[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]




     THE ROLE OF FANNIE MAE AND FREDDIE MAC IN THE FINANCIAL CRISIS

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

                                HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                            DECEMBER 9, 2008

                               __________

                           Serial No. 110-180

                               __________

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


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform

     THE ROLE OF FANNIE MAE AND FREDDIE MAC IN THE FINANCIAL CRISIS



 
     THE ROLE OF FANNIE MAE AND FREDDIE MAC IN THE FINANCIAL CRISIS

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

                                HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                            DECEMBER 9, 2008

                               __________

                           Serial No. 110-180

                               __________

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


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform


                  U.S. GOVERNMENT PRINTING OFFICE
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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
CAROLYN B. MALONEY, New York         CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York              DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of   PATRICK T. McHENRY, North Carolina
    Columbia                         VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
JACKIE SPEIER, California

                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
               Lawrence Halloran, Minority Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on December 9, 2008.................................     1
Statement of:
    Pinto, Edward, former chief credit officer, Fannie Mae, and 
      real estate financial services consultant; Charles 
      Calomiris, Arthur Burns Scholar in international economics, 
      American Enterprise Institute; Arnold Kling, adjunct 
      scholar, CATO Institute; and Thomas Stanton, fellow, Center 
      for the Study of American Government at Johns Hopkins 
      University.................................................   135
        Calomiris, Charles.......................................   220
        Kling, Arnold............................................   201
        Pinto, Edward............................................   135
        Stanton, Thomas..........................................   322
    Syron, Richard, former CEO, Freddie Mac; Daniel Mudd, former 
      CEO, Fannie Mae; Leland Brendsel, former CEO, Freddie Mac; 
      and Franklin Raines, former CEO, Fannie Mae................    17
        Brendsel, Leland.........................................    31
        Mudd, Daniel.............................................    23
        Raines, Franklin.........................................    37
        Syron, Richard...........................................    17
Letters, statements, etc., submitted for the record by:
    Brendsel, Leland, former CEO, Freddie Mac, prepared statement 
      of.........................................................    33
    Calomiris, Charles, Arthur Burns Scholar in international 
      economics, American Enterprise Institute, information dated 
      October 2, 2008............................................   221
    Kanjorski, Hon. Paul E., a Representative in Congress from 
      the State of Pennsylvania, prepared statement of...........    77
    Kling, Arnold, adjunct scholar, CATO Institute, prepared 
      statement of...............................................   203
    Lynch, Hon. Stephen F., a Representative in Congress from the 
      State of Massachusetts, American Enterprise Institute 
      article....................................................    97
    Mudd, Daniel, former CEO, Fannie Mae, prepared statement of..    25
    Pinto, Edward, former chief credit officer, Fannie Mae, and 
      real estate financial services consultant, prepared 
      statement of...............................................   138
    Raines, Franklin, former CEO, Fannie Mae, prepared statement 
      of.........................................................    39
    Stanton, Thomas, fellow, Center for the Study of American 
      Government at Johns Hopkins University, prepared statement 
      of.........................................................   325
    Syron, Richard, former CEO, Freddie Mac, prepared statement 
      of.........................................................    20
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................    70
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California, prepared statement of.................     5


     THE ROLE OF FANNIE MAE AND FREDDIE MAC IN THE FINANCIAL CRISIS

                              ----------                              


                       TUESDAY, DECEMBER 9, 2008

                          House of Representatives,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:04 a.m., in 
room 2154, Rayburn House Office Building, Hon. Henry A. Waxman 
(chairman of the committee) presiding.
    Present: Representatives Waxman, Towns, Kanjorski, Maloney, 
Cummings, Kucinich, Davis of Illinois, Tierney, Clay, Lynch, 
Yarmuth, Braley, Norton, Cooper, Van Hollen, Murphy, Sarbanes, 
Speier, Burton, Shays, Mica, Souder, Platts, Turner, Issa, 
Westmoreland, McHenry, Foxx, Bilbray, Sali, and Jordan.
    Staff present: Phil Barnett, staff director; Kristin 
Amerling, chief counsel; Karen Lightfoot, communications 
director and senior policy advisor; David Rapallo, chief 
investigative counsel; John Williams, deputy chief 
investigative counsel; Michael Gordon and David Leviss, senior 
investigative counsels; Russell Anello, Stacia Cardille, and 
Margaret Daum, counsels; Alison Cassady and Anna Laitin, 
professional staff members; Earley Green, chief clerk; Jennifer 
Berenholz, assistant clerk; Alexandra Golden, investigator; 
Caren Auchman, communications associate; Zhongrui ``JR'' Deng, 
chief information officer; Leneal Scott, information officer; 
Miriam Edelman, special assistant; Mitch Smiley and Matt 
Weiner, staff assistants; Lawrence Halloran, minority staff 
director; Charles Phillips, minority senior counsel; Brien 
Beattie, Molly Boyl, Christopher Bright, Alex Cooper, Adam 
Fromm, Todd Greenwood, and John Ohly, minority professional 
staff members; Larry Brady and John Cuaderes, minority senior 
investigators and policy advisors; Mark Lavin, minority Army 
fellow; Patrick Lyden, minority parliamentarian and Member 
services coordinator; and Brian McNicoll, minority 
communications director.
    Chairman Waxman. The committee will please come to order.
    Today, we are holding the committee's sixth hearing on the 
financial crisis. To date, we have examined the bankruptcy of 
Lehman Brothers, the fall of AIG, and the role of credit-rating 
agencies. We held a hearing with Federal regulators and one 
with the Nation's most successful hedge fund managers. Today's 
hearing will focus on the collapse of two government-sponsored 
mortgage financing enterprises, Fannie Mae and Freddie Mac.
    On September 7th, the Treasury Department took control over 
Fannie and Freddie. The companies have now been given access to 
$200 billion in capital from the Federal Government. Our job 
today is to examine why Freddie and Fannie failed.
    As part of our investigation, the committee obtained nearly 
400,000 documents from Fannie Mae and Freddie Mac. These 
documents show that the companies made irresponsible 
investments that are now costing Federal taxpayers billions of 
dollars.
    One key document is a confidential presentation from the 
files of Fannie Mae's CEO, Daniel Mudd. According to this 
document, the company faced a strategic crossroads in June 
2005. The document states, ``We face two stark choices: one, 
stay the course; or, two, meet the market where the market 
is.'' Staying the course meant focusing predominantly on more 
secure, prime and fixed-rate mortgages. The presentation 
explained that this option would ``maintain our strong credit 
discipline and protect the quality of our book.''
    But, according to the confidential presentation, the real 
revenue opportunity was in buying subprime and other 
alternative mortgages. To pursue this course, the company would 
have to ``accept higher risk and higher volatility of 
earnings.'' This presentation recognized that homes were being 
utilized like an ATM. It acknowledged that investing in 
subprime and alternative mortgages would mean higher credit 
losses and increased exposure to unknown risks, but the lure of 
additional profits proved to be too great.
    The documents make clear that Fannie Mae and Freddie Mac 
knew what they were doing. Their own risk managers raised 
warning after warning about the dangers of investing heavily in 
the subprime and alternative mortgage market, but these 
warnings were ignored.
    In 2004, Freddie Mac's chief risk officer sent an e-mail to 
CEO Richard Syron urging Freddie Mac to stop purchasing loans 
with no income or asset requirements as soon as practicable. 
The risk officer warned that mortgage lenders were targeting 
borrowers who would have trouble qualifying for a mortgage if 
their financial position were adequately disclosed and that the 
``potential for the perception and the reality of predatory 
lending with this product is great.'' But, Mr. Syron did not 
accept the chief risk officer's recommendation. Instead, the 
company fired him.
    A year later, on November 10, 2005, a top Fannie Mae 
official warned, ``Our conclusion has consistently been that 
the lowering of risk in many of these private-label securities 
has not adequately been reflected in their pricing.''
    On October 28, 2006, Fannie's chief risk officer sent an e-
mail to company CEO Daniel Mudd warning about a serious problem 
at the company. He wrote, ``There is a pattern emerging of 
inadequate regard for the control process.'' In another e-mail 
on July 16, 2007, the same risk officer wrote to Mr. Mudd 
again, this time complaining that the Board of Directors had 
been told falsely that ``we have the will and the money to 
change our culture and support taking more credit risk.'' The 
risk officer wrote, ``I have been saying that we are not even 
close to having proper control processes for credit market and 
operational risk. I got a 60 percent budget cut. Do I look 
stupid?''
    But, these warnings were routinely disregarded. In one 2007 
presentation, the management of Fannie Mae told the Board, ``We 
want to go down the credit spectrum. Subprime spreads have 
widened dramatically to their widest level in years. We do not 
feel there is much risk going down to AA and A. We don't expect 
to take losses at AA and A level. Eventually, we want to go to 
BBB. We want to move quickly while the opportunity is still 
here.''
    Taking these risks proved tremendously lucrative for Fannie 
and Freddie's CEOs. They made over $40 million between 2003 and 
2007. But, their irresponsible decisions are now costing the 
taxpayers billions of dollars.
    At an earlier hearing, the minority, Republicans, released 
a report that called Fannie and Freddie ``the central cancer of 
the mortgage market, which has now metastasized into the 
current financial crisis.'' The next day, John McCain made a 
similar statement during a Presidential debate in Nashville, 
stating that, ``Fannie and Freddie were the catalyst, the match 
that started this forest fire.''
    The documents do not support these assertions. The CEOs of 
Fannie and Freddie made reckless bets that led to the downfall 
of their companies. Their actions could cost taxpayers hundreds 
of billions of dollars. But, it is a myth to say they were the 
originators of the subprime crisis. Fundamentally, they were 
following the market, not leading it.
    It is also a myth to blame the Nation's affordable housing 
goals. The bulk of Fannie and Freddie's credit losses, nearly 
$12 billion so far this year, are the result of their purchases 
of Alt-A loans and securities. Because many of these risky 
loans lack full documentation of the borrower's income, they 
did not help the companies meet their affordable housing goals.
    At today's hearing, we will have the opportunity to 
question four former CEOs of Fannie Mae and Freddie Mac, and I 
thank them for their cooperation. I also want to thank the 
companies themselves for cooperating with the committee's 
investigation.
    But, I especially want to thank and congratulate the 
members of this committee for their work in this Congress. This 
will be the last full committee hearing we will hold this year, 
and it will be the last Oversight Committee hearing that I will 
chair.
    It has been a tremendous honor to chair this committee. We 
began our oversight efforts in February 2007, with 4 days of 
back-to-back hearings on waste, fraud, and abuse in Federal 
spending. We investigated the missing $8 billion in cash handed 
out in Iraq, the actions of Blackwater's private security 
guards, the politicization of Federal science, high drug 
prices, and CEO pay. We took testimony from Valerie Plame and 
Condoleezza Rice, Kevin Tillman and Donald Rumsfeld, Roger 
Clemens and Brian McNamee, and dozens of corporate and 
government leaders. And our actions were the catalyst for 
legislative changes that will save the taxpayers billions of 
dollars.
    It has been a busy schedule, but the one constant of all of 
this has been the dedication and commitment of the members of 
the committee. Oversight is not easy. To have an impact, you 
have to work hard and know your facts, and that is what the 
Members have done in hearing after hearing. I will always be 
proud of the work of this committee and even prouder of the 
Members with whom I have had the great fortune to serve.
    I know that this committee will do great things next year 
under the leadership of your new chairman and your new ranking 
member. And I want you to know that I will miss being here, and 
it has been a tremendous privilege for me to serve with you.
    And I want to recognize the ranking member of the 
committee, Mr. Issa, for his opening statement.
    [The prepared statement of Hon. Henry A. Waxman follows:]

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    Mr. Issa. Thank you, Mr. Chairman.
    Before I begin, I would ask unanimous consent that my 
colleagues from Financial Services, the ranking member, Mr. 
Bachus, and Mr. Garrett of New Jersey, would be permitted to 
participate in this hearing today.
    Chairman Waxman. Without objection, that will be the order.
    Mr. Issa. Mr. Chairman, I additionally ask unanimous 
consent that documents produced pursuant to the request by the 
committee, including certain e-mails, memorandum, and 
presentations of Fannie Mae and Freddie Mac, be inserted into 
the record of this hearing.
    Chairman Waxman. If you gentlemen would withhold that 
unanimous consent request, we just want to be sure we are 
talking about the same documents.
    Mr. Issa. Of course, Mr. Chairman.
    Chairman Waxman. Thank you.
    Mr. Issa. Mr. Chairman, also before I begin, on behalf of 
Ranking Member Tom Davis, who, as you know, has now left the 
Congress just slightly early, I have had the honor of serving 
with you and serving with Mr. Davis for these last 2 years. 
Although we have not always agreed--as a matter of fact, we 
have not often agreed--the elevation of this committee by your 
tireless effort has, in fact, put this committee where it 
should be: at the center of Congress's oversight of this large 
economy, both public and private.
    And, for that, this committee will owe you--and hopefully, 
the picture to be hung soon--a debt of gratitude, because to 
elevate a committee is one of the hardest things in the world 
to do. Many chairmen spend years at the helm of a committee and 
see it reduced or, at best, held the same. But, you truly have 
left this committee much stronger than when you found it. And, 
for that, both sides of the aisle will always be grateful.
    [Applause.]
    Mr. Mica. Mr. Issa, would you yield to me?
    Mr. Issa. And I would yield to the gentleman.
    Mr. Mica. You know, I think one of the reasons Mr. Waxman 
has probably sought the position on Energy and Commerce was to 
escape the claws of Mr. Issa and Mr. Mica. But we wish him well 
in his new endeavor.
    Two things. One, there is no substance, as I told you 
before, to the fact that our steering committee is moving the 
two of us over to that committee. So, that will be very good. 
And, also, could you please keep me posted on the exact date of 
the hanging of Henry Waxman? Because I want to be here for it.
    Thank you.
    Mr. Issa. Thank you.
    Thank you for your indulgence, Mr. Chairman.
    Chairman Waxman. The gentleman's time has expired--no. 
[Laughter.]
    Mr. Issa. Thank you, Mr. Chairman, for scheduling this 
important hearing. And thank you, again, for the second panel 
of expert witnesses. That shows a great deal of bipartisan 
cooperation, and, for that, again, I am grateful.
    As we attempt to deal with the ongoing financial crisis, it 
is critical that we look at all the factors that caused the 
collapse of the financial system. The one thing we know for 
certain is that the overinflated housing market and defaulting 
subprime loans are at the center of the problem. And it is no 
secret that I believe that Fannie Mae and Freddie Mac had 
either the primary role or certainly a primary cause of this 
failure.
    The analogy of the Chicago fire and Mrs. O'Leary's cow is 
particularly appropriate here. The cow was the immediate cause 
of the fire, but there were a number of factors that made the 
fire inevitable. The fire spread quickly because homes were 
densely packed and made of wood. It wasn't a question of 
whether the disaster would happen, but when. I believe that 
Freddie and Fannie had a great deal to do with packing that 
great deal of wood close together for a number of years.
    These two government-sponsored enterprises were repeatedly 
urged by politicians to deliver affordable housing to the 
American people. There was an inevitability in this policy, 
just as the events that led to the Chicago fire. Traditional 
home loans were replaced with easy credit, no-document, and no-
downpayment loans. Instead of human judgment assessing risk, 
those responsibilities were shifted to rely on computer 
modeling. Outright fraud and greed wasn't isolated to just Wall 
Street, although I appreciate the chairman's work on uncovering 
the portion that was on Wall Street. Fannie and Freddie shared 
in this disgrace as it drove much of the poor decisionmaking 
that have led us to where we are here today.
    Mr. Chairman, the time for double talk, not in this 
committee but outside this committee, is over. Mr. Chairman, 
the election is behind us. So, let us get to the bottom of this 
crisis and find out what really happened. We must work together 
to get to the root causes of this crisis, not just a root 
cause, but all root causes. It is important that we find out 
what factors interacted with each other to bring about the 
degree of financial destruction.
    Of all the work we have done to date, it is inconceivable 
that we have not had any discussion of the role that we played, 
the role that congressionally mandated policies played in this 
crisis. We must ask ourselves, did Congress advocate policies 
that fermented this crisis? Did individual Congressmen and/or -
women advocate because, in fact, it was a convenient 
relationship, both politically and perhaps personally?
    Some will consider what I am about to say not politically 
correct. A few weeks ago, when the topic of Fannie Mae and 
Freddie Mac affordable housing loans were raised as a cause of 
this crisis, Chairman Barney Frank said it was racist to 
suggest as much. I will say here today, it is not racist to 
suggest anything and everything as a cause of this problem 
until it is properly eliminated by those who are not affected 
directly by it but, in fact, can dispassionately and 
objectively analyze what was or was not a cause of this 
problem.
    In a recent Senate hearing on the automobile bailout, 
Chairman Christopher Dodd continued to point a finger at Wall 
Street as the culprit of the current crisis and many crises. 
Those two men are chairmen of the two most important 
committees, notwithstanding ours, dealing with the financial 
crisis, yet they appear to be wearing blinders in not wanting 
to discuss the full range of issues underlying this crisis.
    Mr. Chairman, the goal of affordable housing is one of the 
most laudable goals we, as legislators, should seek to attain. 
But, we should do it in a way that does not destroy the whole 
financial system, which is, in fact, what has happened.
    Let me draw a contrast. For decades, under the GI Bill of 
Rights, we allowed and encouraged servicemen to get VA home 
loans with little or no money down. And that program, Mr. 
Chairman, works well. What I am saying is that affordable 
housing is a desirable goal, and it can be done the right way.
    But, in the case of the GSEs, how we encourage the program 
is something we have to come to grips with. We have to 
recognize that what we have done with the GSEs hasn't worked. 
Rather, it has allowed the most vulnerable in our society to be 
subject to predatory lenders. We gave hope to people with the 
promise of homeownership without telling them the American 
dream could turn into their personal nightmare. Mr. Chairman, 
we in the Congress have to look in the mirror because part of 
the blame clearly lies at our footsteps.
    I have introduced legislation to establish a 9/11-type 
independent, nonpartisan commission composed of experts, not 
politicians, to assess what went wrong and how the system 
should be remedied. Mr. Chairman, in your new role, I would 
hope that you would sign on in the next Congress as a cosponsor 
of this legislation.
    I believe that this committee and others should continue to 
actively look into the causes. We should, in fact, do our 
oversight role. But, the worst thing Congress can do now is to 
start legislating or advocating for regulation without a clear, 
nonpartisan analysis of what went wrong, including a look 
inward.
    Business Week just ran an article indicating that many of 
the current reworked FHA loans will default in the near future 
and a second bailout will be necessary. Mr. Chairman, for all 
the committees in the Congress, this committee has a unique 
obligation and opportunity to work in a bipartisan way to 
follow the causes of this crisis, both independently and 
through a commission that can provide us with additional 
insight in all directions, including that which comes to our 
footsteps.
    Mr. Chairman, I would hope that we will continue in the 
next Congress to make sure that the Financial Services 
Committee does not supplant this committee in making sure that 
government does what it should do, not only to encourage and 
allow homeownership to all, but, in fact, to protect the 
financial system that today is teetering on the edge of yet 
another precipitous fall.
    If the Congress cannot do this in an objective and 
dispassionate way, then I assure you the minority will continue 
to pull at every possible lever to ensure that we can play a 
constructive role in ensuring that the wood will not be piled 
up again, that homes, whether in Chicago or throughout America, 
will not be built close together and of wood in order to have 
yet another Mrs. O'Leary's fire.
    Mr. Chairman, thank you again for holding this important 
hearing. And I look forward to perhaps you being an original 
cosponsor of the legislation calling for a nonpartisan 
commission in the next Congress.
    Chairman Waxman. Thank you, Mr. Issa.
    I'm pleased to introduce our witnesses today.
    We have Leland Brendsel, the former CEO of Freddie Mac. He 
worked at Freddie Mac for 21 years and left the company in June 
2003.
    Daniel Mudd, former CEO of Fannie Mae, served as the 
president and chief executive officer of Fannie Mae from June 
2005 until September 2008. Mr. Mudd was also a member of the 
Fannie Mae Board of Directors from February 2000 until 
September 2008.
    Franklin Raines is the former chief executive officer of 
Fannie Mae from 1999 until his retirement in December 2004. He 
previously served as Fannie Mae's vice president from 1991 
until 1996.
    And Richard Syron, a former CEO of Freddie Mac, served as 
the chairman and CEO from December 2003 to September 2008.
    I want to welcome each of you to our hearing today.
    It is the custom of this committee that all Members that 
testify do so under oath. So, I would like to ask, if you 
would, please stand and raise your right hands.
    [Witnesses sworn.]
    Chairman Waxman. The record will indicate that each of the 
witnesses answered in the affirmative.
    Your prepared statements will be in the record in their 
entirety. We will have a clock that will indicate a time for 5 
minutes. At 4 minutes, it will be green. The last minute, it 
will turn orange. And then, when the 5 minutes is up, it will 
turn red. That will be an indication to you that we would like 
you then to conclude your comments. Even though it may not be 
the complete testimony, the whole testimony will already be in 
the record.
    We will start with you, Mr. Syron. Why don't we start with 
you? There is a button on the base of the mic. Be sure to push 
it and have the mic close enough so that it can be picked up.

 STATEMENTS OF RICHARD SYRON, FORMER CEO, FREDDIE MAC; DANIEL 
  MUDD, FORMER CEO, FANNIE MAE; LELAND BRENDSEL, FORMER CEO, 
    FREDDIE MAC; AND FRANKLIN RAINES, FORMER CEO, FANNIE MAE

                   STATEMENT OF RICHARD SYRON

    Mr. Syron. Thank you, Chairman Waxman and members of the 
committee. Good morning. I appreciate the opportunity to 
testify today and address your issues of concern in light of 
the current financial crisis. As you know, I served as CEO of 
Freddie Mac essentially from 2004 to September of this year.
    Let me start with a very basic proposition. Freddie Mac 
was, is and, by law, must be a nondiversified financial 
services company, limited to the business of residential 
mortgages. Given the recent severe nationwide downturn in 
housing market, the only nationwide housing decline in housing 
values since the Great Depression, any company limited 
exclusively to that line of business alone would be severely 
impacted. As Treasury Secretary Paulson recently noted, given 
that GSEs were solely involved in housing, and given the 
magnitude of the housing correction we have had, the losses by 
the GSEs should come as no surprise to anyone.
    With respect to the housing market, the prolonged glut of 
credit certainly was one factor that contributed to the housing 
bubble and its subsequent collapse. Another important factor 
was the shift from a system in which mortgage originators held 
loans to maturity to a system in which mortgage originators 
immediately sold or securitized a loan and retained no risk. In 
more recent years, increasingly complex financial techniques 
were also applied to the process with the objective of 
minimizing, shifting, or, some believed, virtually eliminating 
risk.
    We all recognize that homeownership provides benefits and 
generates substantial social advantages beyond just shelter. We 
have learned the hard way, however, that the rapid expansion of 
homeownership is not without risk and ultimately not without 
cost if the choices made by individual homeowners are 
unaffordable.
    What was the role of Fannie Mae and Freddie Mac in the 
credit crisis? These institutions were established by Congress 
to promote liquidity, affordability, and stability in housing 
finance. They do so primarily by guaranteeing the timely 
payment of principle and interest on mortgages originated by 
banks in order to facilitate the purchase of those mortgages by 
institutional investors, thereby enabling banks to make new 
loans. Congress has reaffirmed this role for Fannie and Freddie 
many times, including quite recently.
    When the dramatic and widespread downturn in housing prices 
occurred, the pressures on Freddie Mac and Fannie Mae were 
enormous. The GSEs are a nondiversified business focused solely 
on residential housing in the United States. As the guarantor 
of almost half the home mortgages in the country, it is not 
surprising that these two firms would get hit hard by the 
biggest housing collapse in 75 years. This lack of 
diversification was extremely challenging for the GSEs, even 
though their credit standards were higher than other lenders.
    There has been a lot of attention in the media and 
elsewhere to the problems associated with the nontraditional or 
subprime market. There is no question that Freddie Mac has 
incurred losses associated with nontraditional loans. But, it 
is important to remember that Freddie and its sister 
institution, Fannie, did not create the subprime market, I 
think as the chairman said. Freddie was, in fact, a late 
entrant into the nontraditional, i.e. non-30-year-fixed-rate 
conventional market, such as Alt-A.
    The subprime market was developed largely by private-label 
participants, as were most nontraditional mortgage products. 
Freddie Mac entered the nontraditional slice of the market 
because, as the private lending sector shifted toward those 
type of loans, Freddie needed to participate in order to carry 
out its public mission of promoting affordability, stability, 
and liquidity in housing finance. In addition, if it had not 
done so, it could not have remained competitive or even 
relevant in the residential mortgage market we were designed to 
serve. Moreover, if you're going to take the mission of 
providing low-income lending seriously, then, by definition, 
you're going to take a somewhat greater level of risk.
    Freddie's delinquency rates and default rates, both overall 
and for each type of loan, were much lower than those of the 
market overall and were especially lower than for mortgages 
underwritten by purely private institutions, many of which were 
severely impaired for some of the same reasons as Fannie and 
Freddie. Every institution with significant exposure to 
residential mortgages has been negatively impacted by the 
generally unforeseen magnitude and volatility and rapidity in 
the collapse of the housing price market.
    Before I conclude, I just want to take a moment to recall 
the public mission of the GSEs. As everyone is aware, Freddie 
Mac is a shareholder-owned corporation, chartered for the 
purpose of supporting America's mortgage finance markets and 
operating under government mandates. We had obligations to 
Congress and to the public to promote our chartered purposes of 
increasing affordability, liquidity, and stability in housing 
finance, which included some very specific low-income housing 
goals. But, we also had obligations to our regulator to pursue 
our goals in a manner that was prudent and reasonable. At the 
same time, we had the fiduciary obligation to our shareholders 
that were identical to any other publicly traded company.
    Freddie Mac always worked hard to balance these multiple 
objectives, and for decades, the company was effective. There 
is much to be said about the success of the GSE model, and 
those successes should not be totally overlooked because of the 
current crisis. As Congress looks to the future of residential 
housing finance, the GSEs can and should play an important 
role.
    I would be pleased to answer your questions about my time 
at Freddie Mac and any lessons that might be learned. Thank 
you, sir.
    [The prepared statement of Mr. Syron follows:]

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    Chairman Waxman. Thank you very much, Mr. Syron.
    Mr. Mudd.

                    STATEMENT OF DANIEL MUDD

    Mr. Mudd. Mr. Chairman, Representative Issa, members of the 
committee, thank you all for the opportunity to appear before 
you this morning. My name is Daniel Mudd. I joined Fannie Mae 
in 2000, following a decade at General Electric. I served 
consecutively as chief operating officer and interim chief 
executive officer of Fannie Mae.
    In June 2005, the Board of Directors, with the approval of 
our regulator, asked me to stay on as CEO, complete the 
accounting restatement, work cooperatively with our regulator, 
remediate a number of control weaknesses, and restore the 
company's position and standing in the capital markets. The 
company made significant progress in these areas, returning to 
timely and current filings with the SEC, settling matters with 
OFHEO and the SEC, meeting housing goals, and earning $13.3 
billion of net income from 2005 through mid-2007. I also worked 
with Members of this Congress to support legislation passed 
into law in July to create a strong world-class regulator for 
the GSEs.
    As background, I believe the roots of this crisis go back 
to the enormous increase in consumer and commercial leverage in 
the 1990's. The trend built up through 2007, when the financial 
sector entered what most observers view as the worst conditions 
ever seen in the capital markets.
    The GSEs were chartered by Congress to provide liquidity, 
affordability, and stability to the mortgage market at all 
times. In fact, in the midst of the present turmoil, when other 
companies decided not to invest, the GSEs were specifically 
charged to take up the slack. This had worked in several 
recessions, the Russian debt crisis of 1998, the aftermath of 
9/11, but not--not--in 2008. The housing market went into a 
free-fall, with some predicting a decline now of as much as 30 
percent from peak to trough. A business model requiring a 
company to continue to support the entire market could not 
work.
    Through the spring and summer of this year, my colleagues 
and I worked with government officials, regulators, our 
customers in the banking system, housing advocates, and others 
to maintain what was really an excruciating balance between 
providing liquidity to keep the market functioning, protecting 
Fannie Mae regulatory capital, and advancing the interest of 
the company's owners. At the time the government declared 
conservatorship over the company, we were still maintaining 
regulatory capital in accord with all relevant standards, and 
we were still, along with Freddie Mac, the principal source of 
financing to the mortgage market.
    While I deeply respect the myriad challenges facing the 
Treasury Department and the regulator, I did not believe that 
conservatorship was the best solution in the case of Fannie 
Mae. I believe that more modest government support, basically a 
program something like the banks are now eligible for, would 
have maintained a better model. Admittedly, it would not have 
been a magic bullet, but this market seems to defy magic 
bullets, whether they are fired by the private sector or by the 
government.
    In any case, I think that is now water under the bridge, 
and the GSEs, like many other institutions, are stuck mid-
crisis. I would, therefore, advocate moving the GSEs out of no 
man's land. Events have shown--events have certainly shown me--
how difficult it is to balance financial, capital, market, 
housing, shareholder, bond holder, homeowner, public and 
private interests in a crisis of these proportions. We should 
examine whether the economy and the markets are better served 
by fully private or fully public GSEs. I hope we have a debate 
on the future structure of the housing finance market in the 
country before events themselves produce a fait accompli that 
answers this question.
    It is possible, I think, in all of this, to forget the many 
positive achievements of the GSEs. We finance tens of millions 
of homes to Americans of low to moderate income. We made 
mortgages fairer, more transparent, and available to a broader 
spectrum of society. We developed colorblind underwriting. We 
assured the banking system that their loans would garner a 
predictable price, around the globe, 24 by 7. When asked by 
Congress and the administration, we stepped up and provided the 
only source of funding for loans in high-cost areas and 
elsewhere.
    Let me end by suggesting that homeownership does remain a 
central dream for many Americans. I believe that, once the 
present crisis resolves itself, owning a home will again be a 
way for Americans to express confidence in their future.
    Thank you.
    [The prepared statement of Mr. Mudd follows:]

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    Chairman Waxman. Thank you very much, Mr. Mudd.
    Mr. Brendsel.

                  STATEMENT OF LELAND BRENDSEL

    Mr. Brendsel. Thank you, Mr. Chairman, Representative Issa, 
and other distinguished members of the committee. I am Leland 
Brendsel, and I was formally the chairman and chief executive 
officer of the Federal Home Loan Mortgage Corp., more commonly 
referred to as Freddie Mac. And I want to thank you for the 
opportunity to address this committee as you consider the 
future of the government-sponsored enterprises and their 
importance to housing finance system in the United States of 
America.
    I believe that we have had the best housing finance system 
in the world and that Freddie Mac and Fannie Mae have been 
vital to its success, and they are vital to its future. In 
particular, Freddie Mac and Fannie Mae have been instrumental 
in ensuring the continued availability of long-term fixed-rate 
mortgage loans. And I hope this hearing and future examinations 
will examine the critical importance of those mortgage loans 
and Freddie Mac's and Fannie Mae's essential role.
    Before I do go further, I want to provide a little 
information on my background. I joined Freddie Mac in 1982 and 
devoted 21 years of my life to it. I left Freddie Mac in June 
2003 after more than two decades of service, and I have not had 
any role in the company now for over 5\1/2\ years.
    I do feel very fortunate to have been the leader of such a 
great company with such an important public mission. I was 
raised on a family farm in South Dakota, attended public 
schools in the Sioux Falls area. And after that, I graduated 
from the University of Colorado and ultimately earned a Ph.D. 
in financial economics from Northwestern University in Illinois 
in 1974. I spent 8 years teaching and working as an economist, 
first at the Farm Credit Administration here in Washington and 
later at the Federal Home Loan Bank in Iowa.
    But, as I mentioned, I spent the bulk of my career at 
Freddie Mac. When I joined it in 1982, I served as Freddie 
Mac's chief financial officer, and then I assumed the role of 
chief executive officer in 1985. I was elected chairman of the 
Board beginning in 1989 at the time that Freddie Mac became 
publicly owned and listed on the New York Stock Exchange.
    By the time I left Freddie Mac in 2003, the secondary 
mortgage market had become a major source of stability and 
reliability for financing housing and homeownership. Indeed, 
this is a tribute to the wisdom of Congress in chartering 
Freddie Mac with the mission of increasing the availability and 
affordability of mortgage credit by tapping the world's capital 
markets.
    Today, many homeowners and the secondary markets certainly 
are in distress. Congress is rightly considering many proposals 
for restoring stability. And, in doing so, I hope that Congress 
will take steps, as it has in the past, to assure the continued 
availability and affordability of long-term fixed-rate mortgage 
loans. These mortgages have not contributed in any meaningful 
way to the present crisis, but their survival is in jeopardy 
because of it.
    Freddie Mac was chartered in 1970 by Congress to provide 
stability and liquidity to the secondary market for residential 
mortgages. When I began at Freddie Mac in 1982, the secondary 
market was an embryonic market, and the company was still a 
small participant in it. At that time, in 1982, savings and 
loan associations and thrift institutions were still the 
primary mortgage lenders, they were portfolio lenders, but many 
of them had recently failed or were failing. The housing and 
mortgage markets were in turmoil, and the homeownership rates, 
in fact, were declining at that time.
    A family trying to buy a home was faced with mortgage rates 
that swung between 13 and 17 percent alone for 30-year fixed-
rate mortgage loans over the course of 1982. Because there was 
not widespread access to the national financial markets, the 
availability of mortgages depended on the amount of local bank 
deposits that could be loaned. In addition, the mortgage 
application and underwriting process was arbitrary, 
inconsistent. There were large regional disparities in the 
mortgage market, and too frequently, the process disfavored 
minority and rural communities.
    During the 1980's and 1990's, Freddie Mac played a major 
role in addressing the deficiencies in the mortgage markets. 
Freddie Mac broadened the potential sources of financing for 
residential loans. We helped preserve the 30-year fixed-rate 
mortgage, which had fallen out of favor with many portfolio 
lenders. We drove down origination costs, made it more 
efficient. We improved the speed, reliability, and fairness of 
the underwriting process. And we increased access to mortgages 
for minorities and underserved communities. As a result, one of 
which I am proud, by 2001, 2 years before I left, Freddie Mac 
had answered Congress's call by financing homes for 30 million 
Americans.
    I still care deeply about Freddie Mac and its mission, and 
I share the committee's concern about how to best protect 
America's homeowners and communities. I thank the committee for 
the opportunity to be here today.
    [The prepared statement of Mr. Brendsel follows:]

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    Chairman Waxman. Thank you very much, Mr. Brendsel.
    Mr. Raines. Wait a second, until the bell stops. OK, now.

                  STATEMENT OF FRANKLIN RAINES

    Mr. Raines. Thank you. Chairman Waxman, Mr. Issa, and 
distinguished members of the committee, my name is Franklin 
Raines. And I would like to thank the chairman for accepting my 
longer written testimony as part of the record.
    I've worked in the financial services and investment 
industry for 27 years. I have had 12 years' experience in 
investment banking and 11 years of experience in the mortgage 
industry as vice chairman and chairman and CEO of Fannie Mae. I 
was appointed chairman and CEO by an independent board of 
directors, with 13 of its 18 members elected by public 
shareholders.
    In my 6 years as chairman and CEO, Fannie Mae provided over 
$3.4 trillion of financing, serving more than 30 million low-, 
moderate- and middle-income families. The company's revenue, 
book of business, and economic value more than doubled during 
this period, and the stock outperformed the S&P 500.
    On December 21, 2004, I announced my retirement from Fannie 
Mae, and I've had no management role at the company since that 
time. My experience in financial services, along with my tenure 
as the Director of the Office of Management and Budget, will 
form the basis for much of my testimony today.
    The current financial crisis has a variety of complex 
sources. However, in my view, it did not result from Fannie 
Mae's recent risk management decisions or from its accounting 
practices 4 years ago. There is no doubt that the crisis 
afflicting the national and international financial system is 
without precedence since the Great Depression. Yet, the Federal 
Government's response, while large in dollars, has had limited 
success.
    Financial market convulsions are not a new phenomena. The 
past quarter-century alone has witnessed the junk bond 
meltdown, the Internet stock implosion, and several others, 
including the present mortgage and credit derivatives crisis. 
These separate events have many features in common that I have 
outlined in my written statement.
    Fannie Mae managed to avoid the major causes of the current 
crisis through 2004. The company had significant experience 
during the 1980's and early 1990's with the impact of falling 
housing prices on the value of mortgages. The company was also 
quite familiar with the different credit performance 
characteristics of mortgages with certain features, such as 
adjustable rates or negative amortization; with certain 
underwriting approaches, such as no documentation of assets or 
income; and with certain borrower types, such as marginal 
credit or housing speculators. The company undertook the 
quantitative research in the 1990's that showed all these 
features created greater credit risk.
    As a result, Fannie Mae developed tools to evaluate and 
manage the new types of mortgages that had begun to come on the 
market in the early part of this decade. As subprime and Alt-A 
loans began to grow as a share of the overall mortgage market, 
the risk management restrictions Fannie Mae had in place 
limited the company's involvement with those products. And, as 
a result, in 2004, the company's share of the overall secondary 
market plummeted.
    The company's public disclosures demonstrate that the 
credit risk profile of Fannie Mae changed after 2004. Fannie 
Mae, like a lot of smart investors, expanded its appetite for 
credit risk. However, it is important to note that, rather than 
lead the market toward looser credit standards, Fannie Mae 
generally resisted pressures to significantly lower its 
standards until about 2006.
    There have been many assertions by commentators about the 
role of affordable housing lending regulation and financial 
services regulators as causes of the current financial crisis. 
There was no regulation that forced banks or GSEs to acquire 
loans that were so risky they imperiled the safety and 
soundness of the institution. The riskiest loans in the system 
tended to be originated by lenders not covered by the Community 
Reinvestment Act or the GSE affordable housing goals. On the 
other hand, the absence of consumer protection regulation 
allowed many bad loans to be made to the detriment of 
consumers.
    The question remains, why did the regulators of banks and 
the GSEs not criticize or restrict the acquisition of risky 
loans by regulated institutions? It is remarkable that, during 
the period that Fannie Mae substantially increased its exposure 
to credit risk, its regulator made no visible effort to enforce 
any limits. This was true even though the regulator only 
oversaw two companies, had greatly increased its budget, and 
was then enforcing a form of quasi-conservatorship on the 
company.
    Preventing future crises in the financial services industry 
and their attendant damage to consumers will require three 
things, in my judgment. First, executives will have to exercise 
greater discipline in managing risk. Second, there needs to be 
a better-informed regulation of large, leveraged financial 
entities. And third, there must be greater protection of 
consumers from financial products they cannot be reasonably 
expected to understand.
    Finally, Mr. Chairman, the GSE model is not perfect. 
However, if we maintain the public goal of marshalling private 
capital to achieve the public purpose of homeownership and 
affordable rental housing, it will be hard to find a model that 
has more benefits and fewer demerits than the model that worked 
reasonably well for almost 70 years at Fannie Mae.
    It has been almost 4 years since my decisions have had any 
impact on Fannie Mae, the housing market, or the global market 
for mortgages and mortgage-backed securities. Even so, I 
continue to believe in the mission Congress gave to Fannie Mae 
and Freddie Mac. I also believe these companies can play an 
important role in helping to solve today's mortgage financing 
crisis.
    Thank you, Mr. Chairman. I would be happy to answer any 
questions the committee might have.
    [The prepared statement of Mr. Raines follows:]

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    Chairman Waxman. Thank you very much, Mr. Raines. We 
appreciate your testimony.
    Before we go to questions by the members of the committee, 
I would like to ask unanimous consent that all Members may be 
permitted to enter an opening statement into the record. And, 
without objection, that will be the order.
    By a previous agreement with the minority, I would ask 
unanimous consent that we start off the questioning with 12 
minutes on the Democratic side and 12 minutes on the Republican 
side before we then go to the 5-minute rule. And, without 
objection, that will be the order.
    The Chair, starting the questions for our side, would yield 
10 minutes to the gentleman from Massachusetts, Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman.
    And before I start my questions, I just want to take one 
moment and appreciate your services here as chairman. I share 
with Mr. Issa the observation that you have lifted the stature 
of this committee substantially, and all the Members and the 
staff are grateful for that.
    When you were in the minority as the ranking member, you 
certainly made every attempt and were successful in refocusing 
the Congress and the committee on important matters. As 
chairman, you have focused on a number of important matters 
that were essential to the country and to the Congress. Now, 
you bring your duties and your skills over to the Commerce 
Committee at our loss but, I think, the Nation and Congress's 
benefit.
    And so we thank you very much, and I've been proud to serve 
with you.
    Chairman Waxman. The gentleman will be given the full 10 
minutes. [Laughter.]
    Mr. Tierney. I thank all of you gentlemen for being here 
this morning and working with us on this.
    Mr. Mudd, if you might, I would like to ask you a couple of 
questions, in particular about a document that we found in your 
internal files at Fannie Mae. It says, ``A single family 
guarantee business facing strategic crossroads,'' dated in June 
2005. And it is listed as confidential and highly restricted.
    I'd like to get your responses to it. We have some slides 
up there, if you find that helpful, sir.
    The first slide in this says, ``The risk in the environment 
has accelerated dramatically,'' and the bullets under that say 
that there has been a proliferation of higher-risk alternative 
mortgage products, there is a growing concern about housing 
bubbles, there is a growing concern about borrowers taking on 
increased risk and higher debt, and lenders have engaged in 
aggressive risk layering.
    The next slide, if we switch over on that, says the growth 
in adjustable-rate mortgages continues at an aggressive pace. 
And here the presentation says that there has been an emphasis 
on the lowest possible payment, and homes are being utilized 
more like an ATM.
    It appears, Mr. Mudd, that you were aware of both the 
accelerating risk in this environment, as well as the concerns 
about housing bubbles as far back as 2005. Is that correct?
    Mr. Mudd. Yes.
    Mr. Tierney. The next slide says, ``We are at a strategic 
crossroads, and we face two stark choices. One is stay the 
course, and the other is meet the market where the market is.'' 
The next slide shows the benefits of staying the course. It 
says, ``Fannie could maintain our strong credit discipline, it 
would protect the quality of the book, it would intensify our 
public voice on concerns about the housing bubble and 
accelerating risk, and, most importantly, it would preserve 
capital.''
    The next slide shows the other alternative, meet the market 
where the market is. In other words, you would meet current 
consumer and customer demands for alternative mortgage 
products. This was viewed as a revenue opportunity and a growth 
area. But, under the alternative, you accept higher risk and 
higher volatility of earnings.
    And the next slide puts these pros and cons side by side. 
If you stay the course, you'll have lower revenues and slower 
growth, but you will have more security. On the other hand, if 
you invest in riskier mortgages, you have potential for high 
revenues and faster growth. But, as the slide says, you also 
have increased exposure to unknown risks.
    Based on these slides, Mr. Mudd, you faced a fundamental 
decision in 2005: Do you keep your focus on the more secure 
fixed-rate mortgages but potentially lose out on some profits, 
or do you compete with private lenders by entering into riskier 
sectors of the market?
    It doesn't seem that there was any real question that you 
were aware that you were increasing your risk significantly by 
entering the market. Is that correct?
    Mr. Mudd. No, it is not exactly correct, Congressman.
    Mr. Tierney. Now, the document indicates that you were 
aware that you were increasing your risk. You're saying that 
you weren't aware you were increasing your risk?
    Mr. Mudd. Well, if I might give you a response in context, 
the process and what we were doing at that time was thinking 
through what our various alternatives were, in terms of the 
marketplace. The choice, as you do in corporations or other 
institutions, was presented relatively starkly in order to 
identify what the key issues were, but, in fact, the real 
choice that was made on the ground was not, do you do A, do you 
do B, do you do black, do you do red. The choice was, rather, 
what are the pros and cons of this decision, to make clear what 
the choices were.
    Mr. Tierney. And that is reflected in that document.
    Mr. Mudd. Yes, sir.
    Mr. Tierney. And one of those is that you are increasing 
your risk significantly by entering that market, if you were to 
enter that market.
    Mr. Mudd. If you were to make the full B decision--and that 
is not, in fact, what we did. So, your choice was, how far do 
you adjust from where you are to meet the market, ultimately?
    Mr. Tierney. It looks as if you made the choice to enter 
the alternative market. But, let me put up two more slides, and 
we'll discuss it.
    The first slide we are going to put up is the 
recommendation that was made in 2005 based on all the factors 
you just talked about. It starts by admitting that 
realistically we are not in a position to meet the markets, and 
that is because you had less experience with the riskier loans 
and you didn't have enough data to evaluate the credit risk. 
The slide says, ``Therefore, we recommend that we pursue a 
stay-the-course strategy.'' However, the slide at the bottom 
recommends that you dedicate resources and funding to, 
``underground efforts'' to develop a subprime infrastructure 
and modeling for alternative markets.
    The last slide says this: ``If we do not seriously invest 
in these underground-type efforts, we risk becoming a niche 
player, becoming less of a market leader, and becoming less 
relevant to the secondary market.''
    So, Mr. Mudd, I reviewed your written statement, and I 
listened to what you had to say here today. You didn't seem to 
take any acknowledgement that you may have made some mistakes. 
And looking back in hindsight and directed by the slide that we 
just saw, you may not have led the market--and I really believe 
that is true; you didn't lead the market into the situation--
but you faced a choice of whether to enter it, and it appears 
to me that you made the choice to enter that market, and that 
was a wrong decision.
    Do you agree that was the wrong decision to make?
    Mr. Mudd. No, sir. And what I would point to on this slide 
is the phrase that says we need to invest in these efforts if--
and if the market changes prove to be secular. And the context 
I would point out to you on that was: We weren't sure. We 
weren't sure whether those changes in the marketplace were 
secular or whether they were cyclical, was it temporary or was 
it a permanent change in the market.
    And we thought it was important that we couldn't afford to 
make the bet that the changes were not going to be permanent. 
We couldn't afford to make the bet that somebody who has a 
subprime mortgage, who, at the end of the day, is simply an 
American with a credit blemish, would never be able to get a 
loan in the country if the Fannie Mae approach, Fannie Mae 
standards, Fannie Mae qualities couldn't be applied there.
    So, when we looked at the market, we made a tradeoff 
between the choices, and we said, no, we are going to focus 
back on our bread and butter, but we're going to do this work 
to make sure we understand these new emerging markets and we 
can develop a better view of them.
    Mr. Tierney. But, in actuality, starting in 2005, you 
actually purchased hundreds of billions of dollars of those 
loans, correct?
    Mr. Mudd. No, sir. I think it is important in that to break 
out the various categories of loans, because, in your question, 
you were asking about ARM loans, which were adjustable-rate 
mortgages, which many of us have; Alt-A loans, which are an 
alternative to an A loan, different documentation than an A 
loan; and subprime loans, which are a different matter 
entirely.
    Going back through those, 85 percent of the book at Fannie 
Mae was standard A loans, the basic loans that had been done 
throughout time. A percentage around 10 percent or so was in 
the Alt-A category. And a much smaller percentage that never 
amounted to more than a percent or two of this total book was 
actually in subprime.
    Mr. Tierney. I think, Mr. Mudd, that it's important that we 
make a distinction between the Alt-A and the subprime on that. 
And I think because some of the rhetoric that we have heard 
back and forth here, the subprime, as you said, was a very 
small part of the portfolio?
    Mr. Mudd. Yes.
    Mr. Tierney. All right. Explain for us the Alt-A. You 
didn't really get any credit, did you, on meeting your goals 
for affordable housing by buying the Alt-As because, in my 
understanding, they are not really clarified as to just what 
the basis of those loans are?
    Mr. Mudd. I'm sorry. I missed the end of your question.
    It would depend on whether the actual character of the loan 
met the socio-economic categories that would count toward a 
goal per se. On their face, they might or might not count. The 
Alt-A loans were essentially a subset of overall A loans. As I 
indicated, Alt-A means an alternative to an A loan. So, they 
bear many of the same characteristics. Otherwise, they 
qualified or counted--they might or might not count toward 
those affordable housing goals.
    The market produced those loans, and Fannie Mae's 
participation in those loans, in fact, goes all the way back to 
2000. We were doing, starting in the year 2000, $10 billion, up 
to 2003 about $100 billion, of Alt-A loans, down to $79 billion 
in 2005. I could go on. But, those loans varied in terms of 
what the market was producing, as did the balance between 
fixed-rate loans.
    Mr. Tierney. June 2005 was when you decided to go into Alt-
A's a little more heavily, right?
    Mr. Mudd. We decided to examine the market more carefully. 
In 2004, we were doing a rate of about $63 billion. In 2006, we 
were up to $106 billion, and in 2007, $198 billion.
    Mr. Tierney. Up in 2005. And in this year, substantially 
the largest part of your losses come from your Alt-A loans, 
right?
    Mr. Mudd. I am not completely up to date on the figures, 
Congressman. But, I think that, of a single segment of the 
book--the largest losses come from Alt-A. But, the predominance 
of the book, the old A rate, 85 percent of the book is also 
producing about half of the loans, as the housing market has 
gone down by 35 percent.
    Mr. Tierney. Let me sum up. I don't think that Fannie Mae 
or Freddie Mac caused the slide, but the facts also indicate 
that you bear some responsibility for aggravating it, some 
responsibility for accepting those risks, knowing that those 
risks were not insignificant--in fact, they were substantial--
and plunging into that market, sort of following the Wall 
Street gang into that market. I think we are all going to pay 
the price for that, and we are going to have to deal with that 
now.
    Chairman Waxman. Thank you, Mr. Tierney.
    Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman.
    I look at all four of you, and the one thing that I seem to 
find is that all four of you still seem to be in complete 
denial that Freddie and Fannie are in any way responsible for 
this. Your testimony says you are not accepting any blame for 
this at all. You are either standing behind the mandate of the 
Congress or the mandate of your stockholders, perhaps the 
mandate of your bonus packages.
    And you are telling us that, in fact, everyone was doing 
it. Your whole excuse for going to risky and unreasonable loans 
that are defaulting at an incredibly high rate is, ``Everyone 
is doing it. If we don't do it, we will be left out.'' Well, I 
am sorry that you wanted to be the most popular girl in the 
school, and you forgot what your mother told you about your 
activities.
    Mr. Mudd, you seem to have the clearest reason. And with 
Mr. Tierney's questions, you seem to be able to clearly 
articulate something I would like to have all four of you 
acknowledge today: that, in fact, there are compliant A 
conventional--I met the criteria loan--and then there were all 
others, Alt-A and subprime being the two best known of those. 
Is that correct?
    Mr. Mudd. What I was hoping to describe, Congressman, was 
that the loans exist in a spectrum. And at the, sort of, core, 
heart and soul of the spectrum would be A loans. And the market 
operates, if you might imagine, in a series of concentric 
circles around that. The further out you go, the riskier the 
loans are.
    Mr. Issa. What I would like to do today--and we'll grapple 
with this for the next 2 years--is, Alt-A and subprime are 
substantially the same. You get credit if they are in 
underserved areas. And, in fact, since my understanding of a 
subprime is, if you have a FICO score of less than 660, you are 
essentially subprime, and a great many of Alt-A not only had a 
credit score of less than 660's but they didn't tell you what 
their income was, or they told you, but they didn't prove it.
    Now, that creates an Alt-A that is an Alt-A, but it is also 
a subprime. Isn't that true?
    Mr. Mudd. The way I would answer the question, Congressman, 
is that the combination of features in the loan defines the 
type of loan it is. So, yes, in the market, there are Alt-A 
subprime loans, and in the market, there are high-FICO subprime 
loans. Any of those things is possible, depending on the 
combination of the borrowers and the product features.
    Mr. Issa. So, it is relatively fair, for those of us who 
don't do this every day, that this is a distinction without a 
real difference, relative to the default, relative to the 
problem, to the extent that these practices are part of the 
problem. They are reasonably equally part of the problem, 
because today they are equally part of the default; is that 
reasonably fair?
    Can I get a consensus that--remembering that none of you 
said that you were part of the problem, but they are defaulting 
at substantially the same rate. Is that correct?
    Mr. Mudd.
    Mr. Mudd. I believe that it is more likely that the more 
variable features or the more credit characteristics that apply 
to a loan, those things can aggregate to increase the risk in 
that loan, yes.
    Mr. Issa. Mr. Raines, in your testimony, you said that 
Fannie Mae did not contribute significantly to the housing 
collapse. You acknowledge that your former company holds $300 
billion of Alt-A, which do not verify the borrower's income.
    Now, if those are defaulting and, in fact, were defaulting 
at a time in which unemployment was still at a historic low, 
then wouldn't the failure to verify income be a leading part of 
why you would have a default in a loan that, if the person's 
income was, in fact, honestly stated, they would be able to 
maintain? Meaning, if they didn't lie, they would make the 
payments and they wouldn't be in default. Isn't that true?
    Mr. Raines. It is a very complex question that you----
    Mr. Issa. Trust me, I spent a lot of time making sure it 
was as simple as can be.
    If, in fact, unemployment was still at a historic low level 
when Alt-A's began defaulting but housing had stopped its 
precipitous rise, wouldn't you say, by any reasonable 
assessment, that, in fact, the liars getting loans was a 
significant part of it? Because those people, records are 
showing more and more, counted on a rise in value to make those 
loans, rather than a falsely stated income.
    Mr. Raines. I think that is correct. I think that the 
experience with Alt-A loans in that period--again, this is 
after I had left--and the period 2006-2007 was affected by 
fraud, where people did not tell the truth about their assets 
or their income and they obtained mortgages that they otherwise 
wouldn't have qualified for.
    Mr. Issa. So, here, today, if we take with us one take-
with, if you will, wouldn't it be fair to say, in retrospect--
and I appreciate the fact that you had mixed signals sent from 
Congress and others. If you had it to do all over again, 
particularly Alt-A, but to a certain extent subprime, wouldn't 
you, if you could have, ensured that people who were looking 
for a home greater than, in retrospect, they could afford, if 
it didn't go up in value, had been sent back to go find a home 
they could afford rather than the one they chose? Isn't that at 
the root of why we are here today?
    You know, the demise of various financial institutions 
didn't start until the default started. We can appreciate the 
default is the beginning of this problem. So if default is the 
beginning of this problem, and default began--and I was with 
Mr. Kucinich in Cleveland well before this became described as 
a crisis: unemployment low, housing prices simply no longer 
going up, defaults begin to escalate.
    In retrospect, would each of you say, both as observers and 
almost current CEOs, that, in fact, had people been told to go 
back and find a home they could better afford, thus not 
ratcheting down people to a liar mortgage, that this crisis 
could have been reduced or averted?
    And I will take a ``yes'' from everyone and walk away 
happy.
    Mr. Brendsel. I would like to comment on that.
    Mr. Issa. Although I will take first, the yeses.
    Mr. Brendsel. I think the failure to underwrite a mortgage 
loan properly is certainly at the core of what could be default 
on that mortgage loan. So, the question is, to what are the 
underwriting requirements?
    So, certainly making a mortgage loan to someone that can't 
afford that mortgage loan or who might be surprised by big 
payment shock down the road, a lender or investor in that 
mortgage loan has to be very cautious about that and, in my 
view, should do everything they can to at least educate the 
marketplace as to what is a sound mortgage loan and what is 
not.
    With regard to documentation, that is a second question as 
to failure to document or to verify someone's income, which, 
again, I think a responsible lender should do.
    Mr. Issa. Mr. Raines, would you concur with that?
    Mr. Raines. I concur with what Mr. Brendsel just said, that 
underwriting standards, proper underwriting standards could 
have avoided many of the losses that were experienced on loans 
that were originated in 2005, 2006, and 2007.
    Mr. Issa. Would that pretty well summarize the other two?
    We are looking back to make sure this doesn't happen again. 
Generally, those are the lessons we need to take with us for 
future legislation and messages to your former organizations.
    Is that right? Is it?
    Mr. Mudd. If you could go back and look at the loans that 
were made and pick out the ones that are delinquent or 
defaulted or too close to the loan-to-value ratio, yes, 
absolutely.
    Mr. Issa. Thank you.
    I reserve the balance of my time.
    Chairman Waxman. Mr. Towns, you are recognized for 5 
minutes.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Also, let me join in saying that it has been a delight 
working with you. And, of course, I am happy to know that you 
are not leaving the Congress, and we will still be able to 
continue to work with you, probably in a different capacity, of 
course. So, again, you provided excellent leadership, and you 
have done a lot of major things for this committee, and, of 
course, we are very grateful for that. We look forward to 
seeing you on the other committee.
    And, also, let me thank you for holding this hearing. I 
think it is very, very important that we have this hearing.
    Let me just begin by saying, since the crisis started, I 
just want to ask all of you, we have heard some people claim 
that poor people are to blame for this. That is the problem, 
they are saying. And the way this argument goes, the Federal 
Government forced the banks to give mortgages when they 
shouldn't have--this is what they say--to people who were not 
creditworthy, then forced Fannie Mae and Freddie Mac to buy up 
those bad mortgages.
    And you are the experts here. Is that the main reason that 
Fannie Mae and Freddie Mac had to be taken over, because they 
made too much financing available to low-income homeowners? Is 
that the problem?
    Let me just run right down the line.
    Mr. Syron. Sir, I think the main reason for the problems 
with Freddie Mac and Fannie Mae, these are organizations that 
were not diversified and faced the most violent correction and 
the largest correction in 75 years in housing prices, which is, 
we were in the business of ensuring housing prices, in effect, 
when that happened.
    I would think that it wasn't mostly trying to do things for 
poor people. I do think that we have to realize that we need a 
balanced housing program. And I personally am in favor of, in a 
progressive sort of way, good rental housing that people can 
have while they are getting ready to become homeowners.
    Thank you, sir.
    Mr. Towns. Mr. Mudd.
    Mr. Mudd. I would just observe, Congressman, that when the 
market goes down, it is the folks who are the closest to the 
margin who get hurt first and longest every time. And that is 
what has produced the great human tragedy of this, which is the 
crisis of foreclosures in a lot of the towns and cities across 
the country.
    Fannie Mae's business was to be able to provide lending all 
across the spectrum of affordable housing. And, as part of 
that, you had individuals who are in those communities. And 
now, and during my time, the company is doing everything it 
could to try to stem that wave of foreclosures and difficulties 
in those communities.
    Mr. Towns. Mr. Brendsel.
    Mr. Brendsel. As I testified, I was CEO of Freddie Mac for 
a long, long period of time. I cannot recall ever being forced 
to make or to purchase a mortgage loan that I didn't feel, as a 
matter of policy at Freddie Mac, was a good mortgage loan, a 
sound mortgage loan, and an attractive mortgage loan for the 
home buyer or the owner of an apartment building.
    Mr. Towns. Mr. Raines.
    Mr. Raines. I do not believe that poor people are the cause 
of the current financial crisis, nor do I believe defaults on 
the loans that they might hold is the cause. They have much too 
small a share of the market. Most of the losses, as I read the 
record, have come on mortgages that were made to middle-class 
and upper-middle-class people, not to poor people.
    And I do not believe that community reinvestment loans are 
the cause of the concern, and apparently neither does the 
comptroller of the currency nor the chairman of the Fed, each 
of whom have said that the act requirements had no role in the 
current financial crisis.
    So, I think I agree with you that it is just simply untrue 
to blame the current financial crisis on low-, moderate-income 
people or on the act or on Fannie Mae's affordable housing 
goals.
    Mr. Towns. Let's face it, we do have a mess. What do we do 
now? What do you propose?
    Mr. Syron. I think what we need to do is first be 
cognizant, as some people have said, that if you want to have 
long-term fixed-rate mortgages, which the United States as an 
industrial nation, is pretty unique as having, you need to have 
something like the GSEs. I think it is worth doing a very 
thorough review of how these organizations are structured and 
see what we can learn from this and how we can capture the 
benefits of the long-term fixed-rate mortgage and ameliorate 
some of the concerns that come out of being, for example, a 
mono-line company.
    Mr. Towns. Mr. Mudd.
    Mr. Mudd. Sir, my observation would be that there are, kind 
of, three tiers of homeowners out there right now. There is a 
tier of folks who are continuing to make payments, continuing 
to stay in homes. To get ahead of the problem there, things 
that Congress or these companies or the financial industry can 
do is to reduce the rates and reduce the monthly payments. 
Perhaps even using the Tax Code would be helpful in avoiding 
that segment becoming a problem.
    There is a second tier who are folks that are maybe or 
maybe not making their payments, struggling but staying in the 
homes. That group needs not only the reduction in the monthly 
payments but probably some restructuring, such as, say, balloon 
note or reduction in principal.
    Unfortunately, there is also a set of folks who are already 
in the process of default and foreclosure. And my 
recommendation there for society is we do everything we can to 
keep them in those homes--government relief programs, 
charitable relief programs, providing a conversion from 
ownership back into rental. Those types of things are probably 
going to be most successful.
    So, I think you have to attack the problem, because it is a 
little different depending on the type of homeowner you are 
addressing.
    Mr. Brendsel. My response, to answer the question, would be 
I think, first, in agreement with Mr. Mudd, we need to take 
action to reduce the rate of mortgage home foreclosures. And, 
really, what results ultimately from that is that cascading 
effect on home prices and dumping of homes on the real estate 
market. So, I think some careful review of foreclosure 
practices, loan workout practices and so forth, mortgage 
modification practices by all lenders and servicers and owners 
of these mortgage loans is extremely important. Our experience 
at Freddie Mac at a much earlier time was it is really 
important to the stability of the housing market as to how one 
reacts to it in a time of distress and increase in mortgage 
loan defaults.
    Longer term, going forward, I think actions there need to 
look at, first, how to regulate better the origination 
practices in the country. I think they are doing spotty 
regulation over time as to the types of mortgage loans that get 
made, how they get made, the origination practices, and so 
forth.
    Part of that goes to the definition even as to what is a 
subprime mortgage loan, what is covered under HOPE and what is 
not and all that. And I do think that there are parts of this 
market in terms of the origination practices that were really 
very flawed.
    Finally, as I said explicitly in my testimony, I think one 
certainly needs to review, as part of the work of this 
committee and others, the appropriate structure of Freddie Mac 
and Fannie Mae and the regulation of them. I am absolutely 
convinced that preserving a viable fixed-rate mortgage market 
in the United States is critical to this Nation and that 
Freddie Mac and Fannie Mae, as government-sponsored enterprises 
with this public mission, relying on private capital is 
essential to it.
    Mr. Raines. I agree with much of what has been said, and I 
think there are four steps that--or, really, five steps that 
need to be taken to resolve the overall financial crisis but 
particularly with regard to housing.
    Step No. 1 is we have to provide financing to the system. 
The system is frozen up, piecemeal. The administration and the 
Fed have begun to provide financing, for the good and bad. That 
needs to expand.
    Second, we need to separate the good assets from the bad 
assets and recapitalize financial institutions, such as Freddie 
Mac and Fannie Mae, but also the banks and others. They need to 
recognize that the bad assets are bad assets and separate them, 
so people can look at these institutions without having to 
guess what their real financial condition is. They need to be 
recapitalized because the bad assets--you need to replace that 
capital.
    The third step is to work out the bad assets. To me, I have 
been stunned at the reluctance to actually work out these 
millions of loans because houses, as assets, are depreciating 
assets. An empty house can overnight become worthless as people 
come in and strip out the copper, take out the plumbing, remove 
other things. The only thing you can do with that home is tear 
it down. To me, it is a crime that we are not investing funds 
to keep people in these homes. It is too late to worry about 
moral hazard with regard to these loans.
    The last two things relate to regulation. We need to have 
more extensive regulation of big, leveraged financial entities, 
whether they are called GSEs or banks or insurance companies or 
hedge funds, whatever their name. If they are big enough to 
threaten the economy, there has to be intelligent regulation.
    And the last point, there needs to be regulation to protect 
consumers. There is no way that the average consumer can 
understand the documents that are placed in front of them when 
they get a mortgage. I know I can't, and I have tried. I made 
it through one time, and I got to all but one that I could 
understand. That one, to this day, I don't know what it said.
    And every day we are asking ordinary consumers to 
understand negative amortization, to understand what it means 
for them to have a subprime versus a prime loan, to understand 
a two/30 mortgage. It is impossible for the average person to 
keep up with this. We need to have more rigorous protection of 
consumers in the mortgage market.
    Mr. Towns. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Edolphus Towns follows:]

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    Chairman Waxman. Thank you, Mr. Towns.
    I would like to request Members, if you have an open-ended 
question, to ask it in the beginning rather than at the end.
    Mr. Mica.
    Mr. Mica. Thank you, Mr. Chairman.
    We have before us some of the perpetrators of the financial 
meltdown of our country. It is interesting how the committees 
operated. If you want to see where we are going today, read 
today's Washington Post. Commend the staff working diligently 
with the Washington Post to see where they are trying to lead 
the public. The committee tried to lead the public first in its 
Wall Street's fault. Today, we are going to concentrate on 2005 
forward, or 2004 forward. But, you have also heard some of the 
perpetrators, most recently named here, of our financial 
downfall blame it on somebody else. And Mr. Raines, of course 
his hands are clean, and he is telling us how to behave in the 
future.
    Just for the record, let me read from Investor Daily a 
different take on this: ``Fannie and Freddie, the main vehicle 
of Clinton's multicultural housing policy, drove the explosion 
of the subprime housing market by buying up literally billions 
of dollars of substandard loans, funding loans that ordinarily 
wouldn't have been made, based on much time-honored notions as 
putting money down, having sufficient income, and maintaining a 
payment record indicating creditworthiness.''
    With all the old rules out the window, Fannie and Freddie 
gobbled up the market. Using extraordinary leverage, they 
eventually controlled 90 percent of the secondary market 
mortgages. Their total portfolios top $5.4 trillion, half of 
all U.S. mortgage lending.
    They told you that they were following Wall Street. Mr. 
Raines mentioned, just in his little commentary to us, that we 
had to have good underwriting standards. Actually, if we go 
back and look at some of the underwriting standards, they start 
deteriorating under the Clinton administration. But, we don't 
want to talk about that today.
    Mr. Raines, you were there when Mr. Cuomo decided to lower 
the reserve from 10 percent to $2.5 billion. That was a little 
bit of lowering some of the standard. And then you came and 
testified before Congress that the reserves were adequate 
before you left.
    Mr. Raines went on to say in 1999--let me read this quote 
from September 30, 1999. ``Fannie Mae has expanded 
homeownership for millions of families by the 1990's by 
reducing down payment requirements. `I guess that wouldn't be 
lowering standards,' said Franklin Raines, Fannie Mae's 
chairman and chief executive officer.'' And continue to quote, 
`` `Yet, there remain too many borrowers whose credit is just a 
notch below what our underwriting has required who have been 
relegated to paying significantly higher mortgage rates than 
the so-called subprime market.' ''
    Mr. Raines was indeed part of the problem. Mr. Raines was 
also found that, under his watch, the Office of Federal Housing 
Enterprise Oversight, regulating the body of Fannie Mae, found 
that Mr. Raines, under his directorship, he received $50 
million in overstated--and he overstated earnings by some $50 
million--is estimated to gain huge bonuses.
    Mr. Raines, I have some of your compensation here. Could 
you tell the committee how much compensation that you received 
from 1998 through the time you left? Bonuses, compensation, 
benefits.
    Mr. Raines. I don't have that.
    Mr. Mica. Would you say it is $90 million?
    Mr. Raines. OFHEO has estimated the number as $90 million.
    Mr. Mica. And when you found that, under your leadership, 
that some of these factors had been fudged--well, first of all, 
the two fellows over here--Mr. Syron, you just left in 
September.
    Well, let's go back to Raines. We said that, 2004, you are 
still getting bonuses. In 2008, so far, you have gotten 
$2,085,000--that is just year to date--in payments from Fannie 
Mae. Is that correct?
    Mr. Raines. That is what I am given. The number I think you 
are referring to is a result of the settlement I had with 
OFHEO.
    Mr. Mica. It was a neat settlement, too, because you agreed 
to donate some of your stock rather than take the proceeds from 
the stock. Was that part of the settlement?
    Mr. Raines. That is part of the settlement.
    Mr. Mica. That was pretty clever, because you had about a 
1\1/2\ in stocks. But, if we get your tax returns, you donated 
that and then took an exemption for that. Is that correct?
    Mr. Raines. I didn't file tax returns for 2008. No.
    Mr. Mica. I am talking about your settlement with--I need 
an additional minute.
    Mr. Issa. I will give the gentleman a minute.
    Mr. Mica. So, again, I know what you did. The settlement, 
you really didn't pay anything. You probably took a tax 
deduction to deduct the amount that you said you were donating, 
and then the insurance company actually paid the fine. Fannie 
Mae's insurance paid the fine that was levied on you. Is that 
correct?
    Mr. Raines. There was no fine.
    Mr. Mica. There was $3 million that was paid by the 
insurance. We can call it whatever you'd like.
    The last thing--I don't have a lot of time here--is this is 
the bill Mr. Shays introduced in 1992 to further regulate some 
of the practices that were going on at Fannie Mae. And I know 
you helped to kill this. I was one of Mr. Shays's cosponsors. 
$175 million was spent in lobbying from 1998, a good portion of 
that under Mr. Raines' reign.
    Is that correct?
    Mr. Raines. I am not familiar with that number, no, sir.
    Mr. Mica. But, you are familiar with the lobbying 
information that you had from 1998 until you left in 2004.
    Mr. Raines. Fannie Mae did have lobbyists, yes, sir.
    Mr. Mica. And if I find some documents that showed you 
tried to influence killing legislation that would have 
regulated Fannie Mae, but that documentation doesn't exist?
    Chairman Waxman. The gentleman's time has expired.
    Mr. Mica. I want him to answer that last question.
    Chairman Waxman. There is a pending question, and the 
gentleman will be given an opportunity to answer it.
    Mr. Raines. I have no idea what documentation you have. 
Fannie Mae, like any other corporation owned by shareholders, 
came to Congress and expressed its views. And we have done that 
consistently in another committee where I've had the 
opportunity to testify many times, and that is a matter of 
public record.
    Chairman Waxman. The gentleman's time has expired.
    Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Maybe I should make an observation that I thought the 
purpose of this hearing would be to uncover the potential 
causes of the real estate disaster in the country, but it seems 
we are going over testimony that I have heard in another life 
before the Financial Services Committee.
    And I suggest, if the members of this committee want to get 
a good history, go back and read the volumes and volumes of 
testimony from 2000 on until 2005, while the Financial Services 
Committee and the Congress of the United States were under the 
control of the Republican majority. And the piece of 
legislation that Mr. Mica refers to was introduced by a 
Republican while he was in the majority of the Congress and 
under a Republican President. It failed to move through. But I 
am not going to make those points about gaming the politics, 
because it is really unimportant.
    The question is, and I think Mr. Towns put his hand on it: 
Are there any observations that you can make to help us out as 
to how we can stop?
    And I think my first question would be, as I understand it, 
Fannie and Freddie would be in trouble today even if they had 
not been involved in subprime lending purposes. Is that 
correct? Assuming that you never had packaged a subprime 
situation and the real estate devaluation in this country fell 
by approximately 30 percent, as it has. Under the formula that 
we had studied on the Financial Services Committee for 5 years, 
it was indicated to be the perfect worst storm.
    I think, Mr. Raines, you recall when Mr. Baker was holding 
those hearings. And we were all saying, what would happen if we 
had a perfect terrible storm? And if I recall, I think your 
testimony was: If the real estate deflation in this country 
amounted to more than 25 percent, all real estate and all of 
the GSEs would be in trouble. And, lo and behold, that is 
exactly what has happened.
    So I re-pose the question: If there had never been subprime 
mortgages in the portfolio of Fannie and Freddie, would it 
still have difficulty because of the precipitous fall of the 
valuation of the real estate market of this country, 
particularly where you are so heavily involved, in California, 
Florida, Nevada, and States that have really suffered that 
devaluation?
    Mr. Mudd. As an analogy, if you are in the business of 
insuring against hurricanes, and hurricanes hit a third of the 
country, you are going to suffer. If you are in the business--
solely the business of financing U.S. housing, and the U.S. 
housing market goes down by 30 percent, you are going to 
suffer, yes, sir.
    Mr. Kanjorski. We all knew that, didn't we? That was 
brought out in testimony 4 or 5 years ago. Is that correct?
    Mr. Mudd. It was modeled and discussed and disclosed.
    Mr. Raines. I completely agree with your characterization 
that it was well-known that a significant decline in housing 
prices would have a dramatic effect, not just on GSEs, but on 
the entire financial system. The housing finance market is so 
big that you cannot have a major impact there without affecting 
the entire economy. So, I think your characterization is 
exactly right.
    Mr. Kanjorski. We are thrusting around right now to find 
some underpinning to real estate valuation, stop the deflation 
in the real estate market, and to sustain people in houses, as 
you have all discussed, to prevent foreclosure. Hold the market 
and hold the house occupied, so that it doesn't depreciate in 
value.
    Has either of you gentlemen participated in an analysis to 
see whether or not we could create a subsidiary corporation, a 
sponsored enterprise of the Federal Government, to aid or 
subsidize mortgages that are going underwater or going into 
foreclosure, to hold people in their homes, and what the 
relevant cost would be of doing that?
    And would the value of rescue to the economy warrant taking 
that unusual action in the million or million-and-a-half 
mortgages that probably could be held in residence or 
foreclosure tenants in residence?
    Mr. Raines. I have done a little analysis of that, but 
without the benefit of a lot of staff resources. But, it is my 
view, and I think it is the view of a number of consumer-
oriented groups, that amounts as small as $10,000 to $20,000 
can go a long way to salvaging a lot of mortgages. In many 
cases, lenders and the homeowners are not that far apart in 
their ability to modify a loan and go forward.
    And so, in my view, providing that kind of money at the 
table where there are negotiations going on to modify mortgages 
would have a substantial impact. And you can do that without 
having to go and buy up all the mortgages in the country. You 
can simply provide the additional funds to bridge the gap on a 
modification. I believe that would have a significant positive 
net present value for the taxpayer, as well as for the 
homeowner and the lender.
    Mr. Kanjorski. How would we get that analysis done quickly, 
and by whom?
    Mr. Raines. I think the best resources available to the 
Congress on understanding the housing market exists within 
Fannie Mae and Freddie Mac. And I believe that, through their 
contacts with their services, they can give you a pretty quick 
assessment of what level of funding would need to be available 
to greatly increase the rate of working out mortgages.
    Mr. Kanjorski. Could we take that action even though the 
real estate market has not ceased to deflate? In other words, 
could we do it at any point and plug in, or do we have to wait 
until we hit the bottom of the real estate market to start 
working the rescue?
    Mr. Raines. I think you can start now and work with those 
loans that are available to be modified. Certainly there are 
some where we will find that the market has gone down further. 
But, trying to wait until the market hits bottom I think will 
only make the bottom deeper.
    And, therefore, I think starting now and ramping up over 
time is the right way to do it. You can't charm the market back 
into having confidence, but if you start working out loans one 
by one, people will begin to have confidence.
    [The prepared statement of Hon. Paul E. Kanjorski follows:]

    [GRAPHIC] [TIFF OMITTED] T0808.047
    
    [GRAPHIC] [TIFF OMITTED] T0808.048
    
    Chairman Waxman. Thank you, Mr. Kanjorski. Your time has 
expired.
    Mr. Burton.
    Mr. Burton. Have you ever heard a term, ``Friend of 
Angelo'' program?
    Mr. Raines. I have heard of that term in the newspapers.
    Mr. Burton. Have you ever had a home loan from Countrywide?
    Mr. Raines. Yes.
    Mr. Burton. Was this given to you through the term, 
``Friend of Angelo?''
    Mr. Raines. No.
    Mr. Burton. So, you didn't get any preferential treatment?
    Mr. Raines. No, I did not, in terms of the terms of my 
mortgage.
    Mr. Burton. So, you paid the same rate and same conditions 
as anybody else would under the same conditions?
    Mr. Raines. If they have the same credit profile, the same 
loan to value as I had, yes, sir.
    Mr. Burton. So, if we checked on that loan that you got 
from Countrywide, we wouldn't find anything different from 
anybody that borrowed from Countrywide in the whole country? 
You would not get preferential treatment?
    Mr. Raines. I am unaware of any preferential treatment.
    Mr. Burton. Would it be possible to get copies of the 
mortgage papers that you had made with Countrywide?
    Mr. Raines. I am sure that Countrywide has copies.
    Mr. Burton. Do you have copies?
    Mr. Raines. I no longer own that property.
    Mr. Burton. I am sure you kept those documents--I keep mine 
for a long, long time--if you had a mortgage on a home. Could 
you provide those to the committee for the record?
    Mr. Raines. If I can find them, I will be happy to.
    Mr. Burton. Thank you very much.
    Did you or anyone at your direction discuss with Angelo 
Mozilo--I guess that is how you pronounce his name--or his 
subordinates who might be candidates for this kind of 
preferential program? Did you ever talk to him about this 
special treatment for any government officials?
    Mr. Raines. No.
    Mr. Burton. You never did?
    Mr. Raines. Never.
    Mr. Burton. You are sure?
    Mr. Raines. Yes.
    Mr. Burton. None of the U.S. Senators or Congressmen or 
anybody in the government, that you know of, you never 
discussed their loans with Mr. Mozilo?
    Mr. Raines. No, I never did that.
    Mr. Burton. OK.
    Mr. Raines and Mr. Mudd, we have a September 2004 memo that 
discusses a 16-month outlook for Fannie Mae from Mr. Marzol, 
chief credit officer and later for financing credit. The memo 
was written to Mr. Mudd and was developed at Frank's request. I 
presume that was you, Mr. Raines. And Mr. Marzol writes that 
``the trend of rising home prices nationally will continue 
until near term, but the downside risk will be greater due to 
declining affordability and signs of frothiness.''
    This sounds like a clear warning as early as 2004 from him 
that a housing bubble is likely to occur. Yet, it was precisely 
in 2004 when Fannie Mae started increasing its purchases of 
risky subprime and Alt-A mortgages dramatically.
    And I can't understand, why would anyone enter into a risky 
market like the subprime business when he knew there was a 
possible bust in the housing bubble? Can you explain that to 
me? I mean, he sent this memo to you, and yet, you increased 
the risky mortgages and subprime Alt-A mortgages that you were 
supporting.
    Mr. Raines. If you are talking about 2004, when I was 
there, I can respond to that, which is, in fact----
    Mr. Burton. Mr. Mudd can respond subsequent to that.
    Mr. Raines. In 2004, Fannie Mae, in fact, lost a dramatic 
share of the market because it did not participate in these 
markets. And where we did buy subprime loans, we also sought to 
get insurance for covering those loans from mortgage insurance 
companies, where they would absorb the risk of these mortgages.
    So, we were very cautious about any entry into that market 
and how we did it. And I think it has been proven by the 
performance of those loans. They performed better than the 
loans in the market as a whole.
    Mr. Burton. According to Mr. Marzol, in 2004, he said there 
was a real problem, that a housing bubble was likely to occur. 
And according to the information we have, Fannie Mae increased 
its purchases of risky subprime and Alt-A mortgages 
dramatically after that.
    Mr. Mudd, you were in charge after that. Do you want to 
respond?
    Mr. Mudd. Yes. From 2004 to 2005, the purchases of subprime 
securities actually went down from $34.5 billion to $16.3 
billion and then went up again in 2006, largely as a reflection 
of what was being----
    Mr. Burton. But, was there a redefinition of subprime 
through your underwriting mechanisms? Your underwriting 
standards went down. So, if your underwriting standard went 
down, then a mortgage that was considered a risk would no 
longer be considered a risk because you lowered your 
underwriting standards. Did that take place during that 
timeframe? Did you change your standards at that time?
    Mr. Mudd. The underwriting standards change constantly in 
response to a market.
    Mr. Burton. During the time when you were in charge, did 
the underwriting change dramatically so that the subprime risk 
went up?
    Mr. Mudd. We did our best at the time to balance out both 
sides of the equation with respect to risk. The day you open--
--
    Mr. Burton. You were the ultimate person who made the 
decision on underwriting changes, were you not?
    Mr. Mudd. Chief executive officer, so I am responsible, 
yes. And am I making----
    Mr. Burton. Were you, with change like that, when they 
changed the underwriting requirements----
    Mr. Mudd. I think it is important, Congressman, to 
understand there are two sides to the underwriting equation. 
One is the risk side, and the other is the pricing side. So, 
one has to look both at what is incremental risk, and second, 
are you pricing for it, and are you getting appropriately 
compensated for that risk?
    Based on everything we knew at the time, we did the best 
that we could to ensure that we were pricing for the risk that 
we were putting on the book, because the market had moved in a 
direction because of the affordability problem Mr. Marzol 
referred to.
    Chairman Waxman. Your time has expired.
    Mr. Burton. How about Mr. Kanjorski?
    Chairman Waxman. He didn't have extra time.
    Mr. Burton. I saw the light.
    Chairman Waxman. You've forgotten what it is like to be at 
the end of the line waiting for your turn.
    Now I am going to recognize Mrs. Maloney. But, before I do, 
I would like to ask unanimous consent that the documents from 
Fannie Mae and Freddie Mac productions, identified by the 
majority and minority as relevant to today's hearing, will be 
included in the record. Without objection, that will be the 
order.
    You are recognized for 5 minutes.
    Mrs. Maloney. Thank you, Mr. Chairman.
    You have been a spectacular chairman. It has been an honor 
to serve on this committee. And in your new position on the 
Commerce Committee, you will be trying, confronting, really, 
some of the most pressing issues we have: universal health 
care, health care for the 9/11 workers, global warming, energy 
independence. And my constituents wish you well, particularly 
those without health care. And I hope this committee can play a 
supportive role in the many challenges you confront.
    My constituents are very angry about these bailouts, and 
they want to know why a $100 billion line of credit was given 
to Freddie and Fannie, and that Freddie has drawn down $15 
billion of that $100 billion line of credit. We are looking at 
what happened. They want to understand what happened.
    So, in preparing, we interviewed your former chief risk 
officer, Mr. David Andrukonis, from 2003 to 2005. He said he 
held that position and reported directly to you. He told us 
that, during these years, mortgage lenders were making 
increasing demands for Alt-A loans, loans that had no 
documentation. He found them risky. I know that in New York, 
many people said it was easier to get a loan with no 
documentation than to pay your rent during those days. And he 
said, ``Wall Street became, I think, pretty adept at packaging 
securities of loans that we would have considered to be higher-
risk; that is, reduced or very little documentation.''
    According to him, big mortgage lenders like Countrywide and 
Lehman, put a lot of pressure on Freddie Mac to buy these 
risky, no-doc, Alt-A loans. And he said these lenders were 
constantly looking to reduce documentation because it was 
easier to produce these loans and sell them, get fees. And the 
toxic loans are now what we are confronting.
    He said that he reached out to you. He said that he was 
opposed to these no-documentation loans, that he talked to you 
directly, that he sent you memo after memo outlining to you and 
the Board and others that this was risky and not the right way 
to go.
    And I would like to put these memos in the record, along 
with the interview that was conducted with him and our staff.
    Chairman Waxman. Without objection.
    Mrs. Maloney. And so, is it true that your chief risk 
officer advised you not to buy these reduced-documentation, 
Alt-A, no-doc loans?
    Mr. Syron. Well, first of all, I don't believe I have seen 
those memos that were addressed to me, but I am not sure.
    Mrs. Maloney. We will be glad to give them to you. Did he 
advise you not to buy those loans? And did he advise you that 
they might be risky?
    Mr. Syron. Yes, ma'am. But if you look----
    Mrs. Maloney. I only have 4 minutes.
    Furthermore, I would like to say that he was right, 
because, under your leadership, Freddie Mac bought more than 
$150 billion of no-doc, Alt-A loans. And, according to your 
most recent SEC report, your company's Alt-A purchases have 
resulted in more than $8 billion this year in credit losses due 
to these risky products that your chief risk officer said do 
not buy.
    Now, what happened to Mr. David Andrukonis? He was fired. 
He was fired. He felt that you agreed with him but that you 
still continued to buy what everyone was saying was high-risk. 
It is common sense: If you give a loan to someone and they 
don't even have to show you that they have a job, you are in 
trouble.
    So, my question to you now, and my basic question to you in 
light of all of the money that Freddie has lost and that 
taxpayer money that has been supporting you--and you have spent 
$15 billion of it--given the fact that you lost so much money 
on these Alt-A risky loans, wouldn't it have been better not to 
fire your risk manager, but to fire your portfolio manager of 
your Alt-A loans?
    Do you regret firing your risk manager who told you that 
you were moving in the wrong direction, that it was risky and 
toxic and not what you should be doing? Do you regret firing 
him? Do you regret buying these risky loans? Do you regret the 
way you led and, I would say, mismanaged your company?
    Mr. Syron. Well, ma'am, if you go back and look at the 
records in Freddie Mac in--I think you said 2000, but it is 
about right----
    Mrs. Maloney. 2003 to 2005.
    Mr. Syron. I am not sure of the exact time. But, there was 
a long, long debate with people on both sides of what should be 
done with Alt-A. This was done, and the debate was in the 
context of an environment in which Freddie Mac's market share 
was declining and the question of our relevance and ability to 
influence markets----
    Mrs. Maloney. But, sir, with all due respect----
    Chairman Waxman. Your question is pending, and the 
gentleman should answer, but then we have to move on. The time 
has expired.
    The question is, do you regret the decision to fire the 
risk manager and not to fire the portfolio manager?
    Mrs. Maloney. And to buy the Alt-A loans that were risky 
and put the taxpayers' money at risk.
    Mr. Syron. First of all, Mr. Andrukonis was fired for a 
variety of reasons, and it was not primarily for his having a 
view on credit.
    Second--I am trying to remember the different parts of the 
question. Second, in perfect hindsight, I think you always wish 
that any loan that went bad that we hadn't bought. But, given 
the information that we had at the time and given the balance 
that we were trying to achieve, we thought we made the right 
decision at the time.
    Chairman Waxman. The gentlelady's time has expired.
    Mr. Westmoreland.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    I am going to ask each one of you this question.
    Mr. Syron, what was your salary from 2003 to 2008, your 
total salary? And do you get any pension?
    Mr. Syron. My total salary over that period of time was 
about $4 million a year. And I have pension rights that I am 
not quite sure, but I think, after tax, are worth in the 
neighborhood of a little less than $2 million.
    Mr. Westmoreland. About how much?
    Mr. Syron. I think a little less than $2 million.
    Mr. Westmoreland. $2 million a year?
    Mr. Syron. No, no. The present value actuarial, depending 
on how long I live.
    Mr. Westmoreland. Mr. Mudd, the same question to you. From 
2005 to 2008, your total compensation?
    Mr. Mudd. I have a different number, so if I can make an 
estimate to meet your request, it would be in the vicinity of 
probably $7 million or $8 million of compensation. That 
wouldn't be counting any stock, which obviously grants value, 
and very little value now.
    Mr. Westmoreland. But, total, you are going to stay with $7 
million or $8 million?
    Mr. Mudd. I have numbers for 2004 to 2008. I would be happy 
to supply those later.
    Mr. Westmoreland. Are you eligible for a pension?
    Mr. Mudd. I believe so, yes.
    Mr. Westmoreland. And what would that pension be?
    Mr. Mudd. I can't be precise. I would have to research it.
    Mr. Westmoreland. Did this pension come from just your 3 
years of service?
    Mr. Mudd. No. I had been with the company going back to 
2000. So, I would assume that it would have been throughout 
that period.
    Mr. Westmoreland. And you are going to get a pension of 
somewhere----
    Mr. Mudd. If I can get you a precise number?
    Mr. Westmoreland. All right.
    Mr. Brendsel, how about you?
    Mr. Brendsel. Yes. Of course, I left the company in June 
2000. So, what years are you----
    Mr. Westmoreland. From 1987 to 2003.
    Mr. Brendsel. That is a matter, certainly, of public 
disclosure.
    Mr. Westmoreland. Can you give me a hint?
    Mr. Brendsel. I would have to say that, in the last few 
years, the amount disclosed, reflecting stock grants and 
everything, based on the valuations used, about $10 million a 
year. Of that------
    Mr. Westmoreland. About $10 million a year?
    Mr. Brendsel. Yes, including the stock grants. The salary 
was about $1 million in 2002 and 2003.
    Mr. Westmoreland. They got you cheap.
    How about the pension?
    Mr. Brendsel. I am eligible for a pension, and I am 
receiving a pension.
    Mr. Westmoreland. And how much is that?
    Mr. Brendsel. It's reflecting my 21 years of service; it is 
about $400,000 a year.
    Mr. Westmoreland. Now, Mr. Raines, I know it has been said 
that $90 million, and I notice in your testimony you got some 
explanation of that, that it really wasn't $90 million, but 
what was your total package for the time that you were there?
    Mr. Raines. I don't know off the top of my head. The number 
I referred to was a number that OFHEO has included in their 
documents.
    Mr. Westmoreland. Well, you had $90 million in there, and 
then you said there was some discrepancy in that and because--
--
    Mr. Raines. Not a discrepancy. Accepting the OFHEO number 
as the beginning point, 40 percent of that has effectively been 
clawed back as a result of my settlement with OFHEO and the 
stock options that I was awarded becoming worthless. So, 40 
percent of the $90, if you accept the $90 as the number, has 
been clawed back by one means or another.
    Mr. Westmoreland. That is still good money though, you 
know, it's still good money.
    Mr. Raines. Excellent money.
    Mr. Westmoreland. What kind of pension do you get, sir?
    Mr. Raines. I am qualified for a pension based on my 11 
years at Fannie Mae.
    Mr. Westmoreland. And what would that be?
    I know you got $3 million in 1 year, $400,000 1 year.
    Mr. Raines. My pension is approximately $1.2 million.
    Mr. Westmoreland. $1.2 million for the 11 years of service. 
That is not good, I mean that is good. That is good money. And 
let me say this, you know, I'm glad that I came to the hearing 
today to learn that none of you all had anything to with Fannie 
Mae or Freddie Mac going south, that you all were getting paid 
millions of dollars a year, millions of dollars a year, but you 
didn't know anything was wrong. You didn't have any idea that 
it was going south, and none of you seem to have done anything 
about it. I haven't heard one person say today that you 
recognized that Fannie Mae or Freddie Mac was in trouble and 
that you did something about it. So, it's quite extraordinary, 
and I think the American people and the taxpayers are going to 
be kind of miffed that you all's job was basically as CEOs of 
these companies was rearranging the deck furniture on the 
Titanic as it went down and didn't know it was going down. That 
is amazing.
    Chairman Waxman. Gentleman's time has expired. If the 
witness, I don't know if it's a pending question or not, but 
let's----
    Mr. Brendsel. Mr. Chairman, I want to respond to that last 
comment.
    When I left Freddie Mac in June 2003, Freddie Mac was safe 
and sound and well-capitalized and had a high quality mortgage 
portfolio.
    Chairman Waxman. Thank you. Now, we go to Mr. Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman, and 
gentlemen, thank you for being here. I can tell you as I sit 
here I, you know, am just disturbed, and that is putting it 
lightly, because when I look at this fiasco, I think both of 
these companies did have something to do with it. And I'm not 
going to sit here and act like they didn't. I think Tom 
Friedman in his article dated November 25th, in the New York 
Times, put it right. He said so many people were in on it. 
People who had no business buying a home with nothing down and 
nothing to pay for 2 years. People who had no business pushing 
such mortgages but made fortunes doing so. People who had no 
business bundling those loans into securities and selling them 
to third parties as if they were AAA bonds but made fortunes 
doing so. People who had no business rating those loans as AAA 
but made fortunes doing so, and people who had no business 
buying those bonds and putting them on their balance sheets so 
they could earn a little better yield but had no--but made 
fortunes doing so. And you know, the thing that gets me is that 
I have constituents who, and I think Mr. Towns alluded to this, 
folks have tried to blame poor people and minorities, but a lot 
of those people, and I admire you for what you said, Mr. 
Raines, you talked about the dreams of folk and trying to help 
them get a home and how important it is, but what has happened 
as a result of all of these folks, including some of you guys, 
what has happened is that the people in my district have been 
left with two things, holding a bag. They have lost their 
houses, and they have zero in one bag and debt in the other. 
That is what they have.
    And so, I want to go to you, Mr. Syron, because you have 
said some very interesting things that I would just like to 
hear a little bit more about. You know you talked about these 
no income, no asset loans. They call them NINA loans, is that 
correct?
    Mr. Syron. Yes, sir.
    Mr. Cummings. Keep your voice up. We want to hear clearly 
what you're saying. Banks use no income, no asset mortgages to 
lend money to a borrower, without requiring any information 
about the person's income or assets. This was an increasingly 
popular type of Alt-A loan in 2004, 2005, 2006, and Freddie Mac 
purchased a lot of them. Let me ask a common sense question. 
Why would anyone give a mortgage without requiring information 
on a borrower's income or assets? Help me with that.
    Mr. Syron. Well, sir, if you have information on their FICO 
score, right, and they have a strong FICO score and you have 
information on the loan-to-value ratio of the property and in 
many of these cases, you would see that the risk for the loan 
shouldn't be that great. These loans were developed in the 
first place for what you might call borrowers that had special 
characteristics; i.e., uneven income flows, actors, 
waitresses----
    Mr. Cummings. Well, obviously you're not familiar with Mr. 
Raines' testimony because what I read in his written testimony, 
he said part of the problem was when we got into these 
subprimes. Before they were based on people who had equity, and 
then when they didn't and when we moved to these kinds of 
loans, they were more based on score, so, we got rid of the 
equity, a lot of times the equity that we really needed to 
secure these loans, I mean to truly secure them, and we went to 
this other form of basically what you're about to tell me now.
    But, so, can you tell me why one of your top executives 
wrote in a memo to you on October 6, 2004, that Freddie should 
continue buying NINA loans because in his words, ``it provides 
unique market growth opportunities to Freddie Mac.''
    Mr. Syron. Sir, I don't have the memo before me, but I will 
try to answer on the basis----
    Mr. Cummings. Briefly because they only gave me 5 minutes.
    Mr. Syron. I think what had happened is the market had 
migrated away from the traditional kinds of products that 
Freddie Mac and Fannie Mae had provided, and I think what he 
was--I'm speculating.
    Mr. Cummings. Let me speculate. Let me tell you what I 
speculate. I speculate it was about profit, I speculate that it 
was about greed because a top Freddie credit official, Ray 
Romano, explained the rationale for doing so in June 4, 2007, 
in a memo to the Freddie Mac board where he warned about the, 
``increased reputation, fraud, predatory lending and credit 
risk posed by our current program.'' How about that? Let's see 
you speculate.
    Mr. Syron. Sir, we're an organization that had to develop 
balance, and we had to balance between the needs of safety and 
soundness, the needs of our mission, and the needs also to be 
relevant from the perspective of our shareholders because we 
were like any other privately held company, and I checked a 
number of times, and we had no ability to treat our 
shareholders differently than anyone else did.
    Mr. Cummings. I see my time is up. Thank you, Mr. Chairman.
    Chairman Waxman. Thank you, Mr. Cummings.
    Mr. Souder.
    Mr. Souder. Thank you I want to followup just a little bit 
on a similar line that my friend, Mr. Cummings, just had. One 
of the extraordinary things about this series of hearings, 
whether it was the bond people or the AIG people or the hedge 
fund people, nobody takes responsibility for anything. Nobody 
comes up and says, I'm sorry, I may have made some judgments, I 
did the best I could. It's like, no, it wasn't us. And it gets 
very frustrating to figure out what to do next if nobody is 
responsible for anything.
    I was really intrigued with the statement of with 20/20 
hindsight, it would be reasonable to say that people who didn't 
have credible income to meet their payments, who were depending 
on house values going up to meet it, or who lied, would have 
been higher in defaulting. You know, I would say with 20/20 
hindsight; in fact, I would say the average American could 
figure that out with foresight, and they don't need to get paid 
$7 million a year to figure that out with foresight, that your 
model was not working.
    Now, what is disturbing to me is that you said, Mr. Mudd, 
that you weren't sure whether it was systemic or cyclical so 
that you plunged into it, separating now subprime and the Alt-A 
types of things, but then in addition to that, I think Mr. 
Syron said in his testimony and, Mr. Mudd, you said similar, 
that your organizations were there to make the market work, in 
order to provide somebody who supported affordable housing, Mr. 
Raines' statement really interested me because this isn't just 
about low-income housing, this is about what happened to the 
housing market as a whole, and if what you said--can I ask you 
a followup question to that? You said it wasn't just low 
income, it was higher. Are you saying that for Fannie and 
Freddie, your problems aren't just low income, that Fannie and 
Freddie was also going far beyond affordable housing in giving 
risky loans?
    Mr. Raines. What I was saying is that Fannie Mae provided 
service to low, moderate and middle-income Americans, and I was 
saying in answer to the question, that low-income Americans 
have not contributed disproportionately to the problems at 
Fannie Mae or Freddie Mac.
    Mr. Souder. Reclaiming my time, I just wanted to make that 
clear that it wasn't just the lowest housing portion here, that 
Fannie and Freddie were risking dollars as they moved up the 
scale because, in fact, there appears to have been as much of a 
profit motive as there was just to get people into homes. And 
that is important as we develop the--where we go next. And the 
challenge here is that since I understand Mr. Syron's 
testimony, he says, I want to make sure, yes, that you do this 
enabling banks to make new loans; in other words, part of the 
purpose of these agencies was to expand and enable. So, when 
you went into this market, you pretended like you came in late, 
reluctantly, you were worried whether your business model, 
whether it was systemic or cyclical, but in fact you're the 
enabler's agency, in fact your two agencies enabled this market 
and gave it a security that it didn't otherwise have or it 
might have flattened out.
    In fact, they can put this up, Mr. Syron, March 30, 2004, 
e-mail from one of your executives. The author describes 
loosening of Freddie Mac's underwriting standards in order to 
accommodate risky mortgages that do not require verifying the 
borrower's income or assets, which is extraordinary. He goes on 
to write, these are largely driven by a need to allow lenders 
to compete with Countrywide's Fast and Easy program and Bank of 
America's Paper Saver programs. I view these programs as 
fundamentally changing the underwriting process for as much as 
30-plus percent of the mortgage loans we purchase.
    Now, the question here is, is what were Fannie and Freddie 
trying to compete with Countrywide's Fast and Easy programs 
for? You're supposed to be the more--you're supposed to not be 
the enabler of risky programs. What was your check? Mr. Syron, 
do you want to----
    Mr. Syron. Sir, I would debate whether we were, that this 
market wouldn't have developed even if we weren't involved in 
it. I mean what we saw in the subprime market is the subprime 
market developed around that, and so did the Alt-A market.
    Mr. Souder. Let me ask a followup to that. Do you believe 
that if Fannie and Freddie would not have gotten involved in 
this market, that the market would have flattened? In other 
words, I'm not saying it wouldn't have started, but would it 
have flattened, or in fact, did your involvement accelerate the 
market, give a glint of Federal, because people don't know 
whether you're private, public, or whatever, approval to that 
market in a different way, and in fact, the taxpayers have 
wound up now holding your share, and in fact, then wound up 
with a bigger problem than we would have had?
    Mr. Syron. Sir, in all due respect, I think we would be 
speculating on my part whether the market would be flattened or 
not because other markets that we were not in expanded and 
expanded quite rapidly.
    Mr. Souder. So, you don't believe you had any basic 
responsibility for the crisis; that is your testimony? That you 
believed it was OK, you went and competed with Countrywide and 
put Fannie and Freddie at risk and gave the patina of cover for 
this for a profit motive?
    Mr. Syron. Sir, I can honestly say I am not saying we made 
decisions perfectly. We certainly didn't, as you pointed out. 
But, I can honestly say that in what we were trying to do at 
the time, we were trying to balance the interests of our 
mission, regulatory objectives, and our obligation to 
shareholders.
    Mr. Souder. By taking in 20/20 loans that did not use 
reasonable standards, didn't have income verification and 
depended on----
    Mr. Towns [presiding]. Thank you very much. Gentleman from 
Ohio, Mr. Kucinich.
    Mr. Kucinich. I thank the gentleman. I'm listening to my 
colleague, Mr. Westmoreland, and I want to pick up on something 
that he said. You know we've got some of the Representatives 
here who act like you just didn't know, that it's almost like 
hearing the response ``I don't know nuttin,'' no 
responsibility, no accountability, stuff just happens, it's the 
housing market, it's the economy, it's the poor people wanting 
homes. But, the facts show, gentlemen, that many of you at this 
table did know the risks and that you were warned not to take 
them, and that you ignored your internal adviser, your Chief 
Risk Officer.
    Now, Mr. Mudd, the committee has been provided with an e-
mail that your Chief Risk Officer sent to your CEO and copied 
you. You're dealing with hundreds of billions of dollars, and 
this memo from your Chief Risk Officer said the company has one 
of the weakest control processes I have ever witnessed in my 
career. He said the company really doesn't get it, it's 
scraping on controls.
    Now, it appears from the record that as CEO, you were 
taking hundreds of billions of more risk, you were warned by 
your Chief Credit Officer not to do that, you're taking higher 
risks anyway, and then you cut the budget of your Chief Risk 
Officer by 16 percent, you took on more risk while cutting 
internal controls, and at the same time, you're telling your 
board you had all the research necessary to properly assess 
risk. Now, you received an e-mail from your Chief Credit Risk 
Officer, Enrico Delvecchio, that said, I'm very upset, I had to 
stand at a board meeting and hear we have the will and money to 
support taking more credit risk.
    Now, Mr. Mudd, you testified that your investment strategy 
is to keep up with the market. Did you change, did you have a 
change in strategy that involved reducing the resources of your 
credit risk office, which assessed the inherent dangers of your 
investment strategy while at the same time you're taking more 
external risk? Was that part of your strategy to reduce that 
credit risk office?
    Mr. Mudd. No.
    Mr. Kucinich. Then why was there a budget cut occurring 
while you're involved in these great risks with billions of 
dollars?
    Mr. Mudd. Congressman, I think the best response is to read 
my----
    Mr. Kucinich. The best response is the truth. Now, did 
someone tell you to cut credit risk, to cut the credit risk 
office budget, or did you make that decision?
    Mr. Mudd. Let me read you what I wrote back to him.
    Mr. Kucinich. Can you answer the question? Who told you to 
cut the budget? Who told you to cut it? You're dealing with 
hundreds of billions of dollars. Can you answer the question? 
Who made the decision to cut the credit risk office's resources 
at the time that you're taking increased risk?
    Mr. Mudd. The cuts in the budget that applied across the 
company were driven by the financial need to drive higher 
capital in the company and to maintain our regulatory capital 
standards. We started with the process----
    Mr. Kucinich. Holy smokes. Is anybody listening to this? He 
is cutting the one person that is telling him, hey, wait, 
you're going to go over a cliff cutting that, and he said we 
have to cut across the board.
    Now, your Credit Risk Officer told you in a memo that far 
from--he said that you are operating far from current market 
practices. He said, ``we are not even close to having proper 
control processes for credit, market, and operational risk.'' 
And then he went on to say, ``I get a 16 percent budget cut,'' 
and he suggested that there was malice involved.
    Now, what I want to find out, was this calculated? You know 
this is one of the concerns that we have. This isn't a case of 
a cop walking off a beat. This is a case of a cop being told 
don't go there by not giving him enough resources.
    Why did you do that? Explain this to the American people. 
Why did you make a decision to cut your----
    Mr. Mudd. I will explain it to you by reading to you a 
response to him, which was part of a conversation, 
Representative. It is not fair to take an e-mail that is in a 
train of e-mails that has a response right behind it that says 
if you feel the process is not working you know my door, 
telephone, and house are open to you. I'm not aware that you 
sought to do so on this topic. And if, of course, you may say 
that anything you believe to be true at any time to anyone on 
the board or anywhere else, this is my response to him, and I 
believe it is inaccurate for you to suggest anyone expressed a 
view there are enough resources for everyone to do everything 
necessary for the plan. Resources are tight. Everyone has cuts. 
Come and see me----
    Mr. Kucinich. Did you take responsibility for the risk----
    Mr. Mudd. That is what we did. That was the process----
    Mr. Kucinich. Do you take responsibility for the risk----
    Mr. Mudd. We sat down and did that----
    Mr. Kucinich. Your company took--when you ignored the 
advice of your Credit Risk Officer and when you cut the budget, 
do you take that responsibility?
    Mr. Mudd. I followed the process to listen to all of my 
staff, not just the Chief Risk Officer.
    Mr. Kucinich. What did you do though? What did you do? Did 
you cut the budget of your Credit Risk Officer?
    Mr. Mudd. Just like all budgets involving business, we 
negotiated the right number for the people we----
    Mr. Kucinich. Is the answer yes or no? Did you cut your 
Credit Risk Officer's budget?
    Mr. Mudd. As you know, giving a yes or no answer to the 
question will not be accurate----
    Mr. Kucinich. Can you answer the question?
    Mr. Towns. Gentleman's time has expired.
    Mr. Mudd. I will give you an accurate response, and the 
answer is that budgets are determined as a result of a back and 
forth between executives that have purview on it. His budget 
was subsequently increased from where it had been placed. He 
could not hire everybody that he needed because there was huge 
demand for risk officers all around the financial markets. So, 
we appropriately adjusted it and gave him the opportunity to 
come back in should he be able to hire above that rate. Yes.
    Mr. Towns. The gentleman's time has expired.
    Mr. Kucinich. You testified you increased his budget; is 
that what you're telling this Congress?
    Mr. Mudd. We negotiated the budget the same as we did every 
year from time immemorial.
    Mr. Kucinich. Incredible.
    Mr. Towns. Mr. Shays, it has been a pleasure serving with 
you over the last 20 years. It has been a delight. Of course, 
we had an opportunity to work on many issues together.
    Mr. Shays. I was reluctant to step up because I thought I 
might get a little teary eyed because I love this committee, 
and I congratulate you as being the new chairman, and ranking 
member, Mr. Darrell Issa, and I know this committee will do 
well.
    I'm also reluctant because this issue is very sore to me 
because we knew a long time ago, the train was going to crash. 
Everyone at this table knew the train was going to crash and 
the people who warned are the ones who took the hit, and you 
all just continued to make a lot of money and, ultimately, to 
the harm of the very people we wanted to help. It is kind of 
surreal, you had Richard Baker, who was pointing out that 
Fannie and Freddie had problems and they needed to have proper 
regulation. After the Financial Services Committee had a 
landmark hearing on Enron and we passed Sarbanes-Oxley, I said 
this is good, Fannie and Freddie are finally going to have to 
play by some rules, but then Richard said they are not under 
the 1933 and 1934 act so they're not going to be under 
Sarbanes-Oxley. So, I said, fine, let's deal with it, and Ed 
Markey, a Democrat, and I said, OK, let's regulate Fannie and 
Freddie like any other company. And in 2002 and 2003, well, I 
will tell you something hit the fan because every lobbyist that 
I have ever met was knocking down our door. Fannie and Freddie 
paid lobbyists to lobby for them, and they paid lobbyists on 
retainer so they wouldn't lobby against them. And so we had 
$175 million spent in 10 years on lobbying Congress, and this 
is a quasi-government organization that felt it had to 
manipulate Congress, and it did. It had a hugely weak regulator 
with OFHEO and, Mr. Raines, you didn't want a stronger 
regulator, you didn't want the 2002 act, you didn't want the 
2003 act. What fascinates me is you even argued that just to 
set aside 3 percent made sense, when banks have to set aside 8 
or 9 percent, and you're getting $90 million for your good 
work.
    It just is almost surreal to be at this hearing and to hear 
you. If I were critical of this administration, I would say 
that they cared so much about loyalty that loyalty trumped the 
truth. And they failed to hold people accountable. But, we're 
still in Congress failing to hold people accountable. Whether 
you're Republicans or Democrats, you're not being held 
accountable. I hope this new administration starts to hold 
people accountable.
    Mr. Raines, do you still believe that setting aside less 
than 3 percent for potential losses was financially wise? You 
made that argument in the Financial Services Committee. Do you 
still believe that was a wise thing to do?
    Mr. Raines. I think we have some evidence on that with 
regard to Fannie Mae's portfolio, as I understand it. The 
requirement for capital was approximately 2\1/2\ percent for 
the mortgage portfolio, the on-balance sheet portfolio, and 
there have not been losses in that area that have exceeded that 
capital. The losses that Fannie Mae has reported, as I 
understand them, have come from the credit side, not from the 
portfolio side. So, based on this unique experience, it appears 
that is sufficient capital for a portfolio.
    Mr. Shays. Mr. Raines, you're not just speaking to this 
committee. You're speaking to the whole financial sector. You 
are making the argument that setting aside only 3 percent was 
financially a wise thing to do. I'm not going to change your 
answer. I just want to make sure that you with a straight face 
are saying that was a wise thing to do.
    Mr. Raines. It is proven in the current circumstances 
that----
    Mr. Shays. I would like a yes or no. Yes, it was, or no, it 
wasn't.
    Mr. Raines. It has worked. Congressman, it worked with 
regard to the portfolio. On the credit business, it's a 
different thing. And we were talking in the committee, in 
Financial Services Committee, about the portfolio because 
ironically the criticism of Fannie Mae in those days was its 
on-balance sheet portfolio, which in fact has not been the 
problem now. The problem has been the credit business that 
people were arguing that is all that Fannie Mae should do, was 
the credit business.
    Mr. Shays. Mr. Raines, when we finally got Fannie and 
Freddie to agree to be under the 1934 act, we learned that both 
Fannie and Freddie had cooked their books, overstated income, 
and you ultimately had to leave. I'm just curious to know, do 
you still believe that Fannie shouldn't be under the 1933 and 
1934 act and play by the rules that no one else has to play by?
    Mr. Raines. At this point, I don't think it matters. Fannie 
Mae is already registered with the SEC; so, including Fannie 
Mae as a registrant----
    Mr. Shays. On the 1934 act.
    Mr. Raines. I understand. I was going to get to that. You 
mentioned both acts, I believe. With regard to the 
registration, I don't think it matters a lot. With regard to 
the overall registration of its securities, particularly 
mortgage-backed securities, I think that the damage that I 
foresaw at that time would be less now, given all the 
convulsions that have already gone on in the marketplace, I 
think that the market for mortgage-backed securities are going 
to have be to reconstructed anyway. So, I think it's just a 
matter of process at this point. But, I don't think it matters 
one way or the other.
    Mr. Issa. Mr. Chairman, I ask unanimous consent that Mr. 
Shays have just 1 additional minute. Thank you.
    Mr. Shays. Just a bottom line question: In other words, the 
1933 and 1934 act were designed to protect the public. Fannie 
and Freddie are not under the 1933 act. They voluntarily got 
under the 1934 act. Because they got under it is when we 
learned that they couldn't comply with basic accounting 
standards. That is when we learned it. Had we not put them 
under the 1934 act we never would have learned that. And your 
comment to me is it doesn't matter if they're under the 1933 or 
1934 act?
    Mr. Raines. No. I said that because Fannie Mae is now a 
registrant, it would be redundant to include them. But, if you 
would like to include them under the act, I think that is fine. 
I don't think it would change anything about the registration.
    Mr. Shays. How about the 1933 act?
    Mr. Raines. 1933 act. As I said, I am fearful it would 
disrupt the mortgage-backed securities market. Right now, the 
market is so disrupted, I don't know adding a registration 
requirement would do any more harm.
    Mr. Towns. Thank you.
    Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman. Fannie and Freddie lost 
a significant share of the secondary mortgage market by 2004, 
as private Wall Street companies bought increased numbers of 
subprime and Alt-A loans. Mr. Mudd, I want to ask about 
decisions Fannie made to regain some of this ground.
    On June 26 and 27, 2006, Fannie Mae executives attended a 
retreat in Cambridge, MD, for a senior management group. The 
committee obtained a document that lists the highlights from 
that meeting. The document was circulated to you and other top 
executives on July 7, 2006. The document summarizes what we 
accomplished, the key take-away from our sessions, the open 
issues to address and corporate strategies, next steps. Under 
the section titled ``New Business Modeling Growth 
Initiatives,'' the memo describes a new approach for Fannie 
Mae's Single Family Mortgage Division. It says this. ``Single 
family strategy is to say yes to our customers by increasing 
purchases of subprime and Alt-A loans.''
    Mr. Mudd, based on this summary, there was detailed 
discussion at the retreat in 2006 about whether to enter the 
subprime and Alt-A market, and the decision was made to say yes 
to these types of loans. The memo says this initiative will 
generate attractive returns, but was there any discussion about 
the increased risk involved?
    Mr. Mudd. Yes, sir, that was an intimate discussion in the 
process, and so, when we first entered the subprime market, and 
I would fast forward to the end of the story to say once we got 
there, we realized we didn't like it that much, so it didn't 
grow very much, but the analysis that you're asking about at 
the time was if we enter this market, what are the appropriate 
forms of risk mitigation and so forth. So, typically, what we 
did was we actually bought bonds in small numbers and we bought 
the highest rated AAA tranches of those bonds and in some cases 
actually bought supplemental insurance on top of these bonds. 
That then gave us some exposure to the marketplace that we 
could evaluate and assess whether it was a market we could be 
in. And by the way, we also set standards that said those bonds 
had to be, the loans, any subprime loans we were involved in 
had to be originated under a very specific set of conditions 
that gave us some assurance there would be no predatory 
features in them.
    So, with those two pillars, we had some exposure to market. 
We saw it. We didn't like it that much, and that is why you see 
from the numbers it didn't grow very quickly.
    Mr. Clay. OK. Fannie acted quickly on this new business 
model. For example, Fannie purchased more than $200 billion in 
Alt-A loans in 2006 and 2007, according to the data provided to 
this committee by the Federal Housing Finance Agency. In 
retrospect, it seems that the decision made at this retreat in 
2006 to increase your company's purchases of subprime and Alt-A 
mortgages was a major mistake. Do you agree?
    Mr. Mudd. Well, again, separating out the subprime and the 
Alt-A, now addressing the Alt-A, can you look back in 
retrospect and say that you wish you had less Alt-A business? 
Yes, absolutely.
    Mr. Clay. Well, the numbers speak for themselves. I think 
you know last month, Fannie reported almost $4.3 billion in 
credit losses for 2008 so far. Almost half of these losses came 
from your investments in the risky Alt-A mortgages, especially 
those that originated in 2006 and 2007. Do you agree with that?
    Mr. Mudd. Certainly a high proportion of losses has come 
out of, has come out of the Alt-A book, yes, and certainly if 
you look back in retrospect and say based on what you know now, 
would you have as much exposure in Alt-A, no, you wouldn't. 
But, based on the information that we had at the time, based on 
where we saw the market at the time, based on the evolution of 
our own standards and based on the prudential things that we 
did and got a lot of criticism for, increasing price, 
increasing standards, requiring more documentation was there 
was important. And by the way, the Alt-A loans on Fannie Mae 
books have performed a factor of 2 better than any of the Alt-A 
loans in the marketplace at large. So, I think some of those 
processes were helpful. Were they ultimately helpful enough? 
Goes to your question.
    Mr. Clay. Thank you very much for your response. The memo 
also said we discussed additional growth ideas that warrant 
further exploration, including a new acquisitions method to buy 
all loans. What does it mean to have a policy to buy all loans? 
That doesn't sound like risk is considered at all.
    Mr. Mudd. No, it doesn't, and that wasn't in fact the 
policy, Congressman. The challenge that we were facing in the 
marketplace at that time was because of the footprint or, what 
we called it, the box of loans that Fannie Mae would actually 
accept. Originators were originating product that was outside 
that box. It was difficult for them to segregate the loans that 
they could only sell to Fannie Mae from the ``all other'' 
category. So, we had a number of initiatives in place to say 
could we provide an upfront solution, so they would have kind 
of one-stop shopping, but that we would never take on those 
risks that were either risks that we didn't like or risks that 
we couldn't price for or loans that were perhaps jumbos or 
something like that. That was the subject of that study.
    Mr. Towns. The gentleman's time has expired.
    But, he can answer the question.
    Mr. Mudd. I'm sorry, Mr. Chairman. I didn't hear the 
question.
    Mr. Clay. The question was you took bundles that were 
combined with good and bad mortgages, good and bad loans.
    Mr. Mudd. No. The purpose of that project was specifically 
not to take the loans that we weren't comfortable with, but to 
continue to attract the business of our customers. That was the 
traditional business that we had done or the business that we 
could price and were comfortable with.
    Mr. Clay. Thank you, Mr. Chairman.
    Mr. Brendsel. Mr. Chairman, I apologize. Could I take a 
brief break?
    Mr. Towns. Sure.
    Mr. Syron. Mr. Chairman, while that is occurring, may I 
accompany?
    Mr. Towns. I'm sorry?
    Mr. Syron. May I do the same thing while that is occurring?
    Mr. Towns. Why don't we just take a 5-minute recess.
    [Recess.]
    Mr. Towns. The committee will reconvene.
    We will now recognize the gentleman from Ohio, Mr. Turner, 
for 5 minutes.
    Mr. Turner. Thank you, Mr. Chairman.
    Mr. Raines, I want to read you a portion of your written 
testimony. You make a statement that I think is very important 
in your written testimony that I agree with about the CRA. In 
your statement, you say a very common allegation that has been 
made is that the Committee Reinvestment Act forced mortgage 
originators to make loans that were too risky and burdened 
banks with assets that would later default. It's on page 11. 
This claim is incorrect. The most risky loans in the system 
tended to be originated by lenders not covered by CRA. The 
statement that you're making there. I hear from a lot of CRA-
covered banks, lenders, who then go the next step though and 
say that they're not as at fault or at fault for the mortgage 
lending crisis because their loans, which they originated, were 
not those that many of us would identify as predatory or even 
in the subprime area.
    My thoughts in that are that by their actually then buying 
the mortgage-backed securities of these subprime or these 
predatory loans, they're providing the fuel back for those 
types of loans that they claim that they weren't originating; 
in other words, from the back door, buy those things that 
they're not selling out the front door, and then provide 
gasoline or fuel to allow more of those loans to occur, and so, 
their having participated in purchasing those and then using 
their capital to buy them helped fund what was the practice--
what were the practices that in fact were the problem. Would 
you agree with that?
    Mr. Raines. Well, I think you have a very legitimate point 
as to at what stage are you providing necessary funds to the 
market and at what stage have you moved over into encouraging 
practices that aren't good market practices? Most subprime 
loans go to people, you know, like my father, who simply didn't 
have a lot of income and didn't have a great credit rating, and 
he had to go to the finance company to get financed. That is 
what an original subprime loan was, you went to HFC, and they 
gave you a loan, and it was backed by your house that you had 
some equity in. Over time, as I point out in my testimony, 
these loans morphed into other things. Instead of it being a 
loan on your house that you already own, that you have equity, 
subprime loans became loans to buy houses where you had no 
equity. Instead of being people who had a long track record of 
paying their bills but just simply every now and then fell 
behind, it became people who have just gotten out of 
bankruptcy. So, not all subprime loans are bad. A chunk of them 
have been very bad for consumers. And it's hard for your banker 
to know in the mortgage-backed security that he is buying, does 
this only include the good ones or does this also include 
predatory ones? That is why as early as 1999 we published 
standards on subprime lending as to what Fannie Mae would buy 
or wouldn't buy to try to establish some standards in the 
market.
    Mr. Turner. But, they did know. They did know both from the 
information that was being received on the default rates, the 
foreclosure rates, the sloppy underwriting processes, the lack 
of documentation, the loan-to-value ratios that had been 
changed, they did know that these were the more risky ones and 
that these were those that you would not want to encourage 
either for a borrower or really for the assets for the overall 
bank. And I don't want to go to the next step, Mr. Raines, 
because you said exactly what I thought you would say, which I 
agree with, that where do you cross the line of actually 
encouraging bad behavior versus just participating in the 
market? And that is what I believe that Freddie and Fannie did. 
It's not just the CRA-covered bank that had one originating 
loan standard in the front door and bought mortgage-backed 
securities out the back that had bad standards. It was Freddie 
and Fannie, also. You provided fuel, all of you gentlemen, by 
providing fuel for these loans. By buying them up, you 
encouraged an area of the market to both expand, recapitalizing 
them so that they can go out and do more of these, without 
providing the types of standards necessary to protect the 
borrowers, to protect the public or to protect your 
shareholders.
    Mr. Syron, you stated that the market had migrated away 
from traditional loans. You're supposed to be an organization 
that has a knowledge that tradition is not just based on some 
archaic structure that we all knew when my parents first went 
to buy their first home. It's based upon sound business 
principles. Mr. Syron, you went on to say we were doing what we 
needed to to serve our shareholders. Your shareholders haven't 
been served. I can't imagine one of you today can sit here 
today and say the conditions of your companies are such that 
you were following practices that were shareholder directed. 
They weren't borrower directed. They weren't, our Federal 
mortgage processes directed, and they certainly haven't served 
the taxpayer.
    Mr. Syron. Sir, a couple of points. First, I think you're 
absolutely correct that even though a lot of these changes 
provided other opportunities that, in retrospect, you would 
have been a lot better off if the market had stayed in its more 
traditional source. But neither Fannie----
    Mr. Turner. Didn't you have a role in that? Didn't you have 
an ability to raise your hand and say what needs to be done on 
the regulatory side to prevent the market from migrating there 
and have a role to not enter that market area by funding it and 
fueling it?
    Mr. Syron. Well, sir, we didn't have any capacity to 
constrain the growth of that market, is what I would say. And 
the second part of your question, I think that what we did, and 
I really firmly believe this, is I'm not saying we didn't make 
mistakes, we did what we thought was the right thing at the 
time, but you're absolutely right; it's hard to say that the 
shareholders or any of us, who were shareholders, have 
benefited from that.
    Mr. Towns. The gentleman's time has expired.
    Mr. Turner. Thank you, Mr. Chairman.
    Mr. Towns. The gentleman from Massachusetts, Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman, and briefly, I just 
want to congratulate Chairman Waxman, in his absence, for his 
great work on this committee as well. He will be sorely missed. 
I want to thank you, Mr. Chairman, for the time, and also to 
the ranking member.
    Mr. Chairman, I would ask that the American Enterprise 
Institute article entitled ``The Last Trillion Dollar 
Commitment: The Destruction of Fannie Mae and Freddie Mac,'' by 
Peter J. Wallison and Charles W. Calomiris, be entered into the 
record.
    Mr. Towns. Without objection, so ordered.
    [The information referred to follows:]

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    Mr. Lynch. Thank you, Mr. Chairman. Just as an initial 
matter of clarification, it was asked earlier by the ranking 
member, I believe, whether 660 was used as your dividing line 
for Alt-A mortgages, Mr. Mudd, and probably you as well, Mr. 
Syron. I'm looking at some Fannie Mae and Freddie Mac documents 
here, and it appears that you use the FICO score of 620 as the 
dividing line, is that right?
    Mr. Mudd. In our case----
    Mr. Lynch. Please don't burn my time. This is just a simple 
matter. Is it 620 or 660?
    Mr. Mudd. No.
    Mr. Lynch. No?
    Mr. Mudd. No.
    Mr. Lynch. You use 660 then.
    Mr. Mudd. No.
    Mr. Lynch. You don't use 660, you don't use 620. What do 
you use?
    Mr. Mudd. The original definition of a subprime loan was 
based upon the originator. When the market developed other 
definitions, we disclosed based on the other definitions, that 
were used in the marketplace.
    Mr. Lynch. OK. This is consistent. You know what I can tell 
you right now? If you have accomplished anything here today, 
you have made conservatorship look very, very good. I was very 
worried about that decision to put these organizations in 
conservatorship. But what I have seen here today, with the 
total denial that is going on here today and the refusal to 
answer simple questions whether you put the budget up or you 
put the budget down, and you can't answer that, it just gives 
me great comfort, great reassurance that these two GSEs are now 
in the hands of the conservators because I can see what led us 
into this problem just by the way you have been failing to 
respond. Despite all the denials of what is going on here, I 
happen to have some of the documents that were submitted here. 
This is a 10Q investor summary for the quarter ended June 30, 
2008, and, let's see, Fannie reported that, this is for Fannie 
Mae, that subprime characteristics, mortgages with subprime 
characteristics comprised substantial percentages of all 2005 
through 2007 mortgages that the company acquired. And there's 
some tables here that are shown as well. If you add up, this is 
Fannie's report, if you add up the categories, and eliminate 
double counting, and this is also in the Wallison-Calomiris 
article, it appears that on June 30, 2008, the reporting date 
just after the time that you left, I believe, Mr. Mudd, around 
the time that you left, Fannie either held or had guaranteed 
subprime and Alt-A loans, however that is defined, with an 
unpaid principal balance of $553 billion. In addition, 
according to the same Fannie Mae report, the company also held 
$29.5 billion of Alt-A loans and $36.3 billion of subprime 
loans that it had purchased as private label securities. And 
these figures amount to the grand total of $619 billion and 
reflect a huge commitment to the purchase of mortgages of 
questionable quality between 2005-2007.
    We also appointed, as I said before, we have a new 
regulator in town, a new sheriff, and I'm going to quote from 
him, this is Jim Lockhart, who now heads up the FHFA. Here is 
what he says. This is in a report that he gave. Fannie Mae and 
Freddie Mac purchased and guaranteed many more low doc, low 
verification, and nonstandard mortgages in the 2006 and 2007 
years than they had in the past, roughly 33 percent of the 
company's business involving buying or guaranteeing these risky 
mortgages compared with 14 percent in 2005. Those bad debts on 
mortgages led to billions of dollars in losses at these two 
firms and affected the capacity to raise capital to absorb 
further losses and forced them to go to the Treasury for 
support.
    Now, let me ask you, the way we set up this whole 
organization where you have, as we've said before, you have an 
obligation to your shareholders, and we've talked about that, 
my colleague previously mentioned that, there is also the 
liquidity function here, and you're trying to shore up the 
markets. We're going to have to look further down the road at 
the possibility perhaps of going into a receivership, and 
Fannie and Freddie will go away.
    Do you think, in looking back, that created a conflict, 
your obligation to the shareholder where you're going for 
return, and I know that is what you were going for with some of 
this stuff here. This was making a lot of money at one point. 
Is that a core problem with the way these organizations are 
structured now? And I will just take my answer and yield back 
my time. Thank you.
    Mr. Mudd. Congressman, first, I would apologize. I was--you 
asked a question about the definitions, and I wanted to be as 
precise as I could, and if I can followup by writing 
individually I will. I don't mean not to answer your question 
in any way.
    Mr. Lynch. That would be great.
    Mr. Mudd. On the second question, what I found personally 
was that due to the hybrid nature of the company, a private 
company with a public mission, that charter, that structure 
gives rise to a number of challenges that become conflicts that 
become this very difficult balancing act that you describe 
between shareholders, homeowners, taxpayers, capital, 
liquidity, stability, which market to be in. In a good market, 
in a rising market, it's possible to make the tradeoffs to keep 
that balance in a pretty effective place. In a crisis of these 
proportions, you can't manage the dial and, as you know from 
your work on the Financial Services Committee, you could see 
that some of the dials we had to sub-optimize, whether it was 
in terms of the affordable housing mission or the liquidity 
mission, at any given point in time.
    So, yes, I think the current structure needs to be 
revisited, but my hope would be to revisit it in the context of 
what Congress wants the overall housing finance market and the 
government's involvement in that to look like, thence how 
Fannie and Freddie fit into it rather than having an answer 
provided for Fannie and Freddie, and then the rest of the 
market gets rebuilt around that without sufficient debate and 
examination.
    Mr. Lynch. Mr. Syron, would you like to have a crack at 
that just briefly?
    Mr. Syron. Yes, sir. I think, as I said, these 
organizations have provided a lot of value in the past. There 
has been a lot of change going on. I agree with Mr. Mudd 
completely that we have to look at how this fits into the whole 
system and with, very quickly with respect to the balancing of 
the three, I think in an up market it was a lot easier, but 
essentially what you were trying to do in these companies, you 
could never make any one of the three completely happy. It was 
how you could sort of minimize the unhappiness and make it 
feasible.
    Thank you.
    Mr. Lynch. Mr. Chairman, I appreciate your forbearance. 
Thank you, sir. I yield back.
    Mr. Towns. Gentleman from California, Mr. Bilbray.
    Mr. Bilbray. Thank you, Mr. Chairman. Gentlemen, a 
colleague of mine used the reference ``perfect storm.'' Can we 
agree that this was not an act of God, it wasn't just something 
that happened, that this was a situation that was created, 
nurtured, and triggered by human activity? Can we agree to 
that? Or do you agree with a perfect storm that just this 
happens, and there was nothing anybody could do about it?
    Mr. Raines. Congressman, if you're addressing the question 
to me, I agree with you; it's a result of human beings making 
decisions, and I laid out in my written testimony how not only 
in this storm, but in other storms, it's going to result in 
human beings making a variety of decisions in the financial 
markets.
    Mr. Bilbray. My concern is I feel like in 10, 15 years I'm 
going to have power plant owners come to us for all of these 
grants because their power plants are being washed out by major 
storm activity and say we had nothing to do with this; 
greenhouse gases, who would have thought? But, all I'm saying 
down the line, there were contributing factors here. OK, it 
wasn't an act of God. When you looked at the market, the 
residential housing market and the increase that we were seeing 
over a period of time, far beyond what we saw in the 1970's, 
the other climbs we've seen before, was anybody suspicious at 
all that as we say in the environmental community, that this 
bubble was not sustainable, that if you look at the population 
growth, both birth rate and immigration, it didn't justify the 
market expansion that we saw? Did it? When we saw the way this 
market was growing, where was the market coming from? Where was 
the demand coming from?
    Now, Greenspan testified that there were two major factors: 
One, major portion of foreign investment coming in and buying 
paper and creating an artificial, basically the fact of sight 
unseen you get this paper out there, we will buy it, and the 
values kept going. A lot of that being our own petrodollars 
coming back from the Third World. But, the other part you have 
to admit was that the expanded market that you were creating by 
going out on this thin ice with this Alt-A, this really was 
going out on ice.
    Can you at least admit that a contributing factor was the 
entire industry going out on this thin ice and broadening the 
market that created the bubble? Because you keep saying once 
the bubble popped, what could we do? But, the creation of the 
bubble itself, this artificial inflated market out there, was 
not an act of God. It was an act of foreign, massive foreign 
capital coming in far beyond what was reasonable, and the 
expansion of the market and not just to low income, but middle 
class. I have a constituent, five defaults, no, seven defaults 
she had on people buying and selling the market. Can you at 
least admit that the bubble was created partially by the 
institutions that were out there creating, giving loans to 
people who never should have qualified, thus broadening the 
market and inflating the value?
    Mr. Mudd. I would say that the expansion of credit that 
went all the way back to the 1990's and went through the 
consumer sector as well as the commercial sector, combined with 
the lack of affordable housing and the increase in housing 
prices, all built up that bubble, yes.
    Mr. Bilbray. But, Mr. Mudd, let's talk about self-creating 
the crisis. Didn't the availability and the expansion of the 
market through giving loans that weren't qualified was a major 
contributing factor to the acceleration, to the appreciation of 
residential housing? The cost was going up because you were 
responding to a tip.
    Mr. Mudd. Congressman, I think you rightly describe it as a 
circular problem and the more one thing happened, the more it 
led to the other thing. And the more the homes were 
unaffordable, the more the products got stretched in order to 
create products that people who 5 years before might not have 
been qualified, could be qualified today, and that then led 
to----
    Mr. Bilbray. Just by the act, be it good intention or not, 
be it Congress or be it the private sector, providing the 
market to people who couldn't afford it was causing the price 
of affordability to move out beyond them some more because it 
did contribute to the inflationary, the appreciation of real 
estate because you had more people that were in the market that 
could buy than you have otherwise, right?
    Mr. Raines. You were describing a classic financial bubble. 
And I think you're right. And as I tried to set forth in 
testimony, in my written testimony, we have seen this again and 
again and again, that this is how we end up in financial crises 
by ordinary products being morphed into something different, 
and then, it keeps feeding on itself until a point in which 
time when the market can no longer support it.
    Mr. Bilbray. Mr. Raines, I was involved 18 years with 
affordable housing. Explain to me how you can provide 
affordable housing to people who can't afford it normally, and 
at a time that income and salaries are static, basically static 
over 20 years, while the price of housing is skyrocketing, the 
gap was growing. How do you maintain the ability for that 
population to stay in the market that is moving beyond them 
without somewhere down the road subsidizing them one way or the 
other, filling that gap? How does the public sector do that 
without somebody filling that gap with a subsidy?
    Mr. Towns. Gentleman's time has expired, but he can answer.
    Mr. Raines. I think you and I have probably spent a similar 
period of time with affordable housing, and I think the answer 
is in that circumstance, there has to be a subsidy. We were 
lucky during much of the 1990's, that we had incomes rising 
faster and therefore, with some engineering, you could help 
people who were close to the edge to get into housing. But, at 
a time when home prices were rising as quickly as they were in 
the early part of this decade, it made it almost impossible for 
affordable housing to work.
    Mr. Bilbray. Mr. Chairman, let me point out that I think 
the bailout was the hidden subsidy, not just the low income but 
middle income, to go into markets that they shouldn't get into 
and this bailout ought to be recognized as the end product of 
the fact that there was a subsidy, and that subsidy was the 
bailout and the taxpayers are paying right now to subsidize 
those decisions that were made over the last two decades.
    Thank you very much, gentlemen. I appreciate it.
    Mr. Towns. Thank you. The gentleman from Illinois, Mr. 
Davis.
    Mr. Davis of Illinois. Thank you, Mr. Chairman. I too want 
to thank the gentlemen for being here. I have two basic 
questions for the panel. They are, what mistakes did you make 
that may have contributed to the current financial crisis? And 
what can we learn from these mistakes to guide us as we reform 
and reshape Freddie and Fannie?
    Let me just begin with you, Mr. Mudd. You were quoted in 
the New York Times on August 5, 2008, as saying you have the 
worst housing crisis in U.S. recorded history, and we're the 
largest housing finance company in the country, so when one 
goes down, the other goes with it, end of the quotation.
    Do you believe that your company's financial strategies 
played no role in its problems? Can you look back and identify 
any decisions you made that ultimately were harmful to your 
company and may have contributed to the crisis?
    Mr. Mudd. I can, Congressman. And thank you for the 
question.
    I think that the structure of the companies as monoline 
companies in the housing industry, in a housing market like 
this, presents a challenge and ought to be considered going 
forward because you don't have the ability, as another 
financial institution would, to diversify. So, when the housing 
market goes down, the commercial market goes up, and there is 
some balancing.
    In that light, what do I wish I had done differently? I 
wish I had gone earlier in the process to the regulator, to the 
Treasury Department and said, you know, we are--we are 
struggling to maintain this balance between affordability, 
liquidity, and capital and funding and housing goals and cost. 
Which one do you want us to emphasize? Because the longer that 
we keep trying to balance these areas and be the sole source of 
support in a declining housing market, the more difficult 
challenge this becomes. So, that is one thing that I wish I had 
done differently.
    I wish I had stayed longer and had been able to help more 
with the foreclosure problem which has now come to the fore. 
That, as you know, is really the place where the rubber meets 
the road on this. When I was there, we were able to modify, I 
think, about 200,000 loans in order to help people either 
refinance and save for loans or avoid a foreclosure. I think it 
is apparent now, in retrospect, that more sooner to avoid those 
foreclosures would have been better for the overall market.
    Mr. Davis of Illinois. Thank you very much. Let me ask you, 
Mr. Raines. I would like to hear your view about what mistakes 
were made either during your tenure or after you left.
    Mr. Raines. Well, I would--I'm sorry. I would point to a 
couple of things during my tenure that I wish had been done 
differently.
    I wish we could have gotten a regulatory bill relating to 
Fannie and Freddie enacted earlier because I think that the 
battle over Fannie and Freddie was a distraction to the 
companies, to our regulator, as well as to other parts of the 
financial system regulatory process. So, I wish that we could 
have gotten that done at a much earlier stage in time, which I 
think would, in these times, have provided some real assurance 
to the market about the future of the companies.
    I also wish that we had been able to complete, before I 
left the process, fully entrenching the risk management 
approach to credit that we had worked out over a couple-year 
period that I believe would have been helpful to my successors 
in managing the extraordinary credit issues that they had to 
face after I left.
    With regard to my successors, I'm really not in a position 
to judge them. I don't have the facts. I wasn't there. It would 
be unfair for me to say, Well, sitting here today, here is what 
I would have done differently. I tried in my testimony simply 
to point out what I thought were the facts that the company has 
disclosed, but I don't truly feel in a position to critique 
what they are doing without knowing what they know.
    Mr. Davis of Illinois. Thank you very much.
    Let me just quickly ask Mr. Syron and Mr. Brendsel, 
answering the same questions, could you indicate any feeling of 
mistakes or errors or things that could have been done 
differently?
    Mr. Syron. Yes, sir. What I wish we had done--and we tried 
to do this--is insisted on more precision or some precision in 
how these tradeoffs should have been dealt with. For example, I 
had suggested that simple regulatory language that said that we 
should have--we needed to be fulsome on our mission, be safe 
and sound and provide a return to shareholders that was 
competitive.
    I mean, I think something that would have helped in 
determining how this balance should be met over time.
    Mr. Brendsel. Thank you. Yes, of course, I was the CEO of 
Freddie Mac for a long time, and over the course of those 
years, I made many mistakes in the process. And I learned from 
mistakes as well. And I think certainly what I learned is, 
strong controls over credit and credit policies are critical to 
the long-term survival not only of the organization but also of 
homeowners and the Nation.
    Beyond that, though, I left in 2003, and at the time, I 
felt that our approach in the subprime market focusing, being 
very conservative and cautious, was the appropriate one. And I 
think that has proven to be true.
    I can't say really what has happened since then, in terms 
of the decisions that were made. The appropriateness of the 
decisions is clear based on public statements that the subprime 
investments have proven to be a problem for Freddie Mac and 
Fannie Mae subsequently.
    But, certainly with regard to regrets, I think the issue 
about a strong, professional regulator that is credible and has 
the confidence of the public, of Members of Congress, and of 
investors is of critical importance and continues to be. And I 
think that was at least a source of concern in the early 2000's 
that I would have--as Mr. Raines said, I think--I wish I had 
been more effective in working toward.
    Finally, of course, as has been briefly mentioned, Freddie 
Mac did go through restatement in 2003. It is interesting, of 
course, that the statement resulted in Freddie Mac reporting 
more income rather than less. But, nevertheless, that 
restatement happened under my watch as a CEO; and I wish that, 
No. 1, the restatement had not been necessary, and I still 
continue to kind of search through what I might have done 
differently in that regard.
    Mr. Towns [presiding]. The gentleman's time has expired.
    Mr. Davis of Illinois. Gentlemen, thank you very much.
    Thank you, Mr. Chairman.
    Mr. Towns. Congressman Sali of Idaho.
    Mr. Sali. Thank you, Mr. Chairman.
    Gentlemen, I have to tell you I'm a little surprised that 
I'm getting this impression that all of you feel that Fannie 
and Freddie and the difficulties that we find ourselves in now 
are just because you were victims of a market.
    Mr. Syron, I think you described the mission for your 
organization while you were there as liquidity, affordability, 
and stability. Did I get those three right?
    Mr. Syron. Yes, sir.
    Mr. Sali. Well, I think that each of you would agree that--
I don't know what the exact numbers are, but somewhere around 
close to half of the residential market was funded through 
Freddie and Fannie together. In fact, it has been described as 
two GSEs that were too big to fail.
    You do all agree with that characterization, don't you? 
Does anybody disagree with that characterization?
    OK, fine.
    We heard a description earlier that there was this perfect 
storm, and I think, as Congressman Bilbray pointed out, the 
storm is an act of God and there is no control over that. You 
would all agree that as the biggest stakeholder in the 
residential mortgage market that you will have a significant 
impact on that market?
    Does anybody disagree with that?
    OK.
    And you probably agree that it is not unreasonable to give 
the biggest stakeholder in the residential mortgage market the 
mission of bringing stability to that market.
    Does anybody disagree with that?
    And given that the Alt-A loans failed, I think at something 
like 10 times the rate of other loans and that at the time they 
were being made, they were mockingly referred to as ``liar 
loans,'' none of you would disagree that both Fannie and 
Freddie really failed in their mission, their charge of adding 
stability to the market by trying to meet the market with those 
Alt-A loans.
    Does anybody disagree with that?
    Mr. Mudd. Yeah, Congressman, I would disagree respectfully 
in the sense that it is necessary to maintain a balance during 
that. I don't think that market share is a primary indicator of 
whether the company is being successful or not. It is a 
secondary indicator that says, are you remaining relevant to 
the market. People continuing----
    Mr. Sali. But, we are not talking about success. We're 
talking about stability. And Alt-A loans failing at 10 times 
the rate of other loans, that is not going to add stability to 
the market, is it? You'd agree with that?
    Mr. Mudd. Yes.
    Mr. Sali. OK. Now, each of you would agree that during your 
time at Fannie and Freddie you received more in bonuses than 
you did in your salaries. That is a correct assessment, isn't 
it?
    Does anybody disagree with that?
    And that would be true, Mr. Raines, in spite of that claw 
back that took back part, you still received more in bonuses 
than you did your salary. And those bonuses increased at least 
in part on the pursuit and the resulting increased levels of 
Alt-A and/or subprime loans.
    Do any of you disagree with that?
    Mr. Raines. I would disagree with that.
    Mr. Sali. There was no part of your bonuses that was based 
on increased levels of Alt-A loans?
    Mr. Raines. That was not one of our goals in our 
compensation system to increase Alt-A loans, no.
    Mr. Sali. Because of the number of Alt-A loans, your 
bonuses went up. Is that a fair statement? Because of the 
amount, the total amount of loans that were given?
    Mr. Raines. I don't believe so, no.
    Mr. Sali. It didn't increase the amount of total loans that 
were given?
    Mr. Raines. Alt-A loans can increase the total volume of 
loans you have, but that doesn't----
    Mr. Sali. Yes. And that increased your bonuses, didn't it?
    Mr. Raines. No. It was not based on volume. It was based on 
profitability and pricing. So, if you----
    Mr. Sali. So, if you have more volume, you have more 
profit; is that correct?
    Mr. Raines. Not necessarily. As we can see, having a lot of 
volume can create a lot of losses. So, there was no necessary 
relationship between volume and profit. You hope you have both. 
But, you have to work hard to get the profit part. The volume 
part is not that hard.
    Mr. Sali. OK. So, your bonuses--you're saying that your 
bonuses are based on volume and that the Alt-A loans had no 
bearing on----
    Mr. Raines. I said my bonuses were not based on volume.
    Mr. Sali. Not based on volume, based on profitability; and 
that the Alt-A loans had nothing at all to do with the level of 
bonus that you got?
    Mr. Raines. I said that the profitability of Alt-A loans, 
just like any other loans, would have an impact on the bonus.
    Mr. Sali. OK. Did the fact that there were more Alt-A loans 
that were funded by Fannie and Freddie, did it increase your 
bonuses at all?
    Mr. Raines. In my case, I don't believe so, but I would 
have to go back to 2004. Remember, I left in 2004; so, I would 
have to go back to 2004 to see what impact it had. Alt-A loans 
were a very small percentage of the book of business when I was 
there. So, I don't believe it had any impact on my bonus.
    Mr. Sali. It had no impact at all on the bonuses that you 
received? Is that your testimony today?
    Mr. Raines. I don't believe it did. That's what--I believe 
it did not, because it was such a small part of our business in 
2004.
    Mr. Sali. It had no impact on your bonuses?
    Mr. Raines. I don't believe it did.
    Mr. Sali. Is that true for the rest of you as well?
    Mr. Brendsel. Yes. The last time I received a bonus was for 
the year 2001, and certainly it wasn't based on the amount of 
Alt-A mortgages that----
    Mr. Sali. OK. I'm not asking--I'm not asking about the 
level. I'm asking about the fact that there were more Alt-A 
loans given, that you were trying to meet the market. Each of 
you agrees with me that is what you were trying to do, that 
increased your bonus.
    Do you disagree with that?
    Mr. Raines. I think you have to--in the case of Mr. 
Brendsel and myself, I think you have to separate--the Alt-A 
market became dramatically larger later. It was growing during 
this time. But, as a percentage of the book of business through 
2004, the company's numbers show it was a small part of the 
business. My last bonus was 2003; his was 2001.
    Mr. Sali. Let me ask Mr. Mudd and Mr. Syron. Is that true 
for you, that the Alt-A loans increased your bonuses?
    Mr. Towns. The gentleman's time has expired.
    Mr. Mudd. No, Congressman, because the goals that I had for 
most of that period reflected a wide range of things that 
weren't simply financial and would have included restatement, 
regulatory settlements, and a number of other things. So, there 
weren't explicit goals tied to any given area, A.
    And, B, the compensation was decided by an independent 
committee that I wasn't a member of. So, part of the answer I 
think, Mr. Raines and I, probably all of us would deal with is, 
we were not in the room at the time the discussion was being 
held. So, you have to factor that in mind, I believe.
    Mr. Syron. Sir, we also had a compensation committee 
comprised of the independent directors. We had a balance 
scorecard, the most important things on the balance scorecard 
were becoming SEC registered and getting financial statements 
for 6 years supplied.
    Mr. Towns. Thank you very much.
    The gentleman from Kentucky, Mr. Yarmuth.
    Mr. Yarmuth. Thank you, Mr. Chairman. And I'd like to also 
add for the record my congratulations and thanks to Chairman 
Waxman for the great leadership that he has provided this 
committee over the last 2 years.
    To Mr. Syron and Mr. Mudd, you both said, and I think in 
response to Mr. Lynch's question, that you didn't have a 
problem handling things when values were going up; you could 
keep all these accounts in balance and so forth. And one of the 
things that I think we have learned in this series of hearings 
we have had on the financial crisis is that there are a lot of 
smart people when things are going well, and then people are 
smart until they are not smart; and one of the things that has 
happened is when things turn bad, and through across the 
spectrum, people have not been able to handle it well. Or the 
institutions haven't.
    The other thing we have learned is, in case after case, we 
found institutions that were extremely highly leveraged. I 
mean, the case of Lehman Brothers was basically a 30-to-1 
leverage rate risk versus their capital. And that has been 
pretty consistent throughout--across the board. In May of this 
year, the New York Times reported that your companies had net 
capital of about $83 billion and that was against $5 trillion 
worth of debt, which is a leverage ratio of more than 50 to 1.
    In retrospect, to both of you, do you think your companies 
were overly leveraged? Is that a problem that--was that one of 
the contributing factors to this crisis that you find yourself 
in or found yourselves in?
    Mr. Syron. Well, I think in retrospect, sir, we've learned 
that the entire financial system, and if I may say so, the 
household sector and the government sector in the United States 
was overleveraged.
    I think our concern about leverage was that we would have 
the same capital ratios, if you will--or leverage ratios, for 
the same type of assets is the point we made all the time--that 
our competitors would. I think they could have been higher for 
everybody.
    Mr. Yarmuth. Mr. Mudd.
    Mr. Mudd. If, hypothetically, I were running the company on 
a going-forward basis, and I had the benefit of being able to 
factor in the real-world experience of 2007 and 2008 into the 
models and into the estimates, that data would introduce--there 
is a much wider degree of variability than was ever seen in the 
history of the U.S. housing market. So, some of the question 
you're asking is, I think, going to be self-solving not just 
for Fannie Mae and Freddie Mac, but for other financial 
institutions as well simply because the data of a crisis of 
these proportions didn't exist before, they say, 1938.
    I learned the other day that the last time the Bank of 
England got rates this low was 1641. So, people have gone back 
quite a long ways to try to find this level of dislocation.
    Mr. Yarmuth. And going back to the question of leverage, 
though, was there ever any discussion internally in your 
operations about whether your risk was in excess of your----
    Mr. Mudd. We actually had raised capital and were carrying 
capital during this past year that was significantly higher 
than regulatory standards, so--and we recognize that and I had 
said publicly this is the type of market in which you want to 
be low in capital.
    So, I think while--I don't know how you would debate the 
numbers, but the philosophy of wanting to go into a difficult 
market with strong capital is important; and also for folks to 
remember the reason that you have capital on the sunny days is 
so that you can weather the rainy days, and it shouldn't be a 
surprise that capital goes down as a crisis becomes more 
pointed.
    Mr. Yarmuth. So, I take it--and I'm not trying to say--I'm 
not questioning or second-guessing with hindsight your judgment 
at the time. But you had more leverage than you should have 
had? You were overleveraged in light of the circumstances?
    Mr. Mudd. We were carrying the--we were carrying capital 
that was not only met, but exceeded all of the regulatory 
standards.
    Mr. Yarmuth. I understand the regulatory standards. But, 
doesn't leverage of this type, doesn't it rely on the bigger 
fool theory. When you're leveraged 50 to 1, doesn't that always 
assume there is somebody--there is a bigger fool that is going 
to continue to buy? Because if you have a normal default rate, 
if you have a 3 or 4 percent default rate and you're leveraged 
50-to-1, you're going to dip into capital.
    If you have a 10 percent leverage rate, you can experience 
a much higher default rate; isn't that right?
    So, you're assuming that this is almost an endless 
acceleration of prices to be able to leverage at that rate; is 
that not true?
    Mr. Mudd. Sir, I definitely think that you're onto the 
right issue, and the ability of the level of capital in either 
a company or a GSE to be responsive to the market conditions is 
important. That is now, as I understand, in the regulatory 
regime.
    And back to my earlier point, the fact that we now have 
more robust data that shows what capital should look like in 
various stress scenarios will inform--what were, after all, 
models designed by--won Nobel Prizes. So, I think that will be 
helpful in that regard.
    Mr. Yarmuth. Thank you.
    Mr. Towns. Thank you very much.
    The gentlewoman from North Carolina, Ms. Foxx.
    Ms. Foxx. Thank you, Mr. Chairman. And I too want to 
congratulate you on your new position and tell you I look 
forward to working with you and our ranking member.
    There is so much to talk about here and so little time to 
do it, as my colleagues have said. But Mr. Yarmuth has just 
injected an important issue into what we were talking about, as 
have some of my other colleagues.
    I want to pose a question to you all that I'm not going to 
ask you to answer until after I make some more comments. But, I 
want to followup on what Mr. Yarmuth was saying about it seemed 
that, Mr. Mudd, you and others were always looking for things 
to get better because there is a quote here from the New York 
Times, ``Almost no one expected what was coming. It is not fair 
to blame us for not predicting the unthinkable.''
    Well, the question I want to ask you is, how in the world 
can shareholders and even citizens of this country when they 
have so much at stake and entities such as Fannie Mae and 
Freddie Mac, how do we and--and back up. And you have all said 
that the main thing that you would have liked to have done was 
to have stronger regulatory control. And I will come back to 
that in a minute.
    So, how do--how do boards of directors test people coming 
into their positions? Not just as CEOs, but CFOs and these 
other positions. But, you all have been CEOs, so, that's what 
we are talking about.
    How do we test for backbone? How do we test for ethics? How 
do we test for a sense of vision? And how do we test for people 
who are going to look at the full spectrum of issues, not just 
always looking for the sunny side of the street?
    But, we need people who understand how to deal with crisis. 
You're saying it is unfair to ask you to work in situations of 
crisis. What in the world were you getting paid millions of 
dollars to do, simply ride the gravy train and always be there 
when things were good? For heaven's sake, did you not have any 
sense that anything could ever go wrong under your watch and 
that you weren't responsible for that?
    You have exhibited no sense of accountability for your 
actions here. None. And that is disturbing to me and the 
American people. They expect us to be held accountable. And I 
want to say I appreciate the bipartisan nature of this hearing 
today. It has been the most bipartisan, I think, that we have 
had because we all agree there are problems.
    Administrations have created these problems too. This is 
not a Democrat/Republican issue. We have people--we have 
Members of Congress who are at fault too.
    I wasn't here when these things were happening, but I want 
to come up to a point my colleague, Mr. Shays, brought up. And 
again I'm going to leave time for you to answer your question. 
He made a comment that really triggered my concern about this, 
We got them to agree to go under the 1933 and 1934 act. You 
know, I'm just appalled as a Member of Congress that Members of 
Congress felt they had to get the agencies they regulate to 
agree to those regulations.
    What a situation we find ourselves in. Members of Congress 
don't have enough backbone themselves to do the kinds of 
regulations--and you're telling me, Mr. Raines, that the 
regulatory bill should have been enacted earlier and yet you 
fought it tooth and nail. But, now, in hindsight, you're 
willing to tell us it should have been regulated earlier, 
should have been more with risk management, but you fired the 
risk managers. So, you were afraid of being regulated because, 
again as Mr. Shays said, much of what has been found out that 
was wrong came about as the first real regulation.
    And, you know, it is not just your shareholders, it is not 
just the people you helped, but it is every American that is 
being affected by this because, as a result of your actions, 
home prices all over this country have gone down. You really 
have been irresponsible in what you have done, and the people 
who worked for you.
    And I have quote after quote after quote. And I think part 
of the problem boils down to the amount of PAC money that was 
coming in from you guys and how much you spent to make sure 
that Members of Congress would go easy on you in their 
regulations. And I hope that what has come out about that has 
raised the awareness of the American people about the 
connection between those moneys.
    And I love this committee. I got on it because it has the 
ability to investigate these kinds of things, where the other 
committees have vested interests in what's happening and are 
often swayed by those very lobbyists that you hired to stop the 
kind of hearings going on today and the regulations.
    But now with 20/20 hindsight, you want----
    Mr. Towns. The gentlewoman's time has expired.
    Ms. Foxx. We want the American public to know what your 
advice is on that.
    Mr. Towns. Very quickly because time has expired.
    Mr. Raines. Congresswoman, first of all with regard to 
accountability, I have three full pages in my written testimony 
on the issue of my accountability. And therefore, I would hope 
that you would recognize that I have not been silent on that. 
We simply are not allowed to testify to everything we have in 
our written statements.
    But, I went to great lengths to point out that from the 
beginning, when there was a question raised about Fannie Mae 
and its accounting, I said I hold myself accountable; if the 
SEC finds we have made errors, I will hold myself accountable 
and my board will.
    I retired early. I've had compensation clawed back. So, it 
is unfair to say that I have not accepted accountability for 
what happened when I was the CEO of the company.
    Mr. Towns. Mr. Brendsel.
    Mr. Brendsel. Yeah. I certainly was accountable for what 
happened at Freddie Mac during my time----
    Mr. Towns. Is your mic on? Is your mic on?
    Mr. Brendsel. I'm sorry.
    I am. And I was held accountable for what happened to 
Freddie Mac during my tenure at the company, which ended in 
June 2003.
    I do believe that with regard to the subprime market and 
that--I think Freddie Mac behaved very responsibly under my 
tenure. My greatest accountability and ultimately why I left--I 
resigned from the company, of course--was a result of the 
financial restatement that we had to go through during 2003, 
which fortunately left the company with more capital than 
before, but nevertheless, it was still a restatement that the 
company should not have gone through.
    Mr. Towns. Mr. Mudd.
    Mr. Mudd. Do I expect sunny days? No. I went to Mexico when 
the peso was devalued. I went to Asia when the 1998 crisis hit. 
I went to Beirut when they were shooting there. People say that 
I like it too much when it is not a sunny day. So, I would 
disagree with that.
    I would say that this time through, reality exceeded my 
imagination. And with respect to the 1933 and the 1934 act, we 
were agreeing to reverse a registration that a prior Congress 
had provided an exemption from.
    Mr. Towns. Mr. Syron.
    Mr. Syron. Thank you, sir. With respect to foresight and 
seeing things going forward, I was not as pessimistic as things 
eventually turned out. What I expected to happen was that 
housing prices would go down to being about flat in nominal 
terms and decline in real terms, but not catastrophically.
    Mr. Towns. Thanks very much.
    Mr. Braley.
    Mr. Braley. Mr. Chairman, Ranking Member Issa, thank you 
for holding this hearing. Mr. Chairman, there have been several 
references today during this hearing to a perfect storm. And I 
think it is important to remind everyone that in a perfect 
storm, the entire crew of the Andrea Gail perished. And the 
purpose of this hearing is because we've got paddles on the 
chest of two patients, and we're trying to determine how much 
voltage to apply to resuscitate them.
    Mr. Mudd, I'm going to start with you because you're one of 
the rare people that can say, My name is Mudd with a straight 
face. I want to start by asking you about an e-mail exchange 
you had with your chief risk officer, Enrico Dallavecchia.
    For 6 months beginning in March 2006, Fannie Mae 
implemented a new business initiative to buy subprime loans. 
And under this program, Fannie concluded one deal to buy $74 
million in subprime loans from a company called New Century, 
and it also began negotiating new deals. On August 16, 2006, 
the corporate risk management committee approved a final plan 
to purchase up to $5 billion in whole subprime loans in 2006.
    Two months later, on October 28, 2006, which ironically is 
the same day the Great Depression really began in earnest, Mr. 
Dallavecchia, your chief risk officer, sent an e-mail to you 
raising concerns about this huge increase in subprime 
purchases; and I'm going to ask them to put that e-mail up so 
that we can all take a look at it, and I want to read to you 
the portions that are in these callout boxes: ``Dan, I have a 
serious problem with the control process around subprime 
limits. Ramping up business much faster than we agreed upon 
less than 2 months ago is de facto preventing me to exercise my 
reserved authority to determine limits without damaging 
relationships with customers.''
    Mr. Mudd, Mr. Dallavecchia was saying you were ramping up 
too quickly on the subprime purchases and that this 
acceleration prevented him from determining appropriate risk 
limits. Isn't that true?
    Mr. Mudd. I'm sorry, sir. Could you repeat the question--
part of your question?
    Mr. Braley. Yes. What he is saying here is that your 
company was ramping up too quickly on subprime purchases, and 
this acceleration was preventing him from determining 
appropriate risk limits; isn't that true?
    Mr. Mudd. I believe that's what he was saying in his note, 
yes, sir.
    Mr. Braley. And then, later in the e-mail, if we can go to 
the next slide, he says: ``We approved twice, in March and in 
June, to buy subprime loans without having completed the new 
business initiative.'' And then, in bold, ``This is a pattern 
emerging of inadequate regard for the control process.''
    It seems like in this portion of the memo, your risk 
officer believed that you were rushing into billions of dollars 
worth of subprime loan purchases without really knowing what 
you were doing. Isn't that what he is saying here?
    Mr. Mudd. Yes. And there is a part of the memo that is my 
response to him that is covered up by the box.
    Mr. Braley. We are going to get to that.
    Mr. Mudd. That furthers the conversation on the top.
    Mr. Braley. When he sent this e-mail to you, did you agree 
with this assessment?
    Mr. Mudd. That is why I wrote above it, ``It is a serious 
matter, and if the facts are supportive, you and I will come 
down hard.'' That's what it says above that.
    So, he came and saw me. We went through the facts. We got 
the folks at the table, we had the discussion, and we went back 
to address those concerns. That was exactly the process, sir.
    Mr. Braley. Right. So let's go to that portion of the memo 
that you replied, and your reply was dated on Sunday, October 
29th, at 12:42 p.m. As you indicated, you said, ``This is a 
serious matter;'' so you agreed with his assessment that it was 
a serious matter, correct?
    Mr. Mudd. Yes.
    Mr. Braley. And then you said if the facts are supportive, 
we will come down hard. Were the facts supportive?
    Mr. Mudd. As often happens in these types of situations, 
the facts were partially supportive. I would say in this case 
maybe even mostly supportive.
    Mr. Braley. So, did you come down hard?
    Mr. Mudd. Yes, we did.
    Mr. Braley. What did you do?
    Mr. Mudd. We called all of the people that were involved in 
the process into the room, had a discussion, had a meeting, 
laid out the--if I can just rewind for 1 second.
    The role of an independent chief risk officer at Fannie Mae 
and most financial institutions was a relatively new role. So, 
the rules of the road were kind of being written in real time, 
and what I wanted to do was to make it very clear that the CRO 
not only reported to me but also reported to the board. I 
wanted to make it very clear in this process of coming down 
hard that person was my right hand on risk, that person needed 
to be part of the process, that person needed to be heard; and 
if that person needed to discuss a report independently to the 
board, he or she had the ability to do so.
    Mr. Braley. Well, Mr. Mudd, I think the American taxpayers 
are the ultimate jury on whether you came down hard, and I 
think the record indicates you didn't come down hard. Instead, 
you continued the acceleration. And let me show you a 
presentation made to the credit risk committee less than 3 
months later on January 17, 2007.
    Can we have that, please?
    Well, in that presentation, management proposed expanding 
the subprime business unit in 2007, purchasing $11 billion more 
in subprime loans and eliminating restrictions on the volume of 
mortgages you could purchase with lower borrower scores and 
unverified incomes. So, in effect, you were increasing your 
levels of risk rather than moderating them as your chief risk 
officer had recommended; and it looks to me, and I think it 
looks to a lot of taxpayers, like you were going in exactly the 
opposite direction of your risk officer's recommendations.
    I yield back the balance of my time.
    Mr. Mudd. Sir, if I may. His memo--I have a serious problem 
with the control process around the subprime limit. So, he 
wasn't expressing a problem with subprime as a broad issue, as 
characterized. He was expressing a concern around the control 
processes--the sign-offs, the coding, the filing, and so forth. 
And that control process was the subject of this discussion and 
of the remediation. And that is a separate issue than an 
entire, broader debate that we had in the company and with the 
board and with the regulator and elsewhere about the subprime 
market in general.
    So, I would just recommend it is important to keep the two 
issues somewhat separate.
    Mr. Braley. I understand that. But, the whole purpose of 
having control processes in place in a company like yours is to 
make sure you're making rational business decisions based upon 
the best information available and that you are following a 
rational process to make those decisions. So, if the control 
processes are not in proper working order, it prevents you from 
following a rational decisionmaking model, doesn't it?
    Mr. Mudd. Yes. And that's why it was important to fix them.
    Mr. Towns. The gentleman's time has expired.
    Mr. McHenry from North Carolina.
    Mr. McHenry. I like the new chairman, and congratulations 
to you. I look forward to working with you. We'll start with a 
simple yes-or-no question.
    Ms. Foxx. Good luck.
    Mr. McHenry. Good luck, I hear.
    OK, in order to fulfill your affordable housing goal, 
instituted and given to you by Congress, did you feel in order 
to fulfill that affordable housing goal, did you feel pressure 
from Congress to do riskier mortgages, perhaps more borderline 
mortgages?
    We will start with Mr. Raines, and we'll go right down the 
list. Yes or no?
    Mr. Raines. I did not feel pressure from Congress because--
--
    Mr. McHenry. So no? I'm asking--I only have 5 minutes.
    Mr. Raines. No.
    Mr. McHenry. You have had a long day, so I'm trying to----
    Mr. Raines. No.
    Mr. McHenry. No. Interesting.
    Mr. Brendsel. No.
    Mr. McHenry. No.
    Mr. Mudd.
    Mr. Mudd. No, because if the goals went up, the goals came 
from HUD, and meeting those HUD goals created pressure.
    Mr. McHenry. Mr. Syron.
    Mr. Syron. As the goals went up and the goals were 
specified by HUD, you inevitably, to make more progress, had to 
take more risk.
    Mr. McHenry. So, in order to make more progress with your 
affordable housing goal, you had to make riskier mortgages?
    Mr. Syron. Buy riskier mortgages.
    Mr. McHenry. Buy riskier mortgages. I think it is 
interesting Mr. Syron gave something more akin to what I was 
accustomed to as a member of the Financial Services Committee. 
I have seen some of you before, and I don't know if you just 
refuse to listen to what happened in those hearings, but there 
was massive pressure from Members of Congress on your 
institutions to provide more affordable housing and, therefore, 
riskier mortgages.
    Now, I'm not calling them riskier. Your risk officers 
called them riskier. And in Freddie Mac's case, Mr. Andrukonis 
wrote a memo in 2004--we can call that up--to push for ``more 
affordable business.'' I guess that is your lingo for more 
affordable housing; and ``increased share'' means more 
borderline and unprofitable business will come in. ``The best 
credit enhancement is a profit margin, and ours is likely to be 
squeezed in response to these market pressures.''
    So, I think--it is interesting to me that in some respects 
and by your newspaper accounts, you acknowledge that there was 
pressure on you. And obviously pressure from Congress in terms 
of congressional efforts on HUD to raise those standards, but 
also on you all directly.
    And I think it is pretty bizarre--I mean, the chairman of 
my committee, ``financial services,'' Barney Frank, said, ``I'm 
worried, quite frankly; there is tension here.'' This is from 
2003. ``The more people in my judgment exaggerate a threat of 
safety and soundness, the more people conjure up the 
possibility of serious financial losses to the Treasury which I 
do not see. I think we see entities that are fundamentally 
sound financially and we are seeing some of the disastrous 
scenarios. Congresswoman Waters, who I serve with on Financial 
Services, said, `If it ain't broke, don't fix it.' ''
    We're still paying the price for that. But, my point is, 
you did have pressure to meet your affordable housing goal. And 
that was done through Members of Congress; it was done through 
HUD; and that was conflicted with your delivery for your 
investors to produce profit. That's what your risk officer 
said.
    Do you all disagree? Mr. Raines.
    Mr. Raines. I disagree. In my time that I was there, I did 
not feel pressured from the Congress to do riskier loans to 
meet housing goals. Our housing goals were ratcheted up 
administratively by HUD. Congress gave guidelines that I 
thought were quite reasonable to HUD. HUD, by the time I had 
left, was proposing to push those guidelines to a level to 
force the companies to begin to entertain loans that they 
otherwise wouldn't have entertained. So it really was more from 
a regulatory standpoint than Congress.
    Mr. McHenry. And who funds HUD? Congress.
    Let me just tell you--I hate to reference this, and Mr. 
Raines knows from his political background, but this is a 
political city. There was pressure from Congress.
    Mr. Raines. However, Congressman, at that time, just to be 
fair, Congress was in the hands of the Republicans. So I don't 
think that the Republicans were intending to force HUD to 
rachet up our goals to an unreasonable level.
    Mr. McHenry. Reading from your quote in the Washington Post 
yesterday, you want to make this a partisan situation.
    Mr. Raines. Congressman, that is just not correct. I 
actually want it not to be a partisan situation.
    Mr. McHenry. That's generous of you.
    So, I read in the Washington Post from yesterday, that same 
article I just referenced, what they say is, ``People familiar 
with the matter said Freddie was being pushed by advocacy 
groups to come up with new loan products to offer to low-income 
and minority borrowers.'' Is that true?
    Mr. Towns. The gentleman's time has expired.
    Mr. Syron. By advocacy groups, yes, sir.
    Mr. McHenry. Yes. And those same advocacy groups are 
closely aligned with some Members of Congress as well, and they 
are voices for that advocacy groups as well.
    Mr. Syron. I would be speculating to get into----
    Mr. McHenry. Well, I will tell you, yes, they are. Thank 
you.
    Mr. Towns. Mr. Sarbanes from Maryland.
    I'm sorry. The gentlewoman from Washington returned.
    Ms. Norton. Thank you very much, Mr. Chairman. You don't 
want to start off making mistakes, do you?
    Mr. Towns. That's exactly right. No doubt about it. I want 
to start this thing off right.
    Ms. Norton. Gentlemen, I have to confess my major concerns 
are going forward because the GSEs have been so important for 
low- and moderate-income housing in the United States for 
decades. Indeed, after we finally figure out how to get to the 
bottom of housing crisis, which is a subject of extreme 
frustration I must tell you here, I think the most important 
decision that we could make on housing has to do with the GSEs.
    I'm very concerned about the ad hoc problem solving that is 
going on with respect to this crisis. Something pops up, 
somebody leaps on it; and I certainly hope somebody is working 
on this one right now.
    You have a twin identity that absolutely fascinates me. On 
the one hand, you have a very important--indeed, the most 
important--public mission in housing, to assist low- and 
moderate-income families. On the other hand, you're like every 
corporation because you have shareholders.
    Mr. Paulson, when Fannie Mae went into conservatorship, was 
very plain about what he thought; and I want to quote from him. 
He said there was a ``consensus that the GSEs, hold a systemic 
risk.'' And he went on to say, ``Government support needs to be 
either explicit or nonexistent, and structured to resolve the 
conflict between public and private purposes.''
    I would like to ask each of you whether you agree with 
Secretary Paulson. Do you think that the GSEs should be 
returned to the entities they were before? Do you think they 
should be part of government? Do you think they should be 
privatized?
    And in giving your answer, I would like to know if you 
believe that they should be--GSEs, whether you would also make 
them exempt from local and State taxes, give them a line at the 
Treasury, exemption from at least certain kinds of regulations, 
which of course give them an advantage when competing in the 
private market.
    Why don't I start with you, Mr. Raines, because I noticed 
in your testimony that you did not apparently see inherent 
problems, and you say you don't think we can find a better 
model. Could you explain your view or is that still your view?
    Mr. Raines. Well, I can explain it, I think, very quickly.
    The systemic risk to the system comes from any very large 
financial institutions that are highly leveraged, whether they 
are called GSEs or they are called insurance companies or they 
are called banks. Indeed, we saw in the current crisis that the 
most troubled entities and the ones that had the most extensive 
impact on the financial system weren't GSEs. The biggest one is 
an insurance company that had never been identified as a 
systemic risk.
    Second, with regard to making the government support either 
explicit or nonexistent, I can agree with that. I think it can 
be explicit and not--I don't think it would be possible to go 
back to the implicit support that was there before. And I think 
the market should be told what the support is; and that should 
be it, and the investors should take the risk.
    On the last point on resolving the conflict between public 
and private purposes, I think that is laudable, but impossible. 
And an example I would give you is a defense contractor. A 
defense contractor is only there to solve for a public purpose. 
They only sell to the government. They are there for national 
defense. That product is not really useful anywhere else in the 
economy.
    But, they are also for-profit companies. They are there to 
advance the interest of their shareholders.
    Ms. Norton. Would people invest in such a company?
    Mr. Raines. I think people invest currently in utility; 
they invest currently in defense contractors, and they invest 
in banks that have the same conflict within themselves.
    Ms. Norton. So, you think perhaps we should treat Fannie 
Mae and Freddie Mac more like a utility then?
    Mr. Raines. I think treating them more like a utility may 
be politically much more comfortable than treating them in the 
current form.
    Ms. Norton. Let me go on to Mr. Mudd, who has indicated 
that Freddie and Fannie are in a ``no-man's land.'' And you in 
your testimony, you advocate to make them either fully public 
or fully private. So, which should they be? And why?
    Mr. Mudd. The advocacy, Congresswoman, is to make it clear 
for a long time throughout----
    Ms. Norton. You don't care which it is, sir?
    Mr. Mudd. I think at this point--I know a little bit more 
intimately the structure of the company, and there are 
different components of the company. One component, the 
mortgage portfolio is a liquidity provider fundamentally, the 
guaranty business is fundamentally a securitizer.
    It seems clear to me now in the history of the past 6 or 8 
months, that if there is a real crisis in the country, the 
liquidity provider is going to be the government. So, that 
would give rise to a question of whether you want a private 
company to be a liquidity provider or whether that becomes a 
function of the government.
    The other side of the business, the guaranty business that 
does work with lenders, provide services, does so at a fee 
might have another--might have another treatment.
    So, I don't think the same answer needs to be true for all 
components of the company if you're going to move it out of 
what you aptly described as ``no-man's land.''
    Ms. Norton. I would like to know if the other two gentlemen 
believe that an entirely private company could be trusted to 
provide the same protection to the consumer, particularly the 
consumers that the GSEs were specifically directed to help.
    Mr. Syron. Well, ma'am, Congresswoman, I don't think that--
excuse me, gentlemen--I don't think a purely private company 
could generate long-term fixed-rate mortgages that are 
prepayable just because no other country, major country, has 
one.
    I think, as some of my colleagues have said, the most 
important thing is getting a more precise definition, whether 
it is a defense company which operates on some sort of cost-
plus, a utility with a specified rate of return, there needs to 
be less sort of swimming around and more definition of what the 
shareholders can expect.
    Mr. Towns. Mr. Brendsel, and then----
    Mr. Brendsel. I think one only has to look at the mortgage 
market of today and the mortgage market of the past two or 
three decades. And you can see where it is that part of the 
market is served by the purely private market. It doesn't work 
as well. It is more unstable, and you don't have the types of 
mortgage products that are consumer friendly.
    I also happen to be of the--maybe the view in the minority. 
I don't see a fundamental conflict between the public purpose 
for which Freddie Mac is chartered, and was chartered, and its 
shareholder ownership. After all, we are chartered to bring 
stability and liquidity and availability of mortgage credit to 
low- and moderate- and middle-income families and to use 
private capital to do so. It is that one mission, unique 
mission.
    Ms. Norton. What about the shareholder mission?
    Mr. Brendsel. Well, in order for--if the shareholders are 
served, they are only served by serving that mission of 
bringing mortgage credit to American homeowners at a profitable 
rate, but at a rate where it is the result in sound loans.
    Ms. Norton. Thank you very much, Mr. Chairman.
    Mr. Towns. Thank you very much.
    Mr. Garrett from New Jersey.
    Mr. Garrett. I thank the chairman, and I thank the ranking 
member for the opportunity. I normally serve on the Financial 
Services Committee; so I appreciate this chance to be here for 
a few minutes--actually, for several hours now--because this 
has been a topic of most importance to me ever since I have 
been here, for the last 6 years.
    I appreciate your testimony and also some of the questions. 
One point is, I appreciate the fact also that the panel is made 
up of members who are here with both organizations during 
different years. And so, therefore, it is probably unfair to 
use a broad-brush approach on any of the questions or some of 
the allegations that were made because you were in different 
spots.
    To the point of who is responsible, which is a lot of the 
questioning, and the committee is evidencing the fact that we 
don't feel we don't get that back from the panel, let me just 
also say the flip side of that on this issue just for 30 
seconds. And that is this: Just as the panel had the 
opportunity to address a number of the questions or issues 
during their tenure in office and some of the questions I will 
raise as well, let it not be forgotten that Congress also had 
the opportunity for the 6 years that I served, and prior to 
that as well, to address some of these issues--the systemic 
risk issues, the operation issues, the issues as far as where 
you were investing, and the size of portfolio and what have 
you, and that was not done.
    So, I would ask each Member, who was raising those 
questions as who was responsible to look in their mirror on 
this panel to see, how did they vote both in committee and on 
the floor when the opportunity came for the House and the 
Senate to rein in, create new regulations for the GSEs in the 
past. So, I think there is an adequate opportunity to see 
responsibility both in the panel and this committee as well.
    Going to the GSEs, you make money in two different manners. 
One, of course, is by buying up securities, packaging 
mortgages, and then selling them. The second way, of course, is 
by taking these mortgages and putting them into your portfolio.
    That second way, in my understanding, is eight times more 
lucrative or profitable than the selling of the securities. The 
number in here that I have seen is, you had reached a high in 
2003 of $1.5 trillion worth of securities in your held 
portfolio, and 2008 went down to $1.4 trillion.
    And interestingly enough on these numbers, in 2005 to 2007, 
this is what--the type of securities you were putting in there: 
97 percent were interest-only securities; 85--or mortgages--85 
percent were Alt-A; 72 percent were negative amortization 
mortgages; 61 or 62 percent were with FICAs under 620.
    Obviously, these are, A, the more risky loans that were 
going on during that time; and in general, during the entire 
period of time for everyone when you were expanding your 
portfolio, that was more profitable on the one hand, but 
certainly riskier on the other hand.
    The issues have already been raised as far as leveraged 
ratio on the capital levels, and this committee criticized 
Lehman for a 31 ratio, and here you're leveraged at a 75-to-1 
ratio.
    One of the members of the panel said to all of these 
points--in general, and not specifically on one--that ``we were 
doing the same as our competitors.'' So, one of my first 
questions will be--and I'll get to this--allow you to answer in 
a second. Is it appropriate for a GSE, which has the backing 
implicitly now, implied at the time of the government, to 
simply be mirroring what the private sector is doing; or were 
you--should have been to a higher standard in each of these 
areas--your risk model, your capital model, what you were 
putting in the securities as well? And that will be the first 
question I would throw out to you.
    Second, to the regulation aspect, but Ms. Foxx and Mr. 
McHenry raised this point very well. Mr. Raines, you were 
saying that you were looking for additional regulation. And I 
think you made the comment in your testimony--you didn't go in 
full detail, but I read your full testimony--OFHEO was not 
restraining credit risks, but they were limited to balance 
sheet and interest rates risk.
    That may be, but I can tell you that certain members of the 
Financial Services Committee were looking at all of those 
areas. And you had Secretary Snow come in before the committee 
and testify. You had Alan Greenspan come in and testify on 
these points. You had Richard Baker when he was here 
testifying--not testifying, but raising these points. There was 
a focus, at least for the 6 years when I was in Congress, to 
try to do these things.
    While perhaps you did come before the committee and say 
that we needed regulation in the House, we know for a fact that 
the House regulations were a lot softer, a lot easier than the 
regulations that were being proposed in the Senate. And what 
the GSEs did effectively through the lobbying mechanisms and 
otherwise was to kill effectively during the time the 
Republicans were in charge of those efforts in the Senate; and 
what we have ended up with now is regulation, albeit late and 
obviously way too late, but much softer regulations than should 
have been done in the past.
    And finally, I guess on that point--since my time is just 
about out--to the point, you may have made the suggestion, Mr. 
Raines, that the problem was not a credit problem per se in the 
portfolios and the mortgage-backed securities. But, really 
wasn't it a problem--and this is when the accounting 
irregularities came up and what have you--wasn't the problem 
underlined by the fact that because of the size of the 
portfolio and having to deal with interest-rate risks that you 
had to be getting involved with derivatives and other 
mechanisms in order to hedge against that; and that effectively 
led to some of the problems that we dealt with later on?
    So, I guess there are three questions there, two for Mr. 
Raines and the rest for the panel.
    Mr. Towns. Let me say to the gentleman, I know you waited 2 
hours, but your time has expired.
    Mr. Garrett. Thank you again for the opportunity, though.
    Mr. Raines. I believe there were two questions that were 
directed to me, one of them about regulation and Fannie Mae's 
activities with regard to legislation and the other related to 
derivatives; is that correct?
    Mr. Garrett. Yes.
    Mr. Raines. With regard to Fannie Mae and legislation, it 
was always my desire--and I worked very hard, but 
unsuccessfully--to try to get legislation passed because I 
believe that as legislation was passed, then all of the 
political swirl around Fannie Mae would subside for at least 
some period of time. And I was an advocate, and I think if you 
talk to the chairman of the committee, the relevant committee, 
even Mr. Baker would indicate that I wanted legislation.
    Did we agree on all of the provisions? No. But, the 
provisions we disagreed on did not relate to regulation; they 
related to our mission. There were efforts to try to try to 
constrain our mission. I opposed those. But, where it came to a 
world-class regulator as defined by Congressman Kanjorski and 
who pushed this over and over again, I was in favor of that.
    I'm still in favor of it. And I'm still opposed to 
constraining the mission of the GSEs. So I think there has been 
a consistency across that time.
    In terms of the derivatives, as you accurately point out, 
Fannie Mae used derivatives in order to enable to fund itself, 
including its own balance sheet portfolio. And the fact that 
Fannie Mae had to do a restatement is something that I have 
stated over and over again that I'm not only sorry for, but I 
hold myself accountable that we did not get it right, even 
though I was not involved in the accounting.
    I would point out, however, this is not a problem that was 
unique to Fannie Mae. I think that upwards of 200 companies had 
to have restatements around derivatives in that time period. 
Some of them had to do it twice before they could do it 
properly, according to the SEC. So, this difficulty of applying 
the FAS 133 standard was not unique to Fannie Mae, but it was 
widespread amongst financial firms during that era.
    Mr. Brendsel. With regard to derivatives, we used 
derivatives at Freddie Mac to reduce risk, to manage interest 
rate risk, and we didn't use it to manage credit risk or the 
risk of default on subprime mortgages, which I have already 
testified to reduce risk, to reduce interest rate risk. But, 
that doesn't have anything to do really with the losses that 
are being taken on credit risks associated with subprime 
mortgages.
    Mr. Mudd. I guess for the purpose of time, I would just 
address the risk question and the standards question. And I 
think in the context of the Alt-A book, the ultimate measure 
there is the performance; and the performance of the Alt-A 
loans that Fannie Mae guaranteed has been a factor to--better 
than the market. The FICAs were higher, the credit scores were 
higher, the loan-to-values were higher. The question was, was 
it ultimately good enough that it matched or exceeded the 
performance of the other 85 percent of the book, which is the 
old standard fixed rate mortgage. No. That is a reflection of 
the change in the marketplace.
    Was there a role for the companies in terms of standard 
setting? Yes, Congressman, I think that expressly defines what 
we were talking about earlier about relevance. You can't set 
any standards whatsoever if you're irrelevant to the market 
because you're offering products that nobody wants.
    Mr. Syron. Mr. Congressman, I will try to quickly answer 
two of the questions.
    One, should we have the same capital standards--not ``we'' 
anymore--but should there be the same capital standards? And I 
think that depends on the degree of the guarantee. I have 
sympathy for your argument that if there is an explicit 
guarantee for the GSEs in not--for the competing financial 
institutions, then maybe there is an argument for higher 
capital to protect the public. I think the reverse situation 
may actually apply now.
    And second is, in terms of the willingness to take risks in 
where things were. Actually, if you look at the latest Mortgage 
Bankers Association figures on delinquencies, they show for the 
country as a--excuse me, for the industry as a whole--4.9 
percent and for Freddie Mac 0.8 percent. So, in terms of--far 
from perfect, but the level of delinquencies, about six times 
greater for the industry than for Freddie Mac.
    Mr. Towns. Thank you very much. The gentleman from 
Maryland, Mr. Sarbanes.
    Mr. Sarbanes. Thank you, Mr. Chairman.
    Thank you all. You have demonstrated extraordinary stamina 
here today. We have been here for 4 hours, one of the longest 
panels we have had over the past couple years, but I think it 
reflects the level of interest there is on the part of the 
committee.
    I wanted to ask if you, and anyone can take a shot at this, 
talk about the distinction--I am going to put this into lay 
person's terms--the distinction between a good risky loan and a 
bad risky loan. Because you talked about how there was pressure 
from HUD, let's say, to make sure that affordable housing 
targets were being met and so forth. But, certainly that wasn't 
an instruction to go find or buy or become entangled with the 
kinds of loans where all manner of conventional underwriting 
standards have been abandoned.
    So, I am curious to know how you would describe what was 
presented to you. Were you looking into a stew of good risky 
loans and bad risky loans? If we want to suggest that all of 
the ones that would take you into the more affordable housing 
arena would be characterized as risky, certainly your 
obligation to continue to differentiate between the ones that 
were extra risky or bad versus the ones that were good, that 
obligation should never have been surrendered.
    So, anybody can speak to that if they'd like.
    We can start with you, Mr. Raines.
    Mr. Raines. Congressman, I like your division between good 
risky loans and bad risky loans because all loans are risky. 
They all have some level of risk to them, and it is important 
to be able to measure that risk and to manage it.
    When seeking to push the envelope of those who have access 
to home ownership, and I think this is an important 
distinction, we tried very hard to come up with loan products 
that we thought helped to make housing affordable and available 
without layering in so many things that the risk was 
unacceptable.
    So, for example, if someone had good credit and they had a 
good steady income, but they didn't have much in the way of 
savings, we would have a low down payment product. If someone 
had good credit but--had marginal credit, but had substantial 
savings, we might say we will take on that marginal credit 
because they have offset it by having substantial savings that 
they could put into a down payment. So, it is the layering of 
these factors.
    When you put together negative amortization, interest-only, 
no documentation, low down payment, bad credit, that layering 
on gets you into bad risky loans. Those are loans that almost 
no one knows how they are going to perform, but you can assume 
it will be pretty bad.
    So, trying to figure out what that line is, when do you 
cross a line between acceptable risk that is advancing 
affordable housing and unacceptable risk that is putting 
families at severe risk to their futures? That is the art. No 
one can tell you exactly where that line is. But, the policies 
that we tried to follow when I was leading the company was, 
keep experimenting. Do small experiments. None that could cause 
you a lot of harm if they go bad, but keep trying. Try this, 
try that. If it doesn't work, stop. If it does work, then 
double down, and do more. And----
    Mr. Sarbanes. Let me go to your tenure, because Fannie Mae 
was purchasing more of these loans that appear to have departed 
from the conventional underwriting standards. Is that because 
you couldn't distinguish between a less risky loan? Or what was 
happening?
    Mr. Mudd. What happened was that the market migrated to a 
wide array of loans with a wide array of features that Mr. 
Raines pointed out was driven by a multiplicity of factors that 
we could go into. But, they certainly included the rising cost 
of a home. They certainly included the technology ability from 
lenders and servicers to offer more choices and more 
complicated products to individuals.
    So, I agree with what he said, that a number of features 
would take a risky loan and turn it into a bad, risky loan. And 
those would go to features that could put an unwary borrower 
into a difficult situation. Negative amortization was 
mentioned, prepayment penalties could be mentioned, required 
insurance, those types of things. But, to me, just stepping 
back for 1 second from a policy perspective, one of the 
starting points might ought to be disclosure, where all of us, 
when we get a mortgage, see a front page that says here's your 
rate, here's the maximum rate you might ever pay, here's your 
monthly payment, here's the maximum monthly payment you might 
ever pay, and that there be kind of a moment of truth between 
the originator and the borrower to make sure they understand.
    Mr. Sarbanes. This is really a question I have had in all 
these hearings because it is not the case--if I am listening as 
a member of the public, it has never been the case in these 
hearings that anyone has suggested that there weren't warnings, 
and that is why all this stuff happened. It's always been the 
case that we have plenty of testimony that there were warnings, 
but they were not heeded. And I am not going to ask you to 
comment on why you didn't heed warnings within your own 
companies, within your own organizations. I am going to ask you 
this:
    What does one do as a corporation--in other words, because 
it was in your interest not to get in. I mean, we talk about 
the effect on the public. But, obviously you would have 
preferred that this didn't happen to Fannie Mae and Freddie 
Mac, and so would all these other companies that are going down 
the tank. What do you do inside an organization to make sure 
that the people that are raising the warnings can somehow 
impact the decisions that are being made? Because it seems, if 
I was a risk analyst from this period of time, I would be going 
through an existential crisis right now. Like what purpose are 
they serving? How do you protect their ability to sound the 
alarm and give it the kind of credence that might have changed 
the course of all of this? So, I will give it to anybody who 
wants to answer.
    Mr. Mudd. My answer would be that you have to create a 
culture that enables those people to get their voice heard. In 
a corporation, it doesn't mean that somebody always gets their 
way, but just like I suppose, in Congress, a legislative 
assistant doesn't get to decide what the Member does. The chief 
risk officer doesn't always get to decide what the CEO does. 
But, you have to make sure that all those voices are a part of 
the debate and that people have a view, no matter what their 
level or their rank or their position or their tenure in the 
company, have the ability to get their voice heard, get it 
considered, be respected. And sometimes, they are right; 
sometimes, they are wrong. Sometimes, you are right; sometimes, 
you are wrong. But, you have to have that culture where you 
don't get a reinforcement of the wrong decisions.
    That would be my experience, Congressman.
    Mr. Towns. Thank you very much.
    The gentlewoman from California, Ms. Speier.
    Ms. Speier. Mr. Chairman, thank you.
    And thank you to the members of our panel. Let me just ask 
a couple of really brief questions and then get to the core 
question I want to ask.
    Are any of you now employed by the financial services 
industry?
    Mr. Syron. No.
    Mr. Mudd. No.
    Mr. Brendsel. No.
    Mr. Raines. No.
    Ms. Speier. And in each of your cases, was your 
compensation in any way, whether it was bonus or stock options 
or salary, linked to the volume that was generated by the 
company?
    Mr. Syron. We had a balance scorecard, and I've been 
racking my mind going through here, whether share was any part 
of that. So, indirectly, there may have been, but I don't 
directly recall.
    Ms. Speier. Mr. Mudd.
    Mr. Mudd. We had a parallel process where there were a 
number of different objectives that needed to occur, and one of 
those was certainly revenues, which would tie to your question.
    Ms. Speier. So, there was a linkage?
    Mr. Mudd. Revenues were a component of the overall 
consideration for bonuses particularly. Yes.
    Ms. Speier. Mr. Brendsel.
    Mr. Brendsel. First of all, my compensation was set by the 
board of directors and evaluated annually in my bonuses, and so 
forth, and they considered many factors: certainly, the 
profitability of the company, but also the capitalization, the 
safety, soundness, the risk profile, whether or not there were 
too many mortgage delinquencies or defaults. And so I always 
felt that my compensation was not at all linked to volume 
generated.
    Ms. Speier. Mr. Raines.
    Mr. Raines. As I testified before, I don't believe that 
volume has played a role in the formula when I was there, but 
profitability did. And sometimes market share vis-a-vis Freddie 
Mac did. But, volume by itself was not a factor, as I recall.
    Ms. Speier. Thank you.
    Mr. Mudd, I am referring now to an October 5, 2008, New 
York Times article that focused on an exchange between you and 
Mr. Mozilo, formerly the head of Countrywide. And the article 
quotes Mr. Mozilo as telling you, ``you are becoming 
irrelevant. You need us more than we need you, and if you don't 
take these loans, you will find you can lose much more.''
    In fact, I think you flew to California to have that 
conversation with him.
    Can you please describe for the record the exchange you had 
with Mr. Mozilo?
    Mr. Mudd. I can't because I don't remember that exchange at 
all. I did look back through my records in preparation for the 
hearing. And I had a number of meetings with Countrywide. I had 
a number of meetings with Mozilo, as I did with all of our key 
customers. As it was described in the paper, that certainly 
would have been a memorable meeting, but it doesn't trigger my 
memory.
    Certainly, with him as well as with other customers, there 
was a back and forth in terms of what was our eligibility, what 
was our pricing, what was our credit standard, what was the 
value of our guarantee, what was our pricing versus Freddie 
Mac, etc. But, particular conversation.
    Ms. Speier. You don't recall him offering you a breath mint 
at the end?
    Mr. Mudd. No.
    Ms. Speier. There was a presentation from June 2005 titled, 
``Facing Strategic Crossroads.'' The presentation discusses how 
Fannie is losing market share to Wall Street. The slide is on 
page 27 and says, Primary market originations of products 
outside Fannie Mae's traditional risk appetite are on the rise.
    Then, the slide on page 32 says, This trend is increasingly 
costing us with our largest customer.
    Now, as the slide shows, your largest customer was 
Countrywide. Isn't that right?
    Mr. Mudd. Yes.
    Ms. Speier. Did you lower your standards to accommodate the 
riskier loans from Countrywide?
    Mr. Mudd. No, we established a set of standards. We had a 
debate that I have described during the course of the hearing 
that said the core of Fannie Mae business with all of its very 
attributes was shrinking, and our market share on that note had 
gone I think from 40 percent to about 20 percent. Meanwhile, 
the market for alternative products had gone from about 10 
percent up to 40 percent.
    So, it was clear that there had been a change in the 
marketplace; that if our lenders, our seller servicers, and 
others wanted to go around us to some different form of 
securitization, which typically was a rating agency sizing, set 
up and distributed through Wall Street; they had that 
alternative. And the continuation of market share trend that 
goes 40/20 is obviously quite low. So, we made a prudent effort 
to figure out what we could do to recapture that business. And 
obviously, with Countrywide as one of the largest originators, 
they were part of that overall effort, as were other major 
financial institutions.
    Ms. Speier. In the documents the committee has received, it 
appears that the Alt-A mortgages that Fannie Mae bought between 
2005 and 2007 in large measure from Countrywide had riskier 
terms and higher delinquency rates, and they contributed to 
more than 40 percent of Fannie's credit losses last quarter.
    So, my time is up, but I think it is interesting that, in 
the end, you did expand your portfolio of Countrywide loans, 
and it has in this last quarter created quite a bit of 
heartburn within Fannie Mae.
    Mr. Mudd. I think the Alt-A loans--just to be clear, I 
think that is a representation of Alt-A losses as a total 
percentage of the book rather than Countrywide, although 
Countrywide would probably be a component of that total number.
    Mr. Towns. Thank you very much.
    Ms. Foxx. Mr. Chairman, I want to ask your indulgence on 
something. You were able to give Mr. Shays 1 extra minute; he 
is leaving the committee. Mr. Sali is about to leave us also, 
and he had one very, very important point he would like to make 
that has not been made today. It is not a repeat of anything. 
And I am wondering if you would indulge us with 1 more minute.
    Mr. Towns. I would be delighted to do so, especially being 
he is leaving.
    Mr. Sali. Thank you, Mr. Chairman.
    It's the last time I will bother you. This would be for Mr. 
Syron, I guess. And I believe you should have a document that 
looks like this in front of you. And I assume you understand 
what that Credit Policy and Portfolio Department Report deals 
with for Freddie Mac.
    I am looking on that second page there under priority No. 
5, and if you go over to the right side of the page, there are 
four bullets there. And the third one talks about additional 
affordable type programs being considered. And in that third 
line, it talks about programs apparently for illegal 
immigrants. And I am wondering, if you could describe what that 
proposed program was about? Why would a government-sponsored 
enterprise, one, engage in something like that? Was it 
implemented in any way? So, how many loans were given? How many 
defaulted? Those kinds of things, can you give me an idea of 
what that program was about?
    Mr. Syron. You know, I am seeing this for the first time in 
some substantial period of time. And, unfortunately, I don't 
remember.
    Mr. Towns. Without objection, so ordered.
    Let me thank all the witnesses of course for your 
testimony. We appreciate the time that you've shared with us 
today. And of course, we look forward to continuing to work 
with you because, as you know, there are a lot of things here 
that need to be fixed and I think we all agree on that. So, 
thank you very much for coming, and thank you very much for 
your testimony.
    We will take a 5-minute recess before going into our second 
panel. And then, of course, after that, we will swear them in 
and receive their testimony. So, a 5-minute recess.
    [Recess.]
    Mr. Towns. The hearing will come to order.
    I want to point out that there is a longstanding tradition 
here in this committee that we swear all of our witnesses in. 
So, please rise, raise your right hands.
    [Witnesses sworn.]
    Mr. Towns. Please let the record reflect that all the 
witnesses answered in the affirmative.
    We are delighted to have with us Mr. Charles Calomiris. Mr. 
Calomiris is the Henry Kaufman professor of financial 
institutions at Columbia Business School. And Professor 
Calomiris co-directs the project on financial deregulation at 
the American Enterprise Institute and is the Arthur Burns 
Scholar in international economics at AEI.
    Mr. Arnold Kling is a former senior economist at Freddie 
Mac from 1986 to 1997. He also served as an economist at the 
Federal Reserve Board. He is currently an adjunct scholar at 
the Cato Institute.
    Welcome.
    Mr. Pinto served as the former chief credit officer of 
Fannie Mae from 1987 until 1989. He also was the head of 
marketing and product management at Fannie Mae for 3 years. 
Since leaving the company in 1989, he has worked as a real 
estate financial services consultant.
    Welcome.
    Mr. Thomas Stanton. Mr. Stanton is a fellow of the Center 
for the Study of American Government at Johns Hopkins 
University. He is also a fellow of the National Academy of 
Public Administration.
    Welcome to the committee.
    And we will begin with you, Mr.--why don't we just go right 
down the line.
    Mr. Pinto, right down the line.

STATEMENTS OF EDWARD PINTO, FORMER CHIEF CREDIT OFFICER, FANNIE 
  MAE, AND REAL ESTATE FINANCIAL SERVICES CONSULTANT; CHARLES 
  CALOMIRIS, ARTHUR BURNS SCHOLAR IN INTERNATIONAL ECONOMICS, 
 AMERICAN ENTERPRISE INSTITUTE; ARNOLD KLING, ADJUNCT SCHOLAR, 
  CATO INSTITUTE; AND THOMAS STANTON, FELLOW, CENTER FOR THE 
    STUDY OF AMERICAN GOVERNMENT AT JOHNS HOPKINS UNIVERSITY

                   STATEMENT OF EDWARD PINTO

    Mr. Pinto. Mr. Chairman, thank you for the opportunity to 
speak today.
    You have already noted my credentials; so, I won't repeat 
them. I will only add that, prior to my starting at Fannie Mae 
in 1984, I had 10 years experience in affordable housing. I 
left the company in 1989, and since then, I have provided 
financial service consulting services, and I followed GSEs 
closely.
    What I found in my study that I have done privately is that 
there is surprisingly little consistent information available 
about the size of the subprime market and the contribution that 
Fannie Mae and Freddie Mac made to its growth. My testimony 
today will bring together all the available information that I 
found through my research and will contain information that has 
not, to my knowledge, been published elsewhere.
    In my prepared testimony, I show that there are a total of 
25 million subprime and Alt-A loans outstanding in the United 
States, with an unpaid principal balance of $4.5 trillion. 
These 25 million default-prone loans constitute 44 percent of 
all mortgage loans by count in the United States. This is the 
largest percentage that has ever happened in our history. These 
loans are the source, although not the exclusive source, of the 
financial crisis that we face today, and they are currently 
defaulting at unprecedented rates.
    Fannie Mae and Freddie Mac played multiple roles in what 
has come to be known as the subprime lending crisis. They 
loosened credit standards for mortgages, which encouraged and 
extended the housing bubble. They trapped millions of people 
into loans they knew were unsustainable. And they destroyed the 
equity savings of tens of millions of homeowners spread 
throughout every congressional district in the United States. 
They accomplished this while being permitted to operate at a 
75:1 leverage ratio that makes Lehman Brothers look like they 
were operating conservatively.
    Relative to some earlier testimony, I detailed the risks 
posed by Fannie Mae and Freddie Mac's portfolios in attachment 
No. 4 to my submitted testimony.
    While Fannie Mae and Freddie Mac may deny it, there can be 
no doubt that they now own or guarantee $1.6 trillion in 
subprime, Alt-A, and other default-prone loans and securities. 
These comprise over one-third of their risk portfolio, not the 
15 percent that they kept referring to during earlier 
testimony. They were responsible for 34 percent of all the 
subprime loans made in the United States and 59 percent of all 
the Alt-A loans made in the United States. They were not bit 
players in this play.
    These 10.5 million nonprime loans are experiencing a 
default rate that is eight times the level of their 20 million 
traditional quality loans. These 10.5 million loans include 5.7 
million subprime, 3.3 million Alt-A, and 1.5 million loans with 
other high-risk characteristics. This 10.5 million total does 
not include FHA's obligations, which add another 3 million to 
the total and bring it to 13.5 million out of the 25 million 
subprime and other default-prone loans. That is more than half.
    According to U.S. bank regulators, subprime loans are 
generally those with FICO scores below 660. An Alt-A, or liar 
loan, was the favorite of the real estate speculator. I 
estimate that 1 million of the GSE's Alt-A loans had no down 
payment.
    The purchase of Alt-A loans was justified because they 
helped meet affordable housing goals. And contrary, again, to 
some earlier testimony, I believe that the Alt-A loans were 
particularly goal rich, because about 20 percent of them were 
made to investors; namely, that meant that properties were 
rental properties. So, the fact that they were done as a no-
income/no-asset was irrelevant. The location, based on zip 
code, would put them into affordable housing categories, and I 
believe they would get credit for that.
    As a result, GSE's default rates are now skyrocketing. 
Although they are too new to predict default rates with any 
certainty, I would expect that those portions of Fannie Mae's 
and Freddie Mac's 2005 to 2007 books comprising of subprime and 
other default-prone loans experience default rates ranging from 
8 percent for the 2005 originations to over 40 percent for the 
2007 originations. I believe there is a chart that is available 
that shows the performance of their books, and you can see from 
the hockey sticks appearance of the 2007, 2006, and 2005 books 
what is happening.
    One of the reasons that subprime, as it is traditionally 
called, has gotten more publicity is those loans are older. 
These loans are going bad at incredible percentages, but they 
are younger; so, they still have a longer ways to go.
    The losses likely to be suffered by Fannie and Freddie will 
be a terrible burden to the U.S. taxpayers. If the default 
rates I predict actually occur, U.S. taxpayers will have to 
stand behind hundreds of billions of dollars of Fannie Mae and 
Freddie Mac losses.
    This could have been averted. They could have exercised 
leadership, and they had done that twice before, once in the 
mid-1980's and once in the early 1990's. And they could have 
stopped the mortgage madness that was developing in the 
industry. Instead, their response was to open the flood gates. 
And in the years 2005 to 2007, they bought over $1 trillion of 
these junk loans that are still on their books. Their purchases 
were a major factor in the development of the housing bubble 
and in the huge number of defaulted mortgages, which are now 
causing massive declines in house prices. Without Fannie's and 
Freddie's actions, we would not have this unprecedented housing 
crisis.
    A few more observations about Fannie and Freddie turning 
the American dream of home ownership into the American 
nightmare of foreclosure. They followed an origination model 
initially established by FHA. It enabled thinly capitalized 
mortgage bankers and mortgage brokers to take over virtually 
the entire origination market. These mortgage brokers and 
mortgage bankers were able to compete for mortgage originations 
with thousands of well capitalized community banks, banks that 
are conspicuously absent from the epidemic of default-prone 
loan problems Nationwide.
    In late 2004, Richard Syron and Frank Raines both went to 
the meetings of the originator community and made clear that 
they were going to wrest back the subprime and Alt-A mortgage 
market from Wall Street. Syron said, ``Our success in the 
future depends on our ability to serve emerging markets, and 
they've become the surging markets.'' Raines also said, ``We 
have to push products and opportunities to people who have 
lesser credit quality.''
    These statements alerted the originator community that, if 
they could make subprime and Alt-A loans, there was a ready 
market for them. And this stimulated an orgy of junk mortgage 
development.
    Fannie and Freddie used their automated underwriting 
systems to divert subprime and Alt-A loans from private label 
securitizers, driving up the value of these loans and making 
mortgage brokers even more eager to find borrowers regardless 
of their credit standing.
    Why did Fannie and Freddie do this? First, they were trying 
to meet HUD's affordable housing goals which, by 2005, required 
55 percent of all their loans that they purchased be affordable 
housing loans, including 28 percent to low-income and very low-
income borrowers. Second, after their accounting scandals of 
2003-2004, they were afraid of new and stricter regulation. By 
ramping up their affordable housing lending, that trillion 
dollars I mentioned earlier, they showed their supporters in 
Congress that they could be a major source on a continuing 
basis of affordable housing financing.
    Mr. Chairman, there is much more in my prepared testimony, 
including my recommendations on how to meet this challenge, but 
that is the end of my oral statement. I look forward to your 
questions.
    [The prepared statement of Mr. Pinto follows:]

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    Mr. Towns. Thank you very much, Mr. Pinto.
    Mr. Kling.

                   STATEMENT OF ARNOLD KLING

    Mr. Kling. Thank you, Mr. Chairman, distinguished members 
of the committee. I would like my written testimony to be 
entered as if I had spoken it.
    Mr. Towns. Without objection.
    Mr. Kling. It is a privilege to be asked to testify in this 
forum today regarding the collapse of Fannie Mae and Freddie 
Mac and the ongoing financial crisis.
    My name is Arnold Kling. My training is in economics. And 
in the late 1980's and early 1990's, I worked at Freddie Mac, 
where I was present at the creation of several quantitative 
risk management tools that paved the way for innovations in 
mortgage finance.
    Speaking as a former financial engineer, I have many 
regrets about the role played by modern financial methods in 
this crisis. Rather than speak defensively about financial 
innovation, I want to offer constructive suggestions for public 
policy going forward.
    I emphatically disagree with the extreme partisan 
narratives of this crisis. To blame the Community Reinvestment 
Act for what happened is wrong. To blame financial deregulation 
for what happened is wrong. The narrative I present in my 
written testimony describes a combination of government failure 
and market failure.
    I want to focus on how both industry executives and 
regulators were fooled about the risks in the system. In 
particular, perverse incentives in bank capital requirements 
encouraged unsound lending practices and promoted excessive 
securitization. When a bank originates a low-risk mortgage, why 
would the bank pay Freddie Mac a fee to guarantee that mortgage 
against default? Freddie Mac has no intrinsic comparative 
advantage in bearing that credit risk. However, in practice, 
the bank was able to reduce its capital requirements by 
exchanging its loans for securities. Forbearing the exact same 
credit risk, Freddie Mac was allowed by its regulator to hold 
less capital than the bank.
    By requiring Freddie Mac and Fannie Mae to hold less 
capital than banks, our regulatory system encouraged Freddie 
Mac and Fannie Mae to grow at the expense of traditional 
depository institutions. That turned out to be dangerous.
    The perverse regulatory incentives were even more striking 
with high-risk loans. If a bank originates a high-risk loan, 
you would think that there is no way to avoid high capital 
requirements. But, it turns out that when a high-risk loan has 
been laundered by Wall Street, it can come back into the 
banking system in the form of a AAA rated security tranche. And 
I should mention that you had the people here--I know this 
committee has discussed the problems with the rating agencies 
and that the ratings were bogus. You had the people here this 
morning who were in a position to call them out on it. They 
could have run these securities--Freddie Mac and Fannie Mae 
could have run these securities through their stress tests, 
reported that these securities were going to blow up, and put a 
stop to the private-label subprime market right then and there. 
They had the power to do that. But, once they were laundered as 
AAA tranches, from the standpoint of capital requirements, bank 
regulators closed their eyes and pretended that the risk has 
disappeared.
    My reading of the history of the secondary mortgage market 
suggests the following lessons: One, capital requirements 
matter. Details that are easily overlooked by regulators can 
turn out to cause major distortions.
    Two, securitization is not necessary for mortgage lending. 
On a level regulatory playing field, traditional mortgage 
lending by depository institutions probably would prevail over 
securitized lending. Rather than try to revive Freddie Mac and 
Fannie Mae, I would recommend that Congress encourage a 
mortgage lending system based on 30-year mortgages originated 
and held by old-fashioned banks and savings and loans. This 
would require instructing the regulators of Freddie Mac, Fannie 
Mae, banks, and savings and loans to all use the same capital 
standard for mortgages, one that is based on a stress-test 
methodology.
    Three, subsidized mortgage credit is an inefficient tool 
for promoting home ownership. Unless what you want is home 
buyers who are buried in debt and speculating on house price 
appreciation, I recommend that Congress not try to create cheap 
mortgages but instead use other means to encourage home 
ownership.
    Four, recent financial innovations, particularly credit 
default swaps, have changed our financial system in ways that 
current policymakers failed to recognize. Bailouts and rescues 
are counterproductive in today's financial crisis. Within the 
financial sector, deleveraging needs to slow down, and the 
process of shutting down failed institutions needs to speed up. 
Relative to these necessities, handouts from the taxpayers are 
a hindrance, not a help.
    [The prepared statement of Mr. Kling follows:]

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    Mr. Towns. Thank you very much, Mr. Kling.
    Mr. Calomiris.

                 STATEMENT OF CHARLES CALOMIRIS

    Mr. Calomiris. Thank you, Mr. Chairman. It is an honor and 
a pleasure to appear before you and the committee today to 
share my views on the role of the GSEs in the current financial 
crisis and the lessons for GSE reform going forward. I would 
like to ask that my written testimony and two background 
articles which provide more detailed analysis in support of my 
statement also be entered into the record.
    Mr. Towns. Without objection.
    Mr. Calomiris. Mr. Chairman, before I begin, I would like 
to correct a typographical error in one of those background 
documents, the one authored by myself and Peter Wallison. I 
think I can just do it orally.
    In that document, on page 8, in the second column, there 
are two sentences that need to be replaced. They read as 
follows: In the addition, Freddie Mac's disclosures indicate 
that, of the loans added to its portfolio of single family 
loans between 2005 and 2007, 97 percent were interest-only 
mortgages; 85 percent were Alt-A; 72 percent were negative 
amortization loans; 67 percent had FICO scores less than 620; 
and 68 percent had original loan-to-value ratios greater than 
90 percent. There were typos in that two-sentence excerpt, and 
that needs to be replaced with the following.
    Mr. Towns. Let me say, based on that, let me read this and 
you can sort of respond to it as you do your presentation, Mr. 
Calomiris. The committee has received a letter from a former 
Fannie Mae executive, Mr. Barry Zigas. Mr. Zigas disputes the 
way you interpret Fannie Mae and Freddie Mac's financial data 
in a recent article you published with Mr. Peter Wallison of 
the American Enterprise Institute. So, you can respond. Since 
the article is now a part of our hearing record, I am going to 
ask unanimous consent to submit Mr. Zigas's letter in the 
hearing record and ask that you respond to it for the record. 
So, you can do that as you move forward.
    Thank you.
    Mr. Calomiris. Thank you, Mr. Chairman.
    Actually, it was through the kindness, I guess, of the 
chairman, who showed me that letter earlier or had it sent to 
me that I looked at the article and recognized these 
typographical errors. So, this correction actually responds and 
completely corrects the article and deals with all of those 
things that gentleman found, and I appreciate his pointing them 
out to me.
    Mr. Towns. I will give you an extra minute in your 
testimony.
    Mr. Issa. Mr. Chairman, I might ask from a parliamentary 
standpoint, wouldn't it be in our best interest as a unanimous 
consent that we enclose that, that the two be placed next to 
each other in the record, so that there not be a chance that 
this oral testimony would somehow not be exactly next to the 
written? Because I would like the record to be accurate as to 
the original and perhaps----
    Mr. Towns. Without objection.
    [The information referred to follows:]

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    Mr. Issa. Thank you.
    Mr. Calomiris. Now I will read the replacement text.
    Tables one and two show that, for each category of 
mortgages with subprime characteristics, most of the portfolio 
of loans with those characteristics were acquired from 2005 to 
2007. For example, 83.8 percent of Fannie's and 90 percent of 
Freddie's interest-only loans as of September 2008 were 
acquired from 2005 to 2007. And 57.5 percent of Fannie's and 61 
percent of Freddie's loans with FICO scores of less than 620 as 
of September 2008 were acquired from 2005 to 2007.
    That completes the correction, Mr. Chairman.
    None of the rest of the article requires any correction. 
This apparently--I had not seen the final edits on this 
article. Apparently, someone was confused and made some word 
changes that didn't make sense. I apologize for that. I also 
have to apologize to Mr. Garrett because as I was listening to 
his questions, I think--earlier, I think he actually was 
relying on that exact paragraph. And so my apologies to the 
committee for that mistake.
    Given the time constraint of my oral testimony, I will 
summarize my written testimony by posing and answering a short 
list of questions: Did Fannie and Freddie play an important 
role in the subprime crisis? Yes. As Ed Pinto has shown, they 
ended up holding about 1.6 trillion or roughly half of the 
total non-FHA exposure on subprime losses. And through their 
role as standard setters in the industry, they played a leading 
role in relaxing underwriting standards and promoting no-docs 
lending.
    Was their involvement in subprime simply bad luck, or did 
it reflect purposeful willingness to undertake risks that they 
recognized as dangerous and that they recognized were arguably 
not in the interest of subprime borrowers? Yes. They were 
experienced in this area. They knew the dangers of no-docs 
lending, and they did it anyway. Their risk manager saw the 
losses coming. The risk managers also saw the potential human 
costs of no-docs lending coming and warned senior management 
about it in advance.
    Was the GSE's willingness to undertake these uniquely large 
risk exposures through relaxed underwriting standards on 
subprime loans related to their GSE status and their affordable 
housing mandate? Yes. The GSE charters and the political deal 
between the GSEs and the government, which was understood in 
the marketplace, was that there was a clear quid pro quo 
connecting the implicit government guarantee of GSE's debts and 
other favorable treatment of GSEs with the GSE's willingness to 
expand their funding of affordable housing, and subprime with 
Alt-A was the means they chose to do it.
    And, as the internal e-mails of Freddie Mac clearly show, 
although management recognized the dangers of subprime losses 
because of the crucial need to preserve government support, at 
least in their minds, affordable housing goals, ``tipped the 
balance,'' in 2004 in deciding to relax underwriting standards.
    Would the subprime crisis have been different if the GSEs 
had not decided to enter subprime and Alt-A lending so 
aggressively in 2004? Yes. The GSEs were the dominant players 
in the mortgage market and also played crucial roles as 
standard setters. They recognized their, ``market-making,'' 
role, and knew that, in the past, their decision to discontinue 
no-docs lending had led to the disappearance of the product in 
the market.
    Furthermore, the timing of entry by the GSEs was important. 
They came into the subprime and Alt-A market as it was ramping 
up in 2004, and their entry was associated with the rapid 
escalation of lending in 2004 and 2005. Lending nearly tripled. 
Subprime lending nearly tripled in Alt-A from 2003 to 2005.
    Finally, unlike some other market participants, they 
continued to buy long after clear signs of trouble had emerged 
in mid-2006 in the housing market, which meant that their 
market-making role grew over time, particularly so in late 2006 
and 2007, when origination volumes remained very high despite 
the impending problems that were already visible in the housing 
market.
    I conclude that, counterfactually, the crisis would have 
been less than half as large as the actual crisis if the GSEs 
has struck to their traditional roles as prime lenders. I would 
also note that the reason people like me didn't complain about 
this in 2005 and 2006 was that they had adopted accounting 
practices that masked these by the way they defined subprime 
and Alt-A lending.
    Finally, my last comment is, it is worthwhile to promote 
home ownership in the United States. This should be done, in my 
view, not through the GSEs. Their assets, their charters should 
be fully and credibly privatized. It should be done by the 
government on budget, in a transparent manner, befiting our 
democracy, and through direct subsidies, like down payment 
assistance, rather than in a way that encourages borrowers and 
lenders to increase leverage imprudently and therefore, promote 
unwarranted foreclosure risk.
    Thank you, Mr. Chairman.
    Mr. Towns. Thank you very much, Dr. Calomiris.
    Mr. Stanton.

                  STATEMENT OF THOMAS STANTON

    Mr. Stanton. Mr. Chairman, I would ask that my written 
statement and two attachments be included for the record.
    Mr. Towns. Without objection.
    Mr. Stanton. Mr. Chairman, Ranking Member Issa, members of 
the distinguished committee, in 1991, I wrote a book called, 
``A State of Risk: Will Government-Sponsored Enterprises Be the 
Next Financial Crisis?'' I then worked with a small group of 
reformers, including Congressman Jake Pickle of the House Ways 
and Means Committee, Democrat of Texas, and Representative Bill 
Gradison of Ohio, Republican. We tried to improve Federal 
regulation of Fannie Mae and Freddie Mac and their safety and 
soundness, but because of very strong lobbying by those two 
organizations, the regulator was created without adequate 
authority.
    In my testimony today, I would like to make three basic 
points. One, while Fannie Mae and Freddie Mac did not cause the 
mortgage credit debacle, they did engage in risky practices 
that turned them into sources of vulnerability, rather than 
strength, for the mortgage market and the larger economy.
    Two, as it becomes clearer that Fannie Mae and Freddie Mac 
in fact are insolvent, it would help to place them into 
receivership and thereby remove private shareholders from the 
two failed companies. Once shareholders are clearly gone, the 
next administration can use the two companies to provide much 
needed support and reform, including consumer protections for 
the home mortgage market. If the companies remain in 
conservatorship rather than receivership, then government will 
face conflicting objectives about the role of the two companies 
in serving urgent public purposes versus serving financial 
interests of the companies and their shareholders.
    Three, Fannie Mae and Freddie Mac should not be restored to 
their previous status as privately owned organizations that 
operate with pervasive Federal backing. The two companies and 
their powerful constituencies have consistently fought for 
higher leverage and against effective accountability. Even if a 
strong regulator were created initially, and somebody mentioned 
the concept of public utility regulation, the political power 
of the two companies can be expected to weaken accountability 
over time and restore the companies to their dominant market 
positions, high leverage and financial vulnerability.
    Let me briefly talk about the first point and leave the 
rest for discussion.
    Fannie Mae and Freddie Mac committed serious misjudgments 
that helped to bring about their insolvency. The most serious 
of these misjudgments involved the company's resistance to 
accepting more effective supervision and capital standards. For 
years, the two companies exerted their influence to fend off 
capital standards that would have reduced their excessive 
leverage and absorbed potential losses. The two companies 
compounded the problem by taking on excessive risk just at the 
point that housing prices were peeking. Among other losing 
assets, the two companies held would over $2 billion of 
private-label mortgage related securities backed by Alt-A or 
subprime mortgages in 2007.
    In making these mistakes, Fannie Mae and Freddie Mac 
revealed the inherent vulnerabilities of government-sponsored 
enterprise [GSE], as an organizational model. First, the GSE 
can live or die according to its charter and other laws that 
determine the condition under which it operates. That means 
that GSEs select their chief officers in good part based on 
ability to manage political risk, as we saw in the first panel 
today, rather than on their ability to manage two of the 
largest financial institutions in the world.
    Second, GSEs combine private ownership with government 
backing in a way that creates a virtually unstoppable political 
force. Because of their government backing and low capital 
requirements, Fannie Mae and Freddie Mac gained immense market 
power. They doubled in size every 5 years or so until this year 
the two companies funded over $5 trillion of mortgages, about 
40 percent of the mortgage market. Their market power gave them 
political power, which is seen in the fact that the new 
regulator created by the Housing and Economic Recovery Act of 
2008, enacted late July just before the companies collapsed, 
still failed to give the new regulator the full mandate, 
authority, or discretion over safety and soundness and systemic 
risk that is available to the Federal bank regulators. And if 
there is a question on this, I would be delighted to submit 
documentation to the record.
    In short, the mix of private incentives and government 
backing created a dynamic that led not only to the hubris that 
brought about the meltdown of internal controls of both Fannie 
Mae and Freddie Mac several years ago, but also their 
insolvency in 2008.
    But, Fannie Mae and Freddie Mac by themselves did not cause 
the housing bubble or the proliferation of subprime and other 
mortgages that borrowers could not afford to repay. In 
analyzing the two companies, I discovered a phenomenon can be 
called Stanton's law: Risk will migrate to the place where 
government is least equipped to deal with it. So, the capital 
markets arbitraged across regulatory requirements and 
ultimately sent trillions of dollars of mortgages to Fannie Mae 
and Freddie Mac where capital requirements were low and Federal 
supervision was weak. But, the capital markets also found other 
places where government could not manage the risk and also sent 
huge volumes of subprime, Alt-A, interest-only, and other toxic 
mortgages to structured investment vehicles of commercial 
banks, private securitization conduits, and collateralized debt 
obligations that were virtually unsupervised.
    Mr. Chairman, I would like to end on a note about the human 
costs of Fannie Mae and Freddie Mac. Their actions led to 
hundreds of thousands of American families, and possibly more 
than a million, facing delinquency and default on their 
mortgages and potential foreclosure of their homes.
    They funded the overbuilding of hundreds of thousands of 
homes that will be vacant or boarded up because no one wants to 
live there. The cost to the American taxpayer will run 
potentially to hundreds of billions of dollars. All of this 
harm occurred on the watch of the four men on the first panel. 
It could have been avoided with prudent lending, prudent 
capital, and prudent management.
    So, thank you again for holding this important hearing on 
two financial institutions that used their high leverage and 
insatiable appetites to grow to an unmanageable size before 
they failed. I would be pleased to respond to any questions.
    [The prepared statement of Mr. Stanton follows:]

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    Mr. Towns. Let me thank you very, very much for your 
testimony.
    You know, I think it would have been wise for us to allow 
them to go first and then allow the others to stay and to 
listen and then respond, because I really think, in terms of 
the testimony and information that they have given us, it has 
been very, very, very helpful.
    Mr. Issa. Mr. Chairman, I totally agree with you, and, in 
fact, of all the things that my hope as ranking member and your 
hope as chairman that I would like to do is to make that 
reversal whenever possible so that, whether it's administration 
or other government witnesses, we're able to do just that. I 
think you're exactly right. It would have been very helpful 
today.
    Mr. Towns. Thank you very much for your comment.
    Let me move right along. I would like to ask, I guess, let 
me start with you, Mr. Stanton, and, of course, others to 
respond. I would like to ask the panel about the affordable 
housing goal that the Department of Housing and Urban 
Development set for Fannie Mae and Freddie Mac. And, Mr. 
Stanton, in your testimony--I think it was page 5 and 6, you 
explained that when Congress rechartered Fannie and Freddie in 
1992, we asked them to devote some of their time and resources 
to finding ways to help low- and moderate-income Americans buy 
homes. But, you said that these goals did not lead Fannie and 
Freddie to invest in risky mortgages. Can you explain to us 
your conclusion and how you arrive at that?
    Mr. Stanton. Yes, sir. I would be delighted.
    If you look carefully at the law--and I'm a student of the 
charters of the two companies and the legal frameworks 
surrounding them--you find that they are required to undertake 
activities, ``relating to mortgages on housing for low- and 
moderate-income families involving a reasonable economic return 
that may be less than the return earned on other activities.''
    In other words, the law does not require them, they do not 
receive appropriations to take losses on the affordable housing 
loans they make. And if you follow that through to the 1992 
act, and it follows through to 2008, what you see is that the 
Department of Housing and Urban Development is not allowed to 
impose goals that would cause the companies to fall below that 
standard.
    So, in fact, when you look, two things were probably going 
on. One, it's a more subtle point. These are political 
companies. Their leaders are retained to manage political risk. 
So, that means they will engage in affordable housing beyond 
HUD in order to get favors for other parts of their charter, 
either to block things they don't want or to gain things they 
do want.
    And, of course, they also had insatiable appetites. When 
you buy $200 billion of Triple-A-rated mortgage securities 
backed by Alt-A and subprime mortgages and you don't ask your 
own risk analysts to run those mortgages through the filter in 
order to do due diligence and check on the rating agencies, 
you're asking for trouble. But you're not doing that to support 
the affordable housing market. You're doing that because you 
expect that there are good returns on those investments.
    Mr. Towns. Other members of the panel agree on that?
    Mr. Pinto. I have a little different take on that.
    When the original goals were set subsequent to the 1992 
legislation, I believe HUD set them in 1993, and they were set 
a little bit purposely low because they didn't quite know what 
was going to happen. And Fannie and Freddie sort of jumped over 
the hurdles very quickly; and that created a backlash that 
said, wait a minute, HUD, you set them too low. And HUD learned 
from that, and year after year, they kept ratcheting them up 
and ratcheting them up.
    Fannie and Freddie had to keep--remember, this is a 
duopoly. They're competing against each other for the same 
loans. They're also competing with FHA for the same loans. 
They're all considered goal rich. Ultimately, they were 
competing with subprime for the same loans. They were 
considered goal rich, and their regulators called all of these 
loans goal rich.
    By the early part of this decade, you had situations where 
at the end of the year, if they were a little bit short, a 
bidding war would break out. In fact, Fannie rented some loans 
for a while. That was a scandal that developed 5 or 6 years ago 
where they rented some loans and then returned them later the 
next year in order to meet their goals.
    So, the pressures that were put on them were tremendous. 
But, I would point out that I believe in the 2007 Freddie Mac 
document, they concluded that the lowest 10 percent of their 
business was put on the books at a zero return on equity. That 
does not meet the standard that was in the charter. A zero 
return on equity, and that was calculated optimistically. It 
turns out if you were to do that calculation today, these loans 
were put on the books at tremendous losses.
    Mr. Towns. Yes. Dr. Calomiris.
    Mr. Calomiris. I just want to add that I think that there 
are obviously other motivations, too, for getting involved in 
subprime and the e-mail correspondence that I saw from Freddie 
Mac indicated that. But, I think that what was interesting is 
that in all those e-mails, it was also reflected that 
affordable housing goals in this political sort of strategy 
that Mr. Stanton referred to were part of the mix and that one 
of the e-mails specifically said tip the balance when they were 
considering whether to get into the no docs area and Alt-A and 
subprime more broadly.
    So, I think it's important to mention both that there are 
multiple influences. Let's face it. There were a lot of 
managers who weren't JFCs who were pursuing this, too, based on 
short-term profits for themselves at the expense of their 
stockholders. I would say that the executives of the GSEs were 
guilty of that as well, but that I think it's pretty clear from 
the e-mails that the affordable housing mandate and their, 
let's say, political manipulation of that was definitely part 
of the story.
    Mr. Towns. Thank you.
    Mr. Stanton. If I could add something, Mr. Chairman, these 
are two companies funding $5 trillion in mortgages. The whole 
point of trying to underwrite mortgages for people that are 
nontraditional borrowers is to do it carefully and really work 
at it, so that you try to, in fact, make people eligible for 
mortgages. Because the normal FICO score, for example, is based 
on traditional borrowers, not on affordable housing borrowers. 
And that isn't what they did. They simply plunged in and bought 
huge volumes of mortgages without regard to the welfare of the 
people they could have underwritten more carefully. So, that is 
part of the problem, too.
    Mr. Towns. Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman.
    This is a wonderful panel, and I appreciate your 
statements, and, obviously, we will be poring over them well 
into the next Congress.
    I'm almost befuddled to try to come up with how many 
questions we could ask, but let me start with Mr. Pinto. The 
earlier panel--which I would have liked you first, but I'm also 
glad you're after--seemed to want to make a distinction between 
Alt-A and subprime; and even when we started asking about it, 
we got told, well, some of the Alt-As are subprime, and some 
are the other. From a standpoint of deviating from sound 
practices that lead to reasonable default rates, is there any 
real difference?
    Mr. Pinto. No. Alt-A actually stood--one of the meanings of 
it was Alt Agency. They were things that the agencies would not 
buy.
    How do I know that? Because, in 1985, I was one of the 
authors of Fannie Mae's revised underwriting requirements; and 
in that revised underwriting statement, we said we were not 
going to do the kinds of loans that ended up being high-risk, 
too high a risk for Fannie Mae to undertake: investor loans, 
particularly three and four units, excess loans on condos. 
There were many different types: low start rates on ARMS, neg 
am ARMS--we called them gyp ARMS--graduated payment ARMS. There 
were all kinds of loans, and those were the loans that became 
known as Alt-A.
    I was happy to hear CEO Raines say earlier that Fannie 
actually remembered what had happened in the early 1980's, in 
the mid 1980's, and it happened in the late 1980's when the no 
doc, low doc business blew up, that they remembered that, but 
they did not learn.
    Starting in the early 1990's, they came back with a 97 
percent mortgage, which they had no basis for figuring out what 
the risks were. Freddie Mac, I put it in the record, had--
showed a 95 percent loan. The default rates on those things 
were sky high. They just about go off the chart. Yet they were 
doing 97 percent loans on the basis of no data. And that was 
the beginning of this process.
    So, the Alt-A loans, the subprime loans, I lump them all 
together.
    How did I end up coming up with 1.6 trillion? It's very 
simple. If you look at the kinds of risks--again, Frank Raines 
referred to them as what we learned in the 1980's and early 
1990's. If you look at the kind of risks that they entered into 
on the 1.6 trillion, they knew those were risky loans. They 
performed under stress the same way. They all have incredibly 
high default rates, and they're performing that way exactly 
today. So, every category I put on my chart ends up being in 
that same bucket.
    Mr. Issa. I appreciate that.
    And, Mr. Calomiris, I see you're shaking your head yes, so 
I think we've established today that we're not going to find a 
difference in spite of the distinction being made by the 
earlier panel.
    I would ask two things. First of all, would all of you be 
willing to answer additional questions for the record? Because 
I know I am running out of time, and I very much would like to 
get them in the record.
    With that, I would ask a couple of questions that are not 
likely to be asked normally and the public has a right to 
understand.
    The vast majority of States, including my own, California, 
have no recourse loans, meaning that no matter how much funding 
somebody has in their personal pocket, including that earlier 
testified roughly 20 percent who were speculators, they're able 
to get a no-money-down, no-stated-income loan, and they're able 
to never occupy that home, perhaps hold it for rental, or 
perhaps just hold it to flip.
    At one of the points in this whole debacle, the turning 
back in or the failure to pay or in some cases--we've had it in 
California--people bought homes, rented them out, never made 
the payments, and waited for the foreclosure. They were 
guaranteed if they put nothing down and rented them out, that 
they were going to make money because they collected rent and 
paid nothing out.
    And, Mr. Stanton, I know you're smiling, but as you see 
them, you begin to realize that not everyone is a victim that 
in fact took out a loan. Should we on this dais look at a 
recourse structure to government-backed, government-guaranteed, 
government-underwritten loans, so as to take the speculator, 
who does have other assets out of the equation of taking this 
``heads I win, tails the government lose'' situation?
    Mr. Stanton, you were shaking your head earlier. Would you 
agree that could be a tool that we would have a right to do 
since we, the people, we, the representatives of people, are 
paying out potentially trillions of dollars and, in some cases, 
the money is because of speculators, who kept their money and, 
in fact, left us holding the bag?
    Mr. Stanton. Absolutely, and that is the logic that led me 
to recommend these companies be removed from conservatorship 
now that they have an apparent negative value, put in 
receivership and used essentially as government corporations.
    It was stunning to hear these CEOs say, gee, it would have 
been nice to have consumer protections. In fact, as a 
government corporation, without worrying about shareholders, 
there would be a way then to impose risk-sharing requirements 
on all the participants up and down the line, to structure much 
more sound ways of doing business and to add, if I can make a 
plug for a colleague, Alex Pollock of the American Enterprise 
Institute, basic consumer protections.
    He has a one-page mortgage form; and one of the questions 
on the one-page mortgage form is what is the highest monthly 
payment that this mortgage could ever go to? That is a really 
simple question that reveals what happens when you have these 
teaser rates. Because a whole bunch of those mortgages' answer 
might have been infinity; there are no natural limits.
    So, as a government corporation, we could use both Fannie 
Mae and Freddie Mac to do the kind of risk sharing you're 
talking about, impose serious consumer protections, and create 
serious standards for the market going forward. Thank you.
    Mr. Kling.
    Mr. Kling. Congressman Issa, I hope that you will keep 
raising the issue of investor loans and nonowner-occupied 
loans. Because your colleagues often seem to forget, and they 
talk about foreclosure moratoriums and work-outs being a 
solution for this, but nobody has told me what the percentage 
of nonowner-occupied loans is. We know that 15 percent of the 
loans made in 2005 and 2006 were nonowner occupied.
    And I would just step back and say, rather than make those 
recourse loans, ask why are they eligible for any government 
guarantee at all? If your goal is to promote homeownership, I 
assume you're not trying to promote home speculating. So, why 
are they eligible for Freddie Mac, Fannie Mae, or any 
government guaranty at all?
    Mr. Issa. Thank you. Thank you, Mr. Chairman.
    I think with that we will probably realize that home 
homeownership and being a homeowner and renting out to others 
is not quite the same thing, and I appreciate it. Homes 
ownership, as the chairman said.
    Mr. Towns. Thank you very much.
    Congressman Bilbray from California.
    Mr. Bilbray. Thank you very much. And let me thank the 
panel; and, Mr. Kling, thank you for throwing darts at both 
sides. It is kind of refreshing in this town.
    There is a whole lot of things I would love to jump right 
into, but when we get into this issue of unsecured, basically, 
finding ways to be able to qualify people at any cost, I don't 
know if you guys are aware of it and the ranking member will 
say--will remember this.
    In 2005, in San Diego, there was a big deal about the fact 
that you not only did not have to be a U.S. citizen, you did 
not only not have to be legally in the country, you didn't even 
have to show a viable ID that you were who you said you were to 
get a loan. And many of those loans were through nonprofits 
that were getting grants from the Federal Government.
    So, this is how deep we got into this issue, and it wasn't 
just the nonprofits, but it was the for-profits were searching 
out anybody and everybody that we can figure out how to get 
them to sign up on this program. Because they were--basically, 
seems like you create the paper and you have all these foreign 
investors love to buy sight unseen but to the point of where 
somebody wasn't even required to prove that they were whoever 
the name was on the loan, didn't even have to show a U.S. 
viable ID. They were using consulate cards from another country 
that is issued based on the honors system.
    I only raise this to show you how far this goes. And I will 
be very interested to see, do we require legal status, viable 
identification under the REAL ID bill to participate in the 
bailout that is going on now or the refinancing and everything 
else? I don't hear anything about that. It's just like, well, 
anybody and everybody can got into the system. The more the 
merrier.
    You brought up the credit default issue, the swaps. And I 
know that is not specific to here. But from the testimony we've 
seen, this is a huge ax hanging over our head right now. 
Anybody knows where it is? How many trillion--anybody got any 
idea how many trillions of dollars--what is the number that is 
floating around now with credit default swaps?
    Mr. Kling. Sixty-two trillion or something? Sixty trillion 
outstanding as of the end of last year gross. It came from 
nothing 10 years ago.
    Mr. Bilbray. Which was really a product of our regulatory 
reforms squeezed off one side and left it wide open, and the 
bulge started coming out there.
    And, Mr. Chairman, I think that is one of the things the 
new Congress really has to look at. Here comes 60 trillion--
think about that--is the culture shock we've had with the 1.3 
we've issued since March but 60 trillion hanging out there and, 
basically, Vegas could give better odds. It's a lot of gambling 
out there.
    So, I want to just in this hearing point out, we have this 
huge, huge threat out there that nobody is really talking about 
because we're kind of responding to the problems of the past 
and not seeing this coming down the pike.
    Guys, any comments about that? Because you have been frank 
and open about it, and I think it's important that the--
hopefully, the future chairman and ranking member of this 
committee is here to hear it.
    Mr. Calomiris. Yes, I'd just like to say something briefly 
about that.
    On an optimistic note, remember that credit default swaps 
are a zero net sum game. So, even if there are 60 trillion in 
nominal exposure, the aggregate exposure in the financial 
system is always zero.
    Now, there is a problem, of course; and we saw that with 
AIG and its credit default swap position vis-a-vis Goldman 
Sachs. And that problem is that if somebody is on the brink of 
failing and they aren't properly collateralized in their 
positions, which was the case for AIG because it had AAA 
status, was not the case for Lehman Brothers, by the way, 
because it didn't have triplea status.
    So we did have a problem with AIG because of its AAA status 
and its lack of collateralization; and so it could have added 
significantly tens of billions, maybe more, to the cost of a 
cleanup.
    But, more generally, the problem isn't nearly as bad as the 
sort of headline numbers are indicating; and it was very 
particularly a problem for AIG precisely because of AIG's AAA 
status.
    Mr. Pinto. And that was demonstrated by Lehman Brothers 
when they unwound. There was--I believe it was a nothing. It 
all happened, and everybody yawned, and the reason was exactly 
what Charlie just said. And they had a lot outstanding.
    Mr. Kling. In my written testimony, I spell out what I 
think are the problems with credit default swaps. I don't think 
we in the economics and finance profession fully grasp the 
magnitude of what is going on and the implications of what is 
going on there. And I think it's quite possible that a lot of 
the panic deleveraging that is going on and the very strange 
relationships in security prices that we're seeing today, I 
strongly suspect that has a lot to do with the way the credit 
default swap market operates.
    Mr. Stanton. I think the issue of credit default swaps has 
been covered, but I want to point out something else on the 
horizon that is worth looking at. Particularly since Charles 
was so optimistic, I can be a bit pessimistic.
    We have seen a huge number of defaults now because of bad 
mortgages, mortgages that never should have been issued in the 
first place, subprime Alt-A, whatever we want to call them. 
What we have not seen yet is the full impact of defaults on 
homes because a recession hits, and that has been the 
traditional source of defaults on homes. So, we can expect a 
second wave to be coming in.
    And again I reiterate, it's time to take both GSEs in hand 
as government corporations. Stop this incessant, gee, do we 
price high? Do we price low? Because we have to satisfy 
shareholders because it's a conservatorship, not a 
receivership, versus we've got to support the housing market 
and start using the GSEs actively to start dealing with what is 
going to be a much worse problem.
    Mr. Bilbray. Mr. Chairman, I just want to say the three of 
us up here actually are sons of areas that were red-lined 
consistently before this; and I think we understand the 
challenges for the working class neighborhoods because it was 
our neighborhoods that were red-lined by these institutions 
before; and we need to address that.
    I think we need to recognize, too, that a lot of this that 
we don't even talk about is that not just homeownership but 
what was perceived as a minimum homeownership back in the early 
1970's, late 1970's, early 1980's. You will remember that 
homeownership, the first step was usually into an attached 
condominium, something you could afford, build equity. You 
build your credit rating. You worked into it.
    What we've seen in the last 10 years is don't even think 
about those things. They're going for the four, five-bedroom 
detached house and whatever. And I think we have to understand 
a level of expectation needs to be reflected appropriately, 
especially for people trying to get out of those neighborhoods 
that we grew up in or to buy a home in those neighborhoods.
    Mr. Towns. Thank you very much and thank you.
    The gentleman from Idaho, Congressman Sali.
    Mr. Sali. Thank you, Mr. Chairman.
    Gentlemen, I'm sorry that I was gone for a short while 
while you were giving your testimony. I had looked at some of 
the information you had provided earlier, and I guess there are 
two pieces to the puzzle as Congress wrestles with what to do 
going forward.
    The first one is, if you start today and you're going to 
make a sound loan, how do you do that? And I think most of your 
information goes to that.
    Mr. Pinto, you have the chart that you talked about I think 
during your presentation, and I'm looking at the 2007 graph, 
and it doesn't look very rosy. Those loans already made, how do 
we get that bleeding stopped? Because this is going to impact--
this piece is going to--if we started making good loans today, 
this piece will still impact things profoundly. What should we 
do to try and shore that up?
    Mr. Pinto. Excellent question.
    In my prepared remarks, I proposed two solutions, a short-
term and a long-term. The short-term, and I liken it to you're 
fighting a forest fire, it's very simple. Where did you fight 
the fire? At the fire line or away from the fire line? If it's 
out of control, you have to fight it away from the fire line. 
You have to build a firebreak. And I have looked at all the 
different modification programs that are being proposed; and 
none of them establish a fire line, away from the firebreak, 
away from the line of fire.
    I'm not one who normally espouses that the Federal 
Government spend a lot of money for something. However, the 
issue that we've got--it was just touched on by Mr. Stanton, 
about the second wave that is coming--it's actually a second 
and third wave. The second wave is, Fannie and Freddie's book 
of business is new, does things that have been causing the 
foreclosures to a large extent in the past, that were loans 
made earlier in this decade, the ones that were made in 2005, 
2006 and 2007 are just--you can see it--are just starting to go 
bad; and the ultimate foreclosure rates are going to be way up 
here. They're going to be way off the charts. And that is the 
second wave.
    The third wave is what is known as the real economy, the 
people who actually played by the rules, and now they're losing 
their job or whatever. And I have estimated that by the end of 
next year, with the price declines that everyone is agreeing 
on, 1 percent a month to the end of next year, that there is 
going to be $12.2 trillion of mortgage debt outstanding and $11 
trillion of home value. That is a national LTV on people--loan 
to value--on people that have homes of 111 percent.
    That has never happened before, I will say, in the history 
of United States. I don't think it has ever happened before in 
the history of the world. In the Depression, it was 30 percent. 
So, that is what we're looking at.
    So, the second and third waves are coming. So, what do you 
do? You have to identify, and we can identify these loans. 
Fannie Mae has a great little chart. Freddie Mac has the same 
chart. Everybody else knows--the New York Fed has all these 
charts. Everybody knows where all these loans are, ones that 
are defaulted and not defaulted.
    We know what the characteristics of the loans are. We 
know--I have identified there are $4.4 trillion of junk loans 
out there. We have to find a few trillion of those that are 
owner occupants, and we have to identify them, and we have to 
put together a program that has the five steps that I listed in 
my testimony and make an offer to those people to refinance 
them.
    But, you're going to have to bring down the principal 
amount substantially so that you create equity and create that 
cushion. You have to create a strong firebreak. But, it's also 
very important that you don't put 50-year loans--I hear them 
talking about extending the term to 40 and 50 years. That is 
crazy. You want equity building back up, not pushing it way 
out.
    You can't be pushing delinquencies on the back end. That 
doesn't create incentive to stay in these homes. We have to 
create hope for these people to continue with these loans and 
continue in their homes, and the way you do that is the 
proposal that I laid out in my testimony.
    The second part, which I will just reference, is we have to 
deleverage the whole housing system. We have overleveraged the 
entire system starting with the homeowner, going to the banks, 
Fannie Mae, which now has no capital, but they were 
overleveraged 75 to 1 all along, and then the mortgage-backed 
securities which were overleveraged. Congress created a system 
that overleveraged everything all the way through. We have to 
deleverage that.
    If I would ask the committee to do anything, it is to look 
at the question of how do you deleverage the financial system 
of the United States. It used to work when the leverage was 3.7 
to 1. We've changed it to 30 to 40 to 1. It's not sustainable.
    Mr. Sali. You're suggesting that the mortgage lenders are 
going to have to take the loss of writing down the principal--
--
    Mr. Pinto. Well, the Federal Government is on the hook 
for--I hate to tell you this. You already own 77 percent of all 
the mortgages in the United States, own or on the credit hook 
for them. Therefore, it comes back to us.
    Mr. Sali. Well, we spent a half a trillion dollars in 
deficit in last year's budget. That doesn't count the 700 
billion of bailout, the 85 for AIG, the other 35 for Bear 
Stearns; and, I mean, that list goes on and on and on. And now 
we're talking about the automakers. We don't have any money. 
What are we going to write down against, just more deficit 
spending? I realize the taxpayers are going to have to be on 
the hook----
    Mr. Pinto. You already own these loans. You're responsible 
for them. 4.6 trillion of the 12 trillion is Fannie Mae and 
Freddie Mac. Who owns Fannie Mae and Freddie Mac?
    Mr. Sali. But, you're suggesting we can create value out of 
thin air.
    Mr. Pinto. No. No. I'm not creating value out of thin air. 
You have to write down these mortgages to a level where the 
people that are in them, the homeowners, have an incentive for 
staying there. Putting them through the foreclosure process is 
slow death. It's letting the fire burn out of control. You're 
going to have 8 million, 8 million foreclosures if you don't 
get ahead of this rampaging fire. I'm telling you, there are 
going be to be, in the next 4 years, 8 million foreclosures. 
That is out of 57 million loans that we've already had 2 or 3 
million foreclosures. That is 8 million more.
    Mr. Kling. I'm going to disagree with that. We've agreed on 
a lot of stuff so far, but I'm going to disagree. Personally, 
my instinct is kind of yours, that the government--my concern 
is that if the government gets involved trying to bail out at 
the homeowner level, you don't know in Washington which 
homeowner can follow through with a mark, with a principal 
write down, which homeowner cannot. You can't manage that from 
Washington.
    The administrative expenses of that are going to be huge, 
and that is--I think 10 years from now all you're going to have 
to show for that is lots of administrative expenses, lots of 
repeat defaults and, worst of all, a housing market that is 
still out of balance because people don't know where the prices 
are, where the prices belong in the housing market.
    I would say in the end it would be cheaper to take those 8 
million people, pay for moving trucks, hold the door for them, 
get them out or turn them into renters than it will be to try 
to rework the mortgages. That is my prediction. I hope it's not 
correct, because I know that you're going to want to rework the 
mortgages, but that is my fear.
    Mr. Sali. Aren't those same 8 million people going to live 
in those same houses, though? They're just going to trade 
addresses at the end of the day, aren't they? You're not going 
to build 8 million more apartments for them to live in.
    Mr. Kling. Or they will rent their houses. But, we have to 
get to a natural market with supply and demand in balance. 
Because as long as you try to prop up people in houses that 
they couldn't--that they didn't belong in in the first place, 
the rest of the market is not going to be cured. That is my 
fear. My fear is that 10 years from now, we're still going to 
be arguing how to bail out the housing market because it will 
still be--the fire will still be raging.
    Mr. Calomiris. May I just talk briefly about this? Because 
I know we have a lot of other questions.
    I think there are elements of what both of them said that 
make sense. First of all, as Ed said, the exit has to be 
viable; and I think also you know both of them agree on that. 
That is, you're not going to want to just paper this over 
without writing down principal substantially.
    My own view, though--and here I disagree with Ed. I don't 
think that the home prices that he is taking for granted, which 
is I think probably derived from the Case-Schiller Index, I 
think that is an exaggerated measure of already where we are on 
the downside; and it's also exaggerated in its projections. So, 
there are technical issues here. There is a huge uncertainty 
about what that home equity shortfall is going to be, and I 
don't agree with the numbers that he quoted.
    But, I would agree, though, also with what Dr. Kling said. 
We don't want to make the solution in Washington. But I think 
they are pieces of what Ed said that can be done in a 
decentralized way.
    So, here is the answer, basically, in one sentence, 
according to me. Singling out owner-occupied homes, have a 
government-loss-sharing arrangement that would incentivize 
privately servicers or owners of mortgages to write down 
principal and interest quickly if the taxpayer is sharing some 
of those losses. So, they did this in Mexico in 1999. It worked 
very well because the thing had a timeline.
    If you want to participate in the loss sharing to mitigate 
the foreclosures, to avoid the foreclosures, you have to move 
very quickly. And what you really want to do is on the margin 
push the lenders with a little bit of money to decide to write 
down rather than foreclose. Because if they foreclose, they're 
going to lose a lot, too.
    So, you don't have to spend so much. You can get the 
private sector to spend a lot and let them decide the size of 
the writedown so long as it leads to a mortgage that is 
realistic. So, that is my view, and I have written about it.
    Mr. Stanton. And if I can supplement that, because my area 
is design of organizations and programs.
    Once again, if Fannie Mae and Freddie Mac were government 
corporations, they have relations with lenders all over the 
country. In fact, as we saw in the colloquy between Mr. Issa 
and Dr. Kling, not all homeowners are alike. Some deserve one 
treatment. Some deserve another. And it has been suggested that 
we essentially provide some sort of legal insulation for the 
servicer of the mortgage and then have a trustee in localities 
to sit there and work out. And if a homeowner goes to that 
trustee, they bind themselves, whatever decision, and the 
decision can range from pay or be foreclosed on to you get 
bankruptcy with cramdown features, to we're going to 
restructure your mortgage. There could be a range of 
alternatives.
    And if I have to think of two institutions that have the 
connections around the country to administer that kind of 
program and possibly with what some of the aspects that Charles 
Calomiris is talking about, Fannie and Freddie would be it. 
Before we can go there, we need to take those institutions 
formally into government hands so they're not all worried 
about, gee, do we have to satisfy those shareholders, that 20 
percent of shareholders that are still there that are going to 
want value in their company in the future.
    But, they would be the administrative mechanism, and they 
would be the people I would consult with first once they were 
in government hands. How do we make this work?
    And I agree with Charles. Housing prices are going to still 
go down. But, at some point, we can't afford to have 8 million 
people facing the disruption of their lives in foreclosure. 
There are cheaper ways to do it and less costly for people, 
lenders, and the government.
    Mr. Towns. Let me say to the gentlemen, your time has long 
expired.
    Let me thank all the witnesses. I really appreciate your 
coming and sharing with us. And, of course, let me also add 
that we have 7 days for additional comments as well. So, thank 
you very, very much for your testimony. We look forward to 
working with you in the days and months ahead. Thank you for 
coming.
    [Whereupon, at 3:38 p.m., the committee was adjourned.]
    [Additional information submitted for the hearing record 
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