testify, you
	give us some sense of how bad it is out there and how much we
	have in nonperforming assets that have to be unwound if we are
	ever going to see a recovery in our housing market.
	Thank you, Mr. Chairman.
	Chairman Garrett. And the gentleman yields back.
	I yield now to the gentleman from Connecticut, Mr. Himes.
	Mr. Himes. Thank you, Mr. Chairman. I join in welcoming our
	witnesses today.
	I am grateful for the opportunity to finally begin
	examining reasonably and seriously the future role of the GSEs
	in our housing market. This has been the subject of much
	demagoguery for a long time. And while there is no question
	that the GSEs meaningfully contributed to our financial crisis
	through irresponsibility and the way they went in the years
	beginning in the 1990s, there are some things that we can't
	ignore.
	First, they operated for decades safely and soundly and
	helped to really bulwark and assist the creation of an American
	middle class. Secondly, a 30-year, fixed-rate mortgage may not
	exist without them, or if it did exist, it could perhaps be
	priced out of the range of American middle-class families. And
	third, multifamily lending, which is so important to smart
	growth and creating vibrant cities, might be severely damaged
	were Fannie and Freddie to not exist in any form at all.
	These are tough issues involving political decisions, and I
	hope that the panel today will address them and give us some
	guidance on how we can best secure our public policy goals
	without taking on the risks that were incurred in the 1990s.
	Thank you, Mr. Chairman. I yield back.
	Chairman Garrett. And I thank the gentleman.
	The gentlelady from Illinois, Ms. Biggert, please, for 1
	minute,
	Mrs. Biggert. Thank you, Mr. Chairman.
	Fannie Mae and Freddie Mac have received the largest
	taxpayer-backed bailout to date, over $150 billion. They are
	responsible for over $5.4 trillion in outstanding mortgage
	applications and were at the root of the greatest financial
	crisis since the Great Depression. And yet the Administration
	has failed to meet its deadline to produce a required report on
	reform. Moreover, GSE reform was intentionally omitted in the
	Dodd-Frank Act.
	Fortunately, this is a new Congress, and housing finance
	reform is at the top of our agenda. Certainly, we must take
	care not to disrupt an already-fragile market. However, it is
	time to move toward a market with less reliance on government
	guarantees and more private-sector participation.
	I thank Chairman Garrett for convening today's hearing, and
	next week, the Subcommittee on Insurance and Housing will hold
	a hearing to examine government barriers to the housing market
	recovery.
	The bottom line is that never again should taxpayers be on
	the hook for risky housing finance policies. I look forward to
	working with my colleagues to examine the future of housing
	finance.
	I yield back.
	Chairman Garrett. I thank the gentlelady for yielding back.
	Two minutes to the gentleman from Texas, Mr. Green.
	Mr. Green. Thank you, Mr. Chairman. And I thank the
	witnesses, as well.
	This is about homeownership, it is about the American
	dream, but it is also about the economy. It is about what
	happens once we start to build housing and we have buyers.
	Because, once you lay that foundation, you know that at some
	point you will sell carpet or you will sell a washer, a dryer.
	This economy has been driven in great part due to the
	success of our housing market. So, as we move forward, we want
	to make sure that market is still in place such that we can
	utilize it to again help us with our economic recovery.
	I think that if we don't consider the impact on the
	economy, we are making a mistake. So let's be sure that, as we
	move forward, we don't develop unintended consequences
	associated with our desire to make things right.
	I thank you for the time, Mr. Chairman. And I yield back.
	Chairman Garrett. And I thank you.
	And the other gentleman from Texas, Mr. Hensarling, for 1
	minute, please.
	Mr. Hensarling. Thank you, Mr. Chairman.
	We all know that the classic definition of ``insanity'' is
	doing the same thing over and over and expecting a different
	result. Those who want to foster a system of continuing
	government guarantees in the secondary mortgage market
	certainly bear the burden of persuasion that somehow we can
	expect a different result--a different result than $150 billion
	of taxpayer bailout money, $8 trillion of debt that ultimately
	the taxpayer is responsible for. That is a strong burden of
	persuasion.
	For 2 years now, we have had the Administration, which has
	discussed, studied, ruminated, cogitated, and done everything
	but acted upon the GSEs. I hope that very soon, they will
	release a plan.
	But I think the real question is, how do we transition to a
	competitive market without taxpayer guarantees and how soon can
	we get there? It is time for us, at three trillion-plus
	deficits in our Nation's history in a row, to end the taxpayer
	bailouts.
	I yield back.
	Chairman Garrett. Mr. Frank?
	Mr. Frank. Thank you, Mr. Chairman.
	I have, actually, a question which will be addressed.
	Chairman Garrett. For 2 minutes.
	Mr. Frank. I have heard criticism of the Administration for
	missing its deadline. And I must say, this is a newly
	discovered attitude of deference towards the Obama
	Administration on these matters. I had not previously thought
	that the Majority was waiting around for the President to
	suggest to them what to do. I had thought that, frankly, the
	Majority knew what it wanted to do.
	Last year, in July, in the conference, an amendment was
	offered to the conference report that we were told, as I
	recall, resolved this problem, got rid of them. And I didn't
	think it was germane; we ruled it was not germane. But when the
	election happened, I had assumed--in fact, I am surprised that
	we are now having a hearing on what the Administration hasn't
	done. I assumed this would be a hearing on the amendment Mr.
	Hensarling offered last year.
	It did seem to me that the Majority knew what it wanted to
	do in July when it was in the Minority. And, apparently, there
	was something about transitioning from the Minority to the
	Majority that induces a kind of legislative amnesia.
	People on the Majority side were very sure what we should
	do. So I had expected to be coming to a hearing in which we
	would be considering the amendment. There was a great deal of
	unhappiness on the Minority side that we couldn't vote on the
	amendment. The Majority is in charge of that, so I assumed we
	would go forward. And, again, I had not expected them to wait
	for the Administration.
	So my question is, why are we not--and I know it has been
	introduced as part of the RSC package, the amendment of the
	gentleman of Texas. So can we anticipate a legislative hearing
	on this and a markup of that legislation? And if not, what
	impediment intervened? Why was this a very good idea in July
	and not in February?
	Chairman Garrett. Would the gentleman yield?
	Mr. Frank. Yes.
	Chairman Garrett. I appreciate that, and I appreciate the
	gentleman's recollection of the history of what we had proposed
	in the past. And I assume the gentleman also remembers, as
	well, that we had also called on the Majority at that time to
	do what we are doing right now, and that is to call in the
	interested parties, call in the academics, call in the
	stakeholders to elaborate, to elucidate, and to explain what
	some of the ramifications of these proposals are.
	That was never done. And now we have a whole slew of new
	freshmen from--actually, we only have one freshmen new--
	Mr. Frank. I take back my time to say, no, these aren't new
	questions. There is nothing new here that wasn't known then. In
	July, people said, ``Adopt this amendment. We know what to
	do.'' And I am surprised that there was a certainty then and
	such uncertainty now. There aren't any new questions about
	this. At least, there aren't questions that weren't there
	before.
	So, again, I am struck by the contrast between the
	certainty that was expressed when the Majority was the Minority
	and the uncertainty that has overtaken them in the Majority.
	And I yield back.
	Chairman Garrett. And the gentleman yields back. I assume
	the gentleman will be interested in the contrast as we go ahead
	in the next 2 years, as well.
	And, with that, I yield to the gentleman from Texas, Mr.
	Neugebauer.
	Mr. Neugebauer. Thank you, Mr. Chairman. And thank you for
	holding this very important meeting. As has been said, we have
	been waiting for 2 years for some action to happen on this
	issue, and finally we are about to start down that road.
	One of the things that concerns me is, while we are in this
	very hearing today, Freddie and Fannie will take on additional
	taxpayer liability. And so, the time to act is not later but is
	now. We need to start to make sure that we are doing everything
	we can and the conservator is doing everything they can to
	minimize additional exposure while, at the same time, making
	space for private securitization to begin to take place
	immediately so that we can begin to reduce that exposure.
	There are a lot of things that should be discussed today,
	and I look forward to this important dialogue.
	Chairman Garrett. And now for 2 minutes, the gentleman from
	Minnesota, Mr. Ellison.
	Mr. Ellison. Thank you, Mr. Chairman and also Ranking
	Member Waters, for this important hearing. I am looking forward
	to this dialogue, and I would like to express a few ideas as we
	go forward.
	First of all, I think it is important to learn the right
	lessons from the recent housing market crisis. And these
	lessons point to the private sector's role in creating private-
	label mortgage-backed securities as we start this new Congress.
	Let's not forget that the subprime mortgage securities were
	created by Wall Street firms, not Fannie and Freddie.
	Now, I am not advocating that Fannie and Freddie were
	perfect actors during the housing bubble, but let's be clear;
	Fannie and Freddie did not start this crisis, and Fannie and
	Freddie's affordable housing mission did not cause the
	collapse.
	Let's also be clear that the Community Reinvestment Act did
	not cause the housing collapse either.
	Reforming mortgage finance systems is a big responsibility
	because homeownership has sustained the middle class of this
	country. Calls to eliminate all government involvement in the
	secondary mortgage market are not responsible. We can't go back
	to the pre-depression housing market when government played no
	role in housing finance and homeownership was restricted to the
	very wealthy.
	As this subcommittee addresses the important work of GSE
	reform, I also hope that equal attention is given to the
	important role that Fannie and Freddie have played in the
	affordable rental housing market.
	So I look forward to the testimony of the witnesses here,
	and I thank all of you.
	I yield back.
	Chairman Garrett. I thank the gentleman for yielding back.
	And now the gentleman from Illinois, Mr. Manzullo, for 1
	minute.
	Mr. Manzullo. Thank you.
	It is very simple. Whoever came up with the great idea to
	allow people who couldn't make the first mortgage payment to
	buy a house made the mistake. It took the Fed until, I believe,
	October of last year to come up with a simple rule that said,
	whenever you apply for a home mortgage, you must have written
	proof of what your earnings are.
	That is how we got in this mess. People bought homes,
	couldn't make the first mortgage payment, everything got
	behind, and derivatives were soured because of the underlying
	securities on it.
	So now, we need to find our way out of this mess. Fannie
	Mae and Freddie Mac could have done it a long time ago. They
	simply could have passed a rule that said, we will not accept
	any loan unless there is written proof of what a person earns.
	I look forward to hearing from the witnesses.
	Chairman Garrett. The gentleman from New Mexico, Mr.
	Pearce, for 1 minute.
	Mr. Pearce. Thank you, Mr. Chairman.
	I appreciate the opportunity to take a little closer look
	at Fannie Mae and Freddie Mac. I hope that we are taking the
	first step today towards significant reform of these failed
	institutions.
	We are titling the hearing, ``Immediate Steps to Protect
	Taxpayers and End the Bailout.'' And it is time for someone to
	speak up for the taxpayers, who have now dished out $150
	billion to save these institutions which were declared ``too-
	big-to-fail.'' It is reason enough to put the country on notice
	that servicing foreign obligations over obligations to American
	citizens will not be the norm any longer.
	While the priority of this committee is to protect
	taxpayers, the conservatorship that took over Fannie and
	Freddie created several other victims whose investments and, in
	some cases, financial health were destroyed by the manner in
	which the mortgage giants were seized. Prior to the
	conservatorship, about 1,000 community banks held an estimated
	$15 billion to $25 billion in Fannie and Freddie preferred
	stock. That stock was wiped out by the government when the GSEs
	were taken over and placed in conservatorship.
	Former Secretary of the Treasury Hank Paulson acknowledged
	in his book on the crisis, ``On the Brink,'' that the action
	constituted an ambush. More concerning, Secretary Paulson also
	mentioned in his book that the decision to wipe out preferred
	stockholders in this country was done in part to satisfy
	America's debt obligations to the Chinese.
	As we move forward with proposals to reform the GSEs, it is
	time for Congress to do the right thing and prioritize the
	Federal Government's obligations to the citizens in this
	country.
	I look forward to the panel. Thank you, Mr. Chairman.
	Chairman Garrett. And I thank the gentleman.
	The gentlelady from New York, Ms. Hayworth, for 1 minute.
	Dr. Hayworth. Thank you, Mr. Chairman.
	The figures we are dealing with are stunning because, to
	date, the GSEs have consumed approximately $150 billion from
	our taxpayers, and most experts believe these losses will be
	much higher. The CBO says that if we do nothing to stem the
	lawsuits, the taxpayers will end up paying nearly $400 billion
	to bail out Fannie Mae and Freddie Mac.
	And as we wait for the Administration to come up with a
	plan to wind down the GSEs, and protect our taxpayers, we know
	that it becomes ever more urgent. So I want to commend our
	chairman for holding this hearing, and I look forward to
	hearing what you have to say.
	I can tell you that my constituents in the Hudson Valley of
	New York have become convinced that the more government
	intervenes, the less common sense prevails. So I submit that
	the task before us is to return common sense, in the form of
	free enterprise principles, to the mortgage and housing
	marketplaces.
	I yield back the remainder of my time.
	Chairman Garrett. I thank the gentlelady.
	The gentleman from Virginia, Mr. Hurt, please.
	Mr. Hurt. Thank you, Mr. Chairman.
	Mr. Chairman, thank you for holding this subcommittee
	hearing on this important issue. With $150 billion in taxpayer
	funds already spent propping up Fannie Mae and Freddie Mac, and
	hundreds of billions more a possibility, it is clear that this
	will be the most expensive Federal bailout in response to the
	financial crisis.
	As it has been said, we must end the limitless bailouts of
	Fannie and Freddie and effectively reform them in order to
	protect the American taxpayer and give true stability to the
	marketplace.
	The previous Congress failed to address GSE reform while
	passing one of the most sweeping regulatory overhauls of the
	financial services industry. Today's hearing makes it clear
	that this committee and this new Congress are prepared to act.
	I look forward to hearing from the witnesses, and I thank
	them for their appearance.
	Thank you, Mr. Chairman. I yield back my time.
	Chairman Garrett. I thank the gentleman.
	The gentleman from New York, Mr. Grimm, for 1 minute.
	Mr. Grimm. Thank you, Chairman Garrett. Thank you for
	calling this hearing.
	And thank you to those testifying.
	This is obviously one of the most important issues facing
	this committee and our entire Nation. Ending the enormous and
	ongoing taxpayer bailout of Fannie Mae and Freddie Mac is, in
	my opinion, an absolute must.
	And this conservatorship started in September 2008. These
	two failed firms have cost the American people over $150
	billion. And this sum is almost guaranteed to go higher in the
	coming months and years. And, shockingly, the recently-passed
	2,300-page Dodd-Frank financial reform bill did not address
	these two firms, and they are continuing to hemorrhage money.
	So, as we move forward on deciding what the future of
	housing finance will look like in the United States, there are
	certain points that we should keep in the forefront of our
	discussion.
	For many years, homeownership has been considered the
	cornerstone of the American dream and has led Congress to
	support homeownership through various initiatives. I know that
	back in my district in Staten Island in Brooklyn, the ability
	to own your own home is unbelievably important to my
	constituents for them to build a strong financial foundation to
	improve the lives of their families.
	And with that being said, we must give serious
	consideration as to how to continue to make homeownership
	affordable to middle-class Americans while, at the same time,
	ensuring that the American taxpayer is never again left to
	shoulder a burden the size of Fannie Mae and Freddie Mac.
	Thank you, Mr. Chairman, for holding this hearing.
	I yield back the remainder of my time.
	Chairman Garrett. I thank the gentleman.
	The gentleman from Ohio, Mr. Stivers.
	Mr. Stivers. Thank you, Mr. Chairman. I would like to thank
	the chairman for calling this hearing today.
	The gentleman from New Mexico focused his comments on the
	American taxpayer, and I think that is appropriate because
	these GSEs should be an issue for all American taxpayers across
	the country. The gentlelady from New York mentioned that the
	taxpayers are already on the hook for $150 billion and
	counting.
	So finding a solution where the American taxpayer is not
	left holding the bag for these gigantic losses while, at the
	same time, continuing to ensure that home loans are still
	available and accessible is a priority for me. I hope we act
	quickly and prudently as we propose and implement reforms.
	I look forward to hearing the panel discuss ideas on the
	way forward for GSE reform. I would like to thank the chairman,
	and I yield back the balance of my time.
	Ms. Waters. Mr. Chairman, I have an unanimous consent
	request.
	Chairman Garrett. What is your request?
	Ms. Waters. I request that Mr. Carney be allowed to
	participate, to sit in on the subcommittee hearing today.
	Chairman Garrett. Without objection, it is so ordered.
	Ms. Waters. Thank you.
	Chairman Garrett. Mr. Miller from California?
	Mr. Gary Miller of California. Thank you, Mr. Chairman.
	Over 10 years ago, we tried to reform Freddie and Fannie.
	We worked on it for years. We tried to put a strong regulator
	in place. We tried to create strong underwriting standards.
	And, as you know, it all got killed in the Senate.
	I have read some of the testimony, and I agree we all need
	to protect taxpayers, and a $150 billion loss is outrageous.
	There is just no excuse for that. But 66.5 percent of the
	families in this country own their homes, and many of those are
	two-taxpayer homes also.
	So we need to look and say, what do we have to do? And when
	we look at the overall marketplace, I think we need to look at
	the marketplace and say, what is wrong with the marketplace and
	how do we reform everything?
	If you look at the default rates on subprime loans, it is
	38.7 percent--38.7 percent. The default rate on Fannie and
	Freddie is 3.1 percent. If you look at the default rate on
	subprimes, it is 26.5 percent. The all-loan seriously
	delinquent rate is at 8 percent and Fannie Mae is at 4.2
	percent. So are the default rates on Fannie and Freddie high at
	3.1 and 4.2 percent? They are high, but they are better than
	the private sector.
	So how do we address that? And we need to get to the bottom
	of it. We can't put taxpayers at risk. I am not arguing with
	that. But what is wrong with the overall marketplace?
	I know some data says we need to eliminate high-cost areas.
	But they are the best-performing loans with Fannie and Freddie.
	If there is data other than that, I would like to see it,
	because I have just not seen that.
	So I look forward to the testimony. And, Mr. Chairman, I
	thank you for the time.
	Chairman Garrett. And I thank the gentleman.
	And, finally, Mr. Fitzpatrick from Pennsylvania for 1
	minute.
	Mr. Fitzpatrick. Thank you, Mr. Chairman.
	I believe the government has a role to play in encouraging
	homeownership, but this laudable goal has led to interference
	in the market, and now the taxpayers are writing checks to the
	tune of hundreds of billions of dollars.
	I believe that the government has overstepped its bounds,
	Mr. Chairman. The United States Government went from being a
	facilitator to now backing over 90 percent of all the loans in
	the United States. There is no question that Fannie Mae and
	Freddie Mac must be weaned off the government in a responsible
	way that protects our economy but gets the American taxpayer
	out of the bailout business.
	We can argue about how we got here, but the fact remains
	that Fannie and Freddie are now bloated with bad loans and
	toxic assets. And while too fast of a wind-down could damage
	our housing economy, we cannot allow prudence to be the enemy
	of progress. The system must be reformed, the system must be
	stabilized, American families protected, and the government be
	relegated back to its proper role.
	The path forward will not be easy, but we were sent to
	Congress to fix the system and to fight for the taxpayers. I
	look forward to the testimony and the solutions.
	And, Mr. Chairman, I yield back the balance of my time.
	Chairman Garrett. I thank the gentleman.
	And I thank all of the witnesses. As you heard, we are all
	very much looking forward to your testimony.
	And we do have a great panel of esteemed witnesses, so let
	me just run through them. And then I will refer to each of you
	for 5 minutes.
	On our left, Mr. Mark Calabria, director, financial
	regulation studies at the Cato Institute. Next to him, Anthony
	Randazzo, director of economic research at the Reason
	Foundation. Next, Alex Pollock, resident fellow of AEI,
	American Enterprise Institute. Following, last but certainly
	not least, Ms. Sarah Wartell, executive vice president of the
	Center for American Progress.
	I welcome you all here today for our very first hearing.
	And I do, indeed, look forward to your testimony and your ideas
	and your expertise to help us solve this problem.
	Sir, 5 minutes.

	STATEMENT OF MARK A. CALABRIA, DIRECTOR OF FINANCIAL REGULATION
	STUDIES, CATO INSTITUTE

	Mr. Calabria. Chairman Garrett, Ranking Member Waters, full
	committee Ranking Member Frank, and distinguished members of
	the subcommittee, I thank you for the invitation to be here at
	today's hearing.
	Given the central role of Fannie Mae and Freddie Mac in the
	financial crisis, the need for reform is beyond dispute. While
	I believe a major overhaul of our Federal mortgage policy
	should happen sooner rather than later, reform should be done
	in a deliberate and thoughtful matter. The need for deliberate
	and thoughtful process, however, does not preclude the
	necessity of taking immediate steps to protect the taxpayer.
	The most immediate and important step that can be taken to
	protect the taxpayer is to change the role of the Federal
	Housing Finance Agency from that of conservator to receiver.
	The Housing and Economic Recovery Act of 2008 establishes a
	resolution or reorganization process for the GSEs.
	It should be noted that there is little, if anything, that
	a conservator can do that a receiver cannot. There is, however,
	a considerable amount that a receiver can do which a
	conservator cannot, the most important difference being that a
	receiver can impose losses on creditors.
	Some might object to receivership on the basis that it
	would end the GSEs. Such a position would be mistaken. HERA
	specifically prohibits the receiver from revoking, annulling,
	or terminating the charters of an Enterprise. Quite simply, the
	charters of Fannie Mae and Freddie Mac would remain in place
	under receivership.
	Another potential objection to receivership would be that
	it forces a solution upon Congress before it has had sufficient
	time to deliberate. Such an objection would also be false.
	Again, under HERA, a limited-life regulated entity, essentially
	a bridge bank for the GSEs, has an initial life of 2 years,
	which can be extended by FHFA for 3 additional 1-year periods.
	This would give Congress and the Administration 5 years to
	arrive at a suitable solution to Fannie Mae and Freddie Mac.
	Another important feature of receivership is that it would
	help lessen the perception that certain entities, including our
	largest banks, are ``too-big-to-fail.'' The Dodd-Frank Act
	establishes a resolution process for both non-banks and bank
	holding companies. This resolution process mirrors, in many
	ways, the receivership provisions of HERA.
	Market participants have questioned whether the resolution
	powers of Dodd-Frank would ever be used to impose losses on
	creditors. Quite simply, if we are unwilling to take Fannie Mae
	into receivership, then most market participants will conclude
	that we are also unwilling to take Citibank or Goldman into a
	receivership. Moving Fannie and Freddie into receivership adds
	credibility to the resolution process established in Dodd-
	Frank.
	In transitioning from a government-dominated to a market-
	driven mortgage system, we face the choice of either a gradual
	transition or a big bang. While I am comfortable with believing
	that the remainder of the financial services industry could
	assume the functions of Fannie and Freddie, I recognize this is
	a Minority viewpoint. Practical concerns as to the state of the
	housing market point toward a gradual transition. The question
	is then, what form should this transition take?
	One element of this transition should be a gradual step-
	rise reduction in the maximum loan limits for the GSEs. I would
	recommend an immediate reduction of the loan limit to $500,000,
	followed by annual decreases of $50,000. Of course, the details
	can differ.
	The hallmark of a private corporation is that its owners
	bear the benefits and costs of its activities. This situation
	no longer holds for Fannie Mae and Freddie Mac. Any revenue
	going forward will help reduce the size of the hole, while
	expenses will dig it deeper.
	Given that the taxpayer is now the residual claimant to
	these entities, it should be clear that the employees of Fannie
	Mae and Freddie Mac are working not on behalf of the
	shareholders but on behalf of the taxpayers. Accordingly, they
	should be paid like other government employees. I recommend
	that all GSE employees be transitioned to the GS pay scale as
	soon as possible. This should also include the executive
	officers. Quite simply, if FHA can adequately manage its
	mortgage risk by paying its employees on the GS scale, then I
	see no reason that Fannie Mae and Freddie Mac cannot do the
	same.
	Credit losses suffered by Fannie Mae and Freddie Mac have,
	in some instances, been caused by the violation of
	representations and warranties by the originating lender. While
	the GSEs have made some efforts to recover losses from the
	originating lenders, there is simply not enough public
	information to gauge the aggressiveness of these efforts.
	Congress should examine in detail the agreements reached
	between the GSEs and the banks in regard to loan repurchase and
	recovery for losses, both on private-label securities and on
	mortgages bought from these lenders by the GSEs.
	I believe a GAO audit of these agreements, along with
	detailed information by lenders, would help stem some of the
	losses.
	The TARP directed the President to submit a plan to
	Congress for recoupment of any shortfalls experienced under the
	TARP. Unfortunately, assistance to the GSEs lacked a similar
	requirement. Now is the time to rectify that oversight.
	Congress should establish a recoupment fee on all mortgages
	purchased by Fannie Mae and Freddie Mac. Such a fee could be
	used to directly reduce the deficit and structured to recoup as
	much of the losses as possible. I believe a reasonable starting
	point would be 1 percentage point per unpaid principal balance
	of loans purchased.
	It is important to note that the structural flaws in our
	mortgage finance system were not limited to Fannie Mae and
	Freddie Mac, but also included the treatment of GSE debt within
	the bank capital standards. One of the rationales for the
	rescue of Fannie Mae and Freddie Mac was the concern over the
	impact their failure would have on the rest of the financial
	system. I believe we need to change the bank capital standards
	away from encouraging the holding of GSE securities over
	mortgages. So I believe Congress should direct the regulators
	to end this preferential treatment.
	Lastly, the bulk of losses suffered by Fannie Mae and
	Freddie Mac were the direct result of declines in credit
	quality. In order to limit future losses, Fannie Mae and
	Freddie Mac should be restricted to the quality of loans they
	can purchase. Under current law, Fannie Mae and Freddie Mac
	essentially set their own credit standards. Going forward, the
	GSEs should be limited to purchasing only those mortgages that
	meet the definition of a qualified residential mortgage as will
	be determined by regulations promulgated under Dodd-Frank.
	Each of these recommendations, as well as others, is
	detailed in my written testimony. I again thank the committee
	for holding this important hearing and look forward to your
	questions.
	[The prepared statement of Dr. Calabria can be found on
	page 56 of the appendix.]
	Chairman Garrett. I thank you for your testimony.
	And, Mr. Randazzo, you are recognized for 5 minutes.
	I should also add that, without objection, the written
	testimony of all of the witnesses will be added to the record
	as well.

	STATEMENT OF ANTHONY RANDAZZO, DIRECTOR OF ECONOMIC RESEARCH,
	REASON FOUNDATION

	Mr. Randazzo. Thank you. Chairman Garrett, Ranking Member
	Waters, and distinguished members of the subcommittee, thank
	you for the opportunity to join you in discussing the important
	matter of reforming the Nation's mortgage finance system.
	My name is Anthony Randazzo, and I am director of economic
	research at Reason Foundation.
	It is important at the outset of this debate to frame the
	issue properly. Mortgage finance policy and affordable housing
	policy are two different things. Whether we should or how we
	should subsidize low-income Americans' putting a roof over
	their heads must not cloud the analysis and the debate about
	the consequences of government policy distorting mortgage
	prices for nearly the entire housing market.
	That being said, now is the time for major reform of the
	government's role in the mortgage finance market. Ideally, a
	fully reformed system would have no explicit or implicit
	government guarantee for mortgage finance. Such financial
	support only subjects taxpayers to high risks and eventual
	losses.
	Ultimately, the goal of housing finance reform should be to
	allow private investors to replace the government, i.e.,
	taxpayers, as financers in the housing market while ensuring
	that any subsidies remaining in the system are explicit,
	direct, narrow, on-budget, and properly accounted for.
	Now, realistically, a robust overhaul of the housing
	finance sector will take time to accomplish. And in the near
	term, there is still a need to protect taxpayers from
	additional future losses while ending the ongoing bailout of
	the GSEs. The government's role in housing must be reduced, and
	private capital must be allowed to return.
	The following are 10 ideas that will help achieve these
	goals. And while they are focused on addressing short-term
	needs, they can also be extended beyond the near term as the
	basis for a robust overhaul.
	One, lower all conforming loan limits for Fannie Mae and
	Freddie Mac by 20 percent by the end of September 2011. A 20
	percent reduction would still leave conforming loan limits
	above national average and median housing prices. And this
	would be a very modest reform to create room for private
	lenders and investors to begin re-entering the mortgage market
	as Congress debates how to reform the system as a whole.
	Two, increasing downpayment requirements for mortgages
	backed by government agencies to 20 percent over the next 3
	years. This would decrease government, i.e., taxpayer, exposure
	to risky mortgages and prevent the government from supporting
	mortgages for those without the resources to become a homeowner
	right now. Both those who want to prevent future bailouts and
	those who are looking to protect consumers from loans that
	would hurt them in the future should support this idea. And
	Fannie and Freddie should also be prevented from buying or
	guaranteeing any loan originated outside the yet-to-be-
	established qualified residential mortgage guidelines.
	Three, instruct FHFA to begin slowly increasing the
	guarantee fee charged by Fannie Mae and Freddie Mac. Over time,
	this would increase the cost of doing business with the GSEs
	and create room for private capital to be more competitive with
	government agencies. And, in the meantime, the GSEs would be
	collecting more revenue to put back towards the cost of bailing
	them out.
	Four, end all affordable housing goals. Again, mortgage
	finance policy should not be considered the same as affordable
	housing policy. And as I outlined in my written testimony,
	while I would argue that we should have no subsidies for
	mortgages at all, it is possible that aid for low-income
	families can be pursued in more effective ways than affordable
	housing goals which distort the entire mortgage market.
	Five, raise capital requirements for Fannie and Freddie.
	Six, create a legal framework for covered bonds.
	Seven, cap expansion of Fannie and Freddie's portfolios at
	a certain date and have the Treasury Department buy the
	combined portfolio to be run off over time. And having the GSE
	portfolios run down on the government's balance sheet would
	allow Treasury to take advantage of Uncle Sam's debt funding
	advantage and save the taxpayers money.
	Eight, p`ut the staffs of Fannie Mae and Freddie Mac on the
	Federal pay scale.
	Nine, require the Treasury Department to formally approve
	new debt issuance by Fannie Mae and Freddie Mac. And this would
	help protect taxpayers by providing more accountability and
	transparency to the GSEs while their fate is being further
	considered.
	And, 10, wipe out the remaining stock of Fannie Mae and
	Freddie Mac. And it is also critical that mortgage finance
	reform be paralleled by FHA reform.
	To close, these 10 ideas should not be considered an
	adequate fix of Fannie Mae and Freddie Mac or as sufficient to
	reform the housing market. They are merely a starting point, a
	first step towards a robust overhaul, and should open the door
	to further mortgage finance reform discussion.
	Thank you for the opportunity to discuss this important
	issue with you, and I look forward to answering any questions
	you may have.
	[The prepared statement of Mr. Randazzo can be found on
	page 70 of the appendix.]
	Chairman Garrett. I thank you for your testimony.
	Mr. Pollock for 5 minutes. Thank you.

	STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN
	ENTERPRISE INSTITUTE

	Mr. Pollock. Thank you, Mr. Chairman, Ranking Member
	Waters, and members of the subcommittee.
	In the same lead editorial cited by the chairman, The
	Washington Post recently wrote about Fannie and Freddie,
	``Advertised as a new way to stabilize the housing market, the
	government-backed mortgage securitization ended up distorting
	and destabilizing the market.'' The Washington Post is
	absolutely right about this.
	To avoid this distortion and destabilization, we should aim
	in the long run for a housing finance sector in which you can
	be either a private company or you can be a government agency,
	but you can't be both. In other words, in the long run, there
	should be no GSEs.
	This is consistent with the GSE reform bill introduced by
	Congressman Hensarling in the last Congress, and also with the
	AEI White Paper recently published by Peter Wallison, Ed Pinto,
	and me.
	May I just remind us that the old GSE charters meant not
	only that Fannie and Freddie had a taxpayer guarantee, but also
	that they were granted many privileges and large economic
	subsidies. They were highly politicized, exercised duopoly
	market power, discriminated against small lenders, and
	transferred a portion of their taxpayer subsidies without
	appropriation to politically directed housing programs.
	They were accurately described as ``masters of Beltway
	capitalism.'' Fannie, in particular, was genuinely feared as a
	hardball political operator. Fannie and Freddie had especially
	low capital ratios because their real capital was known by the
	bond market to be the credit card of the U.S. Treasury. We
	certainly don't want those GSEs back.
	My view is that, in the long run, Fannie and Freddie need
	to be restructured into a private company, a government agency
	and a liquidating trust, but this can't be done just yet. There
	are, nonetheless, a number of focused, specific actions we
	could take now consistent with our long-term aim. My written
	testimony suggests a dozen of them, and I will touch on a
	number of these briefly.
	We should enable covered bonds as an alternate long-term
	mortgage funding option. A lesson everybody has learned from
	the bubble is the importance of whether mortgage lenders retain
	``skin in the game'' for mortgage credit. With covered bonds,
	the issuing bank has 100 percent skin in the game for their
	credit responsibility, and this is a major advantage over the
	GSE originate-and-sell model.
	Granting perpetual charters to GSEs was a major historical
	mistake. We should set a 5-year sunset on Fannie and Freddie's
	charters, thus having them expire in 2016. Before then, we will
	be ready for their long-term restructuring.
	Congress should instruct the GSE regulator to set Fannie
	and Freddie's capital requirements at no less than those
	applied to national banks for the same assets and the same
	risks.
	We should mandate the runoff of the GSE's investment
	portfolios, both loans and securities. As these assets run off,
	GSE unsecured debt will be correspondingly reduced, as will the
	complex derivatives activity and portfolios associated with
	these assets.
	As my colleagues on the panel have recommended, we should
	set a regular, predictable reduction in GSE conforming loan
	limits.
	We should mandate clear Federal budget accounting for
	Fannie and Freddie, as proposed in the Accurate Accounting of
	Fannie Mae and Freddie Mac bill introduced in 2010.
	We should eliminate all GSE affordable housing goals and
	transfer such goals to HUD. Public subsidies for affordable
	housing and non-market, higher-risk lending should be
	explicitly governmental activities. So all affordable housing
	goals, assets, and related funding should be ended for the GSEs
	and, as appropriate, become the responsibility of the housing
	finance operations of the Department of Housing and Urban
	Development.
	One of the big mistakes made by bank regulation was to
	encourage the banking system to increase the systemic risk of
	the GSEs. Congressman Pearce previously raised the issue of the
	preferred stock of Fannie and Freddie held by banks. It is
	essential for us to understand and to correct the risk
	interaction between the GSEs and the banking system. This
	interaction caused a hyper-leveraging of mortgage risk for the
	financial system as a whole, as discussed in my written
	testimony.
	Something everyone agrees on is the need to provide clear,
	simply stated, straightforward key information to prospective
	mortgage borrowers. We should mandate that no loan can be
	guaranteed by Fannie or Freddie which has not provided the
	borrower with the appropriate one-page information form.
	And, finally, an outrageous part of the GSE bailout was the
	full protection, so far, at the expense of the taxpayers, of
	the holders of Fannie and Freddie's subordinated debt. The
	investors in this subordinated debt should be put on a path
	toward market discipline.
	In sum, Mr. Chairman, there is a lot we could do now to
	move in the right direction. Thank you again for the
	opportunity to share these views.
	[The prepared statement of Mr. Pollock can be found on page
	63 of the appendix.]
	Chairman Garrett. Thank you.
	And finally, Ms. Wartell for 5 minutes.

	STATEMENT OF SARAH ROSEN WARTELL, EXECUTIVE VICE PRESIDENT,
	CENTER FOR AMERICAN PROGRESS ACTION FUND

	Ms. Wartell. Thank you very much, Mr. Chairman, and thank
	you, Ranking Member Waters, and all of you, for the opportunity
	to share my thoughts on reform of housing finance.
	We all agree today that we find ourselves in an
	unsustainable situation. Government now bears the credit risk
	on the bulk of residential mortgage loans, and private capital
	must be attracted back into the market to bear as much of the
	load as possible in our housing finance system going forward.
	That said, our housing policy should have other goals, as
	well: decent and affordable housing rental options and
	homeownership so that American families have appropriate
	choices; access to homeownership for creditworthy borrowers who
	are ready to sustain the responsibilities of a mortgage;
	equitable and nondiscriminatory access to credit; the
	opportunity to rebuild, based on sound and sustainable lending
	principles, communities hard hit by the foreclosure crisis; and
	a diverse system not dependent on a handful of large financial
	institutions, but which includes local institutions that can
	meet the needs of the communities they know best.
	Those are all part of our goals. Thoughtful evolution, not
	overnight revolution, is the best way to reform the housing
	finance system, provide stability, and protect the taxpayers.
	So let me touch on just three topics that I mention in my
	written testimony.
	First, there are important conditions that must be in place
	if we are going to pull back government support from parts of
	the housing market in an attempt to try to crowd in private
	capital.
	Investors won't return unless the rules of the game are
	clear. And given the mess that the private-label securities
	market made in the past, we shouldn't want them to. Most will
	wait to see what regulators do in implementing the provisions
	of the Dodd-Frank Act regarding mortgages. And those who would
	delay these regulatory efforts undermine the certainty that
	they claim private markets need for investment.
	The return of private securitization also requires
	restoring confidence in servicing. Investors, as well as
	consumers, are deeply frustrated by the servicing standards of
	the lenders. A new servicing standard process is just
	beginning, and it should be a priority also for those who want
	to see private at-risk capital return.
	Withdrawing the GSEs from market segments before these
	steps, such as through loan-limit increases, risks a shock to
	the housing market already struggling from an inventory
	overhang and weak employment. We must ensure the private market
	is ready to pick up the slack or risk restarting the vicious
	cycle of falling home values, a shrinking economy, which would
	also leave taxpayer losses for its GSE obligations larger than
	is required.
	Second, I have concerns that accelerating the liquidation
	of the GSE portfolio may be directly counter to the taxpayers'
	interest. Asset sales can sometimes yield higher returns, but
	it also can allow buyers to benefit from market recoveries,
	rather than the taxpayer, who is currently backing the GSEs.
	The sales should be dictated by maximizing expected recoveries
	and not a mandated schedule of sales.
	Finally, a few quick reactions to some of the more radical
	privatization proposals that have been advanced about the end-
	state. These would take us to unchartered territories--truly
	unchartered--because, despite assertions to the contrary, no
	developed country has a purely private housing finance market
	without some government support in one form or the other.
	Moody's Mark Zandi made this point in a paper that he released
	this week, as well.
	The oft-cited Canadian market has significant government
	insurance and support. In any event that purely private
	intermediaries were able to finance all of the U.S. mortgage
	market debt, their obligations would surely be considered
	systemically important, given the high degree of concentration
	in U.S. mortgage activity in a few financial institutions.
	So instead of a private system, we might create a new set
	of implicit but unmonitored and unpriced government
	guarantees--exactly the opposite of the solution that any of us
	seek.
	These problems would be exacerbated if we relied entirely
	on the covered bond model. While a useful product as a
	replacement for a mortgage finance system, covered bonds
	encourage the dominance of a few institutions, which receive
	the benefit of implicit government guarantees in Europe. I talk
	a little bit more about this in my written statement.
	While these privatization schemes are unlikely to protect
	the taxpayers and avoid moral hazard, they would result in some
	stark consequences for American households. The availability of
	mortgage finance would be sharply reduced, and middle-income
	households would be shut out of homeownership. To the extent
	that mortgage finance remained available for working
	households, it would be directed into loans of shorter
	durations, higher costs, and very high downpayments. Products
	that help families fix their housing costs over time like the
	long-term, fixed-rate mortgage would not be available at prices
	affordable to most families.
	Lack of long-term private finance would reduce the
	availability and raise the costs of rental housing, even as
	constrained homeownership access would create greater demand
	for rental units and upward pressure on rents.
	Finally, fewer families would have access to the forced
	savings that homeownership represents and the opportunity for
	economic mobility that is the American dream. After the sorry
	consequences of private-market innovation over the previous
	decade, we should think carefully before going down that path
	again, leaving American families who have already suffered the
	worst economy in our lifetime to once again pay the price.
	Thank you.
	[The prepared statement of Ms. Wartell can be found on page
	86 of the appendix.]
	Chairman Garrett. Thank you.
	This is very interesting, so I will begin with the
	questioning for 5 minutes. Mr. Pollock, you use the expression
	in your written testimony about double leveraging of the GSEs
	by the banking system.
	Could you give me just briefly, in about a minute or less,
	a little more detail on this and discuss what steps? You sort
	of touched on how we could curtail that double leveraging.
	Mr. Pollock. Yes. Thank you, Mr. Chairman.
	As I mentioned, the interaction between the way that
	lending money and investing in the GSEs was encouraged by
	regulation in the banking system and the GSEs themselves
	resulted in double leverage or hyper-leverage. One example is
	with preferred stock. A large amount of the capital of the GSEs
	was in the form of preferred stock. Preferred stock could get
	leveraged 60 to 1, 60 in debt to 1 in stock by the GSEs.
	Among the biggest buyers of the preferred stock, and
	encouraged by regulation, were commercial banks. And the banks
	themselves owned that stock on a leveraged basis, or a margin
	basis, with a risk-based capital requirement of only 20 percent
	risk weighting, which is equivalent to 1.6 percent capital. In
	other words, they owned the equity of the GSEs on a 98 percent
	margined basis, like buying stock on 98 percent margin.
	So if you combine the banking system with the GSEs and
	think about that as a total system, there was virtually no real
	equity. You had a leverage of 60 squared, or over 3,000 to 1.
	That thinking about the interaction between the banks and the
	GSEs is, I think, critical. I will just mention quickly, if I
	may, that banks were also encouraged to hold GSE debt and
	mortgage-backed securities without limit, so that you got over-
	concentration in GSE risk by the banks.
	Chairman Garrett. Thank you.
	And Ms. Wartell, right now we are trying to take actions.
	What can we do today? Looking at the GSEs today, they are in
	conservatorship, lots of money going out the door. A couple of
	things are going to be coming up. The FHFA is soon to announce
	that executive compensation is going to be due with the
	executives of Fannie and Freddie.
	What is your position on exec compensation packages that we
	have seen over there? Should the taxpayer basically be funding
	these quite high compensation packages in your view?
	Ms. Wartell. I think what is important for the GSEs is that
	because they do represent a significant contingent liability,
	potential liability for the taxpayers, it is very important
	that they be able to continue to attract the talent to manage
	their obligations. And I do in their current situation believe
	that it is difficult for them--they are seeing a great deal of
	runoff already of their senior leadership into private
	institutions--and the ability to attract people, for example,
	to manage servicing and retain assets. So I don't have a
	position particularly on the current compensation packages. I
	understand the difficulty that they present. I also think it is
	really important that we don't let them lose talent to manage
	and protect the taxpayers' ultimate outcomes.
	Chairman Garrett. We have to be careful of that because
	over at Ginnie Mae and FHA, they are having to deal with the
	same problems over there, and they are not getting the same
	compensation package. So we may be getting a call for giving
	them bonuses if we are not willing do it here.
	Let me just ask you one other question. With them in
	conservatorship right now, is now a good time to address the
	issue or have them issuing affordable housing goals? Do you
	think that should be something they should be doing right now?
	Ms. Wartell. I think what is important, and what we would
	suggest for both the near term and the long term, is that the
	secondary market serve what the primary market is doing.
	Chairman Garrett. How much is the near term? Because I am
	looking at what we could do for them.
	Ms. Wartell. In the near term, the affordable housing
	goals, as written in the statute that the conservator is now
	still implementing, require the GSEs to lead the market. The
	rulemaking by the Bush Administration that really forced them
	to stretch out ahead of the market is where I think the goals
	really got out of bounds. Requiring the secondary market to
	continue to serve the primary market, the loans that lenders
	are making, and not cherry-pick those loans so that we end up
	with communities without access to capital, communities that
	are effectively credit deserts, seems to me an important
	ongoing obligation. We just don't want to make them stretch in
	ways that have them make unsafe loans.
	Chairman Garrett. Okay. And in my 30 seconds' time, because
	someone is trying to keep the time here, Mr. Randazzo, Mr.
	Calabria, you both discussed variations of how to treat their
	outstanding debt.
	Mr. Randazzo, could you expound on your idea to bring that
	debt online with the Treasury and Treasury's balance sheet, and
	the potential taxpayers' savings there? Have you had any
	discussions, I should say, also with Treasury on this as well?
	Mr. Randazzo. You are speaking specifically to how to bring
	the debt of the GSEs in line?
	Chairman Garrett. Right. And onto the Treasury's balance
	sheet, and then the tax savings that results there--in 15
	seconds.
	Mr. Randazzo. Sure. In short, the GSEs, because they are
	not technically government agencies right now, pay more to
	issue debt than the Treasury Department does. By bringing those
	portfolios onto the Treasury's debt, you would have roughly 25
	basis points cheaper borrowing when you reissue short-term
	debt. And given that over the next year, about 40 percent of
	their debt is going to come up for renewal, that has potential
	savings of anywhere between $4 billion and $12 billion for
	taxpayers just by having those portfolios run off on the
	Treasury's balance sheet as opposed to in a separate holding
	company.
	Chairman Garrett. My time has expired. Ms. Waters for 5
	minutes.
	Ms. Waters. Thank you very much. Let me direct my first
	question to, I believe, Mr. Pollock, of American Enterprise
	Institute. Could there be a 30-year fixed-rate mortgage product
	available on the market for the median-income family without
	any government involvement in the housing finance system? If
	so, how many basis points more expensive would it be compared
	to what borrowers pay now?
	Mr. Pollock. Congresswoman, there could certainly be one
	and would certainly be one. I guess it would be somewhat more
	expensive. I doubt that it would be very much more expensive.
	It is hard to say until we run the market experiment, of
	course. But that it would be available, I think is beyond
	doubt.
	Ms. Waters. I would like to ask Ms. Wartell that same
	question.
	Ms. Wartell. I agree that it would probably be available.
	But I disagree that it would be available at a rate that would
	be competitive in the marketplace and that would be able to
	attract middle-income families. I think the reality is with the
	economic uncertainty people have, they are not going to pay one
	dime more than they can for their housing costs. And the
	reality is that we are adding economic volatility into the
	system by moving people to adjustable rate mortgages, as we saw
	during the crisis. And you are also I think putting limitations
	on central bank regulators' capacity to manage interest rates
	if we know that so many families' housing costs will vary up
	and down with adjustable rate mortgages.
	Ms. Waters. Mr. Calabria, what do you make of the fact that
	William Gross, the co-founder and managing director of the
	investment firm Pimco, has said his funds wouldn't buy pools of
	private label mortgages unless homeowners made a downpayment of
	at least 30 percent? I know that as an investor, he is not
	exactly an impartial party. He has an interest in there being a
	government guarantee. Do you think he is bluffing, or do you
	think his statement is an accurate picture of what investment
	firms would actually do?
	Mr. Calabria. I think he is doing what they call on Wall
	Street ``talking your book.'' As you mention, Pimco is a very
	large holder of GSE securities. Were a government guarantee to
	end, his book of business would take a very large loss. I can't
	blame him for trying to protect that. I think his statement as
	to the effect of 3 percentage points strikes me as absolutely
	ridiculous. I think that is outside of the realm of reason.
	We don't see that kind of difference between--I think a
	more reasonable--I will be willing to guess, where Alex would
	not, and put an estimate, which is, I think, if we were to move
	our conforming mortgage market to resemble our jumbo mortgage
	market, we would see interest rates increase somewhere on the
	range of 30 to 40 basis points at most, which I will note is
	not large enough to impact the homeownership rate. And while
	that might make mortgages more affordable, I think a constant
	theme that we need to keep in mind is that homeowners are also
	taxpayers. So taking a dollar out of one pocket just to put 90
	cents back in the other does not make someone better off, and
	we need to look at the whole picture.
	Ms. Waters. Thank you very much.
	Mr. Randazzo, I don't know if your expertise extends to
	servicing. But given all of the expertise we have had over the
	past year or so in housing finance, can you explain why we are
	seeing a breakdown in the mortgage servicing industry? Today,
	the Veterans Affairs Committee is holding a hearing on improper
	military foreclosures by JPMorgan Chase. Do we need national
	standards for mortgage servicing? If so, what should be
	included in these standards?
	Mr. Randazzo. Thank you for the question. I will say my
	expertise is not mainly focused in the servicing market. I
	would say that there are a number of outside factors that have
	impacted the way that banks have put together their own
	specific servicing standards. Without the right incentives for
	private companies to track their risk, things can get out of
	whack. And I think that has happened with a lot of these
	companies.
	I don't know that national servicing standards are
	necessarily needed. But as long as there are misaligned
	incentives in the marketplace, it would be natural that that
	would be the route to go. I would say that--
	Ms. Waters. Ms. Wartell, on the same issue of servicers,
	there is a big problem--robo signing, all of this we are coming
	up with. What happened? Do we need national standards?
	Ms. Wartell. I think we absolutely need it, not only
	because consumers don't have the ability to be dealt with
	fairly, but also because investors need to know how servicers
	are going to act and whether they are going to have an
	incentive to act in the investors' best interests in trying to
	maximize returns in the mortgage. And they are, I think,
	without that confidence today. There are multiple ways of
	getting to an effective set of best practices that are applied
	across the entire market, either voluntarily or through
	legislation. But if we don't see it happen voluntarily, then it
	needs to happen in another way.
	Ms. Waters. Anyone else on servicing? Yes, Mr. Calabria?
	Mr. Calabria. I will make a comment and show that there are
	certainly some issues on which Sarah and I agree. And I think,
	given that the taxpayer is on the hook for much of the
	servicing industry, there certainly is a national interest. I
	would say the place to start is certainly with Freddie and
	Fannie's book. They have a large amount that they are
	servicing. So there is definitely a Federal interest. There is
	definitely a reason do this. The details will differ, but I do
	think it is something worth looking at.
	Ms. Waters. Thank you. I yield back.
	Chairman Garrett. Thank you. The gentleman from New Mexico,
	Mr. Pearce, for 5 minutes.
	Mr. Pearce. Thank you, Mr. Chairman.
	I think I would go to Mr. Randazzo first. When we consider
	the preferred stocks that were basically allowed to not be
	exercised, do you know what the process was in which these were
	suspended? The banks were being encouraged to buy the stock;
	isn't that correct? Do you know anything about that? Do you
	know anything about the process?
	Mr. Randazzo. In 2008, when the--
	Mr. Pearce. Yes. In other words, prior to the government
	taking conservatorship, banks were encouraged to buy these--if
	it is not something you are familiar with, you can yield to Mr.
	Pollock. I think he might have--
	Mr. Randazzo. I think Mr. Pollock and Mr. Calabria could
	speak more to this.
	Mr. Pearce. Okay.
	Mr. Pollock. Thanks, Congressman. I would be glad to
	address that.
	By the regulatory capital treatment, banks were certainly
	given an incentive to own this equity on a highly leveraged
	basis. And when the GSEs were put into conservatorship, the
	dividends on the preferred stock were suspended. That strikes
	me as an appropriate thing to do under the circumstances. But
	the valuation then of the stocks, looking forward to how much
	could be recovered ever, of course, was extremely low. And the
	write-offs were very high. It troubled many banks and it put
	several banks into failure.
	The fault, as I see it, is the design of the system in the
	beginning, which encouraged the banking system running on what
	you might think of as double-dipping of the government
	guarantee. That is to say, you took government-guaranteed
	deposits and used them to leverage investments in equity of the
	GSE. That, in my view, was a big mistake.
	Mr. Pearce. The term ``preferred stock'' means basically
	just that. Were there lower-level creditors who were given
	their value while preferred stockholders lost theirs?
	Mr. Pollock. No. There were common shareholders, of course.
	There still are legally common shareholders who saw the price
	of their stock go down more than 99 percent to pennies on a
	share. Then you have the preferred. Above the preferred you
	have the subordinated debt, which I mentioned in my testimony,
	which has been protected. And that is something I believe we
	need to fix going forward; that the subordinated debt holders
	should share in the realization of the risks which they
	knowingly undertook by buying subordinated debt.
	Mr. Pearce. Ms. Wartell, you mentioned on page 17 that we
	need to bring people and families and home back into the
	conversation about housing finance reform. Would you kind of
	elaborate on that? In other words, when I hear that--I am not
	saying that everybody who took out a subprime mortgage knew
	that they could never pay a payment on it and they were being
	encouraged into it, but also they were willing participants. So
	when I hear that, I kind of hear that we need some personal
	accountability and responsibility.
	Is that what you intended in your comment, or did you have
	a different direction? I would like for you to expand on that
	just a bit.
	Ms. Wartell. Sure. That was not what I intended by my
	comment, but I certainly agree with that.
	Mr. Pearce. You would agree with it?
	Ms. Wartell. I certainly agree that individuals who take
	out loans should have the ability to repay them. And I think we
	have a responsibility as individuals and as a society to ensure
	that lenders are making loans available to people who have the
	ability to repay them. Some of them were lured or tricked
	through predatory practices into taking on obligations they
	didn't have the capacity to pay, and others were simply part of
	a crowd that--kind of a crazy frenzy.
	But what I had in mind by my comment was that I think there
	are serious economic consequences for American families if we
	don't care about the stability of the housing market and the
	role that the housing market plays in creating economic
	opportunity and mobility for families.
	Mr. Pearce. Okay. That is fair enough, as long as we take
	both sides of the equation. I mean that seems reasonable
	enough.
	Mr. Calabria, you mentioned on page, I think it is 3, that
	you do not think there is much--that we have experienced most
	of the risk in the financial sector; that if we start bringing
	accountability in the system, there is not much downside risk.
	Am I reading that correctly?
	Mr. Calabria. For starters, yes, I believe we are past the
	point where you could say we are in a financial panic. And my
	point about I think it is time to consider start imposing
	losses on creditors. Now, the concern about, I think during the
	crisis the Treasury had, was there would be a run in these
	markets. And of course the bazooka that Secretary Paulson was
	given to back up Freddie and Fannie was to calm those markets
	and provide liquidity. We are past that point.
	We are at a point where I think we can start thinking about
	where should we allocate the losses. And in my opinion, they
	should be allocated on creditors. I do believe that creditors
	can bear those losses. As I indicated in my testimony, I think
	creditors would get at least 94, 95 cents on the dollar, which
	if the Chinese central bank is not happy with that, they can go
	invest somewhere else in my opinion.
	Mr. Pearce. So all the instruments of risk, the MBS, CDOs,
	whatever you are talking about, you are saying that a large
	percent now resides in the U.S. Government to where there is
	not much left out there. We have bought most of the bad assets.
	Is that right?
	Mr. Calabria. There are still a number of bad assets. The
	concern is really if you start with the observation that 80
	percent of the funding for Freddie and Fannie comes from the
	rest of the U.S. financial services system, so about a trillion
	of that, a little more than a trillion, trillion and a half of
	that is in the commercial banking system, so we do need to be
	concerned that if you impose losses such as were imposed on the
	preferred shares, what would happen to the banking system.
	Now, the FDIC has looked at this. And the number of banks
	that would actually fail is quite small. You have other things.
	The money market mutual fund system holds about a trillion in
	unsecured debt. We have to remember the priorities would be
	preferred shareholders get hit, subordinated debt would
	essentially get wiped out, and the unsecured debt would take a
	significant haircut. The MBS would largely, in my opinion, be
	whole. That would pose significant risk I think to the money
	market mutual fund. You would see dozens probably break the
	buck.
	We still at post-crisis do not have a solution, in my
	opinion, into the issue of money market mutual funds, even
	post-reserves primary. So I think that issue needs to be
	directly addressed, but I think we can allocate those losses.
	Mr. Pearce. Thank you, Mr. Chairman.
	Chairman Garrett. Thank you. The gentleman from
	Massachusetts for 5 minutes.
	Mr. Frank. Thank you, Mr. Chairman.
	I would like to ask all the witnesses if they have views on
	H.R. 4889. That is the comprehensive bill for phasing out and
	reforming and then phasing out Fannie Mae and Freddie Mac. It
	was introduced by the gentleman from Texas, Mr. Hensarling,
	about a year ago. It has been offered on the Floor in the
	committee. And again, I had assumed that from what I had heard
	my Republican colleagues say, that they were ready to deal with
	legislation. They had a fairly well-developed bill. It is been
	reintroduced this year, I understand, as part of the Republican
	Study Committee package.
	So I am wondering, the Majority having invited these
	witnesses, if they called your attention to H.R. 4889, to
	establish a term certain for the conservatorships of Fannie Mae
	and Freddie Mac, to provide conditions for continued operation
	and the wind-down, etc.; do any of the witnesses have views on
	this?
	Mr. Calabria. I will preface by saying I haven't read the
	bill, but I understand--
	Mr. Frank. You haven't read it?
	Mr. Calabria. I haven't read the bill.
	Mr. Frank. Were you asked when the Majority invited you on
	this topic? Did they call your attention to the bill?
	Mr. Calabria. I was not asked.
	Mr. Frank. Next. Did they ask you to read the bill and give
	your opinions on it?
	Mr. Randazzo. I have read the bill. And I read the bill
	when it was introduced last year. I think that it is a good
	basis for where we need to go in terms of comprehensive reform.
	I think that it is going to be difficult to get that specific
	piece of legislation passed through both Houses of Congress
	immediately, and so this hearing does have some value.
	Mr. Frank. Okay. But let me ask you--I appreciate your view
	on the strategy. It sounds like you not only read the bill, but
	might even have been involved in it. You say it would be
	difficult. But do you think, would you urge us to pass this
	bill right now? The Majority controls the House. So would you
	urge that this 4889 be passed right now?
	Mr. Randazzo. I would not urge that the bill as it is
	currently written be passed.
	Mr. Frank. Why not?
	Mr. Randazzo. I think that there are certain things that
	can be adjusted. I think that there needs to be a more
	comprehensive approach. I think that--
	Mr. Frank. Can you tell me specifically? You obviously are
	familiar with this. Again, we were asked to pass it. If the
	Majority had its way, it would have been part of the financial
	reform law as is. But since they didn't have their way, we have
	a chance.
	What changes would you make in this bill? You say it is a
	good general framework but not ready to be passed. What changes
	would you recommend in it? Because I like to think in
	legislative terms.
	Mr. Randazzo. I think the biggest thing that can be added
	to the bill, or can be an additional piece of legislation, is
	reform for rules with FHA. If we were to lower conforming loan
	limits by 20 percent over, say, 5 years--
	Mr. Frank. I appreciate that. But that is the FHA. With
	regard to Fannie and Freddie, do you think it is ready to be
	passed now with regard to Fannie Mae and Freddie Mac?
	Mr. Randazzo. I think that the principal underlying issue
	of beginning a process of winding down Fannie Mae and Freddie
	Mac through all of the different pieces that are in there
	should be pursued.
	Mr. Frank. Okay. But that is not what I asked you. I
	appreciate that. Again, we were told, we were criticized for
	not passing this into law. And I just wonder why, if that was
	something that we should have done last year, the Majority
	wouldn't do it now. So we can't vote on--we don't vote on
	general principles here, we vote on legislation.
	Would you recommend that with regard--you said separate
	stuff on FHA. I understand that. I hope we will get to that. We
	have some pending--in fact, Ms. Capito and Ms. Waters, they
	came to some good agreements on FHA. I hope we will pass the
	rest of that. So I agree with that.
	But with regard to Fannie Mae and Freddie Mac, do you think
	the bill as it now stands is ready to be passed? And if not,
	what changes would you recommend?
	Mr. Randazzo. Once again, I think that there are pieces and
	minutia that maybe we don't want to spend 5 minutes to an hour
	going through and nitpicking.
	Mr. Frank. Be my guest. I have nothing else to do this
	afternoon. There are no more votes. I appreciate your concern
	for my time.
	Mr. Randazzo. I was not a part of putting the bill
	together, so that I have a particular way that I think would be
	best to--
	Mr. Frank. So you would not recommend that we pass this
	bill, as is, with regard to Fannie and Freddie?
	Mr. Randazzo. I would say not immediately. I think that
	there are some things that can be changed. It is a good base.
	Mr. Frank. Thank you. Mr. Pollock?
	Mr. Pollock. Congressman, I did read the bill when it was
	introduced. I supported it then. As I said in my testimony, all
	of the points in my testimony are consistent with Congressman
	Hensarling's bill. And when reintroduced, I will support it.
	Mr. Frank. It has been reintroduced. Would you urge the
	committee then to just have a markup and vote on it fairly
	soon?
	Mr. Pollock. I think that would be a good idea.
	Mr. Frank. Okay. Thank you. Mr. Hensarling is back in
	minority status on the panel of his invitees. It is one to two.
	But one out of three I suppose ain't bad.
	Let me just--one other thing to say, and I do appreciate
	the point that was made about separating mortgages and
	affordable housing. And in my case, in my view what we ought to
	be doing is affordable rental housing primarily. The great
	mistake, I have consistently felt, was pushing people into
	homeownership when they weren't ready. So I appreciate that
	separation. And I hope as we go forward, what I would hope
	would be we would find a way to get a revenue stream for
	affordable rental housing and separate that out from the
	decisions made on mortgages.
	So I appreciate that separation. Thank you, Mr. Chairman.
	Chairman Garrett. And I appreciate those comments. Now for
	the rest of the story, the gentleman from Texas.
	Mr. Hensarling. Thank you, Mr. Chairman. And I certainly am
	fascinated by the ranking member's fascination with my
	particular bill. I would wonder where the fascination was when
	he was committee chairman. He certainly had the ability to give
	a vote on the bill. I think I heard the gentleman say the bill
	has been reintroduced. As the author of the bill, I can say it
	has not been reintroduced. As with many pieces of legislation,
	it is being refined through the process. I do intend to
	reintroduce the bill. It will be quite similar to the one that
	was introduced in the last Congress. But at least, there will
	be a bill.
	I recall on September 29th, during a full committee
	hearing, where the now-ranking member, then-chairman, told us
	that he was disappointed that we were not dealing with, quote,
	a piece of legislation, but there is no point in rushing that
	pace. It is not going to be possible now, I know, until
	November when we come back, because we lost 7 days. Apparently,
	we are now in the process of losing 133 days. I don't think I
	have seen the gentleman from Massachusetts introduce the bill
	that was committed in September.
	Mr. Frank. Would the gentleman yield?
	Mr. Hensarling. I would yield to the gentleman from
	Massachusetts.
	Mr. Frank. The gentleman is not accurately representing me.
	I was not for passing it. I agreed with that. The gentleman
	said it needs to be refined. You know how important refinement
	is to me. I wouldn't have wanted to pass something that was
	unrefined.
	Mr. Hensarling. Reclaiming my time for one point, did the
	gentleman make a commitment that he was going to introduce
	legislation in the last Congress or have I been given an
	incorrect record?
	Mr. Frank. I thank the gentleman for yielding.
	Chairman Garrett. It is the gentleman from Texas's time.
	Mr. Frank. I thank the gentleman. I would ask unanimous
	consent that the gentleman have an additional minute since I
	have taken his time, Mr. Chairman.
	I would just say after the election, when control changed
	hands, it didn't seem to me that there would be any chance of
	getting that done in the lame duck session. So I just want to
	say, no, I was not for passing this bill last year. I was being
	criticized for not being for passing it last year. And I am
	very sensitive, so I was just glad to have some support for my
	position for last year from your witnesses from this year.
	Mr. Hensarling. Reclaiming my time, I am not sure I heard
	the answer on where the gentleman from Massachusetts' bill is.
	Mr. Frank. Would the gentleman yield 30 seconds? The answer
	is, I have not filed one because it is not my expectation that
	the Majority would pay any attention to it. And if I wanted to
	do academic exercises, I would go back to school.
	Mr. Hensarling. Reclaiming my time, I appreciate that
	sentiment. I would note again, the gentleman certainly had time
	on his shift to introduce a bill before the House switched.
	Let me take time now to speak to the members of the panel.
	I think I heard Mr. Randazzo--maybe it was in your testimony, I
	am not sure. Let me ask the question this way. Do any of you
	believe, as we know what has happened to home price values, we
	know about the cratering, you can look at the Case-Schiller
	index, did Fannie and Freddie play a role in the housing
	bubble, in the housing price inflation? Mr. Pollock, do you
	agree with that?
	Mr. Pollock. Without question, they played a significant
	role in inflating housing prices, inflating the bubble, and
	therefore in making the collapse worse.
	Mr. Hensarling. Do others agree? Perhaps just a show of
	hands. At least, I see two nodding heads with Mr. Calabria and
	Mr. Randazzo. I don't know about Ms. Wartell.
	Ms. Wartell. Only a very small and--
	Mr. Hensarling. Okay. All the panelists agree that Fannie
	and Freddie played some role in price inflation. So when I
	write out my mortgage check each month, I have principal, I
	have interest. In the studies that I have seen, the GSEs may
	have helped on the interest side anywhere from 7 basis points
	to 30 basis points. Now, granted, I think the 7 basis points is
	a several-year-old study from the Federal Reserve. I have seen
	a number of academic studies. I don't know, maybe the median is
	15 basis points, 20, I don't know. So they helped me on the one
	hand by, say, a median of 15 basis points; but on the other
	hand, is my principal perhaps not higher because of the
	artificial demand? Meaning at the end of the day, as a
	consumer, was I really better off? Can we make the case? Can we
	make the case that I was better off? We know the taxpayer
	wasn't better off. So Mr. Calabria, do you have a comment?
	Mr. Calabria. To start with, the outcome of any price is
	clearly the interaction of supply and demand. And what you are
	referring to are the demand factors. So my answer would be it
	really depends on the housing market. I think in housing
	markets with relatively tight supply, places like California,
	you ended up running up the house price. The seller was better
	off in those instances.
	Mr. Hensarling. So the consumer, maybe he benefited, maybe
	he didn't benefit. We know the taxpayer did not benefit. We
	have heard some discussion of the fact, or some have made the
	assertion that there would no longer be a 30-year fixed-rate
	mortgage in America without Fannie and Freddie. Yet were there
	not 30-year fixed-rate mortgages in subprime? Were there not
	30-year fixed-rate mortgages in jumbo? You gentlemen and lady
	have researched the market. Am I correct in that assertion?
	Mr. Pollock. You are correct, there were 30-year, fixed-
	rate mortgages without Fannie and Freddie in the parts of the
	market where they don't exist.
	Mr. Hensarling. So they have existed in America in parts of
	the market where Fannie and Freddie didn't exist. Isn't it also
	true, perhaps not common, but in OECD nations in Europe you can
	also find 30-year fixed? At least I think in Sweden and
	Denmark? I have tripped across a few other countries. Is it
	also true you can find examples of 30-year fixed overseas?
	Mr. Pollock. You certainly find it in Denmark.
	Ms. Wartell. I think Denmark.
	Mr. Hensarling. I see my time has expired. I thank the
	chairman.
	Chairman Garrett. I thank the gentleman from Texas. The
	gentleman from California for 5 minutes.
	Mr. Sherman. Just responding to the gentleman from Texas, I
	think 3 to 30 basis points is absurd. The fact is that if you
	try to get a loan today that barely qualifies, and then you
	say, what is a loan going to cost that Fannie and Freddie won't
	touch because it is a little over that amount, the difference
	is hundreds of basis points, if it is available at all.
	The fact is that we would see a collapse in home prices if
	it wasn't for Fannie and Freddie. And that means a collapse of
	our economy. We already had one mortgage/home value collapse of
	our economy. I am not looking for a second. And to say that in
	2012, non-GSE financing is going to be just as available as it
	was in 2002 assumes that all the lenders have been asleep with
	Rip Van Winkle over the last decade. The fact is almost nobody
	is willing to lend money to middle-class home buyers except if
	it qualifies for Fannie, Freddie, or FHA.
	The banks are not lending now because the future of
	mortgage financing is uncertain. Home buyers need a reliable
	flow of mortgage financing. GSE reform is needed. But
	eliminating all Federal involvement would harm this economic
	recovery, put the housing market at risk, and put the economy
	at risk.
	Today, private capital is nonexistent outside the GSE
	mortgage financing limits. And to assume that it will suddenly
	become available if we eliminate the GSEs because everybody
	will go back and do what they did in 2005 assumes a level of
	amnesia among investors that I don't see.
	What we don't need is a precipitous decline in housing
	prices. That is how we got the first dip. That would give us a
	second, or double-dip recession, if not a depression. And it is
	particularly important in regions like mine, where middle-class
	homes go for $600,000 to $800,000. Certainly, all the upper
	middle-class homes do. And without GSE financing, you would see
	not only a collapse of home values, but a collapse of the local
	economy.
	Ms. Wartell, under Dodd-Frank, when defining a qualified
	residential mortgage which is exempt from the Act's risk
	retention requirements, regulators must take into account
	consideration, underwriting criteria that historically
	indicates a lower profile of risk and default such as mortgage
	insurance. To the extent that such insurance reduces the risk
	of default, the data seems clear that loans with PMI have lower
	default rates.
	Do you agree that mortgages should not have to meet the
	risk retention requirements in Dodd-Frank as long as they meet
	other underwriting criteria and PMI is also part of the loan?
	Ms. Wartell. Congressman, I want to be careful not to speak
	to the precise regulatory question today. And if I could send
	you written comments on this, because I don't have all the
	details in front of me. But I would agree with your general
	proposition that there are many ways to ensure that the
	borrower has adequate equity to protect the investors. And PMI
	is certainly one of the ways to do that.
	Mr. Sherman. Okay. We have Bill Gross, the co-founder of
	Pimco, saying that without a government guarantee, if he was
	going to invest in mortgages, he would demand a 30 percent
	downpayment. There are proposals to go for a 20 percent
	downpayment. Wouldn't such a requirement push more business to
	FHA, further constraining that agency's resources? And wouldn't
	it have a dramatic impact on the ability of the average family
	to buy a home in many regions of the country?
	Ms. Wartell. Yes. I completely agree with you. And to your
	FHA point, I think it is important to understand that in the
	case of the GSEs when they were functioning, or some future
	system, it is possible to put private capital at risk ahead of
	the taxpayer. In FHA, we do not have that. So when you shift
	market to FHA by imposing high downpayment requirements like
	that, you actually are having the taxpayer stand at a much more
	extensive risk position than they would otherwise.
	Mr. Sherman. So it is worse for home buyers, worse for home
	sellers, worse for communities, and worse for the taxpayer.
	Ms. Wartell. And unnecessary for us to take risks that the
	private sector could take on their own.
	Mr. Sherman. I yield back.
	Chairman Garrett. All right. Thank you. The gentleman from
	California, Mr. Royce.
	Mr. Royce. Thank you. I think one of the vexing things for
	us is that the Federal Reserve has come to us in the past with
	concerns about the model that we have set up, especially since
	1992, the GSE Act that passed the Congress here. Under that
	model, they were able to dive into the junk mortgage market,
	and they purchased over $1 trillion worth. They wracked up
	leverage of 100 to 1. Part of the concern here is that once you
	establish a GSE, you have established a huge quasi-governmental
	monopoly that comes in and lobbies the Members.
	So the Fed came to us, they asked us to take some action in
	the Congress. I offered an amendment, endorsed by the Fed, that
	would authorize the regulator to rein in Fannie and Freddie on
	these mortgage portfolios based on the systemic risk that they
	posed. That was opposed by Fannie and Freddie, and of course it
	was defeated, as was Jim Leach's amendment.
	Jim Leach, the former chairman of this committee, offered
	an amendment to strengthen the minimum capital requirements for
	Fannie and Freddie. And Ron Paul offered an amendment to
	eliminate the ability of Fannie and Freddie to borrow from the
	Treasury. Any one of these the Fed recognized would have helped
	the situation.
	But once we create these entities, they come in, they lobby
	against those kinds of reforms. And indeed, the only reform we
	ever passed out of the House is one that was opposed by the
	Treasury and the Fed. Why? Because it made the situation worse.
	It tied the hands of the regulators even more.
	So here is the problem. We now have the president of the
	Richmond Federal Reserve--and Mr. Calabria, I will ask you
	about this--he comes to us and he says, ``We should phase out
	government guarantees for home mortgage debt.'' Clearly, he
	doesn't mean tomorrow. He means phasing it out over a long
	period of time in order to make sure that we bring private
	capital back into the market. And he says otherwise, financial
	stability will be elusive, and fiscal balance will be
	threatened by repeated boom-bust cycles in housing.
	I was going to ask you, do you think government guarantees
	on mortgages exacerbate or mitigate the boom-bust cycle that we
	have experienced in the market?
	Mr. Calabria. I would 100 percent agree with the remarks of
	President Lacker. I think that our current system of mortgage
	finance is procyclical rather than countercyclical. And I think
	the point that you make, and I say this from having spent 7
	years working on staff in the other body, I think any system we
	set up will erode over time. The reality is there will be
	another housing boom at some point in the future. We will all
	again think that housing is the best thing since sliced bread,
	and we will want to get everybody in, and we will push
	underwriting standards again down. It has happened time and
	time again. So I would 100 percent agree with that.
	While you could design a system today that, if it just
	stayed that way, might reduce the risk, I have very little
	confidence that it would stay that way over time.
	Mr. Royce. Let me ask you another question. In your
	testimony, you call for shifting the FHFA from conservator to
	receiver for the GSEs. Right?
	Mr. Calabria. Yes.
	Mr. Royce. And I think among the points that you make, your
	argument is that it could be an instrumental step in combating
	the perception that other entities out there are ``too-big-to-
	fail.'' I know some think we have solved the ``too-big-to-
	fail'' problem with the legislation passed last year, but a lot
	of economists think otherwise. And I would ask you to expand on
	that point and maybe explain to us how that transition process
	might occur, how you would envision us getting from point A to
	point B.
	Mr. Calabria. Sure. Let me start with a broader point about
	``too-big-to-fail.'' We have to recall that essentially every
	financial institution, whether it is Fannie Mae or Citibank, is
	primarily funded with debt. Ninety percent-plus of their
	funding is debt. And so it is all good and well to fire
	management and wipe out shareholders, but you will not have
	sufficient market discipline in that absence.
	So to me, to end ``too-big-to-fail,'' again whether it is
	Citi or whether it is Fannie, you have to set up a process
	where creditors take haircuts. And I think because we have not
	done that, and because in the last crisis under this
	Administration and the last Administration, the proposal was
	always to protect creditors, I think that has been a mistake.
	While you can argue maybe in a panic, I think going forward
	post-panic creditors need to take losses. And why? That is
	because as companies begin to take risk, whether it is
	incompetent management, whether it is a business strategy,
	those who provide funding will raise the cost of that funding
	and constrain them. I was always puzzled, working on GSE
	issues, that the more debt Fannie and Freddie issued, the lower
	their funding costs were. It is certainly contrary to--
	Mr. Royce. The bigger the share of the market they would
	take--
	Mr. Calabria. Exactly.
	Mr. Royce. And I would argue--during the conference, I
	actually had an amendment to sort of guarantee a larger
	haircut. That was defeated in the markup in the conference
	committee. I think we need to revisit that issue on the ``too-
	big-to-fail'' front.
	Thank you, Mr. Chairman. I yield back.
	Chairman Garrett. I thank the gentleman from California.
	The gentleman from North Carolina, Mr. Miller, please, for 5
	minutes.
	Mr. Miller of North Carolina. Thank you, Mr. Chairman.
	There is no doubt that we would not have much of a mortgage
	market now without Fannie and Freddie. They are buying, the
	vast, vast majority, well more than 90 percent of mortgages.
	Five years ago, they certainly were not in a duopoly position.
	In fact, they were rapidly losing market share.
	What the three of you seem to imply is that the reason
	their market share is now so enormous is that they are crowding
	out the private securitization market somehow. I have talked to
	mortgage investors, and they don't say that at all. The pension
	funds, the insurance companies that bought the private-label
	mortgage-backed securities 5 years ago, say there is no way
	they are going to buy that stuff again unless there is a
	serious reform of the private securitization market. They are
	not going to buy mortgages based on a AAA rating from a rating
	agency. Unless there is the kind of disclosure that an investor
	in a new stock issue gets, so they can actually do due
	diligence themselves and figure out what they are buying, they
	are not touching that stuff again.
	Do any of you have any basis, any evidence for the idea
	that the private-label securitization market is going to come
	back without reforms if we simply hobble Freddie and Fannie,
	limit what they can do, but don't reform the private-label
	securitization market?
	Mr. Calabria. If I could touch on this, and this might be
	where I differ from some of my colleagues, while I would like
	to see the private securitization market come back, I don't
	think that should be the ultimate objective. The vast majority
	of mortgage lending in this country can be funded by a
	portfolio of various financial services institutions, whether
	it is banks or insurance companies. And it is important to keep
	in mind, as I mentioned earlier, 80 percent of the funding for
	Freddie and Fannie--so when people ask me, if Freddie and
	Fannie aren't going to fund it, who is? The parties that fund
	Freddie and Fannie. If the banking system can hold a trillion
	and a half in Freddie and Fannie securities, then the banking
	system can certainly hold a trillion and a half in mortgages.
	So it is just moving it around from different institutions.
	Are there problems with those other institutions? Absolutely.
	And we should address those problems. But I don't think our
	objective should simply be let's bring back the private
	securitization. I think it should be how do we set up a system
	that has substantially more capital? And it is important to
	remember the very existence of Freddie and Fannie is to a large
	degree a capital arbitrage, it is a massive subsidy for
	lenders.
	Mr. Miller of North Carolina. My understanding is about
	half of all lending 5 years ago was the securitization market.
	And you are saying if we simply let that go away, it would be
	replaced by portfolio mortgages.
	Mr. Calabria. First, we need to remember that in 2005,
	2006, 40 percent of private-label mortgage-backed securities
	were bought by Freddie and Fannie. So if you add what they
	bought, what they originated, they maintained a majority of the
	market share, which was still very close to--they dominate what
	they can do. And if you look at it today in terms of how much
	the housing stock is next to the jumbo market, they dominate
	what they can do.
	Mr. Miller of North Carolina. That strikes me as a
	remarkable leap of faith upon which the entire economy depends.
	Mr. Calabria. I would be happy to sit down with you at any
	time.
	Mr. Miller of North Carolina. Ms. Wartell?
	Ms. Wartell. I would agree with you. I think that the
	capacity of our financial institutions, which right now with
	the new capital standards are already severely
	undercapitalized, to provide the kind of ongoing support for
	the housing market in the near term is an enormous leap of
	faith.
	I would also note that the durations that those--the big
	thing that the secondary market provided, by creating a market
	that was liquid, was it allowed longer term obligations to be
	made available into the capital markets. If you don't have that
	mechanism, banks will not make long-term mortgages available,
	and we will have driven the entire housing market to an
	adjustable rate regime in which you will see people's economic
	costs of living varying with interest rates. And that, in and
	of itself, will limit the ability of central bankers to be able
	to adjust interest rates as they need to for monetary policy
	purposes.
	Mr. Miller of North Carolina. Let me move on to another
	topic. I am sorry. You certainly can supplement your answers.
	You are more than welcome to do that.
	I have raised many questions before about the conflicts of
	interest of having the servicers be affiliated with the
	securitizers. And I have talked to investors who say that the
	barriers they now face in pursuing their legal claims against
	the securitizers is like doing business in Russia and trying to
	bring a lawsuit against an oligarch. And they will not play
	unless that is reformed as well.
	I have talked to the small banks and the credit unions, and
	they say one of the reasons they did business with Freddie and
	Fannie, and not Wall Street, is they knew that their mortgages
	would end up being serviced by a big bank, and the big bank
	would try to use that relationship to steal their customers.
	When the servicers sat there a month or two ago, I asked
	them why on Earth, what is the reason for having a servicer be
	affiliated with a securitizer? And they said, ``cross-
	marketing.'' Which seems to support the concerns about the
	small banks. What possible reason should servicers--should they
	not be separate entities not affiliated with a bank? Is there a
	reason that has not occurred to me? Because I have been
	thinking a lot about it and been drawing a blank.
	Chairman Garrett. I think what we will on that is do just
	what you said, to ask them to provide that answer in more
	detail not only to Mr. Miller, but to all of us as well. It
	would be interesting to see the answer to that.
	With that, I yield to the gentleman from Texas.
	Mr. Neugebauer. Thank you, Mr. Chairman. Again, thank you
	for having this hearing. One of the things I think we need to
	point out is that, prior to securitization, as Mr. Calabria
	said, is there were people who bought mortgages that didn't go
	through Freddie and Fannie. In fact, I originated and actually
	was in the banking business for a while, and we sold those
	loans to other financial institutions, the insurance companies.
	But securitization does provide a certain amount of
	liquidity opportunity for investors to hold those mortgages and
	some other ability to manage interest rate risk. And so,
	certainly, we don't want to do away with securitization.
	Back to what I think Mr. Pollock has said and maybe Mr.
	Randazzo has said and the other panelists, probably where the
	big mistake is here is we have had the government setting the
	risk premium. And the government doesn't have a very good
	record on setting the risk premium. All you have to do is look
	at our National Flood Insurance Program and realize we haven't
	been charging the appropriate amount of money for the risk that
	the government is taking.
	And so there is really not much space for private market
	right now because the risk premium is so low that getting these
	loans sanitized by Freddie and Fannie makes more sense than
	doing it outside.
	So, isn't it a way to make some space for private
	securitization or for private investment--I don't want to get--
	is to lower these conforming loan limits and, at the same time,
	increase the risk premium that Freddie and Fannie are charging
	for buying those loans and securitizing them?
	At some point in time, the private market is going to say,
	I am not willing to give up 50, 75, 100 basis points, whatever
	that is; I would rather have that yield than go through that.
	If I knew that those loans were being underwritten in a fashion
	that gave me some sense that these are good-quality residential
	loans, good old underwritten residential loans is a good
	investment.
	Is there consensus that that has to be some of the initial
	steps if you are going to bring the private market in, is you
	have to take away the competitive advantage of Freddie and
	Fannie?
	Mr. Calabria?
	Mr. Calabria. I would say, absolutely. And, as I mentioned
	in my testimony, I do think you need to institute a fee to try
	to recoup some of the money we have put in. Obviously, one
	benefit of that is you recoup some taxpayer money. The other
	benefit is you reduce the competitive advantage that Freddie
	and Fannie have.
	I would also emphasize--and I know Alex has made this
	point--we really do need to change the incentives facing the
	banking industry. If you hold a Fannie Mae security, it is only
	a 20 percent risk rating, where if you are holding a whole
	loan, it is 50 percent. So, to some extent, the existence of
	Freddie and Fannie has reduced the capital behind mortgages by
	about 60 percent of the system.
	I don't think a public policy objective should be how do we
	get less capital into the system behind mortgages. So making
	that a little more equal and treating Freddie and Fannie
	securities as if they were any other corporate securities, I
	think, would shift the incentives of banks.
	Mr. Neugebauer. Mr. Pollock?
	Mr. Pollock. I think you make a very good point,
	Congressman. We might ask, looking back historically, why did a
	private securitization market for middle-class prime loans not
	develop? It is a natural market. It doesn't need a government
	guarantee. The reason it didn't was because nobody could
	compete with subsidized providers, namely Fannie and Freddie,
	who effectively enjoyed tens of billions of dollars of taxpayer
	subsidy.
	And so, one way I have thought about the question of how
	could you make that move with guarantee fees is to consider
	that Fannie and Freddie, historically, had much lower capital
	than other people. Now they have no capital at all, literally
	zero, counting the government's capital, and their own capital
	is very negative.
	So one might do a calculation and say, if Fannie and
	Freddie had to have the same capital as everybody else for a
	risk and they had to have a reasonable return on that capital,
	what would their price have to be?
	You remember, with the Federal Reserve some years ago, the
	Congress put in what they called the ``private-sector
	adjustment factor'' for the Fed (the Fed is kind of a GSE) in
	order to take away the Fed's pricing advantage. You might think
	about that same kind of calculation for Fannie and Freddie.
	Mr. Neugebauer. Kind of risk-based pricing basically is
	what you are saying?
	Mr. Pollock. Yes.
	Mr. Neugebauer. And I think I agree totally, is that
	whatever we do over at Freddie and Fannie, we can't make FHA
	the new subprime lender. And so we are going to have to go over
	there and determine what the lending limits and the credit
	underwriting standards are going to be over there, as well.
	Otherwise, we just move that market.
	Mr. Randazzo?
	Mr. Randazzo. The one thing I would add to what my
	colleagues have said is I think the approach that you
	mentioned, with a few other steps, addresses the concerns on
	the other side of the aisle that this is not jumping into
	privatization. You are not ending Fannie Mae and Freddie Mac
	tomorrow. You are incrementally dropping the conforming loan
	levels, and you are raising your G fees to let private capital
	begin to step in slowly over time.
	It is not this leap of faith and just trusting that capital
	is going to be there from the private sector. It is, we are
	going to take these short-term steps, and, along the way, the
	private sector can adjust, can look at the new rules of the
	game, and we can begin to back the government out slowly.
	Mr. Neugebauer. Thank you.
	Thank you, Mr. Chairman.
	Chairman Garrett. I thank you.
	And now, my good friend from New York, Mrs. Maloney.
	Mrs. Maloney. Thank you. And I yield 30 seconds to the
	ranking member.
	Mr. Frank. I thank the gentlewoman.
	I want to make it very clear, I did not think that we were
	ready to pass the bill last year, including the one, 4889, the
	Republicans offered. I thought it needed more time. My
	Republican colleagues said, ``No, it is taking too long to get
	to it. We are ready. Here is the bill.''
	I mentioned earlier that it had been introduced this year
	and I was surprised that the witnesses weren't asked to talk
	about it. The gentleman from Texas said it hadn't been
	introduced, but I was not hallucinating. It was introduced. It
	was introduced as part of a package, the Spending Reduction Act
	of 2011, introduced by the prime sponsor, Mr. Jordan. The
	chairman of the subcommittee was a cosponsor.
	So 4889, the late, lamented 4899, which was so popular last
	year but has withered on the vine of popularity, was, in fact,
	introduced.
	And I only stress that to say, yes, I did think it was more
	complicated and needed more time. It was my Republican
	colleagues who were very critical of that, said, ``No, let's
	move now; we can't wait.'' And I am, therefore, surprised at
	this change of heart and their lack of enthusiasm for the bill
	they were ready to have enacted last year.
	I thank the gentlewoman.
	Chairman Garrett. Mrs. Maloney?
	Mrs. Maloney. Reclaiming my time, we have been discussing
	how to restructure, what to do in the future. But irrespective
	of any future policy, how should we address the literally
	trillions of dollars of existing debt from the GSEs that are in
	the mortgage-backed securities and in corporate bonds that were
	purchased with the expectation that there was an implicit
	government guarantee?
	Much of this debt is now in pension funds, it is in
	401(k)s, it is in assets that benefit the overall American
	public. And I have read in some press reports that many central
	banks across the world are also holding large packages of these
	mortgage-backed securities.
	So my question, really, to Ms. Wartell and then to Mr.
	Pollock and just down the line is, how do we address what is
	there now? And are these bonds government-guaranteed, at this
	point? It is always an implicit guarantee? Are they guaranteed
	or not?
	Many of my constituents are holding them in their 401(k)s,
	and they are very anxious to find out what the future holds for
	them.
	Ms. Wartell?
	Ms. Wartell. I understand that the Treasury Department has
	been very careful not to say that they are a full-faith-and-
	credit obligation of the United States Treasury. That said, I
	believe it has been the policy of this Administration and the
	former to treat them as if they were--that the outstanding
	debt--many of us talk about that, in a system in the future
	when we have a new design, most of us would agree that the debt
	of any future institutions should not be guaranteed, that any
	liquidity backstop ought to be on the MBS.
	But for the outstanding obligations, much like our
	discussion about the debt ceiling in this country, it seems to
	us very important that we give investors here at home and
	around the world confidence that the United States stands
	behind those obligations.
	Mrs. Maloney. Mr. Pollock?
	Mr. Pollock. Congresswoman, the question you raised focuses
	on an essential point. Bond salesmen all over the world, when
	they sold Fannie and Freddie unsecured debt and Fannie and
	Freddie mortgage-backed securities, said to the investors
	something along these lines: ``You have nothing to worry about.
	This is a government debt. But it has a higher yield, it has
	more spread, as we say. But it is a government credit. Don't
	worry.''
	Legally, as a technicality, that wasn't true, but, in fact,
	the bond salesmen were absolutely right. It always was really
	guaranteed, and it is guaranteed. Many of us could agree in a
	theoretical world it shouldn't be. But I think we are stuck
	with that on the existing debt.
	In my view, that existing debt should, on the restructuring
	of Fannie and Freddie, go into a liquidating trust, in a very
	similar way as to what was done with the privatization of
	Sallie Mae, and that debt be honored by the U.S. Government as
	it runs off.
	Mrs. Maloney. Mr. Randazzo?
	Mr. Randazzo. This is where I disagree with one of my
	colleagues, is technically, legally, this debt was not
	guaranteed by the U.S. Government. And just as there has been a
	lot of discussion in this Chamber and previous Congresses about
	the importance for institutions that take on too much risk to
	be able to fail, I believe that investors should also be able
	to fail.
	They knew, or they should have known, that, by law, they
	were not explicitly guaranteed by the U.S. Government. And we
	should not extend this explicit guarantee to honor what was an
	implicit guarantee. It would be bad for the taxpayers.
	Mrs. Maloney. Mr. Calabria?
	Mr. Calabria. I would also add, I think an important part
	is, not only by statute--and this was not changed in HERA--that
	not only is it not guaranteed, it is explicitly rejected. The
	Federal law says, you will not be paid.
	And so, any commitments that Treasury Secretaries, previous
	or current, or that bond managers or that GSE CEOs made, they
	had no authority to. And they were making those commitments in
	contradiction of statute.
	And so, to me, a very important principle we should always
	carry with us is the rule of law. It is not what a Treasury
	Secretary says; it is what the statute says that should be
	important and that should govern here.
	Mrs. Maloney. Thank you.
	My time has expired.
	Chairman Garrett. Thank you.
	I yield now to the vice chair of the subcommittee, the
	gentleman from Arizona.
	Mr. Schweikert. Mr. Chairman, fellow Members, and
	witnesses, first off, in my opening remarks, I hope I didn't
	cause a little bit of fussing when I complained that the
	Administration hadn't met its obligation. Being a freshman
	Member, I have actually really, really been killing myself to
	read everything I get my hands on, Mr. Chairman. And, with
	that, I was trying to be fair-minded and read stuff that was
	coming from all directions. And, apparently, I annoyed the
	ranking member with my fairness.
	Mr. Pollock, I absolutely love this. Having now read binder
	after binder after binder, yours is one of the best white
	papers I have read so far. But one of your premises in there is
	that Fannie Mae and Freddie Mac distort the true price of risk.
	Am I fair in that assumption or in that interpretation or of
	what am I reading out of that?
	Mr. Pollock. That is exactly right. It is what we say, and
	I think it is quite indubitably the case.
	Mr. Chairman, may I request that the white paper that the
	Congressman refers to be entered in the record, if that is all
	right?
	Chairman Garrett. Does the vice chair wish to--
	Mr. Schweikert. Mr. Chairman, I would actually be elated.
	There are some terrific items in there.
	Chairman Garrett. Without objection, it will be entered
	into the record.
	Mr. Pollock. Thank you.
	So when you push credit at an asset, at a market, the
	credit flow gets capitalized into the prices in that market.
	And when you separate the risk of the providers of the funds by
	telling them they are guaranteed by the government so they
	don't suffer the results of their putting a large flow of money
	into a real estate market and driving up the prices, I think
	the only fair way to describe that is as a distortion of
	prices. The result will always be unhappy.
	Mr. Schweikert. Mr. Chairman, I know I have very limited
	time, and I have a handful of questions, so can I bounce on to
	the next one? This one is for all the witnesses.
	In also reading your white paper, the belief that if we
	were to move to a much more true either private market or some
	sort of bifurcated, that we would also have to reach out and
	touch FHA and Ginnie Mae and those, so we didn't create a push
	from one side of the bubble to the other.
	Mr. Chairman, witnesses, is there an agreement that if we
	are going to approach a GSE government-insured market that we
	have to do something holistic?
	Mr. Pollock. I think we all agree on that.
	Mr. Randazzo. I do.
	Mr. Calabria. I agree, absolutely, with that. And I think
	we should keep in mind that a lot of that already is happening.
	FHA is about half of new homebuyers now. So it is already a
	considerable push of risk on to FHA as it is. But we need to
	avoid that further erosion of credit quality on FHA.
	Mr. Randazzo. It would be very irresponsible to just look
	at Fannie and Freddie and not address all the components that
	impact housing in the United States.
	Ms. Wartell. I would agree that we need to--one of the
	reasons I would argue against a fully private market is
	because, in fact, it will push and create enormous pressure for
	us to keep FHA taking on risks that I think otherwise the
	private sector could be bearing if the government were standing
	behind with a limited liquidity backstop. So we are taking on
	more risk than we need to.
	Mr. Schweikert. Mr. Chairman, you actually hit an issue. I
	am concerned that if we are going to do something, we need to
	be looking at everything together.
	Mr. Chairman, witnesses, do I have a prediction on the
	total loss in Fannie and Freddie? When we look back a decade
	from now, how much taxpayer money will have bled?
	Mr. Pollock. It is very hard to know, even if you are
	inside and poring over the numbers. But informed estimates
	range from $180 billion to $300 billion or $400 billion. It is
	highly uncertain, of course.
	Ms. Wartell. I agree with that; like he said, it is highly
	uncertain. But the one thing I would say is that our actions
	now can very much affect the size of that obligation, both in
	how quickly we liquidate their portfolios--if we sell at fire
	sale prices, that actually potentially increases the amount of
	the losses.
	And, similarly, the GSEs have an obligation to repay the
	taxpayers, in effect, in the form of these dividend payments.
	And if we, sort of, withdraw them from the market too quickly,
	their ability to continue to make those payments might be
	mitigated.
	Mr. Schweikert. Okay. Mr. Chairman--and it is, Ms. Wartell?
	Ms. Wartell. Yes.
	Mr. Schweikert. Forgive me. To that point, if I am holding
	huge amounts of nonperforming paper and I am waiting for the
	market to come up to sell it, don't I perpetuate a 5-year real
	estate depression to last a decade? Because when do you hit
	bottom? If prices move, and the expectation--and there is
	always an expectation of this huge overhang. And, Mr. Chairman
	and Ms. Wartell, maybe it is because I come from the Phoenix
	area, where there are 50,000 foreclosures in process, and a
	year ago, there were 50,000 foreclosures in process, and the
	year before, 50,000, there is no change in expectation.
	I almost wish we would take our lumps, process through
	those. We may come down substantially more, but at least we
	start to build a base back up.
	Give me your comment.
	Ms. Wartell. My comment is, I guess, the question of, who
	gets the benefit of the upside and having taken the losses on
	the taxpayers? If we sell them at fire sale prices, then
	private investors will get the market when it comes up, and we
	will end up having larger obligations. It seems to me that the
	taxpayers ought to be able to make a sensible, staggered sale.
	And the other thing I would say is, not all those assets
	they hold are nonperforming. In fact, the majority of them are
	performing assets.
	Mr. Schweikert. Mr. Chairman, Ms. Wartell, I was only
	speaking to the nonperforming portion of the portfolio. And
	being at foreclosure central, I don't know how you get the
	chicken and the egg. We are going to wait until it gets better
	to sell, but it never gets better to sell because I always have
	an anticipation of all these foreclosures that are in process
	that never go to the actual sale.
	Chairman Garrett. And, with that--
	Mr. Schweikert. Sorry, Mr. Chairman. Does that mean I am
	beyond my time?
	Chairman Garrett. Just a smidge.
	Mr. Schweikert. Thank you.
	Chairman Garrett. And I thank the gentleman.
	The gentleman from Colorado.
	Mr. Perlmutter. Thank you, Mr. Chairman.
	Mr. Pollock, you and I have had a chance to talk about this
	subject on a couple of occasions. And so my first question to
	you is, when was Fannie Mae created?
	Mr. Pollock. Fannie Mae was created in 1938.
	Mr. Perlmutter. Okay. When was Freddie Mac created?
	Mr. Pollock. By the Emergency Housing Finance Act of 1970.
	Mr. Perlmutter. Okay. And just so we understand that we are
	all talking the same language, we are not talking about Federal
	Home Loan Banks? Are any of you? When we talk GSEs, you are not
	talking about the Federal Home Loan Banks, are you?
	Are you, Mr. Pollock?
	Mr. Pollock. Congressman, I understood the hearing to be
	about Fannie Mae and Freddie Mac.
	Mr. Perlmutter. Okay. But it also says ``GSEs,'' and the
	Federal Home Loan Banks are GSEs, are they not?
	Mr. Pollock. That is true, Congressman.
	Mr. Perlmutter. Okay. What about--we are not talking Ginnie
	Mae here?
	Mr. Pollock. Ginnie Mae is not a GSE. It is a wholly owned
	government corporation whose credit is the full faith and
	credit of the United States.
	Mr. Perlmutter. Okay. But your premise is that Fannie Mae
	more or less has been treated as something that is backed by
	the full faith and credit--rightly or wrongly, it has been
	promoted as being backed by the full faith and credit of the
	United States, right?
	Mr. Pollock. That is correct. I don't think there is any
	doubt that is the way the markets looked at them.
	Mr. Perlmutter. Okay. So here is my question. Initially,
	was Fannie Mae simply government owned and then it became
	partially privatized?
	Mr. Pollock. That is correct, Congressman. Fannie Mae
	originally was a 100-percent government-owned corporation. It
	was actually owned by the Reconstruction Finance Corporation
	when it was first set up. It had an extremely limited function;
	it was to buy FHA loans. That is all it was allowed to do for a
	portfolio.
	Mr. Perlmutter. Right.
	Mr. Pollock. Probably the original sin was the 1968
	restructuring, which most people think was done in order to get
	Fannie Mae off the Federal budget because President Johnson was
	running outsize deficits at that point and he wanted Fannie's
	debt off the budget. That unleashed the much wider activity of
	GSEs, and we are now living with the results.
	Mr. Perlmutter. Okay. And so, I guess the thing that
	concerns me is that from--and I am to not going to be their
	defender, but I want to understand really what is going on
	here. You all have given us several proposals. We can do an
	FDIC kind of a proposal and have a guarantee fund if everything
	fails. We can have a Ginnie Mae, Fannie Mae kind of proposal,
	which is you just go out and buy these mortgages, and you
	provide liquidity in that fashion. Or you can do nothing at
	all. I think there are sort of three--there is a guarantee,
	there is the buy, there is just let the market handle it.
	Given the history, what I see--and, I have my apple, and I
	have--it really was a crash of the housing market starting in
	really, oh, the end of 2007, beginning of 2008. It is about as
	big a picture of a crash as you could have.
	Prior to that, was the full faith and credit of the country
	being called upon in Fannie Mae or Freddie Mac? Had it ever
	occurred before?
	Mr. Pollock. Congressman, the answer to that is ``yes.'' In
	fact, Fannie Mae was in serious trouble in the early 1980s,
	1981-1982, just as the savings and loans of the day were. They
	were losing tens of millions of dollars. But they were always
	able to keep borrowing because their debt was viewed by the
	market as government debt.
	Mr. Gary Miller of California. Would the gentleman yield on
	that question?
	Mr. Pollock. Sure.
	Mr. Gary Miller of California. The first time they lost
	money was 1985.
	Mr. Perlmutter. Okay. In 1985 though 1990, the model that
	was used as a guarantee model, the Federal Savings and Loan
	Insurance Corporation--which is one of the proposals here,
	something like that--failed, and the government had to pick it
	up through the RTC.
	So, I harken back to Mr. Oxley and the effort of the
	Republican Congress in 2005 to put some limits on Fannie Mae
	and Freddie Mac. And, I have said to you his quote. He was
	upset because the House passed it, and the Senate wouldn't. He
	said, ``All the hand-wringing and bed-wetting is going on
	without remembering how the House stepped up on this. What did
	we get from the White House? We got a one-finger salute.''
	Okay? The White House, under the Bush Administration,
	opposed any limitations on Fannie Mae and Freddie Mac because
	it is my opinion, whether it was because of the government-
	backed guarantee being promoted or that real estate only goes
	up in the United States, we were repatriating a lot of money
	that had gone overseas.
	And so, Mr. Calabria, or Doctor, you said that China was
	one of the owners of this debt. So in a perfect world those
	creditors should just get hammered. Why did Mr. Paulson not
	want to take that step?
	Mr. Calabria. I think, to some extent, Secretaries Paulson
	and Geithner were both concerned about, if you impose haircuts
	on foreign holdings of GSE debt, then there would be questions
	about how that would bleed over to the response by Treasuries,
	so that you might see an increase in Treasury costs.
	Now, I don't think that was ever explicitly made, but that
	is an important part of it. So I do think it is looked it as
	the credibility of the American public.
	Mr. Perlmutter. Thank you.
	Chairman Garrett. I thank the gentleman.
	I now turn to the gentleman from Virginia, Mr. Hurt, for 5
	minutes.
	Mr. Hurt. Thank you, Mr. Chairman.
	This is for Mr. Pollock. I was wondering, going back to,
	kind of, the history of Fannie Mae and Freddie Mac, if you look
	back at the time that it was established and formed, how come,
	since that time, we haven't seen a private market for these
	mortgages develop over that time?
	And it sounds like from the question that was just asked
	that, from its founding in 1938 to 1968, that, really, it had a
	very narrow mission. Why didn't the private sector step in
	during that period? And how does that inform us as we go
	forward?
	Mr. Pollock. Congressman, that is a very good question. And
	the answer is, of course, the private sector was acting in the
	market all during that period.
	If I could put in a historical footnote, as I think one of
	the other Congressmen said, there always was a secondary
	mortgage loan market. Going back to the 1920s, there was a
	channel of mortgage bankers who placed loans with insurance
	companies, for example. So that is a classic idea.
	But as the GSEs developed in their post-1968 form, which
	was really the invention of the GSE form, wherever they could
	operate they dominated the market, because no one could compete
	with their government advantages and subsidies.
	So, as I said a little bit ago, the market where it would
	be most likely to have a private securitization market in
	addition to a private portfolio lending market didn't develop.
	It didn't develop because it was dominated by the subsidies
	given to Fannie and Freddie. Of course, the subsidies include
	the government guarantee--real, though not formal.
	Mr. Hurt. Thank you.
	I yield back my time.
	Chairman Garrett. Mr. Green?
	Mr. Green. Thank you, Mr. Chairman.
	Just as a follow-up to the questions that were asked about
	the private loan market in the 1920s, is it true that market
	had balloons? And is it true that market had interest-only
	loans? Is it true that market was very much akin to what we
	just went through, with what we are calling ``exotic products''
	now?
	Is that true, Ms. Wartell?
	Ms. Wartell. Yes, Congressman, that is absolutely true.
	Mr. Green. So you had a private loan market in the 1920s,
	but did it make homes available? Let's not talk about
	affordable, since that has become a negative term now. I marvel
	at how ``affordable'' can be negative for middle-class people.
	But did it make those homes available to middle-class
	people? Were middle-class people able to buy homes and fulfill
	the American dream to the extent that they were before the
	bubble and before the crash?
	Ms. Wartell. In that period, most people who were able to
	buy homes had been able to accumulate very significant amounts
	of savings, sometimes up to 50 percent. And so the availability
	of homeownership was very limited compared to modern--
	Mr. Green. Seems like somebody ought to say that, that we
	had that problem--that it was a circumstance. Let's not call it
	a problem, but it was a circumstance. And we have
	metamorphosed. It is no longer a circumstance.
	But let's move forward to something else. Ms. Wartell, you
	indicated that all governments, I believe, have some kind of
	government involvement in the loans. Is that correct?
	Ms. Wartell. Either explicitly or implicitly. In many of
	the European countries, which are often cited as a comparison,
	there are a relatively small number of financial institutions
	that serve those markets that benefit very significantly from
	an implied ``too-big-to-fail.'' And, in fact, many of them have
	been supported by their countries as they have gotten in
	trouble.
	Mr. Green. Let me intercede because I have limited time.
	My assumption is that the three other persons at the
	table--all of whom I have great respect for, by the way; I
	appreciate your commentary--but that all of you are in favor of
	no government involvement at all. Is that a fair statement, or
	did I miss something?
	Mr. Pollock. I will speak for myself, Congressman.
	My long-term objective for American housing finance is a
	market that is principally a private market. I estimate about
	85 percent. And about 15 percent--
	Mr. Green. Mr. Pollock, you know I love you. We have been
	together before here. And, I have a deep, abiding affinity for
	you.
	But the three of you, in essence, would have no government
	involvement.
	Now, let me ask you, Mr. Pollock, do you speak for the
	banks when you say this?
	Mr. Pollock. No, sir. I speak only for myself.
	Mr. Green. All right. Let's go to your next colleague.
	Do you speak for the banks, sir?
	Mr. Randazzo. No, I do not speak--
	Mr. Green. Do you speak for the banks, sir?
	Mr. Calabria. I only speak for myself.
	Mr. Green. Okay. Is it not true that, generally speaking,
	we consider what those in the industry have to say about this?
	Does someone have some plethora of evidence, empirical
	evidence, if you will, connoting that the banks entirely
	support this type of circumstance that you have called to my
	attention?
	Mr. Calabria. I will react--
	Mr. Green. Is it yes or no?
	Mr. Calabria. It is no. I put--
	Mr. Green. No. Okay, here is why I bring this up. We put a
	lot of thought on this committee into what those who actually
	have to do what we say will be done, what they think about it.
	It seems to me that, given that you are talking about what
	is revolutionary--and I think Ms. Wartell said that we should
	be thoughtful and have a resolution, not an overnight
	revolution.
	Is that your phrase?
	Ms. Wartell. Evolution, not revolution.
	Mr. Green. Evolution, not revolution.
	It seems to me that the banks ought to have some say in
	this process, as well, since they had a pretty good say in all
	of the other aspects of things and since they are going to do
	the lending, they will do the lending.
	How is it that we conclude that banks will do all of these
	things that you say and not what they are saying they will do?
	Because the bankers who talk to me, they tell me they would
	like to see a Federal backstop. That is what the bankers
	talking to me say. And if you tell me that you speak for them
	and that is not what they are saying, I will put that into my
	computer and let that be a part of my processing of this
	intelligence.
	One more thing before we go, and I have to do this. I
	apologize to you. But you indicated that it would be bad for
	taxpayers--I believe this was indicated by Mr. Randazzo--bad
	for taxpayers, but you didn't say what it would be like for the
	economy to allow the default.
	``Bad for taxpayers.'' Taxpayers have to be a part of the
	economy. What is it going to be like for the economy if we just
	allow the collapse? What would it be like if we allow all of
	this bad paper to just go under?
	Ms. Wartell, would you respond, please?
	And I thank you, Mr. Chairman. I know that will be my last
	question.
	Chairman Garrett. Was that Mr. Randazzo's question?
	Mr. Green. No. It is to Ms. Wartell, please.
	Chairman Garrett. Okay. If you will keep that to 10
	seconds, because we are over time.
	Ms. Wartell. Too rapid a withdrawal of support from the
	housing market could cause us to take the fragile economic
	growth we are currently seeing back in the wrong direction.
	Chairman Garrett. And I thank you.
	The gentleman from Ohio, Mr. Stivers, for 5 minutes.
	Mr. Stivers. Thank you, Mr. Chairman.
	I would like to thank the panelists for coming today.
	The thing that I was struck by is that there does seem to
	be some similarities, commonality, that all of you agree on at
	least some of the steps that we might want to consider moving
	forward, or at least there is a consensus among you. And I know
	that there are clearly some differences.
	My first question is for Ms. Wartell. You talked about a
	yield spread analysis, and you used that to conclude that
	investors in Europe view covered bonds as having essentially a
	government guarantee. But I guess the part I am trying to
	understand is that yield spread was actually smaller than the
	yield spread between U.S. Treasuries and the Fannie and Freddie
	debt, which does have a government guarantee.
	Isn't it really a statement by those investors that they
	are admitting that there is less risk in those covered bonds
	because the banks that originated them have continued to have
	skin in the game, and they believe when somebody who originates
	a mortgage has skin in the game, they are not going to let
	themselves lose money, versus the system we have, where you can
	originate and sell off 100 percent? Isn't that another way to
	look at the view?
	And, obviously, there is no--it is all speculation, too,
	because we are just looking at a yield analysis instead of
	really interviewing investors who have invested in these.
	Ms. Wartell. It is my--let's put aside the analysis of the
	spreads, because I think obviously different people can
	interpret it different ways. But I do think that it is safe to
	say both, as you said, that there is particular collateral
	behind the covered bonds, and the investors understand they
	have that, and that they believe that those institutions in
	most of those countries benefit from an implied government
	guarantee
	Mr. Stivers. Thank you. Do you think, Ms. Wartell, that the
	retention of risk leads to less risky behavior by those
	institutions that have skin in the game?
	Ms. Wartell. I generally have supported that lending
	institutions should retain risk, have skin in the game, in
	their loans, as the Dodd-Frank legislation also would require.
	Mr. Stivers. Sure. Thank you.
	And the second question I have, also for Ms. Wartell, how
	do you explain the 30-year, fixed-rate mortgage in Denmark if
	you think that a covered bond won't lead to a fixed-rate
	mortgage here in the United States?
	Clearly, it seems that it is a market requirement that
	consumers in Denmark, consumers in the United States, have
	demanded those products, and, therefore, the market has
	provided them.
	Ms. Wartell. Actually, I think there are two different
	arguments that I have made that are being conflated in this
	case. Denmark has provided, through the covered bond mechanism,
	long-term, fixed-rate mortgages.
	My point is that I think that if you have a purely private
	market, the appeal of covered bonds for most of our financial
	institutions under the U.S. regulatory scheme is very
	different. It won't likely be the primary mechanism of funding.
	And I also think that here we will end up with short-term debt.
	But it is not the covered bond that I argue won't produce
	30-year, fixed-rate mortgages. It is the fact that if we have--
	Mr. Stivers. The problem with the FDIC.
	Ms. Wartell. If we don't have the backstop for the
	investments.
	Mr. Stivers. Okay. Thank you.
	Could the other panelists comment on their thoughts,
	quickly, on retention of risk and what that would mean for the
	marketplace?
	Mr. Pollock. Congressman, I have worked on introducing
	credit risk retention into the mortgage markets for 15 years. I
	think it is an extremely useful and important idea. It is one
	of many ideas, but it is a very useful one.
	I think the advantage of the covered bond, which you cite,
	is that there is 100-percent credit risk ``skin in the game''
	for the covered bond issuer. This is also extremely important
	in understanding how these bonds work.
	Mr. Randazzo. I would just echo the comments of my
	colleague.
	Mr. Stivers. Thank you.
	Mr. Calabria. And I would say, I think retention of risk is
	an important thing in the marketplace, but I also believe there
	was considerable retention of risk prior to the crisis. In
	fact, most of the 400-some subprime lenders that went out of
	business were because they were forced to buy back the piece
	that they had. So skin in the game is important, but it isn't a
	cure-all.
	Mr. Stivers. Sure.
	Mr. Calabria. I would also argue that one of the things
	that should be considered going forward, if we are going to
	keep a Fannie and Freddie model, is to get them out of the
	guarantee basis, where they simply sell off the MBS, they don't
	guarantee the credit risk, because three-fourths of their
	losses have come about because they retained that risk and the
	investor did not take it.
	So we have lots of retention of risk. It hasn't always
	worked that well. Sometimes it has; sometimes it hasn't. But it
	is not a cure-all.
	Mr. Stivers. Thank you.
	Now for the whole panel, just going across, the focus of a
	lot of your testimony was on covered bonds. Are there
	approaches somewhere between what we are doing today and
	covered bonds? Are there other approaches that people are
	talking about, reinsurance or any other approach outside of
	just the two approaches that we have heard today?
	And I know that we don't have much time, so--
	Chairman Garrett. Ten seconds.
	Mr. Calabria. I will say very quickly that I think that you
	can have a large amount of money that is portfolio-based not in
	a covered bond way, even though that is portfolio-based.
	Mr. Pollock. My answer is yes.
	Mr. Stivers. Thank you.
	Thank you, Mr. Chairman.
	Chairman Garrett. Thank you.
	The gentlewoman from New York.
	Dr. Hayworth. Thank you, Mr. Chairman. I will make this
	brief.
	I was thinking about the comments that Ms. Waters made
	regarding the PIMCO chair reflecting his comments about how
	increasing the downpayment on houses might be burdensome for
	homebuyers. But isn't it true that it would also help to, if
	you will, rationalize home prices? I would appreciate the
	panel's assessment of that.
	Mr. Calabria. Yes, it largely would. I do think that we
	need to get back to a point where housing prices reflect
	fundamentals rather than availability of credit driving prices,
	necessarily. There should be credit there.
	I do want to note, as well, there was an earlier discussion
	about very large downpayments in the 1920s. And I will note
	that the homeownership rate for working males aged 55 to 64 in
	1920 was 66 percent. So in no way was the 1920's homeownership
	limited only to the wealthy. That is false.
	Mr. Pollock. Congresswoman, I would say I have spent a lot
	of time around bond markets in my career. The head of PIMCO's
	comments have been widely cited. I never take too seriously
	what bond traders say.
	When it comes to downpayments, there is no doubt--and this
	is just an unquestionable regularity of housing finance--that
	size of downpayments or, inversely, the extent of the loan-to-
	value ratio, is one of the most reliable indicators of credit
	performance, either good or bad.
	Ms. Wartell. I think that it is true that downpayment is a
	relevant factor, but I think we overemphasize it in the
	conversation. In the late 1990s, there was a great deal of very
	positive experimentation that was going on, demonstrating
	positive ways to mitigate the risk of low-downpayment lending.
	And all of those good practices were wiped out by the abusive
	practices in the subprime market.
	And there are enormous disparities of wealth in our
	society, and communities with low homeownership rates have
	other social costs. So if we go to a system where we mandate
	very high downpayments, there will be consequences that I think
	we will all be very sorry to see.
	So we need to make sure that there are ways to mitigate
	risk, but downpayment should not be our only measure.
	Dr. Hayworth. Is it fair to ask, on a very fundamental
	level, whether or not all that these GSEs have done and all
	that the Federal intervention in the housing and mortgage
	markets has done, is it fair to conclude that those most
	vulnerable have actually benefited from these interventions?
	Because, certainly, the state of our economy would suggest
	otherwise.
	Mr. Randazzo. I would say, in large part, no. And if you
	just look at the waves of foreclosures that have basically been
	besieging the United States over the past several years, any
	gains that were established turned out to be faulty and have
	been wiped away. And, in large part, there are a number of
	individuals who seemingly thought that we were helping that are
	now worse off than when we started.
	Mr. Calabria. If I could make a comment, I have worked on
	housing policy and mortgage finance policy for a very long
	time. And one of the things that has constantly puzzled me is
	that proposals that have the aim of running up housing prices
	are presented as enhancing affordability. That kind of confuses
	me. Usually, that is a transfer to the seller.
	I look at it as, housing is a basic necessity of life.
	Everybody needs shelter. And when housing becomes more
	affordable--that is, when prices come down--I think that is a
	great thing.
	Now, currently, the impact of that certainly helps the
	poor, hurts maybe the middle class and the rich, but that is a
	policy outcome I can live with.
	Ms. Wartell. I think it is important, as we look backwards,
	though, not to conflate the role that the GSEs played in the
	housing market with the consequence of the subprime crisis that
	we had.
	The reality is, if you look at the Financial Crisis Inquiry
	Commission report and others, the preponderance of the evidence
	here is that there was an intervening factor. There was this
	unregulated market, the shadow banking that was accelerated
	with the Wall Street inventions. The result of that was chasing
	horrible loans. And it is those lending practices, and not the
	lending practices of the GSEs. They reacted to those; they
	joined in the party. They have cost a significant amount of
	money to the taxpayers.
	I have no book to protect their record. But I think we
	should be very careful here not to conflate the role the GSEs
	played in the housing market prior to the year 2000 with the
	consequences of the subprime crisis.
	Dr. Hayworth. May I have 30 more seconds, Mr. Chairman?
	Chairman Garrett. No, I am sorry, no. Your time has
	expired.
	Dr. Hayworth. Thank you.
	Chairman Garrett. Your colleague from New York is up next.
	If he wants to yield you--
	Mr. Grimm. I will yield my time.
	Dr. Hayworth. Oh, thank you, Mr. Grimm.
	I would simply submit to you that there were, as we all
	know, dissenting opinions regarding that Financial Crisis
	Inquiry Commission report. And the clear message that someone
	like me would take from it is that it is, in fact, the implicit
	Federal guarantee, indemnification of bad risk, that created
	the impetus for all of these risky investments.
	Thank you.
	Mr. Grimm. On that note, I think, Mr. Pollock, if you would
	like to comment on the last comments, please, I will give you a
	minute to do so.
	Mr. Pollock. Thank you very much, Congressman.
	I want only to make two points. One, when it comes to
	subprime mortgage-backed securities, of course Fannie Mae and
	Freddie Mac were among the biggest buyers and the richest bids
	for subprime securities.
	But on a more general point, having to do with credit
	policy and housing finance policy everywhere, the worst thing
	you can do for somebody is to make them a loan they can't
	afford.
	Ms. Wartell. No disagreement.
	Mr. Grimm. I think we are getting ready to wrap up, and I
	will be very brief.
	Overall, I think to bring this all together at where we are
	at, the Federal debt stands at $14 trillion. GSE debt stands at
	$8 trillion.
	I will ask Mr. Pollock, what are the implications of this
	unsustainable debt load, in a nutshell?
	Mr. Pollock. Unsustainable debt can't be sustained, and it
	has to be addressed and adjusted to. It usually involves
	finding ways to reschedule, restructure, or inflate your way
	out of it. We are faced with a really tough problem, as you
	suggest, Congressman.
	Mr. Grimm. My last question: Mr. Calabria, you have
	proposed that Congress establish a recoupment fee on all
	mortgages purchased by Fannie Mae and Freddie Mac to reduce the
	deficit and to recoup as much of the losses as possible. Just
	very briefly, how would that work?
	Mr. Calabria. Essentially, it could be a fee that the GSEs
	charge to any lender that sells them the mortgage, and then
	that fee is recovered just like the way the guaranteed fee
	structures work now. Essentially, you would layer it on top of
	the guarantee fee that the GSEs already require from lenders,
	and then you put it off to pay down the amount of money we put
	in.
	So I certainly would not suggest that we charge them any
	more than we have already put in, but just as an attempt to
	recoup what we have put in.
	Mr. Grimm. Okay.
	And, in closing, I would just like to say that we have
	heard both sides and that, on one hand, we need the government
	to make sure that we still have mortgages. And, without it,
	there will be the collapse of our economy and the collapse of
	home housing. My inclination innately is always that, where
	there is a need, the market will fill that need and that this
	country was founded on private-sector principles that have
	really risen to the occasion time and time again.
	And if the government were to, say, step aside and move out
	of the way of our free market, it would thrive. And a lot of
	the answers to this insurmountable debt is that free market,
	the enterprise, the entrepreneurial spirit that has made us
	great and will continue to make us the greatest nation in the
	world.
	And, with that, I yield back the rest of my time.
	Chairman Garrett. The gentleman yields back, but the
	gentlelady from New York could have 1 minute left of his time
	to use for any other questions that she has.
	Dr. Hayworth. Would the panel agree that, in fact--and I
	thank you, Mr. Chairman. I am sorry.
	Would the panel agree that the mobility issue created by
	the challenges that mortgage holders face because of the bad
	risks they undertook with Federal help, if you will, actually
	affects our unemployment rate materially today?
	Mr. Pollock. Many economists, Congresswoman, have pointed
	out the labor mobility problem entailed by having houses that
	are underwater on their mortgage.
	There is something else we should point out. For all the
	advantages of a 30-year, fixed-rate mortgage, there are also
	disadvantages to it. For example, if you are underwater and you
	have what is now a high-rate mortgage, you can't refinance it.
	I call that the ``dark side of the 30-year, fixed-rate
	mortgage,'' and we have to take that into account. It relates
	to this mobility problem.
	Mr. Calabria. Responding to the Congresswoman's question,
	there are a number of empirical studies that have looked both
	across countries and across States and have reached the
	conclusion that the higher your homeownership rate, the higher
	structural unemployment you have. And this is something that is
	very well-founded, in peer-reviewed journals.
	My back-of-the-envelope is that at least a percentage point
	of the unemployment rate we are seeing today is due to the high
	homeownership rate we had going into the crisis.
	Chairman Garrett. Thank you. And the gentlelady yields
	back.
	The gentleman from California.
	Mr. Gary Miller of California. Thank you, Mr. Chairman.
	This has been a very interesting hearing. I have heard so
	many different sides.
	I heard one of my good friends from the other side of the
	aisle say that the Bush Administration did not support
	reforming GSEs. That is fallacious. I met with the President
	many times on this issue. We probably sent the bill to the
	Senate 3, 4, maybe 5 times. And there was a filibuster that
	occurred, and it wasn't by the Republicans, that stopped the
	bill from being heard. So that is the fact on there. I
	corrected one thing on you earlier, but that was just wrong on
	that.
	And I am having trouble with a lot of facts out here. I am
	not taking sides on the issue. No doubt we have serious,
	serious problems. But I am hearing a lot of the debate that
	doesn't make sense when it is applied to reality, in some way.
	Mr. Calabria, you made a great statement on mortgage-backed
	securities because the only mortgage-backed securities worth a
	darn are GSEs out there. The alternative, when the market got
	really good in 2004, 2005, and 2006 was the private sector.
	Countrywide did come in and be major players in the
	marketplace. Now, if we had defined predatory versus subprime,
	they would have never been in the marketplace. But they played
	a huge part in the marketplace, made a tremendous number of
	loans to people who could never pay them back, sold them off to
	the private sector. And the way those loans are bundled, they
	can't be debundled.
	Now, GSEs--I will say that if you buy a mortgage-backed
	security from the GSEs, you will get what you are promised.
	Because they bundle them in a way where a nonperforming loan is
	removed and replaced with a loan that is performing. And many
	of the loans that the GSEs are eating today is because they are
	taking those loans out and replacing them.
	The problem we have is--let's go back to 2008. When you
	look at the total losses in the marketplace in 2008, the
	lending sector lost about $2.7 trillion in losses. Now,
	understanding at that point in time that Fannie and Freddie
	represented 70 percent of the marketplace, or 31 million loans,
	Fannie lost $117 billion, Freddie lost $67 billion--a lot of
	money, but let's put it in perspective. They had 70 percent of
	the marketplace. Out of $2.7 trillion lost, they lost less than
	$200 billion of it. Unacceptable numbers, no argument.
	There have been statements made that the problem is that we
	made loans to people with low downpayments. But VA and FHA do
	that today. Let's look at the reality. In my district alone, LA
	County, VA and FHA loan defaults are 2.6 percent; Freddie and
	Fannie are 3.9; the jumbos, 10.1. Obviously, VA and FHA are
	doing very well making low-downpayment loans.
	In Orange County, the FHA/VA default rate is 1.4 percent;
	Freddie and Fannie, 2.1 percent; the jumbo private sector is
	2.89 percent. San Bernardino County--a high default rate in San
	Bernardino County overall. VA and FHA is 3.5 percent; Freddie
	and Fannie, 7.8 percent; jumbo is 18.4 percent.
	So if the logic is that a low downpayment means necessarily
	a high default rate, the numbers don't verify that argument.
	To make a loan to somebody that they cannot repay, it
	doesn't matter what they put in, they are going to default. If
	they can't make the payments and they put 20 percent down, they
	are still going to lose the house. If they put zero down and
	they can't make the payments, they are still going to lose the
	house.
	So if we would have taken at some point in time and said,
	let's define predatory versus subprime--which I know I put in
	at least five bills going to the Senate, and my good Democrat
	friends filibustered it--a matter of record, not fallacious--we
	would probably not have some of the problems we have today.
	And if you look at the chart, a great example of that is
	delinquencies today. Had we taken and fixed the problem in 2000
	when we tried to fix predatory versus subprime, the subprime
	ARMs had a default rate of about 5 percent. Now, you go from
	2000, when we did not fix it, to 2008; they had a default rate
	of 38.7 percent. Why? Because nobody bothered to define
	predatory versus subprime.
	The default rate also, if you look at the middle-range
	market, an average in 2000 was about 2 percent. An average in
	2009 was 8 percent. The default rate for Freddie and Fannie in
	basically 2000 were nonexistent. They had no default rate. It
	rose in 2009 on the Freddie side to 3.1 percent and the Fannie
	side to 4.2 percent. It is too high. But the average market is
	8 percent. Subprime is 26.5. The better subprime, the ARM
	subprime, is 38.7.
	So when you look at the numbers, you say, is there a
	problem? A serious problem with the entire industry. I remember
	when I was a young man in my 20s, if I went to borrow money
	from a lender for a construction loan, if I didn't meet
	conforming standards, they would not make me the construction
	loan. Why? Because at the end of the day, there was probably
	not going to be a lender to make them the loan to do the
	takeout on the house I had just built.
	So, Freddie and Fannie were basically created to provide
	liquidity to the marketplace. Had Freddie and Fannie not been
	there in 2007, you could not have given a house away, period.
	Wall Street was shut down. Private sector was shut down. Wells
	Fargo, Bank of America didn't know if they could survive the
	next day.
	So what did we do to the taxpayers in this country who own
	a home? Sixty-five percent of the families own a home. Many of
	those homes have double--I ran out of time, didn't I?
	I hate this when I am preaching. I love to preach. I should
	have been a preacher. If I was a Baptist, I would be a preacher
	today, but I am not.
	But, in closing--
	Chairman Garrett. Was there a question in there?
	Mr. Gary Miller of California. Yes, there was. I never got
	to the question.
	My question was, I heard a lot of great information today,
	but I heard it from a lot of different perspectives. And when
	you put it together in reality, you see there are some basic
	problems that should have been corrected. Was low downpayment
	the problem? According to FHA and VA, no. Were underwriting
	standards a problem? Absolutely. And guidelines were a problem.
	Predatory versus subprimes were a problem.
	And, Mr. Chairman, I hope we have a lot of these because
	there is so much we need to get on the table, because I know
	you have a passion on this issue, and so do I and many other
	Members. But we have to figure out what we are going to do to
	fix the housing market in this country without destroying it.
	And if Fannie and Freddie don't make sense, let's get rid of
	them. If they can make sense with modifications, let's look at
	that. But let's just don't make assumptions based on an entity
	that has 70 percent of the marketplace and is performing better
	than any lender sector out there today other than FHA and VA.
	So when we move into getting an answer for this, let's move
	with that understanding and move cautiously.
	I yield back the balance of my time.
	Chairman Garrett. I appreciate that.
	Mr. Gary Miller of California. Thank you for your
	generosity.
	Chairman Garrett. And I will seek unanimous consent to
	allow the witnesses, even though it is over time, just to give
	a short--
	Mr. Gary Miller of California. --answer to my question.
	Chairman Garrett. Yes, answer his global, and then they
	will be our last--
	Mr. Calabria. There was an awful lot there, but let me
	first react to--in 2007, Fannie and Freddie were actually
	pulling back. And one of the reasons that Secretary Paulson
	gave for taking the conservatorship was to get them to make
	more lending. Now, the fact is today that the reason they are
	making lending is because their losses and their debt are
	essentially backed by the government. And I would put it this
	way: You cover all my losses, guarantee all my debt, and I will
	go out and buy a whole lot of mortgages, too. So we have to
	remember what is the important part here that is keeping them
	together.
	I 100 percent agree that downpayment alone is certainly not
	the determinative factor. I think FICO score is far more
	predictive of default than downpayment. So, certainly, that
	could be a tradeoff.
	I do think we need to keep in mind the vintages of loans
	that we are looking at. As you are very well aware, in about
	2005--
	Mr. Gary Miller of California. Can I ask one question?
	Mr. Calabria. Sure.
	Mr. Gary Miller of California. Yes, on Freddie and Fannie's
	making loans today, but the underwriting standards are
	tremendously different than they were 3 or 4 years ago.
	Mr. Calabria. Yes.
	Mr. Gary Miller of California. Especially in the high-cost
	areas, they are very stringent.
	Chairman Garrett. Yes. Let's let the panel complete,
	because otherwise we will--
	Mr. Calabria. So, but what I was going to say, in comparing
	FHA to jumbo or any other part of the market, you do have to
	look at vintages. As you are well aware, FHA's market share in
	California in 2005 was about 2 or 3 percent. So there was very
	little lending, where they have picked up since when the loan
	limits were raised. So my point would be, you have to make sure
	you are comparing 2005 to 2005 loans. And that is an important
	part of it.
	I do think you can offset the downpayment if you put other
	factors in the require good credit quality.
	Mr. Randazzo. I would be happy to submit comments in
	writing.
	Chairman Garrett. All right.
	Mr. Pollock?
	Mr. Pollock. Mr. Chairman, I look forward to the discussion
	of this at another hearing, should you ever want to invite me
	back.
	Chairman Garrett. Oh, okay.
	Ms. Wartell. Thank you very much, Mr. Chairman, for having
	us.
	Chairman Garrett. Thank you.
	And I thank all the witnesses and the members here today.
	I seek unanimous consent to enter into the record the
	statements of the National Association of Realtors, the
	American Bankers Association, the National Multi Housing
	Council, and the National Association of Federal Credit Unions.
	And, with that, the Chair also notes that some members may
	have additional questions for this panel, which apparently they
	do, which they may wish to submit in writing. Without
	objection, the hearing record will remain open for 30 days for
	members to submit questions to these witnesses and to place
	their responses in the record.
	This hearing is thereby adjourned.
	[Whereupon, at 4:50 p.m., the hearing was adjourned.]



	A P P E N D I X



	February 9, 2011


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