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LEGISLATIVE PROPOSALS ON GOVERNMENT–
SPONSORED ENTERPRISE (GSE) REFORM

HEARING
BEFORE THE

COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION

MARCH 15, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–15

(

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2007

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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
´
NYDIA M. VELAZQUEZ, New York
MELVIN L. WATT, North Carolina
GARY L. ACKERMAN, New York
JULIA CARSON, Indiana
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
DENNIS MOORE, Kansas
MICHAEL E. CAPUANO, Massachusetts
´
RUBEN HINOJOSA, Texas
WM. LACY CLAY, Missouri
CAROLYN MCCARTHY, New York
JOE BACA, California
STEPHEN F. LYNCH, Massachusetts
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
AL GREEN, Texas
EMANUEL CLEAVER, Missouri
MELISSA L. BEAN, Illinois
GWEN MOORE, Wisconsin,
LINCOLN DAVIS, Tennessee
ALBIO SIRES, New Jersey
PAUL W. HODES, New Hampshire
KEITH ELLISON, Minnesota
RON KLEIN, Florida
TIM MAHONEY, Florida
CHARLES WILSON, Ohio
ED PERLMUTTER, Colorado
CHRISTOPHER S. MURPHY, Connecticut
JOE DONNELLY, Indiana
ROBERT WEXLER, Florida
JIM MARSHALL, Georgia
DAN BOREN, Oklahoma

SPENCER BACHUS, Alabama
RICHARD H. BAKER, Louisiana
DEBORAH PRYCE, Ohio
MICHAEL N. CASTLE, Delaware
PETER T. KING, New York
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
RON PAUL, Texas
PAUL E. GILLMOR, Ohio
STEVEN C. LATOURETTE, Ohio
DONALD A. MANZULLO, Illinois
WALTER B. JONES, JR., North Carolina
JUDY BIGGERT, Illinois
CHRISTOPHER SHAYS, Connecticut
GARY G. MILLER, California
SHELLEY MOORE CAPITO, West Virginia
TOM FEENEY, Florida
JEB HENSARLING, Texas
SCOTT GARRETT, New Jersey
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
JIM GERLACH, Pennsylvania
STEVAN PEARCE, New Mexico
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia
GEOFF DAVIS, Kentucky
PATRICK T. MCHENRY, North Carolina
JOHN CAMPBELL, California
ADAM PUTNAM, Florida
MICHELE BACHMANN, Minnesota
PETER J. ROSKAM, Illinois
KENNY MARCHANT, Texas
THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel

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CONTENTS
Page

Hearing held on:
March 15, 2007 .................................................................................................
Appendix:
March 15, 2007 .................................................................................................

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83

WITNESSES
THURSDAY, MARCH 15, 2007
Cornick, Hon. L. Carter, General Deputy Assistant Secretary, Department
of Housing and Urban Development (HUD) ......................................................
Crowley, Sheila, President, National Low Income Housing Coalition ................
Dalton, John H., President, Housing Policy Council, Financial Services
Roundtable ............................................................................................................
Fishbein, Allen, Director of Housing and Creidt Policy, Consumer Federation
of America .............................................................................................................
Flynn, Michael, Director of Government Affairs, Reason Foundation ................
Gleason, Thomas, board member, National Council of State Housing Agencies .........................................................................................................................
Howard, Gerald M., Executive Vice President and Chief Executive Officer,
National Association of Home Builders ..............................................................
Kennedy, Judith A., President and CEO, National Association of Affordable
Housing Lenders ..................................................................................................
Lockhart, Hon. James B., III, Director, Office of Federal Housing Enterprise
Oversight (OFHEO) .............................................................................................
Mudd, Daniel H., President and Chief Executive Officer, Fannie Mae ..............
Steel, Hon. Robert K., Under Secretary for Domestic Finance, Department
of the Treasury .....................................................................................................
Syron, Richard F., Chairman and Chief Executive Officer, Freddie Mac ...........

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68
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53

APPENDIX
Prepared statements:
Capito, Hon. Shelley Moore .............................................................................
Gillmor, Hon. Paul E. .......................................................................................
Pryce, Hon. Deborah ........................................................................................
Waters, Hon. Maxine ........................................................................................
Cornick, Hon. L. Carter ...................................................................................
Crowley, Sheila .................................................................................................
Dalton, John H. ................................................................................................
Fishbein, Allen ..................................................................................................
Flynn, Michael ..................................................................................................
Gleason, Thomas ..............................................................................................
Howard, Gerald M. ...........................................................................................
Kennedy, Judith A. ...........................................................................................
Lockhart, Hon. James B. III ............................................................................
Mudd, Daniel H. ...............................................................................................
Steel, Hon. Robert K. .......................................................................................
Syron, Richard F. ..............................................................................................
ADDITIONAL MATERIAL SUBMITTED

FOR THE

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108
112
120
128
138
145
161
174
183
187
193

RECORD

Frank, Hon. Barney:
Letter to Chairman Frank and Representative Kanjorski from the American Land Title Association ..........................................................................

228

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IV
Page

Frank, Hon. Barney—Continued
Letter to Chairman Frank and Ranking Member Bachus from the Consumer Mortgage Coalition ............................................................................
Clay, Hon. William Lacy:
Responses to questions submitted to Hon. James Lockhart III ...................
Watt, Hon. Melvin L.:
Responses to questions submitted to Hon. James Lockhart III ...................
Royce, Hon. Ed:
Chairman Bernanke’s March 6, 2007 speech .................................................

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LEGISLATIVE PROPOSALS ON
GOVERNMENT–SPONSORED
ENTERPRISE (GSE) REFORM
Thursday, March 15, 2007

U.S. HOUSE OF REPRESENTATIVES,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The committee met, pursuant to notice, at 10:04 a.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding.
Present: Representatives Frank, Waters, Maloney, Watt, Meeks,
Moore of Kansas, Hinojosa, Clay, Miller of North Carolina, Scott,
Cleaver, Bean, Davis, Sires, Hodes, Ellison, Perlmutter, Murphy,
Donnelly; Bachus, Baker, Royce, Gillmor, Biggert, Shays, Miller of
California, Hensarling, Garrett, Pearce, Neugebauer, Bachmann,
and Roskam.
The CHAIRMAN. This hearing of the Committee on Financial
Services will come to order. This is the second hearing we will be
having before the committee on the question of the GovernmentSponsored Enterprises (GSEs).
The chairman of the Subcommittee on Capital Markets, Mr. Kanjorski, had a very useful hearing on this on Monday.
We hope to be voting on this bill in committee before the break;
I think we set it for March 28th. We then hope to be able to go
to the Floor; that is where we are.
We have been working on this bill for some time. A version of
this bill that is quite close to the bill that is before us passed this
committee by a very large majority and in the House by a large
majority in the previous Congress.
It was largely bipartisan. There were some points of difference.
I will note that a couple of the points of difference have been specifically addressed, not in the existence of the housing fund, but in
how it is administered and calculated.
There have been some other changes as well in conversation that
I had with some consultation with the Minority, but I do not claim
to date to have the full responsibility for this, but we did try to
stay in touch with people.
This was in December, so it was still when Mr. Oxley was the
outgoing chairman. We had conversations with the Treasury Department, with various people; Under Secretary Steel was very important in that.
We have the bill before us. The bill does several things that
seemed to us important. First of all, it substantially enhances the
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2
power of the regulator. I do want to say that I think there has been
a somewhat excessive debate over exactly what the powers of the
regulator are.
We currently have a regulatory structure that most of us agree
gives the regulator less legal authority than he ought to have. Despite that, in the past few months, the regulator has ordered both
Fannie Mae and Freddie Mac to do things that they did not want
to do on their own because nobody ever has to order anybody to do
what they want to do, except in circumstances which it would be
inappropriate to discuss here.
The fact is that even with the acknowledged less than full authority, both Fannie Mae and Freddie Mac complied. I think we
ought to recognize that if you have a regulator and he has powers
and he is determined to do something, he is probably going to be
able to do that.
We can set a framework and set some guidelines. Here are the
guidelines that I want to set in the bill, and I think the bill does
this.
There are people who believe as a matter of economic philosophy
that it is a mistake to interfere with the allocative function of the
capital market by giving a preference to housing and particularly
homeownership. That is a legitimate philosophical debate.
By creating and continuing the GSEs, which get a certain advantage when they borrow in a marketplace because of arrangements
that exist, and even more important, because of perceptions about
those arrangements, including some misperceptions, I do not feel—
I try not to promulgate misperceptions, but I have no objection to
benefitting from other people’s misperceptions, as long as their existence was not my fault.
I think that is where we are to some extent with Fannie Mae
and Freddie Mac. I believe the misperceptions are deeply rooted
but it will not shake them by so designating them.
That does give a preference in the capital market for housing—
homeownership but also rental housing—as we will get into. I understand there are people who are philosophically opposed to it.
I believe some of the debate that happened last year and before
came between people who shared the philosophical view that it was
a mistake to have the allocative function in the capital market
interfered with and those of us who said no, we like having this
preference for housing.
Then the question becomes okay, if you agree that it is legitimate
to maintain the preference for housing, two sets of questions come
up. Is there sufficient power of the regulator to make sure that as
you go forward with this system, you do not run into problems
within these two entities that could cause broader problems, safety
and soundness issues.
I believe in this bill, and I know the former chairman, Mr. Oxley,
agreed with this. We believe strongly that the bill we had last year
gave the regulator full power to deal with any safety and soundness issue, whether by raising the capital or reducing the portfolio
or other means.
Subsequent to that bill being passed, when Mr. Oxley believed as
I did that we had reached that level, we have somewhat enhanced
the power of the regulator.

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I do not think there was any room for doubt that the regulator
has full powers under this bill to do what needs to be done for safety and soundness.
We did disagree that they should be empowered to deal with
something defined as ‘‘systemic risk’’ over and above safety and
soundness. I will confess to being very skeptical that you can have
entities that cause risks to the system when they themselves had
no problems.
I am trying to envision Samson in the Temple pulling down the
walls and not getting hit in the head. I do not think you can destroy the entity and escape any damage yourself. We will discuss
this.
I have to say that this is an atmosphere of some sensitivity, and
I would hope that we would get agreement, not just on the language of this bill, but agreement frankly among us, including the
people here, as to what that means and how it will be interpreted.
You can never write everything exactly. I think we need some
common understanding of what we mean by this in the areas I am
talking about.
Full powers over safety and soundness, but not reaching the philosophical debate, and I think the philosophical debate gets into the
systemic risk issue.
Secondly, there is the question of housing. I will give myself an
additional 2 minutes and then I will pass it onto the Minority.
One of the arguments that has been made for changes is that
Fannie Mae and Freddie Mac get the benefits that I talked about
from the perception or misperception by the financial community,
and too many of those benefits remain with the stockholders of
Fannie Mae and Freddie Mac, and in past times, with even the
CEOs of Fannie Mae and Freddie Mac, although stay tuned for the
executive compensation legislation where we may deal with that in
a broader sense.
Under Fannie Mae and Freddie Mac’s past executives, not current ones, there was an abuse of compensation practices. There was
also an argument that they shared too much of the money, that
money was being held for Fannie Mae and Freddie Mac’s benefit,
and not enough was being shared with the public purpose.
There are two things you can do if you feel that. You can reduce
what Fannie Mae and Freddie Mac are able to accumulate by cutting back on the portfolio or other ways, or you can allow them to
continue that level, depending on how they fare in the market, but
require them to share more of it with the public purpose.
That is what we chose in the bill last year and we choose again
in the bill that is now pending. That is the creation of the housing
fund. Let me be clear.
Fannie Mae and Freddie Mac have goals, and those goals are to
help affordable housing. Affordable housing, as people who cover
housing know technically has several subcategories.
Affordable housing used to be for the goals housing aimed at people at 100 percent of the median. At the suggestion of people in the
Financial Roundtable, and in particular, our former colleague here,
Mr. Bartlett, we said no, that is not consistent. We generally say
affordable housing has to be aimed at people at 85 percent of the
median or below. We changed that in the bill to 80 percent.

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You cannot get much below people who are at 80 percent of median simply by the secondary market by buying loans.
If you are going to reach people who are at low income, 50 percent, extremely low income, 30 percent of median and below, then
there has to be an element of subsidy. You cannot do it just by
loans. That is the distinction that some people fail to understand.
This bill does enhance the goals. It does try to push Fannie Mae
and Freddie Mac—it will push Fannie Mae and Freddie Mac into
doing more in the 80 percent range. Nothing you can do with loans
and repurchase of loans and securitization of mortgages reaches
that low level.
We then say yes, we agree that they are keeping more of the
benefit than they should. We take a small part of that benefit and
put it in the housing fund.
I have to say here that some of my friends on the conservative
side seem to me to be inconsistent. On the one hand, they are advocating very tough regulation for Fannie Mae and Freddie Mac, unlike any other private entity, because they have this governmentsponsored enterprise element.
When it comes to regulating them, telling them how much capital they can have, what they can hold in their portfolio, what, in
fact, activities they can engage in, they are public entities to be
regulated.
But when it then comes to how you deal with the profits they
amass, all of a sudden they become private property, no trespassing, you will be electrocuted if you come on the land.
They cannot be both. They cannot be wholly government sponsored for the purposes of regulating them and setting their capital
standards, etc., but then private enterprise, so that you cannot take
the money. We think that they are a mix, and reasonable activity
is permissible in both cases.
That is what this bill does.
The Chair now recognizes the gentleman from Alabama. The
gentleman from Alabama has used the power under the rule here,
which we agreed to, to take an additional 10 minutes, so he has
20 minutes. The gentleman is entitled to 20 minutes for an opening
statement.
I realize this is a lot for you all to sit and listen to, but this is
an important bill. I do think it is important that we air these
things. I assume you are all smart enough to figure that the morning was killed anyway, so it should not be a problem that you have
to sit and listen to us.
The gentleman is recognized for 5 minutes.
Mr. BACHUS. I thank the chairman. I do not know whether it is
a bigger burden on you to listen to me or to listen to the chairman.
[Laughter]
Mr. BACHUS. I will not ask you.
Chairman Frank, let me start by thanking you for holding this
hearing. This is a very important matter. It is important for the
GSEs, Fannie Mae, Freddie Mac, and for our 12 Federal Home
Loan Banks. It is also important for homeowners, for taxpayers,
and for prospective homeowners.
This committee has been working to enact meaningful reform of
the GSEs and their regulator for years. This is not an issue with

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5
convenient answers. Actually, it is a subject where really every proposed solution raises some new difficult questions.
Having said that, I do believe that we are close to our goal of
GSE reform legislation.
Promoting homeownership, especially homeownership for low
and moderate income families, is a priority for the Republican
members of this committee. Congress created the Housing GSEs to
expand homeownership and meet the needs of any person who
wants to live the American dream.
We must balance that requirement with the responsibility of limiting risk to the taxpayer and the burden to the market. Fortunately, a strong bipartisan consensus exists around the issue of
GSE reform.
Events of recent years have led many to conclude that the current regulators are underfunded, understaffed, and unable to fully
oversee the operations of these sophisticated entities.
Fannie Mae, Freddie Mac, and the Federal Home Loan Banks
are large, complex financial institutions requiring a world class
regulatory structure which is independently funded with all appropriate authority and independence.
When the committee debated GSE legislation last Congress, I did
join, as the chairman said, with a substantial number of my Republican colleagues in opposing the creation of a housing fund that
would have been drawn from the GSEs after tax income and used
to fund certain housing initiatives by outside parties, including
nonprofit organizations and community development groups.
This year’s bill includes a modified version of that proposal—one
substituting a funding mechanism based upon the GSEs’ total outstanding mortgages.
In the interest of fairness and accuracy, as Chairman Frank correctly stated, the language in this year’s bill is an improvement
over last year’s version.
While I respect Chairman Frank’s long-standing and sincere belief in the importance of creating this fund, I agree with the Congressional Budget Office that new assessments on GSEs would inevitably be passed along to their customers in the form of higher
fees, therefore, raising the cost of purchasing a home or refinancing
an existing mortgage.
Additionally, many on our side of the aisle have serious questions
about the ability of State housing bureaucracies to competitively,
and let me stress that word, competitively, and efficiently deliver
and monitor upwards of $500 million per year.
Further, the proposed fund is extraneous to the task at hand,
creating a world class safety and soundness regulator for Fannie
Mae, Freddie Mac, and the Federal Home Loan Banks.
Therefore, I must remain opposed to the inclusion of the proposed affordable housing fund in the GSE reform bill.
We still have in our power the ability to pass a strong, very
much needed GSE reform bill with overwhelming bipartisan support. All that would be necessary to achieve this goal is to de-link
GSE reform from the proposed housing fund, and to make the latter the focus of a separate legislative proposal.
Let me conclude by saying that I still believe we can address this
honest philosophical disagreement in a manner consistent with the

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House Financial Services Committee’s long and unique history of
bipartisan cooperation.
Hopefully, we can move forward swiftly on the issue of GSE reform, and then tackle the separate question of expanding our Nation’s affordable housing supply in a manner beneficial to taxpayers, homeowners, and those who wish to rent in a manner consistent with free market principles.
Again, Mr. Chairman, I thank you for holding this hearing, I
commend you for this legislation. and I thank our witnesses for
taking the time to be here.
The CHAIRMAN. The gentlewoman from California is recognized
for 5 minutes.
Ms. WATERS. Thank you very much, Mr. Chairman. I certainly
appreciate the opportunity to hear from our witnesses today, and
I appreciate the work that both you and Mr. Kanjorski have done
in order to get us to this point.
I am very, very interested in GSE reform for a number of reasons. I must share with you, Mr. Chairman and members, that despite the fact that I agree that there is a need for some reform, I
have never been comfortable with the politics that led to this reform, the formation of FM Watch, and what that means, and what
appears to have been a fight about market share, and a lot of concern about whether or not the GSEs were entering into the retail
portion of this business rather than being confined to their mission.
I am not so sure that much of this had not been about that kind
of competition.
I have paid some attention to this bill. It is a masterpiece of legislation that certainly I must spend a lot more time on. I have a
lot of questions about OFHEO. I have had a lot of questions about
OFHEO from the first time that I was introduced to exactly what
they did and what they did not do. I am anxious to have the correct
kind of oversight agency, but I still have questions.
We talk about the new make-up of the board of the GSEs and
taking away the President’s appointments, and I am not so sure
that I agree with that. I want to raise the question about whether
or not OFHEO has a board. Who oversees OFHEO?
I am also concerned about some of the functions of HUD that will
be removed from HUD to OFHEO, and I think that this committee
has never resolved whether or not the accepted accounting principles and practices are consistent and that we really do understand them.
I suspect that there will always be some questions about whether
or not the accounting practices are the correct ones to be used because it seems to me that there are still things about the accounting practices that have never been resolved.
We are all interested in safety and soundness. I know the constant refrain about the fact that these GSEs are too big and that
God forbid, they should collapse, but it has been a lot more of the
kind of negative questioning and the anticipated problems rather
than any real problems within these GSEs as it relates to their
soundness.
I think they should have reasonable capital requirements, but I
will be taking a strong look and discussing with you, my colleagues, not only that but other aspects of this legislation.

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Let me commend you, Mr. Chairman, on the housing trust fund.
I think that was brilliant. I like the idea that we are going to help
the GSEs realize their mission of more affordable housing.
We have all constantly said to the GSEs that we want more done
in low-income housing, and this certainly will help.
I think we still have a long way to go to talk about how it gets
managed. I think there are a lot of ideas about how that housing
trust fund gets managed and what is the best way to get the resources to the people who can really do something about creating
housing opportunities for our Nation.
I look forward to that discussion and the information that will
be shared with all of us by our colleagues about their experiences.
Also, all of these agencies need oversight on diversity. One of the
good things about the GSEs is our ability to talk with them about
diversity and their responsiveness to us, where they come in and
they show us their charts. They let us know about movement. They
let us know about their efforts to have diversity within these huge
corporations.
The last time I talked with OFHEO, I do not think there were
any African Americans in management, for example. I am not supportive of any oversight of any agency of government that is supposed to be doing the business of all the people that does not reflect
the kind of diversity that will help me to understand that they
know they are working for everybody.
I will be raising these questions. I will be pushing very hard to
make sure that we do some corrections. I am not yet sold on quite
the way this reform has taken place.
I yield back the balance of my time.
The CHAIRMAN. I will recognize the gentleman from Alabama.
We agreed under our rules that we would have 10 minutes of opening statements for each side, with either the ranking member or
the chairman of the subcommittee or committee at his request to
do an additional 10 minutes.
The gentleman from Alabama now has time remaining. I am
going to yield to the gentleman from Alabama and he can yield the
time that is remaining to him as he wishes.
Mr. BACHUS. Thank you, Mr. Chairman. Mr. Chairman, I plan
to yield 3 minutes to Mr. Baker, 3 minutes to Ms. Biggert, 3 minutes to Mr. Royce, 1 minute to Mr. Gillmor, 3 minutes to Mr. Miller, and 1 minute each to Mr. Garrett and Mr. Neugebauer.
The CHAIRMAN. The gentleman has permission to do that, and it
is the timekeeper’s problem now, not mine. The gentleman may
proceed.
[Laughter]
Mr. BACHUS. At this time, I yield 3 minutes to Mr. Baker, Congressman Baker.
Mr. BAKER. Mr. Ranking Member, I know there are people asking for time. I do not need 3 minutes. I will take 30 seconds, if you
would, in keeping your calculation, that will give you a couple of
minutes to play with.
Mr. BACHUS. I will yield such time as you may consume.
Mr. BAKER. I will take 30 seconds. I want to thank you for the
time. I want to thank the chairman for his good work on this im-

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8
portant bill. We have come a long, long way over many, many
years.
Now is the time to get this done. I think this is an excellent
product from a safety and soundness standpoint. Certainly, there
are improvements that can be made to any bill that is offered.
I look forward to improving it and more importantly, to hearing
from our witnesses and learning more about the subject.
I yield back.
Mr. BACHUS. Thank you. That will free up time for one additional member. Ms. Biggert for 3 minutes.
Mrs. BIGGERT. Thank you, Mr. Chairman, and Ranking Member
Bachus, for holding this hearing today.
I would like to welcome today’s witnesses, Under Secretary Steel,
Director Lockhart, and Assistant Secretary Cornick, our GSEs’ representatives, and all of the housing professionals who are here
today.
I look forward to hearing your views on the latest version of the
bill.
This is not a new bill or a new issue for those of us who have
served on the committee since at least the 106th Congress. We held
about 23 hearings and heard from well over 100 witnesses. In May
of 2005, this committee reported out Mr. Baker’s bill, H.R. 1461,
by a vote of 65–5. In October of 2005, the House passed the bill
by a vote of 331–90.
I supported Mr. Baker’s bill and commend him on his years of
work on this issue. Our colleagues on the other side of the Capitol,
however, failed to act on his bill during the last Congress, since we
have returned for another round of GSE discussions.
I would also like to thank Chairman Frank and Mr. Baker for
introducing a GSE bill to establish a new and stronger regulator
for the GSEs and the Federal Home Loan Banks.
I hope that this legislation will give the new regulator crystal
clear direction about its authority, available tools, and mission, so
that it can guide the GSEs to be more effective for homeowners,
market participants, financial institutions, and taxpayers. We also
should aim to isolate this regulator from political influence.
At this time, I have two concerns with the most recent version
of the GSE reform bill. First, I hope we can take a closer look at
the section of H.R. 1427 on program review and approval.
I was active on this issue last Congress and I look forward to
working with my colleagues to ensure that we strike the right balance, one that allows appropriate oversight, but does not impede
the kind of innovation that ultimately is good for consumers and
homeowners.
Today, we should examine if the language as drafted is too ambiguous or if it will accommodate this important balance.
Second, I am concerned about certain provisions in the affordable
housing fund section of the bill—how this will establish a formula
to allocate funds to States and Indian tribes, which would in turn
determine which organizations receive the funds.
I am not convinced that this is the best delivery method. Should
the language be more specific and outline organizations that are
appropriate to receive these funds? Should HUD play a more expanded role in the fund than the bill envisions?

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Should the affordable housing fund be modeled after the affordable housing program that is administered by the Federal Home
Loan Banks?
I hope today’s hearing will shed light on these specific issues as
well as on other important provisions of the bill regarding mission,
portfolio limits, and capital requirements.
Again, I welcome today’s witnesses and thank Chairman Frank
for holding this hearing. I yield back.
Mr. BACHUS. Thank you. At this time, I yield 3 minutes to the
gentleman from California, Mr. Royce.
Mr. ROYCE. Thank you. Mr. Chairman, despite many of the improvements in this bill, and despite the improvements it would
make on the regulatory structure of the GSEs, I am deeply troubled by two provisions.
First, the legislation fails to give the regulator authority to take
into account the systemic risk to the financial markets and to the
housing sector when reviewing the size and scale of the GSEs’ retained mortgage portfolios.
I think that is the whole point of regulating them. We do not do
here what the Fed has suggested, and as we have heard from various experts, including the Fed Board, a failure by the GSEs to
properly manage their large concentration of interest rate risk
could de-stabilize the global financial system.
In 2005, then-Fed Chairman Greenspan warned this committee—he warned us here—against passing legislation without
giving the regulator appropriate authority to oversee systemic risk.
My second pointis that I am adamantly opposed to the creation
of an affordable housing fund. As I said last year, this fund is an
experiment in socialism. We have a philosophical disagreement
about this, and I will not belabor the point now, but this fund
should not be included in legislation to improve the safety and
soundness of the GSEs. This is essentially a poison pill provision.
Mr. Chairman, I believe that last week Fed Chairman Bernanke
provided a road map for a solution to both the systemic risk and
affordable housing issues.
As the Federal Reserve has not been asked to testify today, I
would like to submit his March 6th speech entitled ‘‘GSE Portfolios,
Systemic Risk and Affordable Housing’’ into the record.
The CBO estimated that Fannie Mae and Freddie Mac shareholders benefit in the amount of $12.3 billion because of the enterprises’ perceived relationship to the Federal Government.
The CHAIRMAN. Without objection, we will accept that document
into the record.
Mr. ROYCE. Thank you, Mr. Chairman.
In light of this subsidy, Federal Reserve Chairman Bernanke’s
latest proposal makes a great deal of sense because it allows the
GSEs to use the subsidy for affordable housing by enabling them
to purchase and retain mortgages extended only to households with
below median income.
This would do much more in addressing affordable housing than
the fund contained in H.R. 1427. It would reduce the systemic risk
posed by the retained portfolios, and I hope my colleagues will consider the approach advocated by the Federal Reserve Board, as I
think it is most practical, and it is a very responsible solution.

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10
I would also end by commending you, Mr. Chairman, because
you did put several things in this bill like setting minimum and
risk based capital standards. You placed a troubled entity into receivership. You set up a system to review product approval and
mission and to be independently funded outside the appropriations
process.
I agree with those changes that you put in the bill, but I raise
these philosophical points because I think—
The CHAIRMAN. If the gentleman will yield briefly, I appreciate
that. I appreciate both his praising some elements but also maintaining his opposition. I need both to get this bill through.
Mr. ROYCE. Thank you.
Mr. BACHUS. Thank you. Mr. Chairman, we have 8 minutes remaining on our side. I would like at this time to assign 1 minute
to Mr. Gillmor and 3 minutes to Mr. Miller following him. I will
have an additional 41⁄2 minutes after that. Let’s do those two.
Mr. GILLMOR. I thank the ranking member for yielding, and I
commend the chairman for moving forward with this hearing.
The issue of GSE reform is an extremely important one for the
safety and soundness of our financial system. It is one that this
committee has worked on previously.
I think it is clear that we need a strong regulator. I think that
regulator ought to have the authority to oversee the size and the
types of activity. I think you can do that and let the GSEs preserve
their very important mission of promoting housing.
I also wanted to mention that I am very happy to see that the
bill includes a provision that I had introduced last year requiring
that these companies disclose their charitable contributions to
shareholders.
There is a lot of concern about corporate governance and a lot of
management kind of forget that it is the shareholders’ money, and
we are talking about billions of dollars here.
I think it is very good that this principle is incorporated in this
legislation; I would hope to see it extended in other legislation; I
appreciate the opportunity; and I yield back.
Mr. MILLER OF CALIFORNIA. Thank you. I commend Barney
Frank and Mr. Bachus for bringing this bill forward.
We have been dealing with this issue for quite a few years and
dealing with safety and soundness on the part of GSEs and limiting risk. That is really, really important.
We need to be careful not to hinder the basic innovation we have
available through GSEs in doing that. We need to guarantee that
mortgages are also accessible in the future.
Increasing capital requirements when there is a risk is appropriate on a temporary basis, but there needs to be a very strong
trigger that rolls back those increases once the issue has been resolved. We do not want to increase and yet leave it there without
decreasing it when the issue has been taken care of.
Conforming loan limits in high cost areas is a really growing
problem. We talk about affordable housing, and in many ways, affordable housing is a matter of perspective based on where you
live.

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11
OFHEO put out a chart that I think is very, very good. I am not
talking about subprime loans. I am talking about jumbo loans in
this country compared to conforming loans.
Only 18.1 percent of jumbo loans are at a fixed rate compared
to 82 percent in conforming loans. Much of the problem that we are
facing in this country with foreclosures and defaults has to do with,
I think, the lack of conforming in high cost areas.
If you look at what the jumbo market is doing today, 34.9 percent of all the loans made are interest only ARMs, and 23.9 are
negative amortization ARMs. If you look at the chart put out by
Business Week in September of last year, you cannot see it, but the
red you see on there is all California.
That is the amount of foreclosures, and the high amount of foreclosures we are facing in this country, and they happen to be in
the marketplace where conforming is not available and GSEs cannot do an adequate job, and even FHA, because the limits are set
so low that they just do not work for California.
This bill does something that is very, very good. It raises those
limits in high cost areas. There has been quite a debate about
subprime and the amount of risk associated with subprime and
foreclosures today and defaults.
I think what you are doing throughout most of this country has
proved to be very good. Yes, there are some defaults, but when you
look at it compared to the defaults we are facing in California because of the exotic loans that the jumbo loan market has created,
we have to be able to effectively deal with that.
I think we are at fault as Congress for not dealing with that. As
with any legislation, there are parts of a bill that some of us do
not like, but that is basically true of any piece of legislation we put
forward in this country.
We need to be very, very creative in GSEs. We need to also be
able to expand the availability of GSEs. People in my district and
my State should not be discriminated against just because they are
a high cost area. That basically is what we face today.
This bill resolves a lot of that. It goes a long way in creating basically fairness throughout this country on how we are going to provide government programs.
I just commend the ranking member and the chairman for pushing this bill forward. I look forward to supporting it, and I yield
back.
Mr. BACHUS. Thank you. At this time, our last 41⁄2 minutes will
be distributed to Mr. Garrett for 90 seconds, Mr. Neugebauer for
90 seconds, and Mr. Shays for 90 seconds.
Mr. GARRETT. Thank you. I would first note that the chairman,
who earlier pointed out the contradictory views that some members
have of the GSEs should look to the GSEs themselves, if they have
contradictory views. Sometimes playing up their government role
when that serves their purpose and playing up their private role
when that serves their purpose.
The chairman also pointed out some of the new actions by the
regulator. I think that also shows the problem with this legislation,
that without some specific benchmarks in place with regard to
portfolio limitations, we may find ourselves in the same situation
with another regulator down the road not implementing those

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12
when we are merely giving direction and not specific benchmarks.
That is the second problem.
The chairman also points out the reference to Samson and the
Temple. I think that is also exactly a problem. When you disrupt
a system, you do pull it down on your head. We must remember
that Samson had his eyes gouged out. He was blind at the time.
I think we are still blind in this situation, and when it falls on his
head, it falls on the taxpayers’ heads in this situation.
Finally, the chairman makes reference to the benefits to stockholders and the CEOs of the implicit government guarantee. He
references only two solutions: reduce the portfolio; or share some
of that public portion of the portfolio.
There are two other ones. We could end the implicit backstop of
that guarantee of the government to these GSEs, and fourthly, we
can use what Chairman Bernanke said, to put limitations on that
portfolio and put it right to low-income and affordable housing, and
that would be a second and third way to make sure those profits
do not go to the stockholders but go to the people that Congress
intended.
With that, I yield back.
The CHAIRMAN. There is a vote. We can finish the opening statements; go vote; and then come back.
Mr. NEUGEBAUER. Thank you, Mr. Chairman, and Ranking Member Bachus.
I think one of the concerns I have is that as I have sat in the
early days of the 110th Congress and the latter days of the 109th
Congress, we have moved from our regulatory role to a management role.
Congress is now not only trying to regulate companies, but now
they are trying to manage those where we are trying to tell companies what they should pay their CEOs. Now we are saying to companies, and this particular entity, that we are going to put a tax
on you. We are going to tax your portfolio based on the amount of
business that you have on the books.
We have gone from leaving that money on your balance sheet
and being able to bring innovative programs to giving it to States.
That is just additional taxation.
I am very concerned about the direction that we are moving in
with this bill in many areas. The fact is that we heard Secretary
Jackson yesterday say to us, and it is a true statement, that today
more people own a home today in America than any other time in
the history of our market.
We have some of the most robust markets in the world. We are
the envy of the world, and particularly our mortgage market. As
I travel abroad and talk to other countries of developing markets,
they do not have the tools for housing that Americans have.
I am very concerned about where we are moving in this direction. I am hoping we can, in the mark-up, make this bill get back
to what it is intended to do, and that is to regulate rather than
manage.
I am very concerned that today as the capital markets are watching C-Span, they are packing their bags for other places that are
more friendly to investment than I think this Congress is heading
as far as making a fertile investment market where we have a very

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13
robust marketplace, but I think we are moving in a direction now
that sends the wrong signal to these markets.
What this bill is going to do is raise the cost of housing for the
American people by the fact that Fannie Mae is a big player in a
lot of the mortgages, and Freddie Mac, they are a very big player
in that.
I am very concerned about putting another tax on the American
people in the form of a fee.
Mr. SHAYS. Thank you, Mr. Chairman, and Ranking Member
Bachus.
First, Mr. Lockhart, thank you for your service to our country,
as Executive Director of the Pension Benefit Guarantee Corporation, Deputy Commissioner of Social Security, and now Director of
the Office of Federal Housing Enterprise Oversight, a constituent
of mine. Had you chosen to be in the private sector, you could have
had a much different return on your investment. Thank you for
your service.
I just want to say that in my judgment, GSEs have been getting
away with not real life murder, but practically. I think they have
been operated in a very corrupt way. They were exempted from the
1934 and 1933 Acts. They were exempted from Sarbanes-Oxley. It
was pressure by a number of people that finally got them to have
to act like they were under the 1934 Act. When we did that, we
learned how corrupt they had been operated.
I am looking forward to them being cleaned up. The bottom line
is that they could keep any profit and pass any loss onto the government, and they basically were able to keep this unique status
by catering to the needs of Members of Congress, and they got
away with it for many years.
I am happy that reality has finally caught up with them and that
we can protect the public and they can do the work they are supposed to do, and that is to help the low and middle income communities, as well as help the housing market in general.
I thank you, Mr. Chairman.
The CHAIRMAN. I thank the gentleman. I will use my remaining
time just to say I did want to acknowledge the gentleman from
New Jersey reposed my accusation that some on the other side
were being inconsistent by viewing Fannie Mae and Freddie Mac
sometimes as purely private profit maximizing corporations and
others as entities with a public interest, and he reposed by saying
they were also inconsistent.
I am glad to lump them altogether. I am glad to say that sometimes Fannie Mae and Freddie Mac are as inconsistent as members
of the Minority. I have tried to be consistent. I will not use either
of them as my standard for logic in this regard.
Secondly, I did want to respond to the gentleman from Texas
who said we were trying to set CEO salaries. No bill that I know
of proposes to do that. We have talked about legislation that will
let the shareholders vote on CEO salaries in an advisory capacity.
The gentleman from Texas demolishes a strawman, and while we
are at the break, perhaps they can sweep up the debris that would
have accumulated.
Also, I think we have seen—my last point is this, and the gentleman from New Jersey said, well, Federal Reserve Chairman

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14
Bernanke suggested a way to resolve this by having them do more
with their portfolio. That is a fundamental misunderstanding of the
need for affordable housing.
You are talking about 80 percent of median and above when you
talk about the portfolio. Those should be done by the sensible purchase of loans.
When you are talking about people at 50 percent below, as we
define low income, 30 percent below median, extremely low income,
there is no way short of subsidy that you can do that.
You may not want to have Fannie Mae and Freddie Mac contributing to alleviating the problem for people at that low end. Literally, no one who deals with housing thinks that by secondary
market and securitization, you can get much below the 80 percent.
We did lower it from 100 percent to 80 percent as the benchmark
for the goals.
It is simply not the case that you can reach the level of subsidy
we hope to, the lowest income people, by using the normal
securitization methods.
Mr. SHAYS. Mr. Chairman, and Mr. Steel, I thank you for your
service as well, another Connecticut resident. Obviously, I thank
all. A great leader in our community.
The CHAIRMAN. I was going to say, what about Cornick? Only
people in Connecticut?
[Laughter]
The CHAIRMAN. Thank you, Mr. Cornick. The hearing will recess
and we will come back. You will have to move to Connecticut to be
thanked.
[Recess]
The CHAIRMAN. The hearing will reconvene. Please take your
seats.
We will begin the testimony. First, we have a panel of Administration officials. We will begin with Robert Steel, who is the Under
Secretary for Domestic Finance in the Department of Treasury.
Mr. Steel?
STATEMENT OF THE HONORABLE ROBERT K. STEEL, UNDER
SECRETARY FOR DOMESTIC FINANCE, DEPARTMENT OF
THE TREASURY

Mr. STEEL. Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee, for inviting me to appear today
before you to discuss the very important issue of Housing Government-Sponsored Enterprise (GSE) regulatory reform.
H.R. 1427 will significantly improve the supervision of GSEs.
This legislation creates a strong regulator with authorities that are
commensurate with other financial regulators’ powers, to ensure
that the housing finance system remains vibrant.
H.R. 1427 is a well-crafted and balanced bill. It has been a privilege working with the committee on this important effort, and we
look forward at Treasury to continuing to do so.
The United States has one of the most successful housing finance
systems in the world. Our Nation’s housing finance system provides consumers with a wide range of mortgage finance options
that open up the door for homeownership and access to normally
illiquid housing wealth accumulated over time.

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15
The housing GSEs—Fannie Mae, Freddie Mac, and the Federal
Home Loan Banks—are important components of our Nation’s
housing finance system, as are federally insured depository institutions, mortgage banks, private mortgage insurers, mortgage brokers, and investment banking firms.
Fannie Mae and Freddie Mac operate in the secondary mortgage
market by providing credit guarantees on mortgage backed securities or by directly investing in mortgages and mortgage related securities through their retained mortgage portfolios.
Recent accounting and corporate governance problems and regulatory oversight have limited the growth of Fannie Mae and
Freddie Mac over the last few years.
Nonetheless, they are still a significant presence in our Nation’s
housing finance system. Together, Fannie Mae and Freddie Mac
have about $4.3 trillion of mortgage credit exposure as of year end
2006, which was about 40 percent of total outstanding mortgage
debt in our country.
The Federal Home Loan Banks also are significant participants
in our Nation’s housing finance system, but they operate under a
different business model than Fannie Mae and Freddie Mac.
The Federal Home Loan Banks’ primary business is making advances or secured loans to member institutions that are involved
in housing finance to various degrees.
As of year end 2006, Federal Home Loan Bank advances were
$641 billion, and they held total mortgage investments of $225 billion, and total assets of approximately $1 trillion.
Treasury has continually stated that we have two core objectives
regarding GSE regulatory reform. First, the need for a sound and
resilient financial system, and second, increased homeownership
opportunities for less advantaged Americans.
In line with our core objectives, our reform proposals have been
designed to minimize the risks that the housing GSEs pose to the
financial system, and to focus the housing GSEs on that specific
mission.
It is widely recognized that there is a deficiency in the oversight
and regulation of the housing GSEs, and Congress has worked to
improve this situation. We at Treasury appreciate this effort and
pledge to continue to work with you to establish a new regulator
that has all the authorities necessary to oversee these complex and
sophisticated institutions.
Throughout the debate on housing GSE regulatory reform, Treasury’s focus has been on ensuring that the new regulator has all the
powers, authority, and statute needed to do the job.
In this regard, a core tenet of our position is that the new regulator’s powers should be comparable in scope and force to those of
our Nation’s other financial institution regulators.
In addition, the housing GSEs are different than a typical financial institution. It is just as essential that the new regulator have
the appropriate authority to consider these unique characteristics
of the GSEs and their housing mission.
In terms of comparable powers, we must ensure that the new
housing GSE regulatory agency has the following authority: it must
have the flexibility to set both minimum and risk based capital requirements; it must have all the receivership authority that is nec-

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16
essary to direct liquidation of assets and otherwise to direct an orderly wind down in the event of the failure of an enterprise; it
must be required to take mandatory receivership actions under certain circumstances; it must have the authority for approving new
activities of Fannie Mae and Freddie Mac and ensuring compliance
with their mission; and it must also have independent funding outside of the appropriations process, independent litigating authority,
and other related powers. In other words, the full tool box of regulatory and enforcement skills characteristic of a financial regulator.
In addition to ensuring comparable regulatory authority, the
housing GSEs must also have unique characteristics that must be
addressed in regulatory reform legislation.
The housing GSEs were created to accomplish a mission and
they were provided a certain set of statutory benefits to help in the
accomplishment of this mission. The GSEs also greatly benefit from
the market’s perception that the U.S. Government guarantees or
stands behind GSE obligations, which results in preferential funding rates being provided to the GSEs.
On behalf of the Treasury, I want to once again reiterate that the
GSEs’ debt and other financial obligations are not backed by the
Federal Government.
As Treasury has previously noted, the combination of three factors of Fannie Mae and Freddie Mac’s retained mortgage portfolios
warrant the attention of policymakers: first, the size of the retained
mortgage portfolios of Fannie Mae and Freddie Mac, $1.4 trillion
as of year end 2006; second, the lack of effective market discipline;
and third, the interconnectivity between the GSEs’ mortgage investment activities and the other key players in our Nation’s financial system.
The combination of these three factors causes the GSEs to
present the potential for systemic risk to our financial system and
the global economy. This view has not changed. Thus, other appropriate measures are needed in this legislation to take into account
these unique characteristics of the housing GSEs.
These essential components include that the new regulatory
agency must be provided specific review authority over the retained
mortgage portfolios of Fannie Mae and Freddie Mac. Such authority should establish a clear and transparent process based on direction from Congress on how the new regulatory agency will evaluate
the retained mortgage portfolios in terms of risk and consistency
with mission.
There must be clarification that the government should not be
involved in the appointment of directors to the boards of Fannie
Mae, Freddie Mac, and the Federal Home Loan Banks.
The Federal Home Loan Banks must be placed under the same
regulator with Fannie Mae and Freddie Mac and then this new
regulatory regime should be structured to take into account certain
special differences between the Federal Home Loan Banks and the
other GSEs. This would enhance the critical mass of financial expertise needed to oversee the GSEs.
In conclusion, we at Treasury appreciate the efforts of the chairman and members of the committee in working towards achieving
resolution of the housing GSE regulatory reform issue.

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17
H.R. 1427 will establish a new regulator with powers that are
comparable to other financial institution regulators, which will
greatly improve the oversight of the housing GSEs.
We still have concerns with certain aspects of H.R. 1427. In particular, if an affordable housing fund is going to be part of this legislation, the fund must be controlled by the Federal Government,
not by Fannie Mae and Freddie Mac. It must be temporary and
capped.
In addition, the provision increasing the conforming loan limit in
high cost areas is inappropriate because there do not appear to be
any problems in the provision of mortgage credit in these areas,
and it could detract from the affordable housing ambitions of
Fannie Mae and Freddie Mac.
Nonetheless, the Treasury is supportive of the regulatory enhancements contained in this legislation as they are a significant
improvement over the current law. Any efforts to limit these powers or weaken the new regulator would not be favorable.
Thank you, very much. We look forward to continuing to work
with you.
[The prepared statement of Under Secretary Steel can be found
on page 187 of the appendix.]
The CHAIRMAN. Next is Director James B. Lockhart III, of
OFHEO, and I would like to point out that, like Mr. Steel, he is
from Fairfield County, Connecticut.
[Laughter]
STATEMENT OF THE HONORABLE JAMES B. LOCKHART III, DIRECTOR, OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT (OFHEO)

Mr. LOCKHART. Chairman Frank, Ranking Member Bachus,
members of the committee, and certainly Congressman Shays,
thank you for inviting me here today to discuss the very important
issue of GSE reform and H.R. 1427. I am grateful to you for your
hard work in reaching what I believe is a balanced approach to
needed reforms. It is time for action.
Housing and homeownership are critical components of the
American dream and the American economy. Together, the 12 Federal Home Loan Banks, Fannie Mae, and Freddie Mac, are involved in 46 percent of the total mortgage debt outstanding in this
country. Their total debt and guaranteed MBS of $5.4 trillion is
larger than the public debt of the United States.
Like all financial institutions, the housing GSEs face a full range
of risk, including market, credit, and operational risk, only on a
larger and more concentrated scale.
Fannie Mae, Freddie Mac, and several of the Federal Home Loan
Banks have experienced serious difficulties handling those risks in
the past.
Current remediation efforts will help reduce but not eliminate
those risks. OFHEO will be making its annual report to Congress
in early April. It will show that Fannie Mae and Freddie Mac are
making progress but still have many problems to correct.
Their, and frankly OFHEO’s, performance fell far short of what
Congress expected. In my view, the most important lesson learned
is the compelling need for legislation.

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The new regulator must ensure that the GSEs operate in a safe
and sound manner and support affordable housing and the liquidity and stability of the mortgage market.
The new regulator must also understand the GSEs’ accountability to their shareholders to earn a fair return, and that the
GSEs are not subject to the normal market disciplines.
I am very pleased that there is a general consensus that the new
GSE regulator’s authorities should be similar to those of bank regulators. Reform must be built on this bank regulator model.
The new regulator must have regulatory, supervisory, and enforcement powers equivalent to the bank regulators, including receivership powers. Receivership powers provide one way to prevent
problems in one financial institution from spilling over to others,
and might enhance market discipline.
As Controller General David Walker said, ‘‘A single housing GSE
regulator will be more objective, efficient, effective, and prominent
than the two separate bodies.’’
It is critical that the new regulator respect the differences and
the similarities of the enterprises and the banks. Just like the bank
regulators, the new GSE regulator needs to have both safety and
soundness powers, as well as mission and new product authorities.
It also needs independent litigating and budgeting authority.
OFHEO is the only safety and soundness regulator that must be
congressionally appropriated. Without relief from the continuing
resolution, planned resources and critical supervisory areas will
have to be cut this year.
Minimum capital rules are lower than other financial institutions, and the risk based capital rule must be modernized. The regulator needs authority to adjust both the minimum and risk based
capital requirements through an open rulemaking process, supplemented by the ability to respond quickly to changing conditions.
From 1990 to 2005, Fannie Mae’s and Freddie Mac’s portfolios
grew out of control; they grew tenfold to over $1.4 trillion. Over
half of their portfolios are invested in their own MBS, and less
than 30 percent meet HUD’s affordable housing goals.
H.R. 1427 provides specific guidelines to the regulator of using
an open rulemaking process to better focus the portfolios on their
missions while considering the risk. This process needs to consider
their ongoing support of the mortgage market.
Last year, in 2006, despite the growth restrictions we have on
their portfolios and stiff competition, their total book of business,
including their unrestricted guaranteed MBS, grew 8 percent.
It is time to move forward on legislation to create a new stronger
GSE regulator, and assure the safety and soundness of the housing
GSEs and their full dedication to their important mission of supporting the liquidity and stability of the mortgage market and affordable housing.
Thank you.
[The prepared statement of Director Lockhart can be found on
page 174 of the appendix.]
The CHAIRMAN. Thank you, Mr. Lockhart.
The final witness from the Administration is L. Carter Cornick,
the General Deputy Assistant Secretary from the Department of
Housing and Urban Development.

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Mr. Cornick?
STATEMENT OF THE HONORABLE L. CARTER CORNICK, GENERAL DEPUTY ASSISTANT SECRETARY, DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT

Mr. CORNICK. Thank you very much, Mr. Chairman. Chairman
Frank, Ranking Member Bachus, and distinguished members, I
ask that my written statement be accepted for the record.
The CHAIRMAN. Without objection. Let me say that any statements by any of the witnesses that they wish to insert will be inserted.
At this point, I would ask unanimous consent also to put into the
record the statement of the Consumer Mortgage Coalition. In fact,
I would ask unanimous consent that members have general leave
to insert any material they wish to insert, assuming that no one
would abuse the privilege.
Please go ahead, Mr. Cornick.
Mr. CORNICK. Yes, sir. Thank you for the opportunity to speak
today about H.R. 1427. This important regulatory reform legislation is needed to strengthen the Federal Government’s oversight of
Housing Government-Sponsored Enterprises—Fannie Mae, Freddie
Mac, and the Federal Home Loan Banks.
The legislation improves the oversight of the GSEs by creating
a regulator on par with the existing financial regulators. HUD fully
endorses establishing a new regulator for all three that would combine safety and soundness authority with oversight of their respective housing missions.
HUD is especially interested in ensuring that the new legislation
continues to promote affordable housing, in part because of the Department’s well-established role in ensuring that the Nation’s affordable housing needs are addressed by both public and private
initiatives, and in part because of a long held responsibility to regulate Fannie Mae and Freddie Mac.
The last 10 years have been years of increased affordable lending
for low-income and minority families in the conventional mortgage
market. The Home Mortgage Disclosure Act data shows substantial
growth in conventional lending to low-income and minority borrowers, and suggests that new affordable lending initiatives have
had a positive measurable impact.
Most agree that in addition to low interest rates, economic expansion, enhanced regulation of CRA obligations, and HUD’s affordable housing goals, all have contributed to a renewed emphasis
on low-income and minority lending in conventional markets.
Today is about how the GSEs will be regulated in the future, and
so how the government will measure GSE performance in meeting
the affordable housing objectives is important.
The affordable housing goals have been a key focus of HUD’s regulatory oversight work. In 1992, Congress expressed concern about
the GSEs’ funding of affordable loans for low-income families, particularly those living in inner city neighborhoods that had been
redlined by primary market lenders.
Congress called for HUD to establish their annual goals. In carrying out its responsibilities to set, monitor, and enforce these

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goals, HUD established progressively higher goal levels by regulation in 1995, 2000, and again in 2004.
Since 1999, both GSEs have improved their performance significantly and in many cases, now exceed the conventional market for
home purchase loans to very low and low and moderate income borrowers.
We believe it is important with respect to the affordable housing
goals in H.R. 1427 that the proposal retains the housing goals’
structure as a means of measuring GSE performance. In fact, there
are some improvements over the current statute, including, as the
chairman has pointed out, the establishment of an 80 percent income ceiling for defining under served census tracts, and providing
monetary penalties for GSEs’ failure to achieve a housing goal.
We think the structure of the housing goals as set out in the bill
may not achieve the desired outcomes. I ask the committee to consider the following, starting with the single family goals.
The single family very low income goal is targeted to a market
that is very small. Currently, very-low-income borrowers account
for only 6 to 7 percent of the conventional conforming market.
Small markets like this provide very modest incentive for GSEs to
develop products. As of 2005, GSEs already exceeded the conventional market for loans at this income level.
Another thought. New goals exclude an important affordable
housing market as we read it, the one to four unit single family
rental properties. Even though these rental units are a very important source of affordable housing, in 2005, as many of you know,
they accounted for 54 percent of all occupied rental units and just
under half of those were affordable to very-low-income families.
We hope your bill will encourage the GSEs to grow their single
family rental business.
Next, three separate multi-family goals will be difficult to establish because market data is not readily available. In the past, HUD
has had to piece together estimates of the multi-family market
from different sources.
I also want to point out that H.R. 1427, as we read it, does not
include overall standards for evaluating GSE performance in serving lower income families and their neighborhoods.
Our experience shows there are effective tools for moving GSEs
from sub-par to market performance across all their books of business, and we would like to see overall market based goals reinstated.
We hope you will clarify the duty to serve provisions and the
written statement expands on this point.
HUD’s written comments for the record include additional analysis and data. I would also like to draw your attention to our written comments on the conforming loan limits.
Before I close, I would like to comment on the affordable housing
fund. With respect to the affordable housing fund, while HUD does
not advocate for the creation of a fund, we share the view that any
such fund should have a cap.
We do think there are important improvements that need to be
noted: the fund managed by the director rather than the GSEs;
providing greater clarity for the recipients; and crafting a more precise sunset provision.

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Thank you for the opportunity to appear. I will be ready for questions.
[The prepared statement of Assistant Secretary Cornick can be
found on page 97 of the appendix.]
The CHAIRMAN. Thank you. Let me begin with Mr. Steel and Mr.
Lockhart. One of the debates we had was that I think it is generally agreed that there should be enhanced power on the part of
whomever the regulator is to compel changes in the capital levels
or in the portfolio from the standpoint of safety and soundness, affected also, of course, by mission.
There was a legitimate philosophical debate as to whether, per
se, the entities were too big. The question is whether the legislation
should or should not give that authority.
In the bill as introduced, at page 50, for later reference, authority
to establish additional capital and reserve requirements, it says
that the director can establish requirements with respect to any
program or activity as he considers appropriate to ensure that the
regulated entity operates in a safe and sound manner with sufficient capital and reserves to support the risks that arise in the operations and management of the regulated entity.
There is a further paragraph on that. I read the one on Federal
Home Loan Banks, with the GSEs, similarly.
Standards by which the portfolio holdings are rated and growth
of the portfolio holdings of the enterprises will be deemed to be consistent with the mission and safe and sound operations.
It lists a number of factors. Liquidity needs, potential risk by the
nature of the holding, and here is where we get to some controversy because of the interpretation, and I want to see if we can
arrive at some agreement on this.
Factor seven, number seven. Any additional factors the director
determines appropriate except that the factor shall be consistent
with the purpose of this Act and any authorizing sections.
My understanding when we were working on this was that those
specific numbered provisions really relate back to ‘‘A’’ in general.
In general, shall by regulation establish standards by which the
portfolio holdings are rated and growth of the portfolio holdings
will be deemed to be consistent with the mission and safe and
sound operations of the enterprises.
In developing such standards, the director shall consider. The
question was whether in referring to other factors, that would go
beyond what was just in the opening paragraph.
My intention was that those factors would be enumerated with
regard to that opening paragraph.
Mr. Steel, does that conform to your understanding?
Mr. STEEL. Mr. Chairman, thank you. I think in that same paragraph, the duality of one mission, and two, safety and soundness
is declared.
The CHAIRMAN. Yes.
Mr. STEEL. Both. Then there is further articulation via points
one through seven, which you summarized. In addition, there will
be additionally up above referenced a transparent process for development of guidance and rules and things like that.
It is our view that these articulations are the right methodologies
by which to empower the regulator.

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The CHAIRMAN. I understand that. When we talk about additional factors, would that include a view that these are just too
large and they were interfering with competitive—what bothers me
is the interpretation by some that additional factors could take you
beyond safety and soundness and mission.
Mr. STEEL. I think mission and safety and soundness capture everything.
The CHAIRMAN. These articulations are in pursuit of the mandate
to do safety and soundness and mission?
Mr. STEEL. Yes.
The CHAIRMAN. That was our intention. I appreciate that. Let me
ask Mr. Cornick, and I appreciate your comments on the goals. You
talked about one exclusion from the goals, on four unit, did I hear
that right? I am inclined to agree with what you said. Would you
elaborate on that?
Mr. CORNICK. Yes, sir. What we have found as we looked through
the legislation, and we are still going through it as much as we
can, is that the goals are silent on the one to four unit rental property.
The CHAIRMAN. I think it is on page seven of the written testimony; is that correct? I think we are in agreement here and we
would want to accommodate that proposal, particularly my colleagues from Summerville and south Boston, Massachusetts, are
not here, and if we did not do three deckers, I could not go home.
Mr. CORNICK. I think one of the things that happens here is you
have engaged in a deliberative process throughout. Obviously, the
spirit and point is that we are in dialogue and working together
and we just wanted to put that goal forward.
The CHAIRMAN. I appreciate that. We will be glad to work with
you on the goal. Again, there is a duality here. There are goals
which Fannie Mae and Freddie Mac can have to advance by the
loans they purchase. We believe there is a segment that needs help
that I was about to say no one is going to lend to that segment,
but actually, it turns out some people were willing to lend to very
poor people, and we are in big trouble because of it. We do not
want to start them buying more subprime loans.
I appreciate those. We will be glad to work with you, Mr. Secretary.
Mr. CORNICK. Absolutely.
The CHAIRMAN. On making sure that we do the goals. I know we
will hear later from some of the people from the various development communities, the affordable housing lenders, again about the
goals. They are separate from although complimentary to the affordable housing fund.
Thank you. The gentleman from Alabama.
Mr. BACHUS. Thank you. I want to address one issue in my questioning because of limitation of time. Let me just read again what
I said in my opening statement.
I said that many on our side of the aisle have serious questions
about the ability of State housing bureaucracies to competitively
and efficiently deliver and monitor upwards of $500 million per
year. We are talking about the housing fund and the State agencies
distributing that.

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23
I am going to ask Under Secretary Steel and Assistant Secretary
Cornick, as drafted, the legislation says the States will be allowed
to decide which of its agencies should administer the program and
allocate the grants.
Do you believe this is an appropriate distribution mechanism for
the fund if one is created, and are you confident that State housing
agencies are capable of administering this new program in a way
that ensures that funds are distributed competitively to deserving
recipients?
If not, what changes would you make in the housing fund?
Mr. STEEL. I will begin, sir. I think that if we talk about first
the housing fund at maybe a higher altitude and then come down
to your specific question.
Mr. BACHUS. Sure. I guess my question could just be are you
comfortable with the housing fund. If not, how would you change
it?
One thing you said was you both would like to cap it, I understand.
Mr. STEEL. Yes, sir. I think that when the history is told, that
the key issue for Treasury was to drive the regulatory reform so
as to have a strong regulator for the housing GSEs.
As part of that, some people saw that the appropriate bridge in
dealing with this issue for the GSEs should also deal with another
part of the housing finance area, and there was birthed the affordable housing fund. That was as part of the process.
That was not the original ambition, but that has developed. If
that is going to be part of this, then the key issues for the Administration and for Treasury are that it not be controlled by the GSEs,
that it be temporary, that it be capped, and not be part of a political process.
If my memory is correct, it is Section 133, which lists about
seven or eight specific attributes of the way in which the housing
fund would be administered, and we are comfortable with that
specificity so that we can be in favor of this.
Mr. BACHUS. Are there any that you would add to that 133?
Mr. STEEL. I think the ones articulated seem like the important
ones to us.
Mr. BACHUS. Mr. Cornick?
Mr. CORNICK. Yes, sir. The first point is obviously the cap. From
our perspective, certainty and stability go with such a feature for
that fund.
The second point that you raised, and it actually gets at some of
what Ms. Biggert also pointed to, we look at this fund—the first
thing is there is no daylight between anyone in the Administration.
We are all supportive of the overall goals and the work that is before you.
It is important to note that this fund is very distinct from safety
and soundness and all of the regulatory concerns. It is a grant program. It is a grant program close to on the scale of a $2 billion
home program, which we do run, I think, with some distinction.
In the division of labor, we tend to believe at HUD that we do
a very good job running these sorts of things. We understand that
the proposal calls for the regulator and we are going to be cooperative in working with people to share the best of our knowledge.

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24
I think that one of the issues that you all speak to in the work
that you put forward is capacity and making sure there is capacity
and making sure that these funds are properly distributed, and you
properly pointed to competitively. It is a very significant point.
I think that is the best that I could offer at this juncture.
Mr. BACHUS. Just to clarify, you both said you would like it to
be temporary and capped. Would you elaborate on that?
Mr. CORNICK. Sir, from my perspective, certainty and stability is
what that introduces from our perspective. We think you do not
want to inadvertently submit the GSEs or the fund to wild swings
one way or another, depending on different conditions.
Mr. BACHUS. Do you have a number in mind or could you come
up with one? While you are thinking about that, I will ask Under
Secretary Steel.
Mr. STEEL. I think with regard to sunset, again, if my memory
is correct, this expires as stipulated in 2012. The second is that the
methodology—there was lots of discussion about the methodology of
how to set the size of this housing fund.
After lots of back and forth and good discussion which was helpful and educational, we basically drove it off the size of the portfolios, which is a less volatile and more predictable measure or
metric. This is tied to something that is comfortable to us from that
perspective.
Mr. BACHUS. You said you would like a cap.
Mr. STEEL. I think it is capped by being tied to the size of the
portfolio.
Mr. BACHUS. You are saying it is capped now?
Mr. STEEL. It is capped by the arithmetic of the size of the portfolio, which will be a function of risk based capital and all the other
aspects of the regulator, which makes us comfortable that this is
a good compromise by which to determine a size.
The CHAIRMAN. Before I recognize the gentleman, I am going to
take just 30 seconds.
Mr. Cornick?
Mr. CORNICK. Yes, sir. The number that we had in mind that we
have shared with the staff and talked with different folk is somewhere on the order of 525 to 550.
The CHAIRMAN. I thank you. When you said it would be comparable to $2 billion, you got my hopes up wildly.
[Laughter]
Mr. CORNICK. I was adding.
The CHAIRMAN. Comparable in that it is one quarter as much. I
suppose that is comparability.
Mr. CORNICK. I was just adding years.
The CHAIRMAN. Thank you. The only other thing I would say
this, and briefly, we had cited that according to some of the critics,
particularly of the GSEs, they receive an implicit subsidy, albeit
once we say it, it is no longer implicit, but they receive a subsidy
of $12.8 billion per year from the taxpayers.
With $500 million, we are asking for about 4 percent of that. I
think they are still getting off pretty good, and those who worry
that we are unduly impinging, it does not seem to me that you can
complain that they are getting a $12.8 billion subsidy from the taxpayers, and then begrudge $500 million for low-income housing.

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25
The gentlewoman from California.
Ms. WATERS. Thank you, very much. I think that was a good discussion of the housing trust fund and the goals that have been set.
While I had intended to talk a little bit more about that, I think
it is just safe to say that many of us are extremely excited about
the possibilities for this fund.
I do believe that whatever needs to be done to work out the management of the fund will be done, and this will go a long way toward helping us all meet our goals.
I wanted to take a minute, if I may, to ask a question or two of
Mr. Lockhart. I see that in your testimony, you have indicated that
the GSEs have made considerable progress and you are pleased
with the progress they have made. I think it said you saw no reason why that should not continue. Is that true?
Mr. LOCKHART. Yes, that is true. We are just finishing our exams
for year end 2006. We will be publishing that in the next 3 weeks
or so.
It will show that they have made progress. I think the progress
has been slower than we expected in the management team, but
they are making progress.
Ms. WATERS. What did you do to contribute to that progress?
Mr. LOCKHART. Certainly, we have been very, very active in the
remediation process with the management teams, and our examination teams have been in there pushing them forward, basically.
Ms. WATERS. Could you be specific about any remediation that
you have been involved in that has helped to improve the performance of the GSEs?
Mr. LOCKHART. Both GSEs have put together plans about how to
remediate their problems, and we have been very active in looking
at those plans and working with them on the plans, and to the extent that they are not performing against the plans, we have certainly pointed that out to them.
Ms. WATERS. Could you be specific about one of the remediation
means or one area of remediation that you have been involved with
that has changed the way they operate in any appreciable way?
Mr. LOCKHART. We certainly have a whole series of different
areas we have been involved with.
Ms. WATERS. Just give me one.
Mr. LOCKHART. Certainly the accounting, and the risk management. They have hired new risk management teams. We have been
working with the risk management teams, market credit and especially operational risk management teams, and working with them
to improve.
Ms. WATERS. Can you tell me why you think the way the board
is constructed for the GSEs needs to be changed?
Mr. LOCKHART. At the moment, both Fannie Mae and Freddie
Mac’s boards do not have any presidentially appointed directors. To
me, the boards are working very effectively at the moment.
The process is that they have head hunters who go out and really
get very high quality people. We vet them to make sure that we
think they are acceptable, and then they are voted in by the shareholders.

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The boards are working extremely hard at these two companies,
given the amount of remediation to do, and we think it is an effective governance structure.
Ms. WATERS. You think that for the future, the boards should
have and keep the presidential appointees?
Mr. LOCKHART. I do not think it is necessary and there are some
conflicts of interest with presidential appointees, and to me, the
more reasonable structure is to have directors elected by the shareholders.
Ms. WATERS. Can you tell me why you believe that you need not
to be reviewed and come under the appropriations process?
Mr. LOCKHART. The appropriations process is a very cumbersome
process for an agency that has to respond quickly to problems. We
have been in existence for about 15 years. In 13 of them, we have
had a continuing resolution. That makes it very hard to plan.
At the moment, we are at last year’s budgeted amount of $60
million. We asked for $67.5 million. Much of that is going to the
litigation that we really have no control over, but we have to respond to the judges.
Ms. WATERS. Is that not true of all the agencies of government
that have to go through the appropriations process?
Mr. LOCKHART. Many of them have similar issues, but I do not
think the same. I think the better analogy is to all the bank and
financial regulators, which do not have to go through the appropriations process.
One of the reasons they do not is that they are funded by the
institutions that are regulated, and they do not have an impact on
the budget, and neither do we.
Ms. WATERS. Do you think you should have a board of directors?
Mr. LOCKHART. Yes, I think we should have a board of directors.
Ms. WATERS. Have you recommended that?
Mr. LOCKHART. Yes, I have. As Congressman Shays mentioned,
I ran the Pension Benefit Guarantee Corporation, and during that
period, we had a board of directors composed of three Cabinet secretaries, including the Secretary of the Treasury.
Ms. WATERS. If I may, Mr. Chairman, I know my time is up, but
what have you done about diversity at OFHEO?
Mr. LOCKHART. First of all, I think diversity is extremely important. I came from the most diverse government agency, Social Security. We are working in our recruiting efforts and our training
efforts to promote a more diverse workforce.
Ms. WATERS. How long have you been working on it?
Mr. LOCKHART. I have been there for 9 months.
Ms. WATERS. You have not been able to find anybody in 9
months?
Mr. LOCKHART. We have been promoting people. In fact, I think
you made a statement that we did not have an African American
in management. We actually do.
Ms. WATERS. You found one?
Mr. LOCKHART. She is very, very talented, and came from Wall
Street.
Ms. WATERS. I know, I just said you found one. You have one?
O-n-e.
Mr. LOCKHART. One; yes.

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Ms. WATERS. Thank you.
The CHAIRMAN. The gentlewoman from Illinois.
Mrs. BIGGERT. Thank you, Mr. Chairman. I would like to go back
to the affordable housing fund section of the bill. As I said in my
opening statement, HUD has the responsibility of establishing a
formula to allocate funds to the States and to the tribes, and then
they would determine which organizations receive the funds. The
funds then go to the States. Mr. Cornick, what normally would the
States do if that is the Administration that goes to—the funds
would go to the States?
Mr. CORNICK. Right, but under the Home Program—well, we
have a couple. The Home Program works off of participating jurisdictions. The CDBG program works off of States as well as off entitlement communities, etc. And so we have a couple of different
methods that substantial sums of HUD money are funneled out to
the communities of State and local governments. We also work very
closely with State housing finance agencies.
As all of this relates though to the Affordable Housing Fund, one
of the things that we are grappling with, we just had but a couple
of days to go through the legislation ourselves, and what we wanted to do was just put forward some big picture points. I cannot
speak exactly with precision about where and how this thing is
working because our folks are still working hard to be sure that we
understand all of the dynamics that are in play. But if you are willing, we would love—we are already working very closely with the
chairman on a number of things that we discussed, we would just
like to continue. We have some follow-up from yesterday with you
as well.
The CHAIRMAN. Would the gentlewoman yield?
Mrs. BIGGERT. Yes.
The CHAIRMAN. We are marking up—well, we are not marking
this up, I take it back. We are not marking this up until the 28th,
so there is plenty of time.
Mr. CORNICK. Okay.
The CHAIRMAN. And we will be open to this. The 28th is the day
of the markup for this and that gives us plenty of time.
Mr. CORNICK. That is very helpful.
The CHAIRMAN. And I think all of us on both sides will be very
receptive to specifics between now and then.
Mrs. BIGGERT. Yes, I would appreciate that.
Mr. CORNICK. Yes, ma’am.
Mrs. BIGGERT. But just in general, do you think that this is the
best delivery method so far?
Mr. CORNICK. Well, I have betrayed a certain prejudice in that
we are very proud of the work that we do, and we think that we
have a pretty good set of systems that work well. By the same
token, we are very respectful of the fact that what is proposed has
some substantial support, and what we want to do is be productive.
I have betrayed the fact that we feel that we could responsibly and
efficiently produce some division of labor gains by using a system
in a network that is very successful. But it is just for consideration.
Mrs. BIGGERT. Well, do you think maybe then that you should
have a more expanded role?

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Mr. CORNICK. We certainly would not be shy about it were it
something that the Congress felt comfortable with.
Mrs. BIGGERT. And what about modeling it after the Affordable
Housing Program that the Federal Home Loan Banks administer;
is that a possibility?
Mr. CORNICK. I would have to get back with you on that because
the truth is I am not smart enough how they do their work.
Mrs. BIGGERT. Okay. I am concerned about the delivery just because we have seen what has happened in Louisiana particularly,
that the money has gone down there and it has not been given out
yet and has not started to be useful as it should be.
Mr. CORNICK. Yes, ma’am. It is something that we have been
working—you and the Secretary have talked about this very—we
have been working very hard with them, and we just have some
substantial challenges and we are just getting through them.
Mrs. BIGGERT. Okay, then, Mr. Steel, would you have any comment on this from the point of view of the Treasury about using
something like the Federal Home Loan Banks as administrators?
Mr. STEEL. Thank you very much for the question. I think that
there are several different ways we could go about this and discuss
it. We are not opposed to that idea but the way as promulgated in
the bill as written today is fine, also. And the key issue was the
caveats that I described, and we walked through earlier, and this
delivery mechanism as described by the States is fine with us. But
if others are to be considered, that is fine too.
Mrs. BIGGERT. Thank you. I yield back.
The CHAIRMAN. I thank the gentlewoman. The gentleman from
North Carolina.
Mr. WATT. Thank you, Mr. Chairman, and thank you for—
The CHAIRMAN. Gentlemen, just for a second, this is a very important piece of legislation. We have a long day of hearings, this
is a very big committee, and unfortunately too many of the members pay attention, so we have long hearings and there is nothing
I can do about that. I just want to tell people, for the convenience
of the members and witnesses, that I plan to stay here all day and
finish this. There is no need to take a lunch break, because it is
not a markup situation; members can come and go. I say that for
the benefit of the later witnesses, if they want to feel free to come
and go, but it is—we are going to finish this hearing today, and
people can adjust their lives accordingly.
The gentleman from North Carolina.
Mr. WATT. Can I steal that part of my time back from you?
The CHAIRMAN. We just started now.
Mr. WATT. Thank you, sir. Let me thank the chairman for convening the hearing. It is an extremely important hearing and an
extremely important piece of legislation. I am a very hardy supporter of a stronger and more independent regulator, and I want
to ask some questions in two areas related to the independence and
the strength because some responsibilities go with being a stronger
regulator. I have some concerns about the level of independence
that I want to get on to the record here if I can.
First of all, Mr. Lockhart, you are familiar with something called
Operation Noriega, have you ever heard that term before?
Mr. LOCKHART. No, I am not sure I have.

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Mr. WATT. Okay. There were reports circulated that somebody in
the White House had more than a passing interest in how this new
regulatory framework got formulated and may have had pretty aggressive interest in the reports that were done evaluating the GSEs
performance. I also serve on Judiciary, and we have seen over the
last couple of weeks revelations about the Administration being engaged in things, I mean the White House itself being engaged in
things we thought were in many respects much, much more independent. Can each of the three witnesses give me assurances today
that there are not e-mails, paper trails, interference from the White
House, either in the reports that OFHEO has issued up to this
point, the financial evaluations or reports, or in the shaping of reactions to the legislation here or legislation in general? Mr.
Lockhart first.
Mr. LOCKHART. Certainly, I am an independent regulator. In fact,
I have been an independent regulator in three jobs in the government—at the PBGC and Social Security, as well as OFHEO—so I
understand independence, and I think it is very important.
Mr. WATT. You agree with me then that it would be inappropriate for somebody in the White House to be interfering in an
independent regulator’s evaluation of conduct?
Mr. LOCKHART. I agree with that and certainly in my 9 months
there, there has not even been a hint of that.
Mr. WATT. I think this would go back prior to your 9 months
there, so I am seeking your assurance that that kind of inappropriate activity has not taken place to your knowledge prior to your
9 months there. I want you to speak beyond your 9 months there,
Mr. Lockhart.
Mr. LOCKHART. Well, again, I can tell you the most important report we put out since I have been there is the special examination
of Fannie Mae.
Mr. WATT. I am talking about conduct that may have occurred
prior to your being there, Mr. Lockhart. You are here on behalf of
the agency. I am asking you about whether you have any knowledge of any e-mails, any correspondence whatsoever that may have
even come close to the line about shaping the reports that OFHEO
has issued?
Mr. LOCKHART. No, I do not.
Mr. WATT. Okay. And, Mr. Steel, Mr. Cornick, do you have any?
Mr. STEEL. No, sir.
Mr. CORNICK. Absolutely not.
Mr. WATT. Now the second part of this inquiry that I want to be
clear on is that there are some responsibilities other than independence that go with a strong regulator and there is some concern
that some people have raised that in the conduct of OFHEO’s activities, it has released information, financial information, publicly
and prematurely. I concede at some point all of this financial information must come out and be evaluated by the public since these
are public corporations. My question to you, I assume you believe,
Mr. Lockhart, that OFHEO is governed by those privacy provisions,
non-disclosure provisions under 18 U.S.C., section 1905?
Mr. LOCKHART. I am not sure of the cite, but I do believe that
we are covered by privacy, yes, and we do keep the information pri-

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30
vate. A lot of our information is insider information and there are
a whole series of rules around that as well.
Mr. WATT. And to your knowledge has OFHEO at any point prematurely and in violation of any of this statute, or any other statute that you are aware of, released any information that it should
not have, either before you got there or within the 9 months that
you have been there?
Mr. LOCKHART. I really unfortunately cannot speak before I got
there on that kind of issue, but I can tell you what we have done
while I have been there is that we protected the inside information.
We do publish information about these two companies, we put out
a quarterly capital report, which has information on them, and we
are required by law to put this annual report to Congress that has
information in it, which is somewhat different that the other regulators.
Mr. WATT. And can I get your commitment to go back and review
those prior disclosures so that we can be assured that this independence and this stronger regulation is accompanied by responsibility that is transparent also?
Mr. LOCKHART. I certainly believe in that, and we will certainly
look at that. I think it is very, very important for a regulator not
to be political.
Mr. WATT. Can I just ask him to do one other thing, I want to
ask him a question, to take a closer look at the provisions of 18
U.S.C., section 1905, and see whether there might need to be some
clarification in this bill that we are considering that makes those
responsibilities of OFHEO more concrete and transparent so the
public has confidence not only in what the GSEs are doing but in
what this stronger, more independent, more public and powerful
regulator is doing?
Mr. LOCKHART. I certainly will look at that. I have just been told
that is the Trade Secrets Act you are talking about, that cite there,
and certainly we will look at it.
Mr. WATT. I think this goes well beyond trade secrets the way
I read this.
Mr. LOCKHART. We will certainly look at it.
Mr. WATT. I thank the chairman for his generosity.
The CHAIRMAN. The gentleman from Connecticut.
Mr. SHAYS. Thank you, Mr. Chairman. Mr. Cornick, as you reviewed the law, is it your interpretation that the legislation would
transfer fair housing enforcement away from HUD or are you concerned about it?
Mr. CORNICK. Our attorneys recognize that we are just going
over this and continue to do it. But currently the way we are reading H.R. 1427, there is a transfer of HUD’s fair lending, fair housing GSE oversight authority to a new regulator.
Mr. SHAYS. And you would be opposed to that?
Mr. CORNICK. Well, we would offer for consideration that we
have a very established record in working that. We have been very
successful enforcing the Nation’s fair housing and fair lending laws.
Mr. SHAYS. So the answer is you would be concerned?
Mr. CORNICK. Yes.
Mr. SHAYS. Okay.

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The CHAIRMAN. Would the gentleman yield? Could we get the
cite to that because we share that concern? Do you have the textual
cite to that?
Mr. CORNICK. Let me see, sir.
The CHAIRMAN. If you do not, we will try—
Mr. CORNICK. But I appreciate the question because it is important.
Mr. SHAYS. Right, I think the committee will be concerned about
that as well. Mr. Steel, if you would, section 115 of the bill requires
Fannie Mae and Freddie Mac to register one class of stock under
the 1934 Act. Why only the 1934 Act and why only one class of securities?
Mr. STEEL. Thank you. The rules are specific that these institutions were exempt from the 1933 and 1934 Act, that is going back
historically. They have chosen to voluntarily comply with the 1934
Act. This is the current situation. It is not—and it is not something
that we feel is required but should it be something that develops
in the course of the bill, we would not be against it.
Mr. SHAYS. Well, let me ask you a question, the 1933 and 1934
Act have very real purposes, correct?
Mr. STEEL. Yes.
Mr. SHAYS. Fannie Mae and Freddie Mac are publicly traded,
correct?
Mr. STEEL. Yes.
Mr. SHAYS. So isn’t there an argument that could strongly be
made at the very least that they should comply like any other company that is traded publicly?
Mr. STEEL. Yes, that argument could be made.
Mr. SHAYS. But the Administration is remaining neutral on it?
Mr. STEEL. We are comfortable with the way it is described now.
Mr. SHAYS. Yes, unfortunately, before your time, folks were comfortable not having them under the law at all. And until we frankly
forced them to have to disclose under the 1934 Act, and they said
voluntarily they were doing it, like we did not have a right to make
them, that is when we learned about all the problems. And it
seems to me, and I will just publicly lobby you, I hope the Administration pro-actively engages in this and says, listen, let’s treat them
like any other company.
Mr. STEEL. Great.
Mr. SHAYS. Let’s make sure they are under all the requirements
that any other company would be. Mr. Lockhart, I would love to
know about, GSEs are exempt from the privacy protection law enacted by Congress for other financial service firms in the GrammLeach-Bliley Act. Has OFHEO issued anything like the banking
agency guidance or does this need to be addressed in our bill?
Mr. LOCKHART. I really don’t know that and I will have to get
back to you on that.
Mr. SHAYS. Okay.
Mr. LOCKHART. But if we need to get it in the bill, I know we
put out guidances around privacy, whether they are exactly like
the bank I am not sure.
Mr. SHAYS. But do you think this is an issue that should be addressed?
Mr. LOCKHART. Certainly, and we will look at it.

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Mr. SHAYS. Mr. Steel, I am sorry.
Mr. STEEL. I think this is somewhat similar to the previous point
that there has been exemption but it is certainly something to be
considered, and we are glad to study and have conversations as
things move ahead.
Mr. LOCKHART. Could I make one point on the registration?
Mr. SHAYS. Sure.
Mr. LOCKHART. Actually, Freddie Mac is not registered yet. By
the time they were going to register with the SEC, their financials—
Mr. SHAYS. They could not comply.
Mr. LOCKHART. They could not comply.
Mr. SHAYS. Yes.
Mr. LOCKHART. So once they get their financials in good shape,
they are going to register.
Mr. SHAYS. And that is a good qualification but it does not argue
not for them to be—
Mr. LOCKHART. Right.
Mr. SHAYS. Okay. One last point, and it is to you Mr. Lockhart,
OFHEO, everyone agrees that it is doing a much job under your
management and significant changes, and I am not just saying that
because you happen to be a constituent. I am not, that is the consensus. But what powers right now do you lack that you think you
should have regardless of this bill that we are considering? What
is the biggest area of weakness in your authority?
Mr. LOCKHART. Well, we really don’t have the powers of a bank
regulator and that is a whole series of powers, receivership, portfolio, capital.
Mr. SHAYS. So there is a whole host of issues?
Mr. LOCKHART. It is a very long list of issues and really has led
to a weak regulator and so we have to sort of pick ourselves up by
the bootstrap, if you will.
Mr. SHAYS. The thing that concerns me is, as hard as we may
work on this committee to get the job done, we cannot be certain
what the Senate will do, and I think we are going to get out a good
bill. So I am just interested in that. My time is up. Thank you, very
much.
The CHAIRMAN. I would just point out that by odd coincidence,
the chairman of the Senate Committee is from, guess where? He
is from Connecticut. Once again, maybe you can work with him.
Mr. SHAYS. You know sometimes, Mr. Chairman, your Massachusetts accent I do not always understand. That is my problem.
The CHAIRMAN. The gentleman from New York, which is where
my accent is really from.
Mr. MEEKS. Thank you, Mr. Chairman, thank you for holding
this important hearing. I have some interest, and let me address
my first question to Mr. Steel. In dealing with the Federal Home
Loan Banks and the appointment of these independent public interest directors, I am concerned about their independence. And I
know that 2 years had gone by and these positions had not been,
only 40 percent of the director positions were vacant. No one was
appointed to them. And then after a rule, and I think the rule was
this past January, they came out with criteria that in the case that

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33
the candidate should include familiarity with financial and accounting matters.
Now these are supposed to be public interest directors, and it
seems to me if in fact you just specify you must have that particular background, are not we eliminating some of the independence? Because it seems to me then that the individuals can hire for
the directors their cronies, the individuals that they know, either
from the member banks, etc. Should there be another criterion in
which we could also utilize individuals who will be appointed because of the public interest on the Federal Home Loan directorships?
Mr. STEEL. Thank you. I think that the way I would answer your
question is you would hope they are complementary skills, that in
addition to the financial tools to be able to monitor the activities,
that having people that have the public interest in their mind and
things like that is an additional attribute that you would hope
would be the case. But I think the idea that there should be people
who do not have these other financial skills is a road that I would
not want to go down.
Mr. MEEKS. Do you think that these directors should be confirmed by the Senate?
Mr. STEEL. Confirmed by the Senate?
Mr. MEEKS. By the Senate?
Mr. STEEL. I am sorry, by the?
Mr. MEEKS. By the Senate?
Mr. STEEL. I think that the best protocol is that they should
come through the normal process and Senate confirmation is fine.
Mr. MEEKS. Let me further ask Mr. Steel on the other matter of
which—
Mr. STEEL. I am sorry, I think I mis-spoke. They should not be
confirmed by the Senate but instead come through and be approved
by the board. And this gets into this issue, sir, that really Mr.
Lockhart spoke about, which is complex, and that is these organizations, as the chairman said in his opening comments, are hybrids. They basically have private market and public policy ambitions too. But I think that the key issue here is that, as we have
described, we need to continue to communicate that they are separate from the government and from a governance perspective so as
to make clear that the financial tie, as described in the preferred
cost of capital, is as clear as it can be, that is not the case.
Mr. MEEKS. My concern just is that there is some independence
and that we just do not have individuals deciding to elect individuals to the board who are just from those same circles because that
is what becomes—that is who you know and there is no outreach
to have some real independence of individuals who will be there
specifically for the public interest. And I just think that we have
to make sure that there is independence there.
Let me just ask you, Mr. Steel, I know that last week Moody’s
upgraded the rating for the Nation’s largest banks based upon the
high potential of a government bail out. And the Treasury has justified limiting the portfolio of the GSEs due to a lack of market discipline based upon a perceived government bailout. My question, is
should the same kind of restraints be placed upon the big banks?

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Mr. STEEL. Well, I think that there is a distinct difference, and
it is a question I look forward to answering. The reality is that the
cost of capital for other institutions in the financial marketplace
goes up and down and their costs of borrowing go up and down.
They are set by the marketplace, and they are not linked in the
same way to the interest rate of the government.
When you look at the cost of borrowing for the housing GSEs, it
clearly does not represent the cost that it would be if there was not
this determined link, this assigned link to the government. When
you look at other large financial institutions, their costs go up and
down depending on whether people perceive them as more risky, or
less risky, and they really are subject to market type checks and
balances.
Mr. MEEKS. They are both regulated, I heard what you said, the
difference, they are both being regulated.
Mr. STEEL. Yes.
Mr. MEEKS. Different agencies, both the industries and it seems
like large sums of money but one you are saying is regulated closer
or restricted more than the other?
Mr. STEEL. The marketplace believes, and as I said in my opening comments and it was also referenced by others, the marketplace assigns a borrowing rate to the housing GSEs that is tied and
infers a government backstop. I have declared that is not the case
but that is the way it works so there is not the market check and
balance that you would normally have when people tend to change
their business model.
Mr. MEEKS. I see my time is up. Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from California.
Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. I rather
enjoy these hearings we have and the testimony from individuals
from Washington, D.C. It reminds me of why I fly home every week
because I do not want to develop a Washington mentality. Under
Secretary Steel, what would you consider affordable housing?
Mr. STEEL. Well, I think that Chairman Frank gave some descriptions earlier.
Mr. MILLER OF CALIFORNIA. But what do you consider affordable
housing? I know what he thinks. I heard your testimony, I want
to know what you think. What do you think affordable housing is?
Mr. STEEL. I think that when you look at the median price, and
we basically go through the arithmetic and conforming loan limits
and things like that, we have basically seen how it works out.
Mr. MILLER OF CALIFORNIA. So you believe that median is some
part of the definition of affordable housing, then why do you discriminate against areas like California in your comments? You do
not have a problem with Guam. You do not have a problem with
Alaska. You do not have a problem with Hawaii and these areas
that are afforded a higher rate to fall under GSEs, you do not have
a problem with that, but when I look at this chart that shows the
States that are in trouble with foreclosure, California, but your
comments actually discriminated against my State of California
when we are trying to raise conforming loan rates in California.
And all you have to do look at OFHEO’s chart to realize there
is a huge need, and I think you need to read this chart before you
testify and make these comments again. If you look at the under-

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writing standards of the private sectors, they are not as rigorous
as Freddie Mac and Fannie Mae are because Freddie and Fannie,
82 percent of their loans are fixed rate loans, 18.1 percent of the
other marketplace is fixed rate loans, and because of these loans
that are being made out there in the private sector, people are in
real trouble today.
And yet in your testimony, you said, ‘‘There does not appear to
be a problem in the provisions of mortgage credit in these areas
and it could be a distraction from the affordable housing efforts of
Freddie and Fannie.’’ What do you consider affordable housing? I
was born in Huntsville, Arkansas, Madison County. My district is
Orange County, California. Are you trying to tell me that affordable housing in Madison County, Arkansas, is the same as affordable housing in Orange County, California? That is a question.
Mr. STEEL. No, sir.
Mr. MILLER OF CALIFORNIA. Then how can you make a generic
statement, as you did, that there does not appear to be a need or
there is no apparent reason to stop discriminating against high-cost
parts of this country and affording them the same opportunity as
Madison County, Arkansas and other places that they can get an
affordable house and they can go through Freddie Mac and Fannie
Mae at a better rate. And if you look at historically, your problem
loans, they have never been as problematic as what I am facing in
California today with the jumbo market, even at Freddie and
Fannie’s worst.
So your comments to me, as I see it, you have a program that
I fully support, that I believe works, and you are telling me that
I am not as good as Guam, as Alaska, as Hawaii? How can you say
that? And that is what you said? How can you say that?
I want you to justify that on TV to the people I represent, and
people in other high-costs parts of this country, that they are not
as good as people in those areas and they should be discriminated
against and not offered a loan that the Federal Government basically backs up and guarantees because we do, and the same taxpayers in my district are the same taxpayers in Alaska and Hawaii, why they are not qualified for the same kind?
I am really upset about this, because we make these stupid—excuse me, we make these unacceptable Washington statements with
a Washington perspective, that is why I think local housing authorities need more control and more leeway in determining the
needs of the local people. We make statements like this, that there
does not appear to be a need and you look at the charts, and the
need is absolutely beyond question and the crisis is beyond question. These are not the crises and the defaults today, these areas
are the crisis. The only red on this entire map of the United States
is California and most of this country has availability of GSE loans;
we do not.
So you cannot tell me that an affordable house in Arkansas, or
maybe some parts of Oregon where my family lives, are the same
as an affordable home in California. I cannot buy a $300,000 house
in my district hardly. If you can, it is in such disrepair that it is
illegal to move into. You would have to go revamp it. So we have
been fighting for years, and I commend the chairman for this, his
efforts in this, too, to try to create some type of a system that is

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fair and equitable throughout this country but the concept that I
have schoolteachers and firefighters and police officers driving 2
hours back and forth to work each day because they cannot afford
to buy a house in the community within which they live, yet if they
get FHA availability and some GSE availability, you would move
more people into homes with a safer, less risky loan.
I apologize, I do not mean to offend you, but when you make
statements like this, that somebody probably wrote and typed for
you and you read in a meeting like this, and you tell me my people
are not good enough, they are the same taxpayers as anybody else
in this country because they happen to live in a high-cost area. You
need to think about what we are trying to do in this country and
that is provide liquidity in the housing market, and we are discriminating against most of the housing market in high-cost areas.
And I am a little fired up, I know, Mr. Chairman, I do not want
you to get too much exercise with your gavel there, but I would like
you to re-think that. That is just not fair and it is just not equitable, especially when you are not the problem.
The CHAIRMAN. Mr. Steel, I would not want to deprive you of a
chance to respond if you are eager to do so.
Mr. MILLER OF CALIFORNIA. I would love you to, please.
Mr. STEEL. Well, I am happy to respond. First of all, I appreciate
the perspective, and it will certainly be considered, and we will
come back. I think, though, that the only thing I would challenge,
sir, with all due respect, is it is not a question of being good. That
is not the right way it was described. We are trying to develop a
system for allocating and it is not a matter of assigning value to
people or things like that.
Mr. MILLER OF CALIFORNIA. Mr. Chairman, 5 seconds, please? If
you can allocate it to Hawaii and Alaska and Guam, it should also
be allocated to my part of California and over all of California.
The CHAIRMAN. I would just say, if the gentleman would yield,
I would just add to this and that allocation, I think, is not the right
word. I do not see this as in any way zero sum, that is, it is not
the case that doing the high-end loans in any way detracts, and indeed if we are looking at the goals, which are a percentage of overall loans, if we look at the Affordable Housing Fund, which is going
to be fueled if we are successful by the portfolio, to some extent,
the more loans they make in these high-cost areas, the more will
be generated. So no one should see this as zero sum. The gentleman from Kansas?
Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. And, Mr.
Chairman, I want to commend you for this legislation, which I believe represents an important bipartisan compromise. H.R. 1427
creates a strong new regulator for government-sponsored enterprises that will ensure the safety and soundness of these entities
in our housing marketplace while also helping them fulfill their
role in providing affordable housing opportunities for families all
across our country. I hope this committee will be able to move forward after this hearing in marking up this legislation and moving
it on its way to becoming law.
The question I have for Mr. Lockhart is that the legislation we
are considering today, sir, charges the new director with developing
standards by which the enterprises’ portfolio holdings ‘‘will be

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deemed to be consistent with’’ their mission and safe and sound operations, as you read this language, do you believe it would permit
the director to set quantitative standards, that is standards to prescribe a specific level or range for the portfolio holdings or does it
contemplate standards that are more qualitative in nature? What
sort of considerations should the director take into account in assuring the safety and soundness of the GSEs?
Mr. LOCKHART. I think the legislation could set quantitative, or
at least ranges, as well as qualitative standards. Certainly, I think
the legislation gives very good guidance to the regulator that it
should be looking at the liquidity of the market and the entities,
it should be looking at the stability of the marketplace, it should
make sure that they are able to securitize mortgages, which is
their biggest business, and also they should consider the risk and
very importantly affordable housing. The legislation requires that
the regulator has to put the regulation out in about 180 days. I
would hope that it could even be done quicker, and that there could
be a really good dialogue about the various factors going forward.
Mr. MOORE OF KANSAS. Thank you, sir. Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from New Jersey.
Mr. GARRETT. Thank you, Mr. Chairman. Thank you again,
panel. First, dealing with the issue of the so-called housing program or as some of us call it a mortgage tax increase because in
essence it is a tax on the GSEs and hence down the line to the
eventual consumers. Maybe Mr. Cornick or maybe other members
of the panel can answer this question, I am not talking about the
programs that you run with regard to housing, but we have heard
other testimony already with regard to the GSEs and that the private market basically is doing a better job when it comes to providing affordable housing than what the GSEs have already done
so isn’t it implicit in this legislation that where it is saying that
we are going to be adding on this housing program, isn’t it implicit
in the legislation that we are saying that the GSEs have failed and
we are trying to come with another solution since they did not do
their job in the first place?
Mr. CORNICK. Personally, I would not draw that conclusion. One
of the things that we have found through our own goals—
Mr. GARRETT. Well, if they were doing the job and they were providing it, they would be doing better than in the private market
and we would not be looking to add another—
Mr. CORNICK. That is where we are trying to get them and they
are not currently there, that is true.
Mr. GARRETT. Again with regard to this program, Mr. Steel, you
were saying I think, maybe Mr. Lockhart you said this as well, I
am not sure, that with regard to this program, it should be a temporary program, is that correct?
Mr. STEEL. Yes.
Mr. GARRETT. I have only been here in Washington for 4 years,
maybe you can give me some examples other than tax cuts, which
are set to expire and there is always an argument that they should
be temporary by some sides of the aisle, can you give me some examples of other government programs that we have set up that
have been temporary programs that actually are temporary? I am

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thinking of TRIO right now, which was supposed to be a temporary
program, and we are seeing that going to continue on, but are
there other programs that are truly established as temporary and
then at the end they go away or do not they always just sort of stay
around for good because once they leave, they begin a constituency
for it?
Mr. LOCKHART. I am newer than you and I do not have examples.
Mr. GARRETT. Okay. Can anyone else give me examples so I can
go home and say that yes—
Mr. CORNICK. Yes, sir, I can give you one.
Mr. GARRETT. Okay.
Mr. CORNICK. Moving to Work at HUD, that is a demonstration
program that I believe has a 10-year history.
Mr. GARRETT. And then expired and did not morph into something else?
Mr. CORNICK. It continues to be reauthorized or authorized
through the appropriations process.
Mr. GARRETT. Okay, so that is an example where we had a temporary program, it was supposed to be temporary—
Mr. CORNICK. Actually, it has always been a demonstration, it
has never grown into a full-fledged authorized stand-alone program.
Mr. GARRETT. So maybe I should have some concern that even
though both sides here believe that it should be temporary, it may
not be.
Mr. LOCKHART. One example would be the Resolution Trust Corporation, which was winding up the S&Ls. I think if you look at
the President’s proposals, one of the proposals is actually to put
forward a sunset commission to oversee these kinds of things to
make sure that programs that are no longer necessary, are no
longer working, are being shut down and that is happening in this
Administration.
Mr. GARRETT. That is something that I would totally agree with
and if we have the authority in this committee, I would encourage
the chairman—I do not think we do—to try to look into sun-setting
a number of programs. Going over to a second area and that is the
portfolios. Back in 1990, the portfolio amounts for Fannie Mae and
Freddie Mac was $136 billion. By 2003, they were up to $1.6 trillion.
And the reason I give 2003 data is because that is what I have
in front of me because I understand that for both of those funds,
we do not have total financials until 2004 and 2005.
So my two questions for you are this, will shrinking their portfolios reduce systemic risk, (a)? And (b), can you really answer any
of these questions when it comes to systemic risks and the size of
their portfolio since we still do not even have data that is less than
3 years old? And how do we move forward on any of this until we
actually have that data?
Mr. LOCKHART. Well, as the regulator, we do have the data, some
of it may be still estimates but we do have the data, and we are
certainly using that from a regulatory standpoint. The portfolios
have come down about $200 billion since then and that is because
the regulator took action and asked them to put up more capital
and the response was to draw down their portfolios somewhat. Cer-

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tainly, one has to consider the size of the portfolios as part of safety
and soundness, and I think it is an important issue.
The other thing about the portfolios is that it is just one of their
two businesses. I think it is important to remember that this is
about only a third of their total book of business and how they help
the mortgage market. The other two-thirds is their guaranteeing of
MBS’s and those guarantees have credit risks, just like their portfolio, but a lot less interest rate risk and operational risk.
Mr. GARRETT. And I think I have time for just more question.
Mr. Steel, you have not suggested any limit on the amount of the
GSE obligations that a bank may hold, that was an idea proposed
by the Clinton Treasury Department, I believe, and included in
some prior versions of this legislation. Do you support such?
Mr. STEEL. I think the key push for us has been, and will be, to
have a strong regulator. And if we make the GSEs subject to good
regulation with the right balance of both the size and the capital
required, then that is the right anecdote for dealing with all the
issues.
Mr. GARRETT. Okay, thank you.
The CHAIRMAN. The gentleman from Texas.
Mr. HINOJOSA. Thank you, Mr. Chairman. I want to thank you
and Ranking Member Bachus for bringing this important issue for
us to have this hearing on your bill. The outcome after this important hearing on reform of enterprises and Federal Home Loan
Banks is very important to my congressional district, as well as to
my State of Texas. I wish to ask my question to the Honorable Robert Steel, and also get input from The Honorable James Lockhart.
Gentlemen, as you know, Chairman Frank’s legislation, H.R.
1427, proposes a product review process for Fannie Mae and
Freddie Mac that goes far beyond the bank regulatory model. National banks are not required by OCC rules to obtain prior approval for every new product that they introduce. Do you support
this section of the H.R. 1427 bill? And, in your view, what justifies
imposing a stricter regime on Fannie Mae and Freddie Mac?
Mr. STEEL. Thank you. I think that the way I would think about
this is really in the context of some of the earlier conversations.
The housing GSEs are hybrid institutions and they have unusual
characteristics. They are part private and part public in terms of
the policy ambitions. And therefore we have said all along from the
Treasury perspective that we think of the tools needed as in two
parts.
The first part are tools that are consistent with a strong banklike regulator. But, secondly, there are additional tools needed because of the special nature of GSEs and this product review is part
of the special nature that we think is appropriate given this hybrid
construct. Let me again reiterate that the development of rules in
the open and transparent system will be a way for Congress to
comment and have input on this and then the strong regulator will
apply them over time. And that seems like the right prescription
to go with this situation.
Mr. HINOJOSA. Well, I am concerned that if you go too far, the
low-income families in regions like the one I represent, where over
40 percent are below the national poverty level, would never be
able to own their dream home. And so I am concerned that you

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folks just might go a little bit too far to the right. And I would ask
Mr. Lockhart, would you give me your views?
Mr. LOCKHART. Well, first of all, I think regulatory review of new
products is not unusual, either in banking or in the insurance industry. I am more familiar with the insurance industry. What is
maybe a little different here is the more public nature of the reviews, but the regulator will put out a regulation, and certainly if
there are private parts that should not be exposed to the public,
that will not be exposed.
But my view, again, is innovation is critical for these companies,
and I think we have to encourage that. At the moment, unfortunately because of their problems, they are not really capable of innovating and so what we need to do is help get them fixed. And
then I think this would be a very good process going forward to
look at major new products.
Mr. HINOJOSA. Well, I believe that to close that gap that has existed for far too long, we are going to have to be creative and innovative and be able to regulate them but, as I said earlier, not to
go too far and not let them work and help us reach that goal.
I want to continue and say that it seems to me that a financially
healthy national bank does not have to obtain the approval of the
Comptroller of the Currency or formally notify the comptroller before offering a type of mortgage that it had not offered before nor
would a healthy bank need permission to start offering auto loans
even though it had not done so before. I am concerned about an
overly-bureaucratic bill approval process that might stifle innovation or harm the very reason we created Fannie Mae and Freddie
Mac. So why treat Fannie and Freddie differently, and I address
that to Mr. Lockhart?
Mr. LOCKHART. Well, as Mr. Steel said, these are hybrid organizations, they have a very important public mission, and they have
a very big role in the U.S. economy so we have to make sure, as
part of regulatory review, that their new products are safe and
sound. That is not meant to stifle innovation, it is just meant to
make sure that they do not have safety and soundness problems.
And I think, hopefully, a regulator can and has been able, will be
able to work the balance between safety and soundness and innovation.
Mr. HINOJOSA. Thank you for your response. I have already gone
beyond my limit, and I yield back.
The CHAIRMAN. I thank the gentleman. The gentleman from New
Mexico.
Mr. PEARCE. I thank the chairman for the hearing. I think my
question, Mr. Steel, would be how do you perceive the secondary
market in the reform bill, the bill that we have due, are GSEs
going to stay involved in the secondary market? What are the applications that we need to face there, I think would be my question?
Mr. STEEL. Well, I think that the clear issue here is that this
proposal focuses on the issue of mission and the issue of safety and
soundness. And the mission is clearly stipulated to be focused on
extending credit for housing and so this does not limit their involvement in the secondary market. And that could continue but it
will be up to the regulator to balance the business model with the

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appropriate risk-based capital and give him guidance and provide
the right perspective so as to protect those twin, dual aspects.
Mr. PEARCE. And you would see that flexibility to stay in or get
out as being an appropriate flexibility, you think that flexibility is
appropriately given?
Mr. STEEL. Yes.
Mr. PEARCE. Okay. Any other comments on the panel on this
particular issue because I suspect we are going to hear more about
this as we move forward because if see enough of it in the evening
news, sometimes it percolates to a hearing, you never can tell?
Mr. LOCKHART. Well, I certainly think that they have an extremely important role in the secondary market and this legislation
that is proposed will only strengthen that role. They not only have
a portfolio but, as I said earlier, they also are the major providers
of securitized MBS’s that back up the mortgage market. So I think
this bill will only strengthen them and strengthen their capability.
Mr. PEARCE. Mr. Cornick, any comments?
Mr. CORNICK. No, sir.
Mr. PEARCE. If we could go just a little bit further and assess the
strength—not just the strength of the market but the activity that
goes into the secondary market? I come from a very poor district,
probably $22,000 to $25,000 is our average income, and so secondary markets frankly play a very large role in seeing that people
in New Mexico get access, so what happens if we constrict the secondary markets unnecessarily? Are there elements of the business
world that are going to pick up those loans?
I think that loan pool right now is about $700 million—$700 billion, excuse me, it is almost a trillion dollars to low-incomers and
yet you can see it coming from the evening news, they think we
ought to squeeze that down and shut it off, but it is going to affect
people in the poor districts. And so what options do we have going
into the future? What potential, what risks are out there in the
market if we over-regulate and then what are the effects, if I could
get some comment?
Mr. LOCKHART. I think you have a very reasonable concern, that
we do not want to over-regulate and we have to be cautious about
what is happening out in the marketplace today. Freddie Mac and
Fannie Mae are big players in the secondary mortgage market, including the kinds of securities you are talking about which are private label securities issued by issuers including Wall Street banks
and other firms. They have been reasonably big buyers in that and
they have actually been only playing at the very top level, the triple A tranche, but they do have between them probably $300 billion of private label securities and there is nothing in this bill that
would not allow them to continue to do that. And then hopefully
over time, they can develop capabilities to do even more.
Mr. PEARCE. Mr. Steel, any comment?
Mr. STEEL. I would agree.
Mr. PEARCE. Okay, thank you, Mr. Chairman. I see my time is
about gone.
The CHAIRMAN. I thank the gentleman. The gentleman from Missouri.
Mr. CLAY. Thank you, Mr. Chairman. Thank you for holding this
hearing. Mr. Lockhart, Chairman Frank’s legislation, H.R. 1427,

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would set the capital levels for Fannie Mae and Freddie Mac. Congress set the capital levels in the 1992 legislation as well. While
I support giving you bank-like authority to increase the capital levels when there is a serious safety and soundness condition, I am
very concerned that you might over-interpret this authority to be
broader and more than we in the Congress intend.
What can you tell the committee today to give us assurances that
we are all on the same page as to what authority we are giving to
the new regulator and how you would use that authority if you
were the new regulator?
Mr. LOCKHART. The legislation gives the regulator, through an
open rulemaking process the ability to look at not only the minimum capital rules but also the risk-based capital rules. On the
risk-based side, the present rules were in that 1992 legislation. The
model that is built out of it is not very effective and we will definitely be looking to make it more effective.
On the minimum capital side, there is no doubt that there are
limits in place. The minimum capital requirements are much lower
than for any other financial institution but there is reason for that.
And there are some other reasons that they potentially should be
higher. As you probably know, at the present time, we have a 30
percent add-on to that given the regulatory risk, which makes instead of 2.5 percent, 3.25 percent. And certainly that is a number
that we are more comfortable with at the moment considering the
situation.
Mr. CLAY. Let me get some clarification from you, Mr. Lockhart.
On January 19th, the ‘‘Wall Street Journal’’ Financial Services
Brief read, ‘‘Fannie Mae OFHEO director reveals a net loss at
Fannie Mae.’’ Did you announce Fannie Mae’s third quarter financial results in mid-January 2007 before Fannie Mae released them
to the public and did Fannie Mae approve your release of this confidential information?
Mr. LOCKHART. We released that information when we put out
the capital report, which is a public document containing information given to us from Fannie Mae that we are required to put out
quarterly. So we released that in late December. And through those
numbers, it showed that Fannie Mae had a loss for the third quarter. We will be putting capital numbers out again at the end of this
month.
Mr. CLAY. And you are aware of 18 U.S.C., section 1905, as far
as not being able to reveal statements of Fannie Mae?
Mr. LOCKHART. I think it was mentioned to me earlier.
Mr. CLAY. Okay, and your response earlier, I may not have been
here?
Mr. LOCKHART. My response is that the information you are talking about was already out in the public sphere because of the capital report that we put out.
Mr. CLAY. Okay, thank you for that response. Mr. Steel, we are
discussing GSE legislation that may lead to limits on GSE portfolios and activities. Fannie Mae and Freddie Mac may have used
the wrong accounting treatment but they seem to be on the right
path now. In a mortgage market downturn when many lenders will
exit the market but the GSEs remain, why are considering pro-

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posals to limit GSE growth? What do you think the effect of these
limits will be on the mortgage market and on borrowers?
Mr. STEEL. I think the key issue that I would want to highlight
is this is not an effort to limit the growth of participation. This is
an effort to establish the right capital regimen and the right regulatory regimen and those twin things will make these GSEs stronger so that they can do their job better. And if you really are concerned for the longer term, intermediate to longer term, about their
ability to be effective, step one is to have a strong regulator that
applies the right capital regimen so people have confidence they
can do their job.
Mr. CLAY. And that still enables them to accomplish their mission of providing affordable housing to Americans?
Mr. LOCKHART. Even more so to my mind.
Mr. CLAY. Even more so?
Mr. LOCKHART. Yes.
Mr. CLAY. Because of the strong regulation?
Mr. LOCKHART. Because of strong regulation and appropriate
capital and the right presentation to the marketplace.
Mr. CLAY. Thank you for that response. I yield back, Mr. Chairman. Thank you.
The CHAIRMAN. The gentleman from Louisiana.
Mr. BAKER. I thank the Chair. Just to quickly summarize, and
I apologize for my absence, believe me I do not miss GSE hearings.
I was over in Transportation on some Katrina-related matters that
required my attention. But to summarize, we have enterprises that
were created by acts of Congress who were given a privileged place
in the market and, as a result, the market views these enterprises
as low risk because there is the prospect that the U.S. Government/
taxpayer would step in, in the event of an adverse economic outcome and assume obligations of the enterprise, while at the same
time, should the enterprises remain profitable, the shareholders of
that enterprise enjoy those profits.
So we have a unique business model in which it is a joining of
public resources which generate profit for shareholders. That type
of entity, in my opinion, requires us to act carefully because we are
the ones who by statute created these two or three particular activities. The Federal Home Loan Bank of course, for the record, is
not a shareholder-driven institution, it is even more unique.
However, given that prospect and the changing nature of the
business practice over the life of these enterprises has necessitated
a change in the proper regulatory oversight. For example, in the
years in which MBS did not exist and the enterprises did not buy
their own, the risk profile of those entities in that day, in my view,
was a great deal less volatile than it would be if considered today
as enterprises buy more and more of their own MBS, bringing that
risk on to the books, which they previously did not enjoy.
And the reason why they do so of course is to enhance profitability. That has nothing to do with the provision of housing to lowincome people. In fact, when you go through a portfolio analysis
and look at the numbers of mortgages held, which are 5 percent
or less down payment, which I have drawn the conclusion that generally poor people do not have money, it is just me, that is where
I wind up, and that means at the down payment level, they are

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going to have less involved in the deal than the person who is selling a home, capturing a profit and rolling that into the next one.
But when you analyze the portfolio, and I will ask, Director, if you
have a number that you could share with us, you would find the
typical home mortgage value in that portfolio to be about what?
Mr. LOCKHART. I think the average home mortgage values are
between $130,000 and $150,000.
Mr. BAKER. In most cases that represents a LTV of 70 percent
or less by my calculation?
Mr. LOCKHART. That is correct.
Mr. BAKER. Which means if it is $150,000 and the person has
$50,000 equity, that is a $200,000 house securing an $150,000 loan
kind of average. So it is not the customary first-time home buyer
that one might assume that these enterprises are principally engaged in. They are funding middle America’s homeownership opportunities. And when you look at their ability to meet the needs
of low-income, minorities, first-time home buyers, however we
choose to characterize it, in your view have they met or exceeded
the traditional market performance or have they lagged behind the
market?
Mr. LOCKHART. It is a tough issue to say whether they have met
the market performance. One issue is that it is hard for them to
reach some of the really low-income borrowers.
Mr. BAKER. And that goes to the risk requirement because when
they buy subprimes, they only take Class A’s, they do not take the
higher risk/lower credit score stuff in order to minimize their risk
so their shareholders know their profit is not at risk and there is
the inherent conflict as to why we need this regulatory change.
Taxpayers and the Congress gave them this authority but required
them the obligation, because of this privilege, to meet certain credit
extensions that otherwise might not be met.
But when we look at what they hold in their portfolio, it is not
typically what we would expect if they were intending to meet only
the low-income, first-time homebuyers’ needs. In fact, 60 percent of
the mortgages held in the country are held by folks other than
Fannie Mae and Freddie Mac, so that credit needs are now being
met in a variety of new ways that are alternatives that did not 10
years ago perhaps exist.
One last thing, Mr. Steel, with regard to the minimum capital
suggestion, some have argued that we need to consider alternative
assets being placed in the pot that counts toward your Tier I capital requirements, such as subordinated debt. Some people call that
‘‘funny money.’’ What I want to know is what is the position, what
is your view of the current construct of the Tier I capital requirement, minimum capital requirement as it is now envisioned in the
legislation? And should we consider the addition of ‘‘funny money’’
to meet those goals?
Mr. STEEL. Well, I think that it is pretty clear in bank capital
that subordinated debt would not be part of Tier I and so that
should not be included as part of the Tier I capital.
Mr. BAKER. So you feel the current construct of the minimum
capital requirement is sufficient?
Mr. STEEL. Yes.

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Mr. BAKER. Thank you, very much. I yield back, Mr. Chairman.
Let me also thank the chairman for his leadership.
The CHAIRMAN. I thank the gentleman as the first one who got
us started in this area, and we appreciate the cooperation. The gentleman from Georgia.
Mr. SCOTT. Thank you, Mr. Chairman. I too want to commend
you, Mr. Chairman, for your leadership on this issue. It is very important. Mr. Steel, let me ask you this, why must the Federal
Home Loan Banks be under this new regulator? There is clearly a
difference here; the Home Loan Banks operate under a totally different business model, and they are not as risk prone. It just seems
to me that that is not the way to go. Why are you persistent in
wanting them under this new regulator?
Mr. STEEL. Good, I will start, and maybe Mr. Lockhart will comment additionally, but I think that from my perspective this is the
right umbrella regulator to get the housing GSEs and the Federal
Home Loan Banks under this. I believe that enough of the same
characteristics are existing between all three of these, and that this
is the best tool for that task. There are differences, and several
have commented, and that the two, Fannie Mae and Freddie Mac
are more similar, but the Federal Home Loan Banks are sufficiently like this that we think this is the right way to approach it.
Mr. SCOTT. But do not the Federal Home Loan Banks basically
just primarily make secured loans to their member institutions
who are involved in this as opposed to Freddie Mac and Fannie
Mae who are involved in a myriad of things that pertain to much
greater risk? And do not we run the risk, in putting these two basically apples and oranges together, of this not operating in the best
interest of our consumers?
Mr. STEEL. I think the real issue here, sir, is that the regulator
will be able to adapt the rules and apply them to each of the entities so that they are in the right form.
Mr. SCOTT. Well, tell me this, Mr. Steel, what is wrong with their
current regulator? I would think that they are doing the job; there
are not the same complaints that we get with Freddie and Fannie?
Mr. STEEL. I think that the same rudiments of why we believe
that we need a bank-like regulator with all the appropriate tools,
and we have walked through the half a dozen characteristics, really
apply here to the Federal Home Loan Banks also.
Mr. SCOTT. Well, tell me this then, what regulatory authority
that they do not now have, will this legislation would provide?
Mr. LOCKHART. Well, I think the legislation really does make a
lot of sense because they do have a lot of similarities. The FHLBs
have portfolios. In fact, two of them got in very big trouble with
the risk management around those portfolios. So they do have
some very similar issues going forward. They are all housing GSEs,
they are all in the marketplace, and it really makes a lot of sense
to me to have one regulator, as Controller General Walker said,
that oversees all the housing GSEs to try to bring more prominence
to the issue and also to bring more efficiency and more effective
regulating?
Mr. SCOTT. Well, how do you see this benefitting the marketplace?

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Mr. LOCKHART. I think a more efficient regulator will benefit the
marketplace. I think going forward that Federal Home Loan Banks
understand that having a stronger regulator will help them retain
their shareholders and their business.
Mr. SCOTT. But is not the current regulator doing the job now?
Where are they failing? I do not see where this problem is that it
is necessary to take the Federal Home Loan folks and put them
into this. If there was a problem with the current regulator, then
I could see that but nowhere has that been pointed out.
Mr. LOCKHART. Well, there are certainly issues at the moment
around the capital and especially the risk related to the capital of
the Federal Home Loan Banks. And, as I said, there were certainly
several that had some significant problems.
Mr. SCOTT. All right, well, let me go to another question I wanted
to ask Secretary Steel. We have been on this issue of GSE reform,
and last year the reform legislation died in the final hours of the
session. And my question is, is this Administration committed,
really committed, to negotiating in good faith to quickly finish action on GSE reform?
Mr. STEEL. I am quite appreciative of that question. I pledge to
you that Treasury, of which I am affiliated, is committed to that
and would like—and is here today in support of the bill. And I believe, and you can—really in some ways the question might be better answered by Chairman Frank as to the commitment and seriousness of intent. And I pledge to you that is exactly why we are
here and that we have worked hard to get to this place and look
forward, as the expression was used, I think by the chairman, to
getting the ball over the goal line.
Mr. SCOTT. Well, are there areas that this committee is considering in this legislation that the Administration will definitely oppose?
Mr. STEEL. I think that we have tried to talk—the things that
are on the table today are things we have worked on. There are
still some open issues but there is nothing that we see as being an
issue that is discouraging to us to want to proceed full speed
ahead.
Mr. SCOTT. Are there areas that the Administration can find that
is not included now that you would desire to be included?
Mr. STEEL. Well, I think we specifically referred earlier to the
Federal Home Loan Bank directors being appointed independently
as opposed to from the government. And I think that would be one.
And there are other nuances that we will discuss, but we have
worked hard to get to this point and feel comfortable with where
we are.
Mr. SCOTT. Thank you, sir. I yield back, Mr. Chairman.
The CHAIRMAN. Before recognizing the gentlewoman from Illinois, if I could respond. Yes, I would say to the gentleman there
have been very good faith negotiations that have been very productive. I think the answer is that we are within reach in all these
things. Let me summarize it this way, the experience I have had
in a number of areas, but most importantly here in negotiating
this, is one of the reasons why I am now convinced that having
been involved in the financial services industry is better prepara-

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tion for being Secretary of the Treasury than either aluminum or
railroads.
[Laughter]
The CHAIRMAN. I would also, just if I could speak a little further,
say that as far as the Home Loan Banks are concerned, several of
us, the gentleman from Pennsylvania who chairs the subcommittee
now and myself, originally took the position that the Home Loan
Bank should not be included and some of the Home Loan Banks
came to us and said, ‘‘But if you set up a new structure and we
are excluded, it will look funny and people will wonder why we are
excluded.’’ And there were some, obviously not all, who feared that
they would then be at a disadvantage in the raising of capital because they would not be under the same secure regulator.
By the way, regarding Sarbanes/Oxley, etc., an acknowledgment
that being well-regulated is an advantage in trying to raise capital
because of the confidence it instills in investors, so many of us
wanted to keep the Home Loan Banks out. However, many of them
came to us and said that they wanted to be in. Now, some of them
say that they want to be out again, and there was a problem here,
which is that legislating is different than playing with a yo-yo, and
you have to accept that some things only go one way.
I would note, however, that there is one very important similarity between the Federal Home Loan Banks and the GSEs, or at
least I hope there will be at the end of this year—the Federal
Home Loan Banks have had, since the late 1980’s or early 1990’s,
thanks to Henry B. Gonzalez’s leadership, an Affordable Housing
Program which comes from the profits of private sector entities. It
has been very well run. Many people do not know about it because
good news is not news and there have not been scandals. And a
significant of units have been built. In my area, the Boston Home
Loan Bank has been a superb supporter of affordable housing.
So when people talk about the Affordable Housing Fund to
Fannie and Freddie, this is not some new idea; it is explicitly copied from the idea and the very good experience of the Federal
Home Loan Banks.
The gentlewoman from Illinois.
Mr. BAKER. I just want to make one little quick observation regarding my experience on inclusion or not to include. I was lobbied
very strenuously not to include, we do not like it, we do not want
to be part of it, but if you are going to do it, put us in it.
The CHAIRMAN. The gentlewoman from Illinois.
Ms. BEAN. Thank you, Mr. Chairman, for the hearing and thank
you to the panel for your testimony today. I have two questions
that I wanted to address to both Director Lockhart and Secretary
Steel.
If I can ask them both and then you can each give your response,
that would be helpful. While it is understandable why an institution’s capital requirements might be increased to address specific
concerns, maybe they are not current, they need remediation, they
lack appropriate controls, my question is, in those situations would
you support returning to the statutory minimum levels once those
conditions have passed?
That is the first question. And the second is are there any circumstances where you would by regulation permanently increase

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capital levels above Congress’ mandated statutory minimum capital
levels?
Mr. LOCKHART. The minimum capital rules were set 15 years
ago. These companies have changed pretty dramatically since then,
and I think you have to reevaluate at the minimum capital rules.
I am not saying they have to be increased but I think they need
to be reevaluated, and particularly, I think, the operational risk
that they have so manifest over the last 3 or 4 years may mean
that there may have to be some extra charge. It may not be the
30 percent, it could be lower, but going forward I think there is
such a large operational risk component to these two companies,
and they are in the process of remediating it but it will never go
away, so I think it is important as we go forward to just reexamine
at the minimum numbers.
Ms. BEAN. Let me just come back before I go to Mr. Steel. So you
are basically not necessarily supporting going back to the original
levels once the conditions have been met?
Mr. LOCKHART. I am not not supporting it at this point, but I
think it is certainly an issue that we have to look at given the large
risk that these companies are taking.
Ms. BEAN. Can you be more specific of what specific instance you
would make those increased levels permanent?
Mr. LOCKHART. Well, I think it would be done through, as the
legislation states an open rulemaking process. There would be discussed in that process, reasons for increasing it if that is what we
thought was appropriate. And then we would go back and forth,
and I think we could get a lot of input from a lot of different players.
Ms. BEAN. Okay. Mr. Steel?
Mr. STEEL. I think really that I approach it in a little bit of a
different lens, but I think maybe to an answer that will speak to
the question. I think that the regulator should be given the right
tools and then by dint of the transparent rulemaking process, a
sense of how people would like those tools to be applied and then
have the judgment of the regulator solve the puzzle. And proscribing in advance whether it should be permanent or not permanent, roll-back or not roll-back, is the wrong strategy. The regulator, as developed by the bill, is empowered by, and takes great
advice from, the transparent rulemaking process and then has the
responsibility to apply the right capital relative in a risk-based approach to the assets.
Ms. BEAN. If I have a couple of seconds, let me ask a further
question to both of you as well. In Chairman Frank’s legislation,
H.R. 1427, it charges the new director with developing standards
by which the enterprise’s portfolio holdings would be deemed to be
consistent with their mission and safe and sound operations. Is
your reading such that systemic risk can be interpreted to be a factor or standard by which the portfolio can be reduced or capped?
Mr. LOCKHART. My reading of systemic risk is it is part of a regulator’s job, it is part of safety and soundness, that you have to
make sure that they do not have a problem that could spread risk
to the rest of the financial system. And so from that standpoint,
yes, if they for some reason had assets in their portfolios that could

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49
cause them a dramatic problem that would spread to the rest of the
financial system, it would have to be considered.
Mr. STEEL. Yes.
Ms. BEAN. Thank you. I yield back.
Mr. LYNCH. [presiding] Thank you. Does the gentleman from Colorado have a question?
Mr. PERLMUTTER. Thanks, Mr. Chairman. And I will get back to
systemic risk in a second. This is for all three of you, what do you
consider the role of the director to be with respect to goals that are
going to be established for low-income, moderate—low-income,
moderate, four-plexes, all that sort of stuff? And I am going
through this statute just as you all are and I am on about page
150, okay, what do you consider the role to be, what do you expect
to do if we pass this legislation?
Mr. LOCKHART. Well, first of all, it is a well-trodden path. HUD
has looked and worked on that for many years, and I think they
have developed a good program. That program would actually be
brought over to their new regulator; it would be merged into the
new regulator. But obviously the legislation has different rules and
so working with the legislation, the new regulator would be guided
by the legislation and work towards making sure that the two enterprises meet their affordable housing goals.
Mr. PERLMUTTER. So on an annual basis you would establish
goals?
Mr. LOCKHART. We would establish goals in accordance with the
proposed legislation, yes.
Mr. PERLMUTTER. And if we added something about energy-efficient mortgages to this legislation, would you consider that as
being a goal, if we added that as a goal?
Mr. LOCKHART. I had not really thought about that. I would have
to get back to you on that one.
Mr. PERLMUTTER. Okay. There has been a lot of conversation
about the—I think I come to this with some skepticism, I have not
been in the Congress before and I have not heard all the ‘‘parade
of horribles,’’ I have our briefing packet that says that Fannie Mae
overstated its earnings by $5 or $6 billion, and I am not quibbling,
it is a lot of money, but against $1 trillion or $2 trillion in assets,
it is like five/one-thousandths or something like that. And that
Freddie Mac, did it understate its earnings by $5 billion or $6 billion, is that right?
Mr. LOCKHART. Well, certainly both companies did not comply
with GAAP and misstated earnings. Yes, Freddie’s was more of an
overstatement and Fannie’s was an understatement. The proper
comparison to me is their capital and not their assets and in both
cases it was a major portion of their capital. And the capital there
is really what we are protecting.
Mr. PERLMUTTER. Okay, so let’s talk about capital for a second.
As I understand it under this legislation there is risk-based capital
and then there is minimum capital, and I am not quite sure—my
experience has been more with credit unions and banks where they
I think—I do not know if it is by regulation or by statute that they
have to have like a 5 percent capital minimum. And then they,
based on their board of directors, can increase or lower it. If they
go below 5 percent, then they are rated by their particular regu-

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50
lators. What is the minimum capital for Fannie Mae and Freddie
Mac today?
Mr. LOCKHART. The minimum capital requirement, the one comparable to your 5 percent—and many banks hold well over 6 percent, as you know—is 2.5 percent. The Enterprises also have to
hold .45 percent or 45 basis points against their mortgage-backed
security guarantees.
Mr. PERLMUTTER. And then I heard you say that right now because of regulatory risks, you are 30 percent above that?
Mr. LOCKHART. Right.
Mr. PERLMUTTER. What is a regulatory risk and does that have
anything to do with a systemic risk?
Mr. LOCKHART. The reason for putting on the additional
requirment was operational risk, and it was related to the fact that
these companies could not produce financial statements, their internal controls were not there, the risk management was not there,
their systems were not there, and they were high risk. And so that
extra 30 percent was put on which makes, I think I said earlier,
3.25 percent.
Mr. PERLMUTTER. Do you think that the minimum capital for
these organizations needs to be increased or are you okay with that
2.5 percent except for when there is this regulatory risk factor?
Mr. LOCKHART. I think it has to be looked at.
Mr. PERLMUTTER. That is a good answer, it has to be looked at,
considered by you as the director or how will that minimum capital
be determined?
Mr. LOCKHART. Again, the way we would look at it is as we look
at other financial institutions. We look at the risk inherent in these
two companies, and we will go through that process. And if we
think there needs to be a change, we would go through an open
rulemaking process and there would be comments on any proposal
and then we would go through the normal process.
Mr. PERLMUTTER. Okay. This gets more to the systemic risk, and
I would like all three of you to comment on it, but somebody said
this is a huge problem, there is a systemic risk, and I can tell you
walking the precincts of Arvada, Colorado, regulation, re-regulation
of Fannie Mae did not come up once. I had a lot of other things
that came up a number of times but not this. What difference does
this bill make to a resident of Arvada, Colorado? How is it going
to save them from something?
Mr. STEEL. Well, I will start, I think, if that is okay. I think this
is a good example, and I am sure you are right that this did not
come up when you were walking among your constituents, but this
is the right way of dealing with this before it is a problem. We can
look at this and Federal Reserve chairmen, the last two, have come
and talked in this group to you about this in the House, and we
are completely consistent with their view that these are issues that
need to be dealt with before they are a problem.
And there are two aspects to this, one is the systemic, but, two,
they will be better able to do their job over time with the right capital and the right regulator, and we should deal with it now before
it is a problem and when your constituents do not talk to you about
it. And if your constituents never talk to you about because the
right moves were made today, that would be a win.

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Mr. PERLMUTTER. Okay. Sorry, I was just going to ask about systemic risks.
Mr. CORNICK. Mr. Chairman, would I be able to respond briefly?
Mr. LYNCH. Very, very, very briefly, thank you, yes, please?
Mr. CORNICK. On the issue of the regulator set, monitor, enforce,
we would just offer that there is missing an overall affordable
housing goal that would apply broadly speaking, we speak to it in
the written testimony at length and hope you would refer to that
and would just echo what Treasury said, the cost of not doing
something is profound.
Mr. LYNCH. Okay, I thank the gentleman. I thank the gentleman
from Colorado. I think this panel has suffered enough, I think we
should thank you for your attendance and your willingness to work
with the committee. This is an ongoing process. I am told by the
Chair that we will continue to reach out to you and ask for your
advice and recommendations with respect to this bill, and we look
forward to our working togther on this. Thank you.
Mr. CORNICK. Thank you, very much. I just want to put forward
to your staff the fair lending cite, page 151 of the bill, section 131.
Mr. LYNCH. Okay.
Mr. CORNICK. Transferring authority for fair housing and fair
lending to the Director from the Secretary.
Mr. LYNCH. We will accept that into the record, without objection.
Mr. CORNICK. Thank you.
Mr. LYNCH. Thank you. The next panel consists of the Honorable
John Dalton, president of the Housing Policy Council, Financial
Services Roundtable; Mr. Richard F. Syron, chairman and chief executive officer of Freddie Mac; Mr. Daniel H. Mudd, president and
chief executive officer for Fannie Mae; and Mr. Gerald M. Howard,
executive vice president and chief executive officer for the National
Association of Home Builders.
First of all, let me welcome you to the committee. I am told that
we may have some votes on the Floor in the near term. However,
in the interest of time, I would like to offer a 5-minute opening
statement to each of the panelists. Again, thank you for your willingness to come before the committee and help us with our work.
And I would like to begin with Mr. Dalton.
STATEMENT OF JOHN H. DALTON, PRESIDENT, HOUSING
POLICY COUNCIL, FINANCIAL SERVICES ROUNDTABLE

Mr. DALTON. Thank you very much, Mr. Chairman, Ranking
Member Bachus, and members of the committee.
I am John Dalton, president of the Housing Policy Council of the
Financial Services Roundtable. Thank you very much for the opportunity to present the views of the Housing Policy Council on the
supervision and regulation of Fannie Mae, Freddie Mac, and the
Federal Home Loan Banks.
I have a prepared statement for the record, and I’d like to summarize the key points of that testimony. The Housing Policy Council or HPC is part of the Financial Services Roundtable. HPC is
comprised of 23 of the Nation’s leading mortgage lenders. We estimate that our members originate over 64 percent of the home
mortgages in this country. Our members support a competitive,

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52
well-regulated marketplace that provides mortgages and financial
products that American consumers want and need.
The Housing Policy Council continues to strongly support enactment of legislation to strengthen the regulatory oversight of the
housing GSEs. That regulation is long overdue. The housing GSEs
are an important part of our Nation’s housing finance system.
The members of the Housing Policy Council do a significant
amount of business with Fannie Mae and Freddie Mac. Those two
GSEs are the largest purchasers of the conforming mortgages originated by the members of the Housing Policy Council.
Many of our members are also members of the Federal Home
Loan Bank System. We have a strong interest that these housing
GSEs be healthy and responsible business partners. Legislation to
strengthen the supervision and regulation of housing GSEs will not
only safeguard our housing finance system, it will also help consumers who seek to become homeowners and it will protect the interests of all taxpayers.
Frankly, the current system for regulating and supervising
Fannie Mae and Freddie Mac is just not up to the task.
Mr. Chairman, earlier in my career, I served as chairman of the
Federal Home Loan Bank board and president of Ginnie Mae. I
have firsthand experience in the authority that a Federal services
regulator must have in order to be effective and the tools that are
necessary. The present regulator’s authority to oversee Fannie Mae
and Freddie Mac is simply not adequate.
Mr. Chairman, we have the strongest banking system in the
world. It is also strongly regulated. It is time for the housing GSEs
to have that same type of world-class regulation.
This committee has worked hard on this issue for a number of
years. It is now time to complete the task. We urge the committee
to act on reform legislation as soon as possible so that a bill can
be finalized in this session of the Congress. We also urge the committee to resist proposals to water down this reform legislation or
weaken the authority of the GSE regulator.
The Housing Policy Council and the Financial Services Roundtable believe that GSE reform legislation should contain the following key provisions:
First, a strong independent regulator. Legislation should create
an independent regulator for Fannie Mae, Freddie Mac and the
Federal Home Loan Banks. A single regulator will ensure that each
of these institutions will be examined on a comprehensive basis
and will permit examiners and analysts to share relevant operational and other information as necessary. An independent regulator will ensure that the agency will not be subject to undue political influence.
Second, comprehensive supervisory and regulator powers. The
new regulator must have clear, strong and broad regulatory and
supervisory powers that are comparable to the powers Congress
has given to the Federal banking regulators. This must include the
authority to both set risk-based and minimum capital for the GSEs
and to place a troubled housing GSE into receivership if necessary.
And finally, independent funding.
Mr. LYNCH. Mr. Dalton, if I could ask you, there’s a 5-minute
time limit, which you have long since exceeded. Perhaps we could

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53
reach some of that during your testimony. And if I could, ask you
just kindly and respectfully just to sum up.
Mr. DALTON. I’ll be glad to.
Mr. LYNCH. Thank you, sir.
Mr. DALTON. In short, we believe that H.R. 1427 includes the
compromises that are worked out by this committee, led by Chairman Frank, and the Treasury that you heard from in the previous
panel, and that bill is a clear improvement over current law.
While we have concerns with some specific provisions, we recognize that this effort has been a long, hard fight. It would be a mistake to make the perfect the enemy of the good. It is now time to
enact legislation to improve the regulatory structures for the GSEs.
Mr. Chairman, I salute you for the leadership that you have
demonstrated in getting us to this point. I want to thank Ranking
Member Bachus and also particularly Congressman Baker for the
leadership that he’s shown on this issue for some time.
I think this legislation will indeed help consumers, the housing
economy, and the GSEs. We urge the committee to approve H.R.
1427 and to resist any amendments that would weaken the authority of the new Federal regulator. Thank you very much.
[The prepared statement of Mr. Dalton can be found on page 112
of the appendix.]
The CHAIRMAN. Thank you. We have a couple of votes, and then
we will be back. I thank the panel members for staying. We’re
going to go vote, and we will come right back and get right to it.
There are two votes, which should take about 20 minutes. We
should be back in about 20 minutes or less.
[Recess]
The CHAIRMAN. An explanation is owed. The Appropriations
Committee was reputedly close to finishing the supplemental appropriation, and the vote was held up because of that. And apparently everybody was afraid that if they had gotten close to a vote,
but left and came back, people would have thought of new reasons
not to be close to a vote. We regret the inconvenience to these witnesses in the next panel. Some of us did not think it was a good
idea to hold it up this long, but that’s for another day.
I believe we had heard from Mr. Dalton. Next, Mr. Richard
Syron, who is the CEO of Freddie Mac.
STATEMENT OF RICHARD F. SYRON, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, FREDDIE MAC

Mr. SYRON. Thank you, Chairman Frank, Ranking Member
Bachus, and members of the committee. I appreciate the opportunity to appear before you today, and I’ll be very brief.
GSE regulatory reform is vitally important to the Nation’s economy and to its homeowners. I must say I’m a victim of my circumstances like all of us and my views have been profoundly
shaped by my experience as a Federal Reserve and Treasury official where I learned the critical need of balancing adequate capital
and safety and soundness with sufficient credit flows, particularly
in times of economic transition in different markets such as the
housing market is in today. The recent downturn in the housing
market is slowing GDP growth. Mortgage delinquency rates are up,
particularly in subprime.

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Now Congress created the GSEs to help cushion U.S. housing
markets from economic disturbances like these. When housing activity contracts, Freddie Mac and Fannie Mae increase their relative provision of funds to the mortgage market, and the opposite
obviously applies when the market is expanding vigorously from
the private sector. This ability to provide stability to the market is
what, in my mind, makes the GSEs a congressional success story.
To be clear, Freddie Mac supports regulatory reform that ensures
both the continued strong franchise and mission achievement.
Many proposals are under consideration, and it is my hope that
each will be measured against the twin criteria of safety and
soundness and mission as well. This inevitably involves striking a
delicate balance.
In a number of cases, we believe the proposed legislation would
strengthen GSE regulation without upsetting that balance, but certain combinations of provisions, depending on how they’re interpreted and implemented, could significantly—I said ‘‘could’’ not
‘‘would’’—impair either our ability to remain financially viable or to
serve our mission or both.
Now I’m not talking about short-term concerns. GSE legislation
has been many years in the making, and once it happens it seems
to me it’s unlikely to be revisited very quickly. And I do have every
confidence that Congress will strike the right balance.
A few weeks ago, Freddie Mac announced that beginning in September of this year, we will restrict our subprime ARM purchases
to mortgages that have been written at a fully indexed level, and
with tighter underwriting requirements. We also announced efforts
to develop model subprime products that we hope will provide safer
funding alternatives for the consumer.
These steps will help stabilize the subprime market while ensuring sustainable homeownership. In my mind, that’s what the GSEs
are all about, but we can only serve this function if we have the
right capital and the operational flexibility to respond quickly to
market transitions. Business cycles will come and go but these economic realities should not keep families from achieving their goal
of homeownership.
I know in some areas my views are controversial. My purpose in
raising them is not to be quarrelsome or make myself unpopular,
rather it’s because the issues before this committee are so important that I think it would be unfair and irresponsible of me in my
duties to you to shy away from candor.
In closing, let me affirm that Freddie Mac is a creature of the
Congress, and we are committed to doing what you want us to do.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Syron can be found on page 193
of the appendix.]
The CHAIRMAN. Thank you, Mr. Syron.
Next, Mr. Daniel Mudd, the CEO of Fannie Mae.
STATEMENT OF DANIEL H. MUDD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, FANNIE MAE

Mr. MUDD. Thank you, Mr. Chairman, and Ranking Member
Bachus, for inviting me here today.

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55
Our company is making progress. We still have much more to do.
High on the list is working with Congress to adopt a bill that will
strengthen GSE regulatory oversight. I would mention that there’s
a backdrop to our discussion today, which is the troubles in the
subprime market.
As for Fannie Mae, although this is a market where we play a
very limited role consistent only with our very strong anti-predatory standards, I do want to assure you that we are doing what we
can to help homeowners to stabilize the market and to avoid foreclosures. And if anyone wonders what the alternatives are to a
market with well-regulated GSEs playing a stability and liquidity
role, we now have reality TV with respect to subprime.
So if anyone wonders why Fannie Mae has taken the positions
we have on GSE regulatory reform legislation, it is precisely so
that we can continue to serve markets, especially in times of upheaval. We would like our portfolio to be able to provide liquidity
when the market needs liquidity. We would like our capital structure to allow us to provide the maximum amount of capital to housing and to communities.
We would like our product approval process to allow us to respond quickly to market needs and constantly roll out and modify
affordability products, and we would like to have a world-class regulatory oversight regime to ensure that we attain all these goals
in a safe and sound manner.
So let me reiterate what we’ve said consistently over the past 2
years. We support the creation of a stronger, independently funded,
bank-like regulator that combines safety and soundness supervision with authority over mission and activities, and we seek to
play a constructive role in that process.
Let me touch quickly on capital, portfolio, products, and the fund.
We support capital authority, and we believe reform legislation
should provide the GSE regulator with a clear process that ensures
proper deliberation, consultation and fairness before capital requirements are changed. Clearly any increase in our minimum and
risk-based capital levels would adversely affect our ability to fulfill
the mission you gave us, so the capital levels established by Congress should be the norm, not the starting point.
We feel the best way to address that in legislation would be to
require the regulator to withdraw any special capital requirements
when the circumstances that gave rise to those requirements no
longer exist.
With respect to the regulation of our portfolio, we also support
an approach similar to that exercised by bank regulators. Bank
regulators have consistently taken the approach that asset growth
by itself does not cause safety and soundness risks but only unplanned or poorly managed asset growth.
To that end, the legislation should identify the specific safety and
soundness factors that would lead to regulatory limits on the size
or growth of our balance sheet. We believe that systemic risks
should not be included in these factors unless bank regulators
agree on the method for applying such a standard to all financial
institutions.
On new product approval, bank regulation also provides a useful
guide. Submitting every new product to public review and comment

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56
would entail submitting our customers’ proprietary new products to
public review and comment. This would not only be cumbersome;
it would present serious competitive concerns. And again, our regulatory regime should be no different.
Certainly, significant new programs should be pre-approved, but
not the literally thousands of new products that we offer.
Finally, Fannie Mae supports the creation of an affordable housing fund similar to that provided in H.R. 1461 that passed in the
last Congress, and we continue to believe that GSEs should manage the fund. I believe that you want us to care what happens to
the grants and investments made under such a program to ensure
that they are effective community building blocks, and not simply
a levee on our business. Of course, all of the fund’s activities should
be regulated, disclosed, reviewed, and supervised by a new regime.
To conclude, yes, we have a mission and a business, and when
they work together, everyone wins. The $20 billion we have invested in the Gulf since the storm is an important example of our
company using all the tools at its disposal—portfolio, capital, products, people, and speed—to serve a public need even as it serves
its shareholders. Our regulator should have the tools it needs to
make sure that we do that safely and soundly to fulfill this dual
promise.
Thank you for the opportunity to be here today.
[The prepared statement of Mr. Mudd can be found on page 183
of the appendix.]
The CHAIRMAN. Thank you, Mr. Mudd.
Next, Mr. Gerry Howard, who is the executive vice president and
chief executive officer of the National Association of Home Builders.
STATEMENT OF GERALD M. HOWARD, EXECUTIVE VICE PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF HOME BUILDERS

Mr. HOWARD. Thank you, Mr. Chairman. I am pleased to be here
on behalf of the National Association of Home Builders.
The GSEs were chartered by Congress to serve a critical public
purpose. That public purpose at the time was to provide liquidity
in the conventional housing markets. Subsequently an additional
mission was added to the GSEs, the mission of focusing on affordable housing. The instant legislation that we’re here to discuss
today must take into account the preservation of those two important missions as it also seeks to balance the very important and
much needed safety and soundness of entities as big as the GSEs.
I would like to make 6 points with respect to the instant legislation.
First, on the structure of the regulator, NAHB supports the provisions in H.R. 1427 that would establish a standalone regulator
outside of any Cabinet department or regulatory agency. NAHB
also supports the bill’s inclusion of a deputy director for housing
mission, but we’d also like to see the restoration of two independent advisory board members with housing experience to further enhance the mission for the focus of the agency.
Second, on capital requirements, NAHB supports the fundamental principal that adjustments to minimum capital require-

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ments must be temporary and that the regulator should deal with
longer term risks though the risk-based system.
In addition, all changes to GSE capital, risk-based and minimum,
should be undertaken through the regulation that provides public
notice, comment except in emergency situations of course where increases could be instituted and then reevaluated in a subsequent
review and comment period.
NAHB appreciates that H.R. 1427 establishes criteria for temporary increases in minimum capital that are exclusively focused
on safety and soundness while providing a process where temporary capital increases would be regularly reviewed and returned
to the statutory level once the triggering issue has been resolved.
Third, NAHB appreciates that portfolio provisions contained in
the bill have no hard limits or criteria mandating huge reductions,
which would have significant adverse effects on the mortgage finance system. Both Fannie Mae and Freddie Mac hold sizeable
portfolios of mortgages and mortgage-backed securities, which play
an important role in stabilizing the supply and reducing the costs
of housing credit.
The provisions also do not directly reference the systemic risk,
which has been a rallying cry for critics advocating major shrinkage in the enterprise’s portfolios. However, as we have stated publicly before, the vagueness of some of the criteria for portfolio regulation has led our members to express concerns that such language
could be subject to overly broad interpretation, and we appreciate,
Mr. Frank, your questioning the prior panel on this very subject.
Fourth, in the area of program approval, NAHB supports a process that is sufficiently rigorous to ensure charter compliance and
safety and soundness while facilitating the ability for the GSEs to
engage in program, product, and technological innovation needed to
address the market needs in a timely manner. NAHB feels the
process contained in the bill passed last year is superior to that
contained in the current legislation.
Fifth, NAHB supports the high-cost area provisions that have
been addressed by you and earlier by Mr. Miller in his questioning.
NAHB believes that H.R. 1427 would allow the conforming loan
limit in the high-cost areas the flexibility needed so that the GSEs
could be providers of housing in high-cost areas such as Massachusetts and California.
And finally, while the GSEs’ advantages should be preserved,
NAHB believes that the GSEs can and should do more to accomplish their affordable housing mission. As such, we support the establishment of a new affordable housing fund contained in H.R.
1427 as well as the bill’s tougher affordable housing goals.
On the affordable housing fund, NAHB believes that it is imperative that the money therein be used for sticks, bricks and mortar,
that it not go to overhead or any other purpose. Further, we believe
that there should be a competitive process so that the fund is used
most cost-effectively and that the most housing possible is developed and built due to the expenditures from that fund.
Thank you, Mr. Chairman, and I look forward to answering any
questions.
[The prepared statement of Mr. Howard can be found on page
145 of the appendix.]

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The CHAIRMAN. Thank you, Mr. Howard.
You had a point in there about the high-cost areas that I want
to pursue, and I appreciate your raising it. I think we may need
to do further definition.
There are a lot of us who, as far as housing policy is concerned,
can’t think of a single housing policy elsewhere in the country
where we use a flat dollar figure for the whole country. But I guess
maybe, was it having the same dollar amount that applies to the
greater Boston area as to Omaha would make about as much sense
as paying the same Section 8 rents in Omaha and Nebraska.
Houses aren’t mobile and therefore housing prices don’t have
that same uniformity. You do raise an important question about
how we measure that, and I agree with that. Although the proposal
you made is to do it on a statewide basis; obviously we wouldn’t
want to apply it statewide. If there are some areas in the State
that are high cost and others that aren’t, you don’t apply it.
We need to further refine that, and I agree. Certainly our intention is, to the extent that you can identify median house prices in
as small an area as possible—let me put it this way. We want to
apply the high-cost loan limit as narrowly as possible. Our job will
be to work together with people, and we have time to do this, so
that we get the best preexisting statistical measure of house price
costs in particular area.
I assume we must have that for SMAs and SMSAs, and if we do,
that’s what we would do. So we do agree that it has to be applied
more narrowly.
The other issue you raised on your testimony—on page eight—
and I appreciate that you alluded to my discussion of that with Mr.
Steel, and there is some ambiguity in the language. There is a section that says that the regulator is, in dealing with the portfolio,
to be focused on mission and safety and soundness. And then as
you noted—those factors. Actually there were two, any potential
risks posed by the nature of the portfolio holdings and any additional factors. It seemed clear to me that we intended those to be
within the limitation of safety and soundness of mission.
You raised that before, and I was pleased to see Mr. Steel agreed
to that. It may be that that needs to be made clearer, but I do
think that’s the common understanding. I appreciate it.
Mr. Steel acknowledged that, and with that, it’s possible to do a
better directing job. But we want to be clear, we are talking here
in terms of safety and soundness of mission. These are not ways
to bootleg back in concerns about interfering with the purity of the
market’s allocative function or systemic risk more broadly defined,
and I appreciate that.
Let me just say to Mr. Mudd and Mr. Syron, as you know when
we originally passed the bill that had a housing fund, an affordable
housing fund, it did have you in charge. And it is not that people
lack confidence in your management skills that has led me to have
to support changing that. It is that they have indeed great confidence in your skills, and they think that you are smart enough
to decide between members who have influence and members who
don’t.
And look, I have to be honest about this. There is no purely objective way to dispense a limited pot of funds. We are talking about

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maybe $500 million. If we had 4 times that much, we wouldn’t
meet the need for 30 percent, 50 percent of median. And what they
are saying is that—and it has nothing to do with the skills. They
don’t want to enhance your political situation.
You know, there’s a song, I saw some reference to it. Tom Lehrer
had a song, ‘‘The Old Dope Peddler’’, about doing well by doing
good. People of a certain age will recall that. They are afraid that
if you dispense the affordable housing funds you will be doing well
by doing good.
And let me even put it this way. Even those who would accept
the purity of your motives, to some extent it is protecting you from
us. That is, we will retain a jurisdiction over you because you have
these Federal charters.
And I think people are foreseeing a day, clearly not now but at
some point in the future, where an influential member of this committee who had in his district a housing proposal about which he
or she cared deeply approached you to make that point clear.
Well, as I said, from the standpoint of efficiency—and certainly
the Federal Home Loan Banks Program is run by them, but I cannot make effective arguments against that. That’s our problem.
I will say this. We have in the housing fund, let me say it publicly, in the first year, I think we have pretty much agreement for
those of us who want a housing fund, it’s going to go to Louisiana
and Mississippi, and it’s going to go because—to the Louisiana and
Mississippi State housing authorities in a ratio—we’ve talked to
members is what we intend, three to one Louisiana and Mississippi.
You know, the Administration’s figures were more than half of
the rental units in New Orleans were destroyed. And where more
than half of the rental units are destroyed, a voucher program
doesn’t do you a great deal of good because it’s going to increase
demand without meeting that supply need, so we need to deal with
that.
Beyond that, we have in there the housing—let me urge people
now, the disposition of the Housing Trust Fund that we vote if we
vote a bill now is not going to take effect for more than a year because in the first year, the money will go to Louisiana and Mississippi. I’m ready to keep talking. We have to do something in the
bill, and I want to make sure that we do something that doesn’t
mean that CBO gets its hands on it, if we ever want to use it again
we get a budget score.
But there’s some flexibility on that. And I’ll urge people, we intend to continue to work with people, but we will not reach the
point of distributing the housing fund, if we have one, beyond Mississippi and Louisiana until sometime in the next calendar year.
And we will work on that.
I think there is agreement that we want it to go for housing. I
do say, you remember when we did it last year there weren’t sufficient restrictions and some—while this committee rejected a proposal to restrict it, there was a proposal adopted by that fount of
housing expertise, the Rules Committee, which adopted the bill and
then did not let it come up to a vote. And they said an organization
seeking to build housing could only receive the funds if it was an
organization whose primary purpose was housing.

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Now one of the problems is that we have a number of religious
institutions in this country who do a great job of building housing.
In my home area and Mr. Syron’s, we’re both familiar with the
Boston Archdiocese, an office of urban planning which has done a
great job of building housing. But I have to say that as good as the
Boston Archdiocese has been at building housing, they cannot
claim that housing is their primary purpose. God is their primary
purpose. Housing might come a strong second, but no religious organization could agree that housing was its primary purpose. That
was part of the problem.
We will work closely together, but I hope you understand what
the problem is with regard to your doing it. Once we get past the
philosophical argument, I think we will be able to work this out.
Mr. Bachus.
Mr. BACHUS. Thank you. The mortgage market has undergone a
lot of rapid changes in the products they’ve offered recently. How
do the GSEs help provide a stable housing marketplace? I’ll ask
Mr. Syron first.
Mr. SYRON. Well, sir, I think you raise an absolutely valid and
very important point that has to be the context for considering this
whole piece of legislation. And that is, if you went back 25 years
ago, and this is very relevant to the concerns in subprime now, institutions made loans, they put them in portfolios, and they held
them.
Now we’re in a world where, quite honestly, pieces of loans—I
happen to have a conforming loan on something—I don’t know
where the pieces of that loan are. They’re scattered all over the
world in CDOs and everything else.
In this kind of world, and there have been experts like Lew
Ranieri who have commented on it, it’s harder and harder to get
a discipline on the market, because quite candidly, we are a creature of the Congress. When you have us, I think, it’s probably fair
to say you’re able to have very substantial influence over us. We
control much less of the market now than we used to. For example,
in our retained portfolio, and I know there’s been a lot of concern
about that, the retained portfolio used to be 21 percent of the mortgage market, and now it’s down to 13 percent. If we’re trying to
dominate a market, Dan and I are going in the wrong direction.
So I think what we have to do is to provide leadership in the
market, develop new products, which I know both institutions are
trying to do now, having hopefully a chance to address some of the
problems in the subprime market, and hopefully to be enough of a
factor that the ability to sell to us influences people’s behavior. We
don’t have as much influence in that regard as we used to have.
Mr. BACHUS. Mr. Mudd?
Mr. MUDD. Thank you. We basically do two things. We provide
affordability and we provide stability, and we do it through two
businesses. There’s a popular myth that these two businesses are
like two businesses in a holding company and they’re divisible. But,
in fact, Ranking Member Bachus, they basically do the same thing.
They provide affordability and stability. The guarantee business
enables lenders to take the loans they have, package them up, sell
them into the market, and get money back so they can reissue the
debt and originate more mortgages.

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On the liquidity side, when there’s a crisis or an interruption in
the market and there’s a need for capital to come in so that those
funds continue to flow, that’s when that other business of ours, the
portfolio, steps in and is able to provide the liquidity so that you
see through most of the recent financial interruptions the flow of
funds into the mortgage market stays very level and very stable.
Mr. BACHUS. So is it your testimony that during this recent
subprime lending problems that you all provided stability or that
you’ve been a positive influence?
Mr. MUDD. Mine would be slightly different. We said a couple of
years ago that this market was evolving in a direction that we
didn’t like. The layering of some of the products presented excessive risk to consumers. We stepped away from it.
What happened was, the market went around us, and there were
arguments that I think you’ve heard that say you don’t need the
GSEs. Others can perform this function. That’s what happened.
Others performed the function, and a lot of risk went out into the
marketplace. Now some of those chickens are coming home to
roost, and you’re seeing a disruption in the subprime market.
That said, I’m not at all happy about that, and I think there is
a role the GSEs can play. We have provided liquidity. It’s tightened
up in the multi-family market. We’ve provided it there. We’ve put
together something we call rescue mortgages to help people who
are getting hit by a reset in subprime to refinance their mortgage
so they don’t lose their home in the process. Yes, we can play a
role, and we’re spooling up to do that.
Mr. BACHUS. All right. Mr. Howard, what impact have the current problems in the subprime market had on your industry, particularly maybe the production of new homes?
Mr. HOWARD. Mr. Bachus, the home building industry is quite
concerned about this issue really for three reasons. The first is, as
you know, we’re in a downward cycle in the industry in and of
itself. There’s a lot of inventory already on the market. This
subprime issue in addition to potentially leading to restrictions in
the capital markets and the mortgage markets themselves, number
one. Number two, this could lead to significantly more units being
thrown back into the marketplace, which we don’t need right now.
And number three, it could lead to an overreaction by the Congress
which could impede the ability of the mortgage markets to recover
from this crisis.
So, we think that there are three concerns that we have, and
we’re working and look forward to working with you and others to
sort of correct the situation.
Mr. BACHUS. Do you think that the current affordable housing
fund as it’s set up will provide equal access to both profit and nonprofit entities?
Mr. HOWARD. We’re concerned about that, sir. We think, as I
mentioned in my oral testimony, that when you’re talking about
the creation of a fund, and taking money from these two entities,
that we have a responsibility to ensure that the money is as best
spent as possible. And to us, that means a competitive process,
open up to for-profit and not-for-profits, whoever can build the most
best housing with that money should be awarded it. There should

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be no distinction made between profit or not-for-profit. It simply
should go to the production of housing.
Mr. BACHUS. Okay. I think my time has expired.
Mr. KANJORSKI. [presiding] I think I will direct my attention first
to getting the opinion of the panel on the selection of representatives for the boards of directors for both the Federal Home Loan
Bank System and Fannie Mae and Freddie Mac. Does anyone want
to express an opinion on that?
Mr. SYRON. Well, sir, I will express not necessarily an opinion
on—because I think ultimately, this is a question for the Congress.
But I think one of the inherent difficulties that putting presidential
appointees brings up has to do with everything else, and that is
that these are interesting institutions.
We have three responsibilities: we have a responsibility to safety
and soundness; we have a responsibility to mission; and we have
a responsibility, because we are publicly chartered, shareholderowned corporations, to our shareholders.
Now, in that regard, there’s been an enormous amount of research that’s been done, and a lot of opinions, a lot of case law that
says that the obligation of directors of a Freddie Mac or a Fannie
Mae is identical to the obligations of a director of General Motors,
or AT&T, or anyplace else.
And I think, you know, our world is one in which we are always
not maximizing one of these things. We’re trying to balance between the three. And a complexity I think, and it’s much more so
for shareholder-owned corporations like ours, than it would be
maybe for the Home Loan Banks—a complexity for us is I can see
those directors, if they were quote/unquote ‘‘political appointees’’
and sent to carry out—I’m not saying this would be the case—sort
of a mission or a direction that might be different than that for the
shareholders. Why I’m making this up, to some extent, I’m looking
at how that could be contradictory to their obligation to shareholders, and maybe that has something to do with the nervousness
and concern about this.
Mr. KANJORSKI. Do you have—maybe I do not understand the
similarities and differences between Fannie Mae, Freddie Mac and
normal corporations, public corporations. But your corporations
have a special mission.
Mr. SYRON. Yes we do, sir.
Mr. KANJORSKI. That is beyond and different from just profit for
shareholders.
Mr. SYRON. That’s absolutely true, sir, and I think the issue is
how we properly balance that. And I will freely admit, at least in
my own institution, I didn’t think we did properly balance it.
Mr. KANJORSKI. So if we had really effective outside appointed
directors, we may have heard of some of the problems at the two
organizations a little earlier here in Congress or in the White
House?
Mr. SYRON. Well, I think they could have been a voice for other
kinds of approaches. But those people—it’s very, very difficult for
the directors. And, you know, we recruited essentially almost an
entirely new board of directors, and I’d put them up against boards
of directors of any corporation in the world, but they are always
having to judge that their actions—and they are fully cognizant of

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the broader public purpose of these organizations—that whatever
they do has to be consistent with shareholder value as well. Because as you know, our corporation has been sued by shareholders
in a class action suit. Fortunately, we’ve resolved that.
Mr. KANJORSKI. So it would be reasonable for me to conclude as
to whatever the Congress decides on that issue, it would be acceptable?
Mr. SYRON. Sir, I think that is ultimately a question for the Congress. We’re a creature of the Congress. We should do what the
Congress tells us, and I totally agree with the Congress resolving
it.
Mr. KANJORSKI. Very good.
Mr. MUDD. Congressman, I would agree. I’ve seen it both ways.
I’ve seen our board operate with presidentially-appointed directors
and without. It’s worked in both ways. I would just echo Mr.
Syron’s comments in that they are very complicated companies.
And to ensure that any directors who come in have some tenure
and have some background are important factors I’d consider.
Mr. KANJORSKI. On that issue, would you—rather than a yearly
appointment, would you recommend a 2- or 3-year term?
Mr. MUDD. If the debate was the tenure, I think longer would be
better than shorter, yes, sir.
Mr. KANJORSKI. Very good. How about Home Loan Banks? Does
anyone—I know no one is a specialist, but—yes?
Mr. HOWARD. Mr. Kanjorski, with respect to the Home Loan
Banks, and we also think that it has merit with respect to Fannie
Mae and Freddie Mac, one of the elements to their boards which
we think has served them quite well is the appointment of public
interest directors, and in this instance, public interest directors
who have experience in the provision of housing.
We think that has been a very effective element to their boards,
and we would encourage its continuation as well as an implementation of that kind of a board member for the other GSEs, too.
Mr. KANJORSKI. All right. There are some elements in Washington that are expressing the opinion that we need more expert
members of the board, and the outside appointees do not necessarily meet that level of criteria. And my counterargument to
that, obviously everyone knows where I stand on this, for continuation and furtherance of those outside appointments.
But does anyone there see the likelihood that if we either took
them off the board, made no outside presidential appointments, or
if we allowed the institutions to guide and identify the appointments, would that not over a period of time lead to an incestuous
type relationship internally within those organizations?
Mr. SYRON. Well, sir, one thing that we have done, and I want
to be sure I’m answering the right question. I’m addressing kind
of our current board now, is that we have a nominating and governance committee. In 2004, we totally redid our entire governance
process. I don’t select board members for the board.
As a matter of fact, my role is, if they want, for me to get in
touch with people, but it’s very much—and we’ve been religious on
this, as I think we should be, making up for some of the things
that you allude to perhaps in the past—that it is our nominating
and governance committee that actually interviews potential direc-

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tors; that’s all made up of independent directors now, and then
makes a recommendation to our board as a whole on how they do
that. But they are not in any sense a choice—
Mr. KANJORSKI. Sort of like the AG’s office, the chief of staff
makes the inquiry?
[Laughter]
Mr. SYRON. Well, it’s—we don’t have one person.
Mr. KANJORSKI. No, I appreciate that. I am just trying to be humorous. We have to find something in this town to be humorous
about.
Does anyone have—my last question. Anything that has been
missed in the bill that perhaps we should pay more attention to or
that would be more efficient or effective for the organizations to be
regulated? Do you see anything there that we have missed?
Mr. SYRON. No, sir, I don’t see anything that you missed. I would
just make one plea in this entire issue, is that these institutions
and the way that they were created—now I think they’ve done a
lot of good. They’re not without a lot of controversy. But they inevitably involve a lot of balance.
It’s just like the issue in the subprime market, making sure that
people can get into homes, but not that people who can get into
homes can’t afford to stay in them.
So, the only issue I would raise is that as we go through this,
we are continuously aware that, you know, we have these multimissions, and we’re always balancing one against the other, and we
want to be sure we can address all three.
Mr. KANJORSKI. Thank you, sir.
Mr. MUDD. I would add that it’s a comprehensive bill and it’s just
important to keep in mind in the process that it’s both a mission
and it’s a business, and both of those things have to be successful
for the other one to work.
So, if that’s my version of balance, I think it’s very important.
If the costs of maintaining the regime, if the costs of compliance
become so high, that obviously has an effect on the business, and
that then impacts the amount of money that we can drive back into
housing.
Mr. KANJORSKI. All right.
Mr. HOWARD. And from our perspective, Mr. Kanjorski, we’d like
to see the regulator include people with housing expertise in addition to financial expertise, just as we mentioned with the boards,
we think it’s important that the regulators understand the complexities of the missions as well.
Mr. DALTON. Mr. Kanjorski, from our perspective, we think that
the bill is balanced, and that it’s appropriate. You’ve addressed all
the major issues, and we’re in support of the legislation.
Mr. KANJORSKI. Thank you. And now I am in support of my
chairman.
The CHAIRMAN. Mr. Dalton, I appreciate that, and I appreciate
your calling it balance, but just don’t call it fair and balanced, because—
[Laughter]
The CHAIRMAN.—then you’ll make some of us very uncomfortable
at the company in which you will be putting us. I appreciate this.
Let me just to follow up on what Mr. Howard said about housing

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people. Yes, I would make another plea, although because of the
First Amendment, it is purely oratory.
I wish the media would assign some people who specialize in
housing to cover this issue. One of the things we have suffered
from is that, understandably, there’s coverage from people who do
the financial aspects, and these are important financial entities.
But they are housing entities. And the people who cover this often
know a great deal about the financial side but not as much about
housing. And I think we would benefit if there was more attention
to the fact that these are major housing entities.
I mean, we do have on our next panel, and I apologize for the
fact it’s delayed, groups that are especially concerned with housing,
who know a great deal about it. And it’s not surprising that Fannie
Mae and Freddie Mac are among their major foci because of what
they do.
Mr. HOWARD. From your mouth to the editors’ ears, Mr. Chairman.
The CHAIRMAN. Thank you. I will say it again, Mr. Howard, because you know we continue to work with the home builders, I do
want to note, and I don’t think this is competitive, but I note the
presence of my colleague from Indiana who represents a large number of manufactured housing places, and we do want to stress
again to both Fannie Mae and Freddie Mac that we think in this
overall balance, there’s room for some manufactured housing along
obviously with the major reliance we have on home building, and
we hope that as we go forward, we will get that full attention. I
know that’s something that Mr. Donnelly continues to remind us
of, as does Ms. Carson, also from Indiana. But Mr. Donnelly has
Notre Dame and mobile homes to worry about.
[Laughter]
Mr. DONNELLY. What a way to be famous.
The CHAIRMAN. I thank the panel. And it wasn’t all bad that we
waited so long, because you had a lot fewer people to ask you questions.
Mr. BACHUS. Mr. Chairman?
The CHAIRMAN. The gentleman from Alabama.
Mr. BACHUS. Thank you. Could I follow up?
The CHAIRMAN. Sure.
Mr. BACHUS. One thing I don’t know, were you present when
Roger Ailes received that First Amendment award Monday night?
The CHAIRMAN. Was I present when Roger Ailes—no, I was not.
Mr. BACHUS. I thought maybe you walked out with Senator Kennedy and—
The CHAIRMAN. No, I did not. I was not there. I do like comedy
shows, but I wasn’t invited to that one.
[Laughter]
Mr. BACHUS. Mr. Dalton, he was talking about fair and balanced,
so I thought I’d better ask you a question.
Mr. DALTON. Sure.
Mr. BACHUS. And I knew that the appointments would come up.
I just didn’t think it would take this long. So I’m not going to ask
any questions on that. But is voluntary SEC filing sufficient by the
GSEs, do you think?

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Mr. DALTON. Mr. Bachus, I think so. I mean, I don’t have any—
we don’t have any strong feelings in terms of requiring compliance
with 1933 and 1934.
Mr. BACHUS. Okay. Are the GSEs’ portfolios any more risky than
a bank’s portfolio of loans? I mean, well, a bank portfolio which is
not just loans. I mean, I guess Freddie Mac and Fannie Mae, it’s
mostly interest rate risk, I would think.
Mr. DALTON. Well, the risk is that their portfolios are primarily—they’re in the mortgage sector of the market, whereas
banks are completely diversified, and they’re all over the lot. So,
there is risk in that one sector of the marketplace, and that’s
wherein lies the risk.
Mr. SYRON. Can I just add something?
Mr. BACHUS. Yes.
Mr. SYRON. I’m sorry. I didn’t mean to interrupt.
Mr. BACHUS. Mr. Syron.
Mr. SYRON. Sir, we are in one sector of the marketplace, but it
is generally considered, and if you look at the Basel II standards
which the international regulators been working on for over 30
years, they would say that it’s the lowest risk asset in the marketplace.
Mr. BACHUS. And that’s what this committee has argued, that it
is the least risky, unless you engaged in subprime or some questionable adjustable rate mortgages, like we’ve seen recently.
Mr. SYRON. And our loss rate, at least I can speak for Freddie
Mac, our loss rate historically has been 1 basis point. The loss rate
of commercial banks in the same product has been 14 basis points
historically, and I think all products, and I think this has only gone
over the last 20 years, has been 83 basis points.
So, you know, 1 basis point to 83 basis points is a pretty big difference.
Mr. BACHUS. Almost no default.
Mr. SYRON. Almost none.
Mr. BACHUS. And you have not engaged in the subprime market?
You hadn’t gone there to a great extent. Is that right?
Mr. SYRON. No, sir. Yes, sir, that’s true. We have bought in part
for goals purposes AAA tranches of some of these mortgage securities which we think are very secure. But I do think that it’s our
obligation, and it’s consistent with what we did a few weeks ago,
to really see, and we have people I think at both institutions working assiduously at trying to develop, you know, getting into the
subprime market.
But this again, sir, demonstrates the balance issue. To get into
that, right, is definitely more mission-friendly. It’s a little less
shareholder-friendly, and some could say, well, gee, is it as safe
and sound? But we do feel if you set us up and this is a primary
obligation of ours, we are going to search for ways to serve that
market.
The CHAIRMAN. If the gentleman would yield, that’s why in the
paragraph that Mr. Howard and I were talking about where the—
which sets the portfolio, it mentions safety and soundness and mission, and that’s to prevent safety and soundness from being in effect a way to stay away from anything that’s lower income and

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risky. That’s why safety and soundness and mission are the
linked—the lodestars there.
Mr. MUDD. On the answer for Fannie Mae, on behalf of
subprime, is that it’s important to remember there is subprime and
there is predatory. Subprime simply means—
Mr. BACHUS. Oh, absolutely.
Mr. MUDD.—you have a credit blemish, and we think those people are part of the market. It’s less than 2.5 percent of our book.
It’s 80 percent insured. It’s highly unsubordinated. We’ve been in
it very carefully, consistent with some very strong anti-predatory
lending guidelines we have.
Mr. BACHUS. In fact, I would take the position that the CRA in
1977, I think—they did actually when it said that you could not
discriminate against low-income populations or neighborhoods,
those neighborhoods, our experience is their credit ratings are
somewhat less than perfect, so there is probably on banks, and I
would say, Mr. Dalton, there’s probably an obligation to make
loans, subprime loans, on behalf of the financial institution.
But let me ask this question. This is a follow-up on what you just
said, maybe. There are new affordable housing goals in this legislation. How can—and Mr. Frank said—this is Chairman Frank—others have thought, how can the two GSEs better focus on low-income families in underserved areas than you’re doing now? How
would you do a better job than you’re doing now?
Mr. MUDD. We do a lot already. We financed about $8 billion
below 30 percent of AMI. So we have a representation there that’s
about similar to where the population is. That said, we do agree
that an affordable housing fund, if structured properly, could be an
effective way for us to play a larger role.
Mr. BACHUS. How would you change the affordable housing fund
to serve some of your lower-income, underserved areas?
Mr. MUDD. Well, it seems to me that the issues in lower income
housing exist now in this country because housing has done so well
in specific geographical areas. Each of those areas has a different
and specific set of needs. Some may be manufactured housing.
Some may be rental housing. Some may be something else. But if
the—if our companies were able to bring the full set of resources,
not just a housing fund, but maybe equity investments or maybe
loans or maybe other products, to the table, you could really begin
to turn around communities.
So that was what I was trying to express in my testimony.
Mr. DALTON. Mr. Bachus, if I could just make one point, sir, with
respect to your question concerning the SEC registration.
Mr. BACHUS. And I didn’t mean to hit you—
Mr. DALTON. No, no. That’s fine. I just want to let you know that
our members do support registration under the 1934 Act.
Mr. BACHUS. So the exemption pitch should be eliminated, in
your opinion?
Mr. DALTON. We support registration under the 1934 Act, yes,
sir.
Mr. BACHUS. And I apologize for coming in with little—
Mr. DALTON. No, that’s fine.
Mr. BACHUS.—differences.

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The CHAIRMAN. I thank the panel, and we will call the next
panel.
The CHAIRMAN. Be polite to each other later. Sit down and let’s
get started here. We’re running late.
We will now begin. We’ll ask that doors be closed. Our last panel,
again, we regret that we were held up. But even though there are
not a lot of members here, this is going to be a very important part
of the record, and we appreciate it. And I assure you that what
you’re saying will have an impact. We begin with Judy Kennedy,
who is the president and CEO of the National Association of Affordable Housing Lenders. Ms. Kennedy.
STATEMENT OF JUDITH A. KENNEDY, PRESIDENT AND CEO,
NATIONAL ASSOCIATION OF AFFORDABLE HOUSING LENDERS

Ms. KENNEDY. Thank you, Mr. Chairman. I won’t take too long
on this, but you got me off on a tangent when you were talking
about the song you remembered.
Think back for a minute, because it is the 30th anniversary of
CRA. And by the way, that’s pearls; I didn’t bring any today.
But think back to where you were 30 years ago. Barbra
Streisand and Robert Redford were young and attractive and
starred in ‘‘The Way We Were.’’ Carole King had issued her first
album. Anyway, it’s a long time.
But in the 30 years since CRA was enacted, the path to helping
low- and moderate-income people become homeowners and have
apartments they’re proud to call home has been incredibly wellforged. Unfortunately—and by the way, I hope you look at the back
of my statement, there are pictures of some incredible properties—
The CHAIRMAN. Are there pictures of Robert Redford and Barbra
Streisand?
Ms. KENNEDY. No. I hadn’t had that thought.
The CHAIRMAN. Let’s get to housing.
Ms. KENNEDY. Curtis Johnson Homes Preservation in LA and on
and on, a beautiful one from Boston, by the way.
I want to say this. I want to say that the primary market for affordable housing is very evolved. It’s very sophisticated, and it’s
very constipated, after 20 to 30 years of making loans on properties
affordable to people under 80 percent and under 50 percent of area
median income, sometimes without subsidy in certain parts of the
country.
Unfortunately, Fannie Mae and Freddie Mac are still AWOL on
support for these loans, so the current goals, which we now know
from documentation that they continue to fudge, have really not
worked. Your proposed reform, I think, will be a good beginning to
getting Fannie and Freddie back on the path to affordable housing
and should make an enormous difference. Let me put it in perspective. Last year alone insured institutions made over $300 billion of
single family loans to people who earned under 80 and under 50
percent of area median income. That was about 23 percent of the
total. Nonprofit lenders alone made over $70 billion of private capital loans for housing affordable mostly to people under 60 percent
of area median income.
So we could do so much more if Fannie Mae and Freddie Mac
were present in the market. When Freddie Mac brags about the

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fact that their losses are one basis point, I think that sums it up.
Thirty years ago, insured institutions were told that the trade off
for Federal insurance was that they meet the credit needs of the
entire community.
Today, the GSEs don’t meet the credit needs of the entire community, and frankly, that requires large institutions—the biggest
banks in America, including in Chairman Frank’s home State—to
have somebody on the road like a Fuller Brush man, peddling loans
door-to-door across the country to try to get more capital to replenish the supply of affordable loans.
Our members have done private placements of their loans and
mortgage-backed securities. Fannie Mae and Freddie Mac not only
don’t buy many mortgages, they don’t buy the AAA-rated tranches
of securities backed by multifamily loans on affordable properties.
Unfortunately, we have recently learned that Fannie Mae and
Freddie Mac have been the primary enablers of subprime lending.
For 5 years, the best seller servicers of Fannie Mae and Freddie
Mac have complained to them that the GSEs refuse to buy a CRA
loan because the borrower need to pay 32 percent of his income
monthly for a mortgage payment rather than the 30 percent or
whatever the GSE guideline is now.
So primary lenders often are limited in the amount of those loans
they can make, and the borrower walks down the street to the competitor of Fannie and Freddie’s best seller servicers and gets a ‘‘piggyback’’ adjustable rate loan that Fannie and Freddie are financing. The chickens have come home to roost. We now know the outcome; 44 percent of all subprime issuances in 2004 were financed
by Fannie and Freddie.
Worse, the GSEs actually used these AAA-rated tranches of securities backed by subprime loans that the advocates say are 80 percent explosive, half of which Freddie Mac has estimated are to borrowers who qualify for prime loans. So while Fannie and Freddie
have been missing from the primary market for consumer friendly,
legitimate, CRA-credited loans that our major insured institutions
and their nonprofits are making, they have been the principal financiers of subprime loans. As the entity that has the AAA-rated
tranches, the GSEs themselves probably are not at risk, but everyone else in the chain, including the borrower and the community,
suffers.
As a good first step to help restore balance to the mortgage market, H.R. 1427 aligns the goals of the GSEs with those of the
banks. Thirty years after CRA and 15 years after Congress told
Fannie and Freddie to support this market, it’s about time.
[The prepared statement of Ms. Kennedy can be found on page
161 of the appendix.]
The CHAIRMAN. Thank you.
Mr. Fishbein. I’m sorry. I didn’t introduce you fully. Alan
Fishbein is director of housing and credit policy at the Consumer
Federation of America.
STATEMENT OF ALLEN J. FISHBEIN, DIRECTOR OF HOUSING
AND CREIDT POLICY, CONSUMER FEDERATION OF AMERICA

Mr. FISHBEIN. Thank you, Mr. Chairman, and Ranking Member
Bachus. We appreciate the invitation to testify here today. We com-

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mend the members of the committee and both of you in particular
for your diligence and particularly your perseverance in working to
develop improved regulatory oversight of the three GovernmentSponsored Housing Enterprises.
Consumers have a huge stake in the outcome of GSE legislation.
These entities are extremely valuable to the Nation’s housing finance system, making important contributions to expanding the
mortgage market, and increasing homeownership levels. Their
business model requires that all three operate as for-profit entities,
however it is their public mission and affordable housing mandates
as prescribed by Congress that make the GSEs unique and that ultimately justifies their government charters and the benefits afforded them through this status.
Strengthening financial oversight to ensure the GSEs’ ongoing
safety and soundness is a very worthwhile public policy objective.
We believe that such legislation can and should be achieved in a
manner that is consistent with these entities’ congressionally chartered status, their housing mission, and affordable housing activities and urge that the committee follow this course.
Accordingly, we support revising the present regulatory structure
in the creation of a new independent regulator with jurisdiction
over all three housing GSEs. We also believe that both financial
and mission oversight should be performed by the same regulator.
It is also critical that the new financial oversight powers provided
are commensurate and appropriate to the tasks at hand while not
unnecessarily diminishing the ability of the GSEs to continue to
perform their vital housing mission.
Reaffirming and strengthening the GSE’s mission and related affordable housing activities should also be a central part of any new
regulatory regime. Current consideration of GSE legislation provides an important opportunity to accomplish this objective, we believe, for all three GSEs. And Mr. Chairman, we especially thank
you for working to ensure that mission considerations and important new affordable housing mandates are a vital part of GSE legislation.
With a few notable exceptions, the bill introduced last week, HR
1427, largely tracks the provisions that were part of the legislation
passed by this committee and the House in the last Congress. And
I want to summarize my written testimony in which we focus on
the bill’s affordable housing provisions.
First, we agree with the underlying premise of the bill that these
mandates serve an important public purpose and have increased
GSE activities in serving low- and moderate-income and other underserved households and communities. At the same time, we
share the view that this can be improved upon and expanded to encourage deeper and more consistent focus by the GSEs on segments
of the market with the greatest needs. These three entities have
accomplished a lot over the years, but we believe they are capable
of doing much more.
Second, the affordable housing goal structure that applies to
Fannie Mae and Freddie Mac would benefit from tighter targeting.
It would encourage them to step up their activities with respect to
lower income households. So would the provision in the bill to establish a more comprehensive multifamily purchase requirement

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and one that would create a statutory duty to serve requirement
for certain specified affordable housing needs.
We are also pleased that the bill would create a single family
home refinance goal for low-income households. Such a sub-goal
would help protect low-income consumers from falling victim to
predatory lenders that are extremely active in this segment of the
market, and enhanced GSE presence in this market can help provide these borrowers with safer and more sustainable loan options.
In my written testimony, I also make a number of recommendations for refinements to the provisions in the bill.
Third, we are very supportive of the establishment of an affordable housing fund through specified annual contributions from the
two enterprises. Such an entity, we believe, would provide an invaluable source of funds for extremely-low-income and low-income
households not served directly through the mortgage market.
Fourth, my written testimony also suggests some additional
items we would recommend for consideration for incorporation in
the bill. In particular, we believe there should be more transparency to the public regarding the GSE’s activity in fulfilling their
affordable housing mandates, and we suggest some steps and ways
to achieve that.
Further, we believe that additional public purpose requirements
are warranted to help ensure a greater portion of the Federal
Home Loan Banks’ core business and mortgage purchase programs
be devoted to the needs of lower income households. Accordingly we
recommend that the bill include provisions directing the new regulator to establish performance goals that would help accomplish
this purpose.
We welcome additional opportunity to submit comments after
this hearing on some other aspects of the bill because this is complicated legislation. But let me wrap up by saying we thank you
again for the opportunity to offer our views on this important subject and we look forward to working with you and other committee
members as the bill progresses. Thank you.
[The prepared statement of Mr. Fishbein can be found on page
120 of the appenidx.]
The CHAIRMAN. Thank you, Mr. Fishbein. The committee will be
glad to receive any further information.
Next, Sheila Crowley, who is the president of the National Low
Income Housing Coalition.
STATEMENT OF SHEILA CROWLEY, PRESIDENT, NATIONAL
LOW INCOME HOUSING COALITION

Ms. CROWLEY. Thank you, Chairman Frank and Ranking Member Bachus, for the opportunity to testify today. My testimony will
focus only on the proposed affordable housing fund, which is a top
priority for the National Low Income Housing Coalition.
We view the affordable housing fund as an important new contribution to the solutions to the affordable housing crisis in our
country. And while the affordable housing crisis has many dimensions, the fundamental problem is the mismatch between what people earn or otherwise have to spend for their homes and what
housing costs.

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The people for whom this mismatch is the most acute are those
with the lowest incomes, precisely who the affordable housing fund
is intended to help. All of the fund would produce or preserve
homes that are affordable to extremely low and very low income
households. Extremely low income households are those with incomes at or below 30 percent of area median. In Boston, those are
households with incomes at $25,000 a year or less, and in Birmingham, that’s $17,000 a year or less. These are elderly and disabled people on fixed incomes or people in the low wage workforce.
Extremely low income renters are the only group of people in the
United States for whom there is an absolute shortage of housing
units. There are 9,022,000 extremely low income renter households
and there are only 6,187,000 homes renting at prices these households can afford if they pay the standard of 30 percent of their income for their housing. This is a shortage of 2.8 million units.
Higher income people may not always have the choice of homes
that they prefer and in some markets there may be shortages affordable to people in higher income groups, but these 9 million
families are the only ones who are playing this very dangerous
game of musical chairs.
What are the consequences of a housing shortage of such proportions? Well, most of these families spend way more than they can
afford for their homes. Seventy-one percent of all extremely low income renters in the United States pay more than half of their income for their housing. This is up from 68 percent in 2001, so the
numbers keep growing. And this leaves very little left for other
basic necessities, forcing impossible choices.
Otherwise, adults have to work two or more jobs, leaving little
time for their children, or they are prey to unscrupulous landlords
who can run substandard housing, or they’re living in overcrowded
conditions or they move from one short-term dwelling unit to the
next making employment and education very unstable, and ultimately people end up becoming homeless.
And so the ultimate consequence of this housing shortage is
homelessness in the United States. This is a housing shortage
that’s not going to be solved by the very robust and remarkable
U.S. housing market. I’m not a housing finance person, but I can—
my basic economics understanding is that, given that there is a
huge demand for housing, rental housing, for the extremely low income population that they could afford, if somebody could make
money building and operating that housing, they would have figured out how to do so by now.
It hasn’t happened. We need a government solution. Nor can the
housing problem be solved by the existing Federal, State, and local
programs. And I’ll be happy to go into greater depth about the
state of our current programs. Given the size of the deficit and the
constraints on Federal spending, we have to figure out some way
out of this problem, and the affordable housing fund is doing that.
It is not a new concept. It is a conceptual cousin of the affordable
housing program of the Federal Home Loan Banks. Fannie Mae
and Freddie Mac would be required to contribute revenue to a fund
that is administered by the new regulator that this bill establishes.

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And in the first year, these funds would be directed to the Gulf,
which we support. We do suggest expanding the eligible States to
include Texas and Alabama.
The Affordable Housing Fund is intended primarily for capital
grants to produce and preserve housing for extremely low and very
low income families. Under the homeownership provisions, funds
could also be used for downpayment and closing cost assistance.
There is also a provision that not less than 10 percent of the funds
are to be spent on homeowner activities.
We suggest a change that would assure that the majority of the
funds are actually spent on physical housing units, the construction
or rehabilitation of units, and this can be achieved by setting a cap
on the amount of funds that can go towards homeownership.
One of the most controversial questions about the affordable
housing fund was whether or not these funds could be used for
anything other than bricks and mortar capital costs. HR 1427
makes it clear what can and cannot be done with the funds, so let
me assure any members of the committee who are concerned about
the potential uses or misuses of these funds that there is no one
who is more dedicated to assuring that doesn’t happen than the
National Low Income Housing Coalition.
I just want to close by congratulating Chairman Frank and Mr.
Watt and Mr. Miller and Mr. Baker for coming together to sponsor
this important bipartisan legislation. The history of Federal housing legislation is that the very best bills have been bipartisan, and
thank you for continuing in that tradition.
[The prepared statement of Ms. Crowley can be found on page
108 of the appendix.]
The CHAIRMAN. Thank you.
Next, Thomas Gleason, who is listed here as a board member of
the National Council of State Housing Agencies, but is incidentally
the president of Mass Housing, our State housing finance agency
in Massachusetts.
Mr. Gleason.
STATEMENT OF THOMAS GLEASON, BOARD MEMBER,
NATIONAL COUNCIL OF STATE HOUSING AGENCIES

Mr. GLEASON. Thank you, Chairman Frank, and good afternoon.
The CHAIRMAN. I understand that you have to leave to catch a
plane, so whenever you have to leave, you can go ahead.
Mr. GLEASON. Okay. Thank you.
The CHAIRMAN. I know where you live, so if I need you, I can
find you.
[Laughter]
Mr. GLEASON. Thank you very much. Chairman Frank, Ranking
Member Bachus, and members of the committee, good afternoon.
My name is Tom Gleason, and I am the executive director of the
Massachusetts Housing Finance Agency.
Thank you for inviting me here today to testify on behalf of the
National Council of State Housing Agencies in support of the Federal Housing Finance Reform Act of 2007. We commend the chairman and members of the committee for recognizing in this legislation the need to sustain and strengthen Fannie Mae and Freddie

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Mac in their affordable housing mission while preserving the GSE’s
safety and soundness.
NCSHA strongly supports the bill’s creation of the affordable
housing fund, capitalized with annual contributions from Fannie
Mae and Freddie Mac. I believe this is a modest assessment of the
GSEs’ resources that is fully appropriate given the many advantages that they have through their Federal charters.
NCSHA believes that the affordable housing fund should be administered by States for several important reasons. Specifically,
States are in the best position to prioritize housing needs across
their jurisdictions. States have a proven track record of allocating
housing resources fairly and effectively. States have become the
central point through which all Federal and State housing resources are now coordinated, and perhaps most importantly, State
housing agencies have the technical expertise necessary to structure complex housing finance transactions that will get housing
built and keep it affordable over the long run.
I think that the most important role that I can play here this
afternoon is to offer some specific examples of how these funds
might be utilized. In Massachusetts, our State legislature created
several years ago an affordable housing trust fund. The fund’s flexibility is its greatest strength.
One example of this flexibility is a project known as Maverick
Landing. It’s a 396 unit HOPE VI development in East Boston. The
rehabilitation of this property turned some of Boston’s worst housing into some of its best and has spurred the development of market rate housing along what was once an abandoned waterfront
area in the City of Boston.
The combination of tax-exempt financing, HOPE VI funds, State
housing trust funds, and green building resources has proven to be
so successful that Maverick Landing was named the number one
affordable housing development in the country this past year by Affordable Housing Finance magazine.
Another example is Project Place, a development in Boston’s
south end. It has used State funds, new market tax credits, home
resources, and green building grants to create 14 units of affordable housing. All 14 units will be targeted to formerly homeless individuals, all of whom will have incomes at or below 30 percent of
the median income.
Project Place is a mixed-use development that brings together
housing, commercial space, and resident services, including job
training. This is housing at its very best, and this is housing that
changes people’s lives.
These kind of developments are the future of affordable housing
in Massachusetts and, in fact, all across the country. The affordable housing fund envisioned in this legislation would be a perfect
complement to what is already being done in all 50 States and
would allow even more of this housing to be built.
As importantly, it would allow us to go deeper, to reach even
more people at very low incomes who are not being adequately
served at this time. Beyond all of this, States are best—
Mr. BACHUS. Mr. Chairman, I missed a point. Could he—would
it be proper for him to back up about 30 seconds and replay that?
The CHAIRMAN. Certainly, if Mr. Gleason would do that.

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Mr. GLEASON. Mr. Bachus, anything specific that I can—
Mr. BACHUS. What you proposed as a perfect compromise?
[Laughter]
Mr. GLEASON. I was saying that I thought the affordable housing
fund, as envisioned in this legislation, would be the perfect complement to what is already going on from our perspective in all 50
States all across the country. And, as importantly, it would allow
us to go even deeper than we are already doing, to reach down and
serve people with very low incomes who aren’t currently being adequately served.
Beyond all of this, I think States are best able to respond quickly
to emerging problems that threaten housing affordability in their
States. Massachusetts, like many States, has thousands of homeowners who have fallen victim to subprime loans. The ‘‘American
Dream’’ of homeownership has, for them, become a nightmare.
In Massachusetts, 12 percent of the mortgages are subprime, yet
they represent 70 percent of all the foreclosures that are taking
place in our State. States could use a portion of the new grant
funds to respond to problems like this. Saving these homeowners
from foreclosure will be difficult but critical, not only to the homeowners themselves, but to the economy of our State.
NCSHA also strongly supports the bill’s affordable housing goals
provisions and urges this committee to encourage continued and
expanded GSE investment in housing credits and bonds by awarding the GSEs goal credit for these investments.
Finally, NCSHA supports the GSEs’ conforming loan limit increase. Seventeen percent of Massachusetts cities and towns have
median home sale prices that are above the existing loan limits.
We need to encourage homeowners to seek out safer mortgage
products, and this is one very important way to do that.
I thank you for your time this afternoon, and NCSHA stands
ready to assist you in any way possible to move forward this important legislation.
[The prepared statement of Mr. Gleason can be found on page
138 of the appendix.]
The CHAIRMAN. Thank you. We appreciate your patience. Next,
Mr. Michael Flynn, who is the director of government affairs at the
Reason Foundation.
STATEMENT OF MICHAEL FLYNN, DIRECTOR OF
GOVERNMENT AFFAIRS, REASON FOUNDATION

Mr. FLYNN. Thank you very much, and I appreciate the special
obligation on the last speaker on the last panel of a long hearing
day, so I will be brief in my remarks. The committee has my full
written remarks and also a list of studies and research the Reason
Foundation has done.
Chairman Frank, Ranking Member Bachus, and members of the
committee, thank you for the opportunity to be here today. My
name is Michael Flynn, and I am the director of government affairs
for the Reason Foundation.
Reason is a nonprofit, nonpartisan think tank that, for more
than 40 years, has researched the consequences of government policy and worked to advance liberty and develop ways for the market
to improve the quality of life for all Americans.

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My remarks will concentrate on the affordable housing fund.
Reason has published several studies on the issue of affordable
housing and housing policy with a special focus on California. As
a matter of policy, we have very significant concerns about this proposed new fund. In many parts of the country, as you know, the
unavailability of affordable housing is a very serious concern.
In California, where Reason is headquartered, the demand for all
housing outstrips the supply by half-a-million to a million units.
Unfortunately a new Federal affordable housing fund will not fix
this situation. In the end, we believe it will fail. It will not fail because of a lack of resources, it will fail because it doesn’t address
the fundamental problem; there are too few housing units being
built to meet the demand.
Simply put, this policy fails three tests: it ignores the real problem; it creates a veneer for action, which may stymie more substantive reforms; and it also creates a host of unintended consequences that not only could distort the housing market but also
further waste and misuse of these funds. I’ll discuss these briefly.
In recent years, the Nation has experienced a burst of homebuilding. New construction, however, has not met this demand. It
is not for a lack of capital. There is nothing in the fundamental economics of housing that would skew building towards any particular
segment of the market. Housing would be no different from every
other sector of the economy but for one factor, and it’s government
policy.
It’s no small irony that while this committee meets to deliberate
and decide how to further affordable housing in this country, there
are governmental bodies everywhere meeting to consider new
growth limits, new growth boundaries, increased impact fees, more
stringent zoning requirements, prevailing wage laws, new environmental regulations, open space requirements, or building standards. While many of these may seem individually reasonable, taken
together they have a cumulative effect. Today it is increasingly expensive, cumbersome, and time consuming to build a single family
dwelling.
Reason Foundation did a study of price trends, just real quickly,
in Washington and Florida State, that found that 20 to 25 percent
of the increase in housing prices in those States was due to the
statewide growth management law. Growth management land use
restrictions artificially limit the supply of housing that can be built.
The result of this higher level of regulation is to make building
lower and middle income housing, which already involves very thin
profit margins, economically risky and less viable.
This causes a ripple effect that is felt all the way down the housing ladder. Middle income and young professional families, who
otherwise might move to larger homes, are priced out of that market and as a result they seek out older, smaller homes and push
up those prices beyond families who could otherwise afford it.
I realize my time has dwindled, and I do want to say that I have
a good, finely calibrated, Irish sense of fatalism, and I realize that
my testimony here today is not going to alter you from moving forward on an affordable housing fund. But I would like to say two
things. One, again, no matter how much money the Federal Government puts in there, you’re going to run into the real architects

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of housing policy in this country, and that’s State and local officials. And as long as they’re able to continue to have land use restrictions and regulations, you’re not going to crack that knot.
I hope that this is not another case where we declare victory and
go home, where we think we passed this fund and the issue is resolved and all we’ve done is put the crisis off for another day.
I also think there are very, very real concerns about how this
money is spent. In the past, housing programs have been a fount
of misuse and even fraud. I do think you need to look to put very,
very particular requirements on how that money is spent.
I’d be remiss if I did not quickly mention one particular organization, ACORN, who has carved a very lucrative niche out of housing
programs over the years. ACORN is a national conglomerate, an
umbrella group of about 70 different organizations—
The CHAIRMAN. Mr. Flynn, if ACORN were here, I’d allow you.
I don’t feel comfortable in this hearing listening to an attack on an
organization that’s not represented. They have no particular stake
in this, and I don’t think that’s appropriate.
Mr. FLYNN. I understand that. I only want to stress that there
is a very, very real need to put very clear restrictions on how this
money is used so that it is not misused, and that there has been
a pattern in the past of misuse. I’m not singling out any; I just
used it as an example. Make sure you restrict that.
[The prepared statement of Mr. Flynn can be found on page 128
of the appendix.]
The CHAIRMAN. No, to the contrary, Mr. Flynn. You did single
one out.
Mr. FLYNN. Because I was going to go through some particular
facts.
Mr. BACHUS. Mr. Chairman, do you yield?
The CHAIRMAN. Yes.
Mr. BACHUS. I think that we, in our testimony, do single out organizations and things. And these are our witnesses, and I know
that the chairman disagrees with what the gentleman said, but—
The CHAIRMAN. The gentleman’s time has expired. I think I
haven’t sat while anybody attacked an organization that wasn’t
here, wasn’t represented. It’s irrelevant to the issue before us in
my judgment because we aren’t talking about empowering any particular organizations. And I would extend the same courtesy to any
organization that was being criticized without an ability to respond.
Mr. BACHUS. Would the gentleman yield?
The CHAIRMAN. Yes.
Mr. BACHUS. While I have great respect for you as chairman, I
will tell you that some of our members—and their concern is that
this money will go into organizations like ACORN as opposed to for
bricks or mortar, and don’t feel like that is legitimate.
The CHAIRMAN. I understand that, and so they adopted an
amendment that kept money from going to the Catholic Church,
the Methodists, and a whole range of other organizations. So I appreciate the concern, but I—one, we are not here, I think, talking
about any particular organizations. We’re talking about a bill
that’s—it’s very different.

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You were talking about Fannie Mae, and you were referring to
a bill which said that Fannie Mae and Freddie Mac would distribute themselves; today we’re talking about the State housing finance agencies. And if people want to warn them about dallying
with these—organizations, it’s a different story. But the policy
issue is separate from an attack on an organization, a very critical
attack on an organization not here represented, not able to defend
itself. I don’t see any reason why our hearing should be a forum
for that.
The general principle is not at issue here.
Mr. Flynn, do you want to summarize?
Mr. FLYNN. Again, I think it is—this money, let me just say—
in a sense, we’re shadowboxing here with this kind of proposal.
And we are thinking we can throw some money into the issue, that
somehow that will take care of it, but again, we’re not actually fundamentally dealing with what causes the problem of affordable
housing.
And I hope that as you go forward in this you will look into what
kind of regulations and restrictions State and local governments
put into this area, what they do with the money, so that this is not
just somewhere where we declare victory and go home and put off
the crisis until another day.
[The prepared statement of Mr. Flynn can be found on page 00
of the appendix.]
The CHAIRMAN. I’ll begin with the questions. First, Mr. Flynn,
did you hear anybody say that if we got this $500 million we could,
(a), declare victory and go home, (b), resolve the problem? Excuse
me, has anyone in your hearing engaged in the kind of hyperbole
you have just rebutted?
Mr. FLYNN. No, but I also do not—I have not heard anything
about what growth restrictions do.
The CHAIRMAN. I understand that. But that’s a separate question. I will get to that in a minute.
Mr. FLYNN. That’s the question.
The CHAIRMAN. I will get to that in a minute, but I am objecting
to this argument by hyperbole, this strawman. No one says this is
going to—no one who is knowledgeable thinks it’s going to solve everything; no one thinks that we’re going to declare victory and go
home. I think some find that helpful.
Now as to growth, let me ask you because this would be, I think,
a problem for some of my Republican friends. I agree with you,
those growth restrictions are a problem. I have complained about
them a great deal. They are almost all at the State and local level
and county level. Do you advocate the Federal Government overturning State, local, and county zoning restrictions?
Mr. FLYNN. No, not at all. However—
The CHAIRMAN. Okay, thank you.
Mr. FLYNN. But I also don’t know that you want to reward those
officials with extra money so that they never bear the cost of what
recessions could pass.
The CHAIRMAN. Well, of course, by definition, the bill wouldn’t be
doing that because if you did this right—
Mr. FLYNN. We don’t know how the money is going to be divided
in the bill.

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The CHAIRMAN. Well, I know something about how State housing
authorities work. And I would say this; by definition, those people
who exclude affordable housing by their zoning aren’t going to get
it. And in fact, you’re being illogical here, it seems to me, because
you say, well, they’re going to exclude it. If they exclude it, they
don’t get it. It’s only the people who include it, who get it. If they
have zoned it out and made it impossible for us to build that there,
then they don’t get it.
Mr. FLYNN. Well, but this always goes to a very inherent—a misconception of this entire debate is that somehow affordable housing
is new housing.
The CHAIRMAN. Excuse me. You’re changing the subject.
Mr. FLYNN. No, I’m not.
The CHAIRMAN. That’s not the question about whether or not
it’s—you were asking me—yes, I was asking you about local zoning
restrictions, and you said, no, you don’t want the Federal Government to overturn these restrictions, but you don’t want us to reward them. And I’m saying nothing in this bill would allow us to
reward them. In fact, the money would go to places that hadn’t
done that.
Let me just turn to Mr. Gleason now on the—and I appreciate
it because one of the things that was raised by Mr. Howard was
making sure that we get it right when we talk about the high end
loans, the jumbo loans here, and you talked about 17 percent of
Massachusetts cities.
I take it from that, that preexisting statistics would allow us to
decide where the a median house price would trigger the higher
loan and where it wouldn’t. Is that correct?
Mr. GLEASON. Yes, Chairman Frank, it would. My number of 17
percent of our cities and towns in Massachusetts was based on data
from 2006.
The CHAIRMAN. All right. So I just want to take—I don’t mean
to get specific. We will make sure, in the bill, as we write it, that
the issue Mr. Miller talks about, the issue of the high cost areas,
that we as nearly as possible use preexisting statistics so those
only apply to where they are justified. I appreciate that.
Mr. Bachus.
Mr. BACHUS. I thank the chairman. You know, this committe, I
think the chairman has said, I have said, and some of these panelists have said, that we try to work in a bipartisan way to address
different issues. One issue here is the safety and soundness of the
GSEs.
The chairman feels very strongly about the need for an affordable housing fund, and members of the minority recognize the need
for affordable housing. And I will say that the testimony of Ms.
Crowley, Dr. Crowley—I won’t speak for all the members of the minority, but I will say that I see the greatest need is what you said
the greatest need of; it’s people who can’t afford homeownership.
We talk a lot about homeownership, and that’s the best thing. I
mean for most people, that’s the ultimate goal. But as you say,
there are elderly, disabled, people on fixed income, or people in the
low wage workforce where really homeownership, at least for some,
will not be, it was and it is—but for most it is not the best option,
and that option is renting affordable housing and not rundown di-

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80
lapidated housing as we’ve all seen in Birmingham. I think that’s
a real problem.
And I will say this. The option for a lot of those people is public
housing. And quite frankly, a lot of times that’s unsafe because
maybe the management is not there and it’s—regrettably it is.
I recently saw some statistics from the State of Georgia where
they profiled the prison population, and it was just amazing how
many of the young men, young boys who were raised in public
housing projects, in just a few of them, ended up in the penitentiary. It was just an amazing number.
Ms. KENNEDY. Mr. Bachus, along those lines, if you look at page
eight of my testimony, I’m particularly proud of a new development
in Montgomery, Alabama. We have a picture of Rosa Parks Homes
there.
This is the new face of affordable housing. It’s a beautiful, three
story, red brick building that—Mr. Gleason’s counterpart for Alabama brought together 34 banks and formed a consortium patterned on the Massachusetts version. And these 34 banks with low
income housing tax credits and the State of Alabama’s tax abatement created the first elderly and disabled affordable rental property in the City of Montgomery that people are proud to call home.
Mr. BACHUS. I don’t think that anybody on this committee, if
they knew the facts, would oppose a project like that. I can’t imagine them doing that.
The CHAIRMAN. I’ll give you a couple.
Ms. KENNEDY. If they saw the picture, they wouldn’t.
Mr. BACHUS. You would get your great majority, in my opinion.
The CHAIRMAN. That I might.
Mr. BACHUS. One of the debates on New Orleans was do we build
it back just like it was when there were tremendous problems
there. That’s a debate for another day, but maybe—you know,
hearings don’t always convince me of anything.
But Ms. Crowley, you said that the affordable housing fund is
the conceptual cousin of the highly successful affordable housing
program of the Federal Home Loan Bank. I’m going to give you
that. You know, I may be criticized by some of my colleagues, but
I will sign on to 98 percent of that.
Ms. CROWLEY. Okay.
Mr. BACHUS. We are concerned—I am concerned that this fund
will not be that effective. And I know that, Mr. Gleason, you want
the money to come to the States, you represent the people who
spend it in those States, so I’m not going to ask you for your opinion. Well, I will. In fairness, I’ll ask you for your opinion, but what
is this money—but you know, that money goes to banks, member
banks, and they’ve been very efficient in creating projects, I think,
that you’ve talked about Ms. Crowley, very, very, very efficient.
If we design this program, what—and a number of people would
say, well, you can’t take it from one GSE and give it to another,
but if we’re doing a short-term program, we’re talking about a temporary program for 4 or 5 years, that program is very proscriptive.
It has none of the problems that members on my side fear, you
know, other than those that just simply say that it’s going to raise
the costs to all homeowners.

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But what if we did that? What if we took that money and put
it into the affordable housing program of the Federal Home Loan
Bank? You’d have to—we have the Louisiana, Mississippi thing,
but even have them address that—
The CHAIRMAN. That’s just for the first year.
Mr. BACHUS. Just for the first year. What if we did that as a bipartisan solution that most members could take?
Ms. CROWLEY. Here is what’s exciting about your question. It is
that we’ve gotten past the notion that we should have the fund and
now we’re just talking about the mechanics of getting the money
out. And that’s really a wonderful step forward that really makes
us very, very happy.
Our view of how to get the money out is that we should figure
out how to get it out quickly and efficiently to the people who can
get the housing built in the most—in the quickest way and do the
best job. And you can—and I’ve been in these discussions for a couple of years now about what all the options are. And you can do
your pluses and minus signs on every single one of those various
options. And the whole issue of having it be also run through the
Federal Home Loan Banks or the Affordable Housing Program is
one very good option.
There are others that people have talked about. I think that is—
I think that we have reached a point where we’ve agreed that it
shouldn’t be Fannie Mae and Freddie Mac doing it. I think everybody has agreed to that, and I think that the remaining questions
are simply things that are logistical to work out.
Now I know my friends at the State housing agencies feel very
strongly about State housing agencies doing that. And our members, we have some members who think that their State housing
agencies are wonderful and we have some members who think
their State housing agencies are not so wonderful, so it does vary
considerably from State to State.
It is certainly a very valid option, if that answers your question.
The CHAIRMAN. Would the gentleman yield to me, because I
would say this—we want to look at all of these things, and I think
we may not get—since we’re going to go Louisiana and Mississippi
in year one, we don’t have to resolve this in a definite way right
away as this goes forward. But I would say this. I don’t believe that
any of the restrictions people have been looking to put into the bill
before are in that. That is, I think the Federal Home Loan Banks
do a very good job without any restrictions of the sort about how
they can do it—it’s a pretty general thing. I like that idea, but it
also, if you look at it, it does not have any of these, ‘‘You can’t give
it to this one, you can’t give it to that one.’’ Nature took its course
there in a very good way.
Ms. CROWLEY. Right.
Mr. BACHUS. Well, I’m just saying, instead of building a whole
new—I know that you could probably—another way to split this
baby is to, if it can be split, is to give part of it to the State. And
then after 5 years you could look at it and see if it worked, you
could see what worked best. But as far as the—I’m talking about
a bill that you get out here, get out here quick and pass.
Ms. CROWLEY. Those are really good questions for us to be talking about at this point.

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The CHAIRMAN. And I want to say, I would again just repeat, in
the first year, the fund is going to Louisiana and Mississippi in
that three-to-one ratio. I think we will be—the Senate is going to
take this bill up; we’re going to go to conference, I believe, and I
don’t think—and there’s no urgency to solve where it goes in years
two through five, because it’s a 5-year thing, as of now, and I want
to look at that. And frankly, if that helps us get this whole thing
forward, you know, there’s something to be said for that.
Mr. BACHUS. I think that what I would say to the panelists and
to the chairman is what it helps us with is to get it not only passed
the House put perhaps, I think, if the House had a very good vote
then it might help the Senate pick it up. And it would certainly,
some of the questions that my House Members have—
The CHAIRMAN. That the gentleman from Alabama would go
home and do what a good citizen would do and write his Senator.
Mr. BACHUS. I’m not talking about—Mr. Chairman, I’m not talking about—
The CHAIRMAN. Let me just—
Mr. BACHUS. I’m talking about—support.
Ms. CROWLEY. Can I comment on Mr. Bachus’s comment about
some people needing to be in the rental market? That’s absolutely
true, and that’s why we need a strong rental housing sector because you have to have a balanced housing sector.
But the way that it’s so imbalanced now is that the people who
are in the rental housing market who have the potential of perhaps
becoming homeowners, not people on fixed incomes but who have
the potential of becoming homeowners, they have no hope of doing
that because they are spending so much of their income on that
rent that they can’t save; they can’t get ahead. And if they have
the ability to have a stable rental home, establish a good record as
a good renter paying their rent that they could afford and did that
over time, then in fact they would be very good potential prospects
for the homeownership market, but under the current situation,
they have no hope.
The CHAIRMAN. I appreciate that. One of the things we will be
looking at when we revisit the credit is part of the problem with
people establishing credit. People who have been paying their rent
regularly and their utility bills and everything else—we should find
some way so that that can be taken into account in terms of credit
ratings.
Thank you, very much. The hearing is adjourned.
[Whereupon, at 3:52 p.m., the hearing was adjourned.]

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APPENDIX

March 15, 2007

(83)

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