[110th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:35407.wais]




                               BEFORE THE


                     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


35-407                      WASHINGTON : 2007
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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held on:
    March 15, 2007...............................................     1
    March 15, 2007...............................................    83

                        Thursday, March 15, 2007

Cornick, Hon. L. Carter, General Deputy Assistant Secretary, 
  Department of Housing and Urban Development (HUD)..............    19
Crowley, Sheila, President, National Low Income Housing Coalition    71
Dalton, John H., President, Housing Policy Council, Financial 
  Services Roundtable............................................    51
Fishbein, Allen, Director of Housing and Creidt Policy, Consumer 
  Federation of America..........................................    69
Flynn, Michael, Director of Government Affairs, Reason Foundation    75
Gleason, Thomas, board member, National Council of State Housing 
  Agencies.......................................................    73
Howard, Gerald M., Executive Vice President and Chief Executive 
  Officer, National Association of Home Builders.................    56
Kennedy, Judith A., President and CEO, National Association of 
  Affordable Housing Lenders.....................................    68
Lockhart, Hon. James B., III, Director, Office of Federal Housing 
  Enterprise Oversight (OFHEO)...................................    17
Mudd, Daniel H., President and Chief Executive Officer, Fannie 
  Mae............................................................    54
Steel, Hon. Robert K., Under Secretary for Domestic Finance, 
  Department of the Treasury.....................................    14
Syron, Richard F., Chairman and Chief Executive Officer, Freddie 
  Mac............................................................    53


Prepared statements:
    Capito, Hon. Shelley Moore...................................    84
    Gillmor, Hon. Paul E.........................................    86
    Pryce, Hon. Deborah..........................................    87
    Waters, Hon. Maxine..........................................    90
    Cornick, Hon. L. Carter......................................    97
    Crowley, Sheila..............................................   108
    Dalton, John H...............................................   112
    Fishbein, Allen..............................................   120
    Flynn, Michael...............................................   128
    Gleason, Thomas..............................................   138
    Howard, Gerald M.............................................   145
    Kennedy, Judith A............................................   161
    Lockhart, Hon. James B. III..................................   174
    Mudd, Daniel H...............................................   183
    Steel, Hon. Robert K.........................................   187
    Syron, Richard F.............................................   193

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Letter to Chairman Frank and Representative Kanjorski from 
      the American Land Title Association........................   228
    Letter to Chairman Frank and Ranking Member Bachus from the 
      Consumer Mortgage Coalition................................   230
Clay, Hon. William Lacy:
    Responses to questions submitted to Hon. James Lockhart III..   243
Watt, Hon. Melvin L.:
    Responses to questions submitted to Hon. James Lockhart III..   259
Royce, Hon. Ed:
    Chairman Bernanke's March 6, 2007 speech.....................   264

                        LEGISLATIVE PROPOSALS ON
                        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 
Government-Sponsored 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 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.
    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 
    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 
    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.
    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 
    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 government-sponsored 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 
    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 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 
    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 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 
    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 
    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 
    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 
    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 important 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 
    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 
    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?
    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 
    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 
    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.
    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 4\1/2\ 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 
    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 
    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.
    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 
    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 
    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 4\1/2\ 
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 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 
    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 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 
    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 
    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 
    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 
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?
    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.
    The Chairman. The hearing will reconvene. Please take your 
    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?


    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.
    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 
    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 
    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 
    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 
    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 necessary 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 
    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 
    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 
    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 
    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.


    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 
    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.
    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 
    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 
    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 
    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.
    Mr. Cornick?


    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 
    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 
    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 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 
    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.
    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 
    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 
    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 
    It is our view that these articulations are the right 
methodologies by which to empower the regulator.
    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 
    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. 
    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.
    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 
    One thing you said was you both would like to cap it, I 
    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 
    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 
    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 
    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 
    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 
    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.
    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 
    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.
    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, 
    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.
    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 
    Mr. Lockhart. Yes, I think we should have a board of 
    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 
    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.
    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?
    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 
    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 
    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.
    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 
    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 private. 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.
    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 
    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, 
    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 
    Mr. Steel. We are comfortable with the way it is described 
    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 Gramm-Leach-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 
    Mr. Lockhart. Certainly, and we will look at it.
    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 
    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 
    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 the candidate 
should include familiarity with financial and accounting 
    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 
    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?
    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 
    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 underwriting 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 
    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 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 
    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 
    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 
    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 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 
    Mr. Moore of Kansas. Thank you, sir. Thank you, Mr. 
    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 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 
    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 
    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. Certainly, 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 
bank-like 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 
    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 folks just might go a little bit too far to 
the right. And I would ask Mr. Lockhart, would you give me your 
    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. 
    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 
    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 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 
    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 
    Mr. Clay. Thank you, Mr. Chairman. Thank you for holding 
this hearing. Mr. Lockhart, Chairman Frank's legislation, H.R. 
1427, 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 
    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 
proposals 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 low-income 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 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.
    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 
    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 
    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 
    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 preparation for being Secretary of 
the Treasury than either aluminum or railroads.
    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 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 
    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 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 
    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 
    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 
    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 regulators. 
What is the minimum capital for Fannie Mae and Freddie Mac 
    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 
    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.
    Mr. Perlmutter. Okay. Sorry, I was just going to ask about 
systemic risks.
    Mr. Cornick. Mr. Chairman, would I be able to respond 
    Mr. Lynch. Very, very, very briefly, thank you, yes, 
    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 
    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.


    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, 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 
    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 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.
    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.

                      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.
    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 
    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 
    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 
    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.

                      OFFICER, FANNIE MAE

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


    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 
    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 
requirements 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 
    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.]
    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 
    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 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 
    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 
    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 
    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.
    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 
    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.
    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 
    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 
    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 
    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 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 
    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, 
shareholder-owned 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 
    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 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 
    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 
    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 
    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 
    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 directors; 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?
    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 
multi-missions, 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 
    Mr. Kanjorski. Thank you. And now I am in support of my 
    The Chairman. Mr. Dalton, I appreciate that, and I 
appreciate your calling it balance, but just don't call it fair 
and balanced, because--
    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 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. 
    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.
    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 
    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.
    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?
    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 
    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 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 
    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 
    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 
    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.
    The Chairman. I thank the panel, and we will call the next 
    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. 


    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 
    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 
well-forged. Unfortunately--and by the way, I hope you look at 
the back of my statement, there are pictures of some incredible 
    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 
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.


    Mr. Fishbein. Thank you, Mr. Chairman, and Ranking Member 
Bachus. We appreciate the invitation to testify here today. We 
commend 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 Government-Sponsored Housing 
    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 
    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 and one that would create a statutory duty 
to serve requirement for certain specified affordable housing 
    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.

                       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.
    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 
    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.
    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 
    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 
    [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.

                     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.
    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 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 
    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 
    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 
    Mr. Bachus. Mr. Chairman, I missed a point. Could he--would 
it be proper for him to back up about 30 seconds and replay 
    The Chairman. Certainly, if Mr. Gleason would do that.
    Mr. Gleason. Mr. Bachus, anything specific that I can--
    Mr. Bachus. What you proposed as a perfect compromise?
    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 
    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 
    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.

                       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 
    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 
    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 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 
    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 
    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 
    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.
    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 
    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.
    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 dilapidated 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 
    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.
    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 
    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.
    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 
    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.]

                            A P P E N D I X

                             March 15, 2007