[Senate Hearing 111-925]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 111-925

 
                   NOMINATION OF JOSEPH A. SMITH, JR.

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

                                HEARING

                               before the

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

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   ON

   THE NOMINATION OF JOSEPH A. SMITH, JR., OF NORTH CAROLINA, TO BE 
                DIRECTOR, FEDERAL HOUSING FINANCE AGENCY

                               __________

                            DECEMBER 9, 2010

                               __________

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


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                   Erin Barry, Legislative Assistant

                Laura Swanson, Professional Staff Member

                 Beth Cooper, Professional Staff Member

               Jonathan Miller, Professional Staff Member

                Mark Oesterle, Republican Chief Counsel

                 Chad Davis, Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                     Levon Bagramian, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                       THURSDAY, DECEMBER 9, 2010

                                                                   Page

Opening statement of Senator Johnson.............................     3
    Prepared statement...........................................    11

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4

                               WITNESSES

Richard Burr, Senator from the State of North Carolina...........     1
Kay Hagan, Senator from the State of North Carolina..............     2

                                NOMINEE

Joseph A. Smith, Jr., of North Carolina, to be Director, Federal 
  Housing Finance Agency.........................................     6
    Prepared statement...........................................    11
    Biographical sketch of nominee...............................    13
    Responses to written questions of:
        Senator Shelby...........................................    20
        Senator Reed.............................................    31
        Senator Kohl.............................................    31
        Senator Bennet...........................................    35
        Senator Crapo............................................    36
        Senator Corker...........................................    38
        Senator DeMint...........................................    39
        Senator Vitter...........................................    40

              Additional Material Supplied for the Record

Letter submitted by the Conference of State Bank Supervisors.....    49
Letter submitted by the Mortgage Bankers Association.............    50
Letter submitted by the National Association of Realtors.........    51
Letter submitted by the Independent Community Bankers of America.    52
Letter submitted by the National Association of Home Builders....    53

                                 (iii)


 NOMINATION OF JOSEPH A. SMITH, JR., OF NORTH CAROLINA, TO BE DIRECTOR,
                     FEDERAL HOUSING FINANCE AGENCY

                              ----------                              


                       THURSDAY, DECEMBER 9, 2010

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:55 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Tim Johnson, presiding.
    Senator Johnson. We have votes at 11 o'clock and, 
therefore, would you commence your introduction?

  STATEMENT OF RICHARD BURR, SENATOR FROM THE STATE OF NORTH 
                            CAROLINA

    Senator Burr. Mr. Chairman, thank you. To Senator Shelby 
and to my esteemed colleagues on the Committee, thank you for 
this opportunity. I am sure my cohort from North Carolina will 
be here shortly.
    Mr. Chairman, I want to thank you for holding this hearing 
and for giving me the opportunity and the pleasure of 
introducing Joseph Smith to my colleagues today. I know getting 
a nominee for Director of the Federal Housing Finance Agency 
has been a long time coming. However, I am pleased the 
Administration has sent forward the best nominee rather than 
the most quickly named nominee.
    I could not agree with the President more when he stated, 
and I quote, ``Mr. Smith brings to this position both 
tremendous expertise and a deep commitment to the strengthening 
of our housing finance system for the American people.'' 
Although born in West Virginia, North Carolinians have proudly 
claimed Joe as one of our own ever since he moved to Davidson, 
North Carolina, to attend Davidson College and become a 
Davidson Wildcat. And, Senator Shelby, that was under the days 
of Lefty Driesell, as you can remember.
    Many of you in the room today have gotten to know Joe over 
the years as his expertise and knowledge as a State banking 
commissioner has been sought by both this Committee and others 
on earlier occasions. Since 2002, Joe has served the citizens 
of North Carolina as our State's Commissioner of Banks. Joe is 
also the immediate past president chair of the Conference of 
State Bank Supervisors. In addition to his expertise as a 
regulator, Joe also has extensive real-world, everyday 
experience, having served as the general counsel and secretary 
for Centura Bank, based in Rocky Mount, North Carolina, during 
the 1990s. From the North Carolina Bankers Association stating, 
and I quote, ``He has been an outstanding commissioner for 
banks. We hate to lose him,'' to the Centers for Responsible 
Lending stating, and I quote, ``It is hard to think of a better 
choice''; to his fellow State banking commissioners stating, 
and I quote, ``I think it is a perfect choice,'' Joe's 
nomination to serve as Director of the Federal Housing Finance 
Agency has been met with much and well-deserved praise.
    For those of us who know Joe and have gotten to see his 
work up close, we are not surprised by the words of praise for 
his nomination coming from both the financial institutions he 
regulated and the consumer advocates alike. The praise is a 
testament to Joe's knowledge, his hard work, common sense, and 
his commitment to getting the job done right.
    Without a doubt, the job Joe has been nominated for will 
not be easy, and many might even ask why anyone would want to 
take on the role of overseer of Fannie and Freddie. However, I 
guarantee each and every one of you, having gotten to know Joe 
over the years, that Joe comes to this not seeking personal 
glory but out of a sense of duty to do a job that must be done 
and that must be done well.
    I want to thank Joe, Mr. Chairman, for accepting this 
difficult task and assure you, if confirmed, we will all miss 
his leadership and his guidance as North Carolina's 
Commissioner of Banks.
    I thank the Committee for the opportunity to speak before 
you and urge my colleagues to, as expeditiously as you can, 
confirm this nominee. I thank the Chairman and I thank the 
Ranking Member. I thank my colleagues.
    Senator Johnson. Thank you, Senator Burr.
    Senator Hagan.

    STATEMENT OF KAY HAGAN, SENATOR FROM THE STATE OF NORTH 
                            CAROLINA

    Senator Hagan. Thank you, Chairman Johnson, Ranking Member 
Shelby, Members of the Committee, and my colleague Senator 
Burr, I am grateful for the opportunity to introduce to you 
North Carolina's Commissioner of Banks, Joseph A. Smith, Jr. 
While he may be quick to point out that he was born and raised 
in West Virginia, Commissioner Smith and his wife, Elizabeth, 
have lived in North Carolina for more than 20 years where they 
raised their two sons, Joseph and Matthew.
    As a student, business leader, and public servant in North 
Carolina, Commissioner Smith garnered the respect and support 
of consumers, regulators, and businessmen and--women throughout 
our State. I am sure they also got a taste of Joe's self-
deprecating sense of humor. Indeed, just this morning, he joked 
that his Type A personality brought him to my office 2 hours 
before this hearing. My office, by the way, is no more than ten 
steps from this Committee room. But, obviously, Commissioner 
Smith comes prepared for any task that he takes on, and I am 
excited that, should he be confirmed, he will have the 
opportunity to serve as Director of the Federal Housing Finance 
Agency, where he will bring his considerable talents and 
experience to some of our Nation's most pressing issues.
    Commissioner Smith graduated from Davidson College in 
Davidson, North Carolina, in 1971 and from the University of 
Virginia Law School in 1974. During the 1990s, he gained 
considerable private sector experience while working as general 
counsel and secretary of a community bank in Raleigh. And for 
the past 8 years, Joe Smith has served as North Carolina's 
Commissioner of Banks. In his latest role, Commissioner Smith 
leads the agency responsible for regulating banks, savings and 
loans, mortgage bankers, mortgage brokers, check cashers, and 
money transmitters.
    Despite the challenges posed by these broad supervisory 
responsibilities, Commissioner Smith has garnered the respect 
of bankers, regulators, consumer groups, and legislator, both 
in North Carolina and across the Nation.
    In 2009, Commissioner Smith's peers honored him when they 
selected him Chairman of the Conference of State Board 
Supervisors. The North Carolina Bankers Association and its 135 
member banks, savings institutions, and trust companies proudly 
support his nomination. And after working with Commissioner 
Smith on consumer finance laws in the North Carolina 
Legislature, I join these organizations by offering my 
unqualified support for Commissioner Smith.
    As the Members of this Committee are keenly aware, the 
housing finance system in this country is in need of reform. 
The Director of the FHFA will play a critical role in the 
future of Fannie Mae, Freddie Mac, and the 12 Federal home loan 
banks that form the backbone of our current housing finance 
system. President Obama has nominated a capable leader in Joe 
Smith who has the experience and convictions to make the tough 
choices that will be required in the coming years. I cannot 
think of a better partner for Congress to work with as we take 
up those challenges.
    After 2 years in the Senate, I understand how difficult the 
nomination process can be, but I am quite confident that, after 
having the opportunity to learn more about Mr. Smith and having 
the opportunity to discuss some of these issues with him, 
Members of the Committee will be as enthusiastic as I am about 
confirming this thoughtful, capable, and effective nominee.
    Thank you.
    Senator Johnson. Thank you, Senator Hagan.

            OPENING STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Mr. Smith, would you take your seat at the 
table so we can begin the second hearing?
    I call to order this hearing on the nomination of Mr. 
Joseph A. Smith, Jr., of North Carolina, to be Director of the 
Federal Housing Finance Agency.
    Mr. Smith is no stranger to this Committee or to the 
challenges of implementing financial reforms. As Commissioner 
of Banks, he was responsible for implementing and enforcing 
North Carolina's antipredatory lending laws, overseeing the 
State's foreclosure prevention program, and serving on the 
Governor's task force to increase small business lending--to 
name a few of his accomplishments--all while regulating small 
and large financial institution in the State. To highlight some 
of those accomplishments, I would like to enter into the record 
letters from the Independent Community Bankers Association, the 
Conference of State Bank Supervisors, the Mortgage Bankers 
Association, and National Association of Realtors.
    Thank you for your willingness to serve at the Federal 
level, especially at a time when our country is trying to 
overcome significant economic challenges. Balancing consumer 
protection and credit availability, regulation and economic 
growth will be extremely important for creating a sustainable 
housing and economic recovery. I look forward to learning more 
about your work and how you view the role of Director of FHFA.
    Senator Shelby, would you like to give a statement?

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. I would like my 
opening statement to be made part of the record because we are 
getting ready to have some very important votes, and I do not 
know if I will get back.
    I would like to propound to you in my time, Mr. Smith--and 
I will furnish these in writing to you, too--some questions 
that I think are very important as you move forward.
    Protecting the taxpayer. Mr. Smith, according to an article 
in the Wall Street Journal yesterday, the Obama administration 
is pressuring Fannie Mae and Freddie Mac, through their primary 
regulator, the Federal Housing Finance Agency, to get the 
mortgage giants to agree to write down mortgages. For a variety 
of reasons, Fannie and Freddie have been reluctant to reduce 
principal balances. An important reason why the Federal Housing 
Finance Agency has been reluctant is that they Federal Housing 
Finance Agency is charged, as you well know, with limiting 
taxpayer losses. While underwater homeowners could benefit from 
principal writedowns, financing the writedowns through 
additional losses imposed on taxpayers amounts to a 
redistribution from taxpayers in general to certain classes of 
homeowners.
    Mr. Smith, given the responsibilities of the Federal 
Housing Finance Agency as a conservator of Fannie and Freddie, 
would you resist Administration pressure on Fannie and Freddie 
for principal writedowns? Do you want to answer that now or do 
you want to answer it for the record later? This is important.
    Mr. Smith. I had hoped to make an opening statement, but I 
know there is----
    Senator Shelby. No, I asked you a question.
    Mr. Smith. I understand that.
    Senator Shelby. Yes or no.
    Mr. Smith. Senator, the Federal Housing Finance Agency is 
an independent agency of Government. I am the head of an 
independent agency of Government now.
    Senator Shelby. Will you be independent if you are 
confirmed?
    Mr. Smith. I will.
    Senator Shelby. And will you not be subject to pressure 
from anybody?
    Mr. Smith. Well, I will be pressured by a lot of people, 
Senator, but the answer to your question----
    Senator Shelby. Well, will you be subject to that pressure?
    Mr. Smith. In exercising discretion--in exercising the 
power that this office has and that the agency has in this and 
a number of other very important issues, first and foremost I 
have got to look at it through the screen, if you will, of role 
as conservator. The first and foremost thing is to protect 
taxpayers.
    Senator Shelby. I hope you will elaborate on that for the 
record.
    Mr. Smith. I will, Senator.
    Senator Shelby. Influence from outside agencies. Given the 
involvement of both Treasury and HUD in loan modification 
programs in which Fannie and Freddie participate, there will be 
instances in which these agencies have strong opinions as to 
what actions Fannie and Freddie should take regarding certain 
policies. What is your view of the appropriate role for either 
the Secretary of the Treasury or the HUD Secretary? Does either 
have any authority relating to the Federal Housing Finance 
Agency and its responsibilities as conservator? Or is that your 
responsibility? And would it be appropriate for either to ask 
you to take some action that is inconsistent with conserving 
Fannie and Freddie assets such as principal reductions or not 
pursuing putbacks to protect bank solvency? You might want to 
answer that for the record a little later. I want to go through 
my questions.
    Mr. Smith. Very well.
    Senator Shelby. PACE loans, an question for you. On July 
16, 2010, FHFA, the Federal Housing Finance Agency, found that, 
and I will quote, ``certain energy retrofit lending programs 
present significant safety and soundness concerns that must be 
addressed by Fannie Mae, Freddie Mac, and the Federal home loan 
banks.'' Accordingly, they released guidance to protect these 
institutions from what are commonly referred to as PACE loans. 
It is my understanding that during conversations with the 
Banking Committee staff, you indicated that you would not alter 
this guidance as long as it was under active litigation. And 
would you confirm that this is your position? And if confirmed, 
would you protect the lien priorities of existing mortgages 
owned or guaranteed by the enterprises through any guidance 
that the Federal Housing Finance Agency may issue in the 
future.
    I want to keep going on my questions.
    Plain vanilla mortgages. During the debate on Dodd-Frank, 
some advocated that customers be offered a default of ``plain 
vanilla mortgages,'' arguing that behavioral economics 
supported this position. In previous testimony before this 
Committee, you seemed to have a position consistent with this, 
stating, ``Recent work in behavioral economics suggests that 
when confronted with information overall, bad choices often 
result.'' You then stated, ``The default mortgage for certain 
borrowers should be the 30-year fixed-rate mortgage.''
    Do you continue to believe in the concept of a default 
mortgage for certain consumers? And how do you define so-called 
behavioral economics? And would you use behavioral economics in 
your capacity running the FHFA? Then we can go to the next 
question.
    Financial statements. Mr. Smith, as a prospective 
conservator for Government-owned enterprises with large 
portfolios and scales of business, you need to be intimately 
familiar, like anyone, with the financial condition of Freddie 
and Fannie. My question to you would be: What financial 
statements of Fannie Mae, Freddie Mac, or the Federal home loan 
banks have you read yourself since you learned of your 
nomination? And what have you taken away from these statements? 
I would like that answer for the record.
    Appropriate level of housing goals. During a conversation 
with Banking Committee staff, you indicated that you did not 
have a position on the appropriateness of the current levels of 
the GSEs' housing goals. The need for the Director of the 
Federal Housing Finance Agency to balance these goals with the 
safety and soundness requirements of the institution, however, 
makes this, I think, a critical matter. My question: Having now 
had more time to reflect on the subject, what are your views on 
Fannie and Freddie's housing goals? Are they appropriately set? 
And do you have any reasons for changing them?
    I appreciate the Chairman's time in letting me have the 
latitude to ask these questions, but we will give these 
questions to you here today, and we would like for them to be 
answered for the record.
    Thank you, Mr. Chairman.
    Senator Johnson. Before we turn to you, Mr. Smith, would 
you please stand and raise your right hand for the swearing in.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you, God?
    Mr. Smith. I do.
    Senator Johnson. Do you agree to appear and testify before 
any duly constituted committee of the Senate?
    Mr. Smith. I do.
    Senator Johnson. You may be seated.
    We have a short amount of time available, but can you give 
us your testimony, please.

TESTIMONY OF JOSEPH A. SMITH, JR., OF NORTH CAROLINA, NOMINATED 
         TO BE DIRECTOR, FEDERAL HOUSING FINANCE AGENCY

    Mr. Smith. Yes, Senator, I will. I would first like to 
thank Senator Burr and Senator Hagan for their kind 
introductions. That was overwhelming. I would like to thank 
Senator Shelby for bringing them back to earth.
    [Laughter.]
    Mr. Smith. Mr. Chairman, Ranking Member Shelby, and Members 
of the Committee, I am Joseph A. Smith, Jr., currently the 
North Carolina Commissioner of Banks, and the President's 
nominee for the office of Director of the Federal Housing 
Finance Agency. It is an honor and privilege to sit before you 
today. I would like to express my appreciation to the President 
for nominating me to this position and his confidence in me in 
fulfilling this significant role.
    I would like to express my particular thanks to Chairman 
Dodd and to Ranking Member Shelby for agreeing to consider this 
nomination so promptly. Such consideration is a great courtesy 
to me and a recognition of FHFA's critical importance. Thank 
you very much.
    I regret that Elizabeth Smith, my wife of 31 years, cannot 
be with me today. Without her love and support, including sound 
advice, I would not be here today.
    I come before you with a commitment to public service and 
to strengthening the Nation's housing finance system. Direct 
experience in both banking and housing and the hard-won 
knowledge I have managed to accumulate over a 35-year career in 
law, banking, and State government service.
    During my career, I have been involved--directly involved 
in a variety of activities that serve as a daily reminder of 
the challenges ahead. I have worked out commercial loans, 
represented a bank through a real estate crisis, implemented 
both State and Federal mortgage licensing regimes, and 
supervised banks in varying stages of distress up to and 
including resolution.
    In my 8 years as North Carolina Commissioner of Banks, my 
colleagues and I have worked diligently and consistently to 
mitigate losses to our lending institutions and the financial 
system at large, as well as to prevent failures on a larger 
scale. My office supervises depository institutions with over 
$245 billion in total assets and a range of nonbank financial 
services firms, including mortgage bankers and brokers, 
consumer finance companies, check cashers, and money 
transmitters. I have been the Commissioner during the recent 
financial crisis and have direct experience as a safety and 
soundness regulator.
    While I believe that this experience will be important 
should I be confirmed as Director of FHFA, I also know that 
experience alone will not be enough to be successful in that 
position. In that regard, I am looking forward to working with 
the staff of the FHFA, the Administration, and with you and the 
other Members of Congress for your input and guidance.
    As you have said, sir, we are facing a significant 
challenge in the housing finance markets today. Fannie Mae and 
Freddie Mac are under conservatorship and have received $151 
billion from the Treasury Department in order to maintain their 
support of the housing market, which is critical at this time.
    But conservatorship cannot be a long-term solution. 
Congress and the Administration have important decisions to 
make regarding the future structure of the housing finance 
system. If confirmed, I look forward to working with you and 
having FHFA become an active participant in this process.
    I understand that if confirmed, you expect leadership and 
not just management. The activities of Fannie Mae and Freddie 
Mac are national in scope but local in impact, directly 
affecting communities across the country. Leadership in this 
context means determining how to address critical local needs 
in conjunction with the agency's duties of conservatorship.
    I also pledge to you the same kind of leadership with 
regard to FHFA's supervision of the Federal Home Loan Banks. I 
expect that many of you have heard from your bankers what I 
have heard from mine. The Federal Home Loan Banks are a crucial 
and needed source of funding and support to community banking, 
which in turn plays a vital role in addressing the credit needs 
of consumers, small businesses, and communities around the 
country.
    As FHFA has effectively reported, the Federal Home Loan 
Banks have their own challenges and are now subject to enhanced 
supervision. Community banks are dear to my heart, and you may 
be assured that the Home Loan Banks will receive my full 
attention with an eye to strengthening them and the banks they 
serve.
    Mr. Chairman, Ranking Member Shelby, and Members of the 
Committee, thank you again for your consideration of my 
nomination. Should you see fit to confirm me, I look forward to 
serving as the Director of the Federal Housing Finance Agency. 
I would be happy to answer any questions that you may have.
    Senator Johnson. Thank you, Mr. Chairman.
    I ask that 5 minutes be put on the clock before we continue 
with questions.
    Mr. Smith, we spoke a little about this in my office, but I 
think it is an important question to get on the record. The 
Director is in a unique position because FHFA is both a 
conservator and regulator of Fannie Mae and Freddie Mac. As 
conservator, the agency is responsible for the operations of 
the entities as well as regulating these operations. How do you 
plan to balance those roles?
    Mr. Smith. Senator, I believe that those two roles are 
actually profoundly complementary because, as a regulator, the 
agency seeks to ensure that the enterprises have proper 
governance, proper risk management, proper operating 
procedures, that they obey law, and all of these things are 
consistent with the preservation of their assets and their 
rehabilitation. And so I think one is an extension of the other 
and I think that we can--the agency is and I think we will 
continue to deal with that--any tension there may be 
successfully. But I think the two support each other.
    Senator Johnson. Would you cooperate with the 
investigations of the Inspector General's Office?
    Mr. Smith. You mean the FHFA Inspector General?
    Senator Johnson. Yes.
    Mr. Smith. FHFA has just gotten, after long efforts to do 
so, an independent Inspector General, and the Inspector 
General, of course, operates independently and we will--as a 
matter of course, I think our activities should be consistent, 
in any event.
    Senator Johnson. In addition to Fannie and Freddie, FHFA 
regulates the Federal Home Loan Banks which are not in 
conservatorship. These institutions fulfill different but 
important roles in our financial system. How will you approach 
the differences and unique characteristics of the Home Loan 
Banks as you develop policies and regulations?
    Mr. Smith. Senator, as I said in my testimony, I think the 
Home Loan Banks are crucial, particularly to community banks, 
and so I will work with staff to come to a full, frankly, 
understanding of the situation in which each of these banks 
finds themselves and the system as a whole, its health and 
operation, and we will work with the managements of those banks 
to improve them.
    And also, I would say, I look forward to working with 
bankers around the country on this issue, as well, because as 
you know, sir, the Home Loan Banks are cooperative 
organizations and so it is important to be engaged with bankers 
themselves about what they are going to do to support their--
the Home Loan Bank system. It is all of the above. I will take 
in a lot of information and we will work together.
    Senator Johnson. Can you talk about how the Federal Home 
Loan Bank Advance System has functioned in North Carolina 
during the economic downturn and the impact on financial 
institutions in the State.
    Mr. Smith. The Home Loan Banks have, over time, during the 
downturn and before, been an important source of funding to our 
banks and an important source of advice, if you will, or 
technical support, and have also been a great assistance to our 
banks in meeting certain of their affordable housing needs. It 
has been crucial over the long term, frankly, Senator, for the 
Home Loan Banks provide a needed source of funding and support 
for our banks through all parts of the cycle.
    Senator Johnson. Can you talk about how you use your 
regulatory position in the State to help address some of the 
challenges that families are facing during this crisis?
    Mr. Smith. I am sorry, I did not quite understand----
    Senator Johnson. Can you talk about you use your regulatory 
position in the State----
    Mr. Smith. The State----
    Senator Johnson. ----to help address some of the challenges 
that families are facing----
    Mr. Smith. I will.
    Senator Johnson. ----in this crisis.
    Mr. Smith. We have done several things. First and foremost, 
we began a licensing system that, over time--it took a long 
time--removed a number of undesirable characters from the 
mortgage origination business. The more recent and more 
apposite answer to your question is that my agency has 
conducted, first with our own funds and now with funds gotten 
from a fee on foreclosures, a foreclosure prevention--we have 
organized a Foreclosure Prevention Network, and over the course 
of the last couple of years have kept 5,000 North Carolina 
families in their home. It took a lot of effort, and I will not 
say it is perfect, but we did what we could do to keep families 
in their homes.
    Going forward, by the way, I will say that the challenge we 
face now in the North Carolina is that while in the past, two-
thirds, let us say, of the loans were what you might call 
subprime or high-cost loans to start, two-thirds of the loans 
now are conventional loans. They are loans that were properly 
underwritten to families who were fine when the loans were made 
and the economic situation in which our Nation and the State 
finds itself has put them up against it. So it is an entirely 
new and different challenge now.
    Senator Johnson. Votes have just begun I will recess until 
after the votes are concluded.
    [Recess.]
    Senator Johnson. Mr. Smith, you are getting off easy. We 
are going to submit questions for the record to you by four 
o'clock p.m. tomorrow. Please get your responses back quickly. 
I am hopeful that we can then begin to move your nomination in 
a timely manner.
    I want to thank both of our witnesses at both hearings 
today. Oversight of the financial system and the reform of the 
housing finance system will be top priorities for this 
Committee as we begin the next Congress, and both of today's 
hearings contributed to those discussions.
    I thank everyone again for their time today, and the 
hearing is adjourned.
    [Whereupon, at 12:29 p.m., the hearing was adjourned.]
    [Prepared statements, biographical sketch of nominee, 
responses to written questions, and additional material 
supplied for the record follow:]

               PREPARED STATEMENT OF SENATOR TIM JOHNSON

    I call to order this hearing on the nomination of Mr. Joseph A. 
Smith, Jr., of North Carolina, to be Director of the Federal Housing 
Finance Agency.
    As our economy recovers, the regulators begin to implement the 
Dodd-Frank Walls Street Reform Act and we consider the future of the 
housing market, it is essential that the Federal Housing Finance Agency 
have leadership that is answerable to Congress. I would like to commend 
Chairman Dodd and Ranking Member Shelby for their joint letter urging 
President Obama to name a nominee for this post and ask that the letter 
be included in the record. The Director of FHFA has a unique role as 
regulator for the Federal Home Loan Bank system and both regulator and 
conservator of Fannie Mae and Freddie Mac. This dual role requires a 
balance between protecting taxpayers and using the tools available to 
stabilize the housing market.
    Mr. Smith is no stranger to this Committee or to the challenges of 
implementing financial reforms. As Commissioner of Banks, he was 
responsible for implementing and enforcing North Carolina's 
antipredatory lending laws, overseeing the State's foreclosure 
prevention program and serving on the Governor's task for to increase 
small business lending--to name a few of his accomplishments--all while 
regulating small and large financial institution in the State. To 
highlight some of those accomplishments, I would like to enter into the 
record letters from the Independent Community Bankers Association, the 
Conference of State Bank Supervisors, the Mortgage Bankers Association 
and National Association of Realtors.
    Thank you for your willingness to serve at the Federal level--
especially at a time when our country is trying to overcome significant 
economic challenges. Balancing consumer protection and credit 
availability, regulation and economic growth will be extremely 
important for creating a sustainable housing and economic recovery. I 
look forward to learning more about your work and how you view the role 
of Director of FHFA.
                                 ______
                                 

               PREPARED STATEMENT OF JOSEPH A. SMITH, JR.
              To Be Director of the Federal Housing Agency
                            December 9, 2010

    Mr. Chairman, Ranking Member Shelby, and Members of the Committee. 
I am Joseph A. Smith, Jr., currently the North Carolina Commissioner of 
Banks, and the President's nominee for the office of Director of the 
Federal Housing Finance Agency. It is an honor and a privilege to sit 
before you today.
    I would like to express my appreciation to the President for 
nominating me to this position, and his confidence in me in fulfilling 
this significant role. I would also like to express particular thanks 
to Chairman Dodd and Ranking Member Shelby for agreeing to consider my 
nomination so promptly. Such consideration is a great courtesy to me, 
and a recognition of FHFA's critical importance. Thank you very much.
    I regret that Elizabeth Smith, my wife of 31 years, cannot be with 
me today. Without her love and support, including sound advice, I would 
not be here today.
    I come before you with a commitment to public service and to 
strengthening the Nation's housing finance system, direct experience in 
both banking and housing, and the hard-won knowledge I have managed to 
accumulate over a 35-year career in law, banking and State government 
service. During my career, I have been directly involved in a variety 
of activities that serve as a daily reminder of the challenges ahead. I 
have worked out commercial loans, represented a bank through a real 
estate crisis, implemented both State and Federal mortgage licensing 
regimes, and supervised banks in varying stages of distress, up to and 
including resolution.
    In my 8 years as the North Carolina Commissioner of Banks, my 
colleagues and I have worked diligently and consistently to mitigate 
losses to our lending institutions and the financial system at large, 
as well as to prevent failures on a broader scale. My office supervises 
depository institutions with over $245 billion in total assets and a 
range of nonbank financial services firms, including mortgage bankers 
and brokers, consumer finance companies, check cashers and money 
transmitters. I have been the Commissioner during the recent financial 
crisis and have direct experience as a safety and soundness regulator.
    While I believe that this experience will be important should I be 
confirmed as Director of FHFA, I also know that experience alone will 
not be enough to be successful in this position. In that regard, I look 
forward to working with the staff of FHFA, the Administration, and with 
you and other Members of Congress for input and guidance.
    We are facing a significant challenge in the housing finance 
markets today. Fannie Mae and Freddie Mac are under conservatorship and 
have received $151 billion from the Treasury Department in order to 
maintain their support of the housing market, which is critical at this 
time. But conservatorship cannot be a long-term solution. Congress and 
the Administration have important decisions to make regarding the 
future structure of the housing finance system. If confirmed, I look 
forward to working with you and having FHFA become an active 
participant in that process.
    I understand that, if confirmed, you expect leadership and not just 
management. The activities of Fannie Mae and Freddie Mac are national 
in scope but local in impact, directly affecting communities across the 
country. Leadership in this context means determining how to address 
critical local needs in conjunction with the Agency's duties of 
conservatorship.
    I also pledge to you the same kind of leadership with regard to 
FHFA's supervision of the Federal Home Loan Banks. I expect many of you 
have heard from your bankers what I have heard from mine: the Federal 
Home Loan Banks are a crucial and needed source of funding and support 
to community banking which, in turn, plays a vital role in addressing 
the credit needs of consumers, small businesses and communities around 
the country. As FHFA has effectively reported, the Federal Home Loan 
Banks have their own challenges and are now subject to enhanced 
supervision. Community banks are dear to my heart, and you may be 
assured that the Home Loan Banks will receive my full attention, with 
an eye to strengthening them and the banks they serve.
    Mr. Chairman, Ranking Member Shelby, and Members of the Committee, 
thank you again for your consideration of my nomination. Should you see 
fit to confirm me, I look forward to serving as the Director of the 
Federal Housing Finance Agency. I would be happy to answer any 
questions you may have.















        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                   FROM JOSEPH A. SMITH, JR.

Q.1. Position on Important Issues. Please state your positions 
on the following important issues that will face the next 
Director of FHFA. What is your view on the current levels of 
affordable housing goals, as set by the Federal Housing Finance 
Agency (FHFA) for Fannie Mae (Fannie) and Freddie Mac 
(Freddie)? Do you view the current levels as appropriate? If 
so, on what basis do you judge appropriateness? If not, why 
not?

A.1. While tension exists between implementing the affordable 
housing mandates and the goals of conservatorship to minimize 
taxpayer losses, if confirmed, I would do my best to strike a 
balance between these two statutory mandates. I believe that my 
first goal will be to conserve and preserve assets, but 
recognize that, as Director I would be legally obligated to set 
and measure compliance with the affordable housing goals. If 
confirmed, I look forward to working with Congress to address 
appropriate alternatives for supporting affordable housing.

Q.2. What is your view on whether Fannie and Freddie should 
have sizeable portfolio holdings?

A.2. I understand that both GSEs are required under the terms 
of their preferred stock purchase agreements with the Treasury 
Department to reduce their portfolios by 10 percent per year. I 
want to acknowledge that, while there is no reason for the GSEs 
to have large investment portfolios, the portfolios are being 
used today for loss mitigation purposes. I understand that some 
level of portfolio is needed to be able to hold nonperforming 
loans that will be modified. If confirmed, I look forward to 
working with my colleagues at FHFA to gain a better 
understanding of the details of the GSEs' portfolios.

Q.3. Is the current conforming loan limit for Fannie and 
Freddie appropriate?

A.3. Congress authorizes and sets the conforming loan limit. If 
confirmed as Director, it would be my responsibility to ensure 
that Congress' direction is correctly implemented.

Q.4. What is your view on whether agency mortgaged-backed 
securities should be explicitly guaranteed by the Federal 
Government as part of any reform of the housing finance system?

A.4. If Congress decides to provide for an explicit Government 
guarantee, I believe that they should consider the costs of 
such a guarantee and who will bear those costs; any guarantee 
must be appropriately priced to compensate for risk, to cover 
potential losses.

Q.5. It is my understanding that during conversations with 
staff of the Senate Committee on Banking, Housing, and Urban 
Affairs (Banking Committee), you stated that you did not have 
positions on the above issues. If you now have positions on 
these issues, what has occurred to change your positions?

A.5. During the last few weeks, I have had an opportunity to 
review public reports and materials related to all of FHFA's 
regulated entities, including their financial statements and 
FHFA's conservator report and loss projections for Fannie Mae 
and Freddie Mac. That being said, these are complex and huge 
financial institutions and there is much more to understand 
before I can responsibly come to fully informed positions.

Q.6. Analytical Support for Positions. What macroeconmic 
analysis or analysis of mortgage and housing markets have you 
performed or evaluated to arrive at your positions regarding 
what you feel should be the future course for Fannie Mae and 
Freddie Mac?

A.6. I am familiar with various pieces of analysis on the U.S. 
housing market and some of the proposals for reforming the 
system. However, I defer to the judgment of Congress regarding 
the future of Fannie Mae and Freddie Mac. If confirmed, I hope 
that I can be helpful to those who will be making critical 
decisions about the most appropriate structure, by providing 
information and data that can help to inform the deliberations.

Q.7. Options for Ending the Conservatorship. When then Treasury 
Secretary Paulson and Director Lockhart acted in September 2008 
to establish the conservatorship for Fannie Mae and Freddie 
Mac, they indicated that this is a ``time out'' so that 
Congress can consider what, if any, is the appropriate role in 
our housing finance system for the GSEs.
    What would you like to see happen if the GSEs become 
economically viable again and Congress has not acted on GSE 
reform? Would you, as FHFA Director, continue the 
conservatorship, or would you be required to return the 
companies to their previous form?

A.7. FHFA's current loss projections for the GSEs show an 
expectation of continued losses over the next few years. If 
confirmed, my role as their conservator is to work to minimize 
these losses. I expect that the decisions made regarding the 
future of the housing finance system will include some type of 
resolution that ensures that the overall cost of the Federal 
support for the GSEs is as low as possible. We all recognize 
the significant problems that resulted from the public/private 
structure. In whatever form the GSEs emerge from 
conservatorship, we should aim to ensure that they are stronger 
and well-managed to perform any role that Congress lays out for 
them going forward.

Q.8. If the companies were returned to their previous form, 
what would be the Treasury's role in their day-to-day 
operations, considering that the Treasury holds warrants for 
79.99 percent of the companies' common stock?

A.8. I believe that Congress will act with due speed to 
consider and enact housing finance reform and I look forward to 
working with you and other members of Congress to ensure that 
this accomplished.

Q.9. Risk Management. According to Fannie Mae's most recent 10-
Q statement, Fannie's business activities expose taxpayers to 
four, often overlapping, major categories of risk: credit risk, 
market risk, operational risk, and model risk.
    If confirmed, please explain in detail what you will do to 
manage each of these risks and whether what you would do 
deviates from what you understand Fannie currently does. If you 
advocate deviation(s), please explain why.

A.9. The risks mentioned in the question are traditional 
concerns of financial services regulators (along with liquidity 
risk, reputation risk, and a number of other risks that may 
vary, depending on market conditions). These risks have been 
and are being addressed by FHFA supervisory staff as part of 
their examination and supervision of the Enterprises. If 
confirmed, I intend that this process should continue so that, 
working with the managements and boards of the Enterprises, 
each of these risks (and others, as appropriate) are 
effectively addressed and the Enterprises are made more stable 
and resilient.

Q.10. Protecting the Taxpayer. Mr. Smith, according to an 
article in the Wall Street Journal dated December 8, the Obama 
administration ``is pressuring Fannie Mae and Freddie Mac, 
through their primary regulator, the Federal Housing Finance 
Agency'' to get the mortgage giants to agree to write down 
mortgages. The FHFA has been reluctant to allow principal 
balance reductions because the FHFA is charged with limiting 
taxpayer losses.
    Mr. Smith, given the responsibilities of FHFA as 
conservator, would you resist Administration pressure on Fannie 
and Freddie for principal write-downs? If so, please explain 
why. If not, please explain why and provide details of the 
analysis you have performed or consulted that has led to your 
position.

A.10. The Federal Housing Finance Agency is an independent 
agency of Government. I am the head of an independent agency of 
State government now, I understand how important that 
independence is, and I appreciate that I will be independent if 
I am confirmed. While there will be many varying interests 
before the agency, I will consider any proposal first and 
foremost from the prospective of the role as conservator, with 
eye to protecting taxpayers. I understand that FHFA has 
publicly stated that the idea of principal reduction is under 
review. I have no further knowledge of the topic than what I 
have read in press accounts.

Q.11. View of Responsibilities. The Director of FHFA has many 
responsibilities. If confirmed, what do you believe would be 
your primary responsibility?

A.11. If confirmed, my main duty is to serve as conservator of 
Fannie Mae and Freddie Mac, working to minimize their losses 
and bring them back to a position of health, in anticipation of 
Congress' determination of the future structure of the housing 
finance system. As Director, I would be expected to ensure the 
safety and soundness of all 14 GSEs and would seek to ensure 
that all of the GSEs have proper governance, proper risk 
management practices, proper operating procedures, and that 
they obey law. For Fannie Mae and Freddie Mac under 
conservatorship, all of these mandates are consistent with the 
preservation of their assets and their rehabilitation.

Q.12. The oversight of Fannie Mae and Freddie Mac, which are 
multitrillion dollar organizations and are larger than any 
private financial institutions, is a serious responsibility. 
How has your experience prepared you to undertake this effort?

A.12. If confirmed, I would look forward to the opportunity to 
participate in the healing and reform of our Nation's housing 
finance system. I would bring to this task 35 years of 
experience in law, banking, and financial services regulation. 
I am humbled by this opportunity and look forward to working 
with agency staff, Congress, and others to address this 
critical effort.

Q.13. If confirmed, who do you believe are what you have 
referred to elsewhere as ``stakeholders'' in Fannie and 
Freddie, and how would you rank those stakeholders in terms of 
importance and in making tradeoffs?

A.13. If confirmed, my first priority will be the success of 
the conservatorship of the Enterprises, to protect the interest 
of taxpayers. As noted in my oral testimony, the Enterprises' 
business has a significant impact on communities around the 
country. I will, if confirmed, have an obligation to implement 
affordable housing mandates and, in that regard, will have to 
deal with the tension between the ``mission'' goals and the 
goals of the conservatorship. I expect that I will be asked to 
implement or support changes to current Enterprise policy in 
order to increase the availability of credit and the 
involvement of private sector in the housing market. If 
confirmed, I will listen to such proposals, but will make 
decisions based on my position as an independent regulator and 
conservator of the GSEs.

Q.14. Lack of Conservator Experience. Thus far, I am unaware of 
any experience you have with running a conservatorship. If this 
is correct, how would you plan to compensate for a lack of 
experience in this area given the magnitude of responsibility 
in operating these companies?

A.14. As my oral testimony points out, as North Carolina 
Commissioner of Banks I have been and am involved with 
financial institutions in distress, up to and including 
resolution. I have extensive experience working with bank 
management, boards, and Federal regulators to mitigate losses 
and, where possible, to prevent bank failures. That said, I 
understand that the Enterprises differ in degree and kind from 
the institutions with which I have been dealing. I am not 
conducting my current work with distressed institutions alone; 
rather, as Commissioner, I supervise teams of examiners and 
other supervisory personnel, who deal with these lending 
institutions diligently and skillfully. If confirmed as 
Director of FHFA, I would review with agency management the 
current status of conservatorship and regulatory activities and 
would work with them to support their efforts and to ensure 
that they have the resources (human, financial, and technical) 
necessary to do their work fully and effectively. Policy 
decisions would be made only after careful review of legal 
authority and facts and only after full discussion with staff. 
The conservatorship and regulation of the Enterprises is not a 
one person job; while responsibility ultimately rests with the 
Director, it has to be exercised through the agency as a whole.

Q.15. FHFA as Conservator. In describing its role as 
conservator, FHFA has previously stated:

        The purpose of appointing the Conservator is to 
        preserve and conserve the Company's assets and property 
        and to put the Company in a sound and solvent 
        condition. The goals of the conservatorship are to help 
        restore confidence in the Company, enhance its capacity 
        to fulfill its mission, and mitigate the systemic risk 
        that has contributed directly to the instability in the 
        current market.

    Do you agree with this assessment of FHFA's 
responsibilities as conservator? Why, or why not?

A.15. I agree with the approach that prior leadership of the 
FHFA have taken with regards to the responsibilities as 
conservator. If confirmed as Director, I intend to pursue three 
main strategies that I believe are consistent with Congress' 
intent in granting FHFA the authority to act as conservator of 
the GSEs: (1) minimize the losses on the poor quality existing 
book of business; (2) ensure that the GSEs take on good quality 
business going forward, with their prices effectively covering 
the expected risk; and (3) work to stabilize the housing 
market, which is in the best interest of not only the GSEs, but 
also homeowners and taxpayers who have supported these two 
firms.

Q.16. FHFA Role in the Financial Stability Oversight Council. 
The FHFA participates in deliberations of the Financial 
Stability Oversight Council (FSOC). One task of that Council 
will be to identify ``systemically important financial market 
utilities and payment, clearing, and settlement activities.''
    What criteria would you use to identify a market utility or 
payment, clearing, or settlement activity as ``systemically 
important'' and can you provide examples of entities that 
currently satisfy your criteria? (If you rely solely on the 
considerations provided in Title VIII of the Dodd-Frank Act, 
please identify quantitative cutoffs beyond which an entity 
would become, in your view, systemically important.)

A.16. As I understand it, the determination of systemically 
important financial market utilities is an important 
responsibility of the Financial Stability Oversight Council. I 
understand that an Advanced Notice of Proposed Rulemaking was 
recently issued by the Council. If confirmed, I look forward to 
fully considering this issue as a member of the Council.

Q.17. Plain Vanilla Mortgages. During the debate on what became 
the Dodd-Frank Act, some advocated that customers be offered a 
default of ``plain vanilla mortgages,'' arguing that behavioral 
economics supported this position. In previous testimony before 
this Committee you seemed to have a position consistent with 
this, stating ``recent work in behavioral economics suggests 
that when confronted with information overload, bad choices 
often result.'' You then stated that the default mortgage for 
certain borrowers should be the 30 year fixed rate mortgage.
    Do you continue to believe in the concept of a ``default'' 
mortgage for certain consumers?
    How do you define so-called ``behavioral'' economics, and 
how would you use behavioral economics in your capacity running 
the FHFA? What do you believe to be the difference between 
``behavioral'' economics and nonbehavioral microeconomics or 
macroeconomics?
    What do you believe behavioral economics has to offer, if 
anything, in the context of mortgage contract design? Please 
identify any empirical studies that provide support for your 
view.

A.17. I would like to clarify that the remarks that are quoted 
were made in the context of a discussion of the subprime 
crisis. The key elements that are important to me are 
simplicity, clarity, and consumer choice in the offering of 
mortgages and their documentation, as well as underwriting 
practices that fairly consider the borrower's ability to repay 
and other factors that lead to a successful loan. These 
considerations are now under the purview of the Consumer 
Financial Protection Bureau and the Federal regulators who are 
working to implement the provisions of Dodd-Frank that would 
define ``qualified residential mortgages.'' The FHFA has a role 
in drafting these regulations and, if confirmed, I look forward 
to working with the staff on this issue.

Q.18. PACE Loans. On July 6, 2010, FHFA found that: `` . . . 
certain energy retrofit lending programs present significant 
safety and soundness concerns that must be addressed by Fannie 
Mae, Freddie Mac and the Federal Home Loan Banks.'' 
Accordingly, they released guidance to protect these 
institutions from what are commonly referred to as PACE loans. 
It is my understanding that during conversations with Banking 
Committee staff, you indicated that you would not alter this 
guidance so long as it was under active litigation. Would you 
confirm that this is your position?

A.18. I feel strongly that the protection of the priority of 
liens with respect to loans financed or guaranteed by the GSEs 
is critical to conservatorship. However, I understand the FHFA 
is currently a party to litigation with respect to PACE loans. 
Accordingly, should I be confirmed, I may well be a named party 
in such litigation. This being the case I believe that any 
further comment on the subject would be inappropriate at this 
time.

Q.19. Role on the FSOC. The Director of the FHFA will sit on 
the Financial Stability Oversight Council, which was recently 
created by the Dodd-Frank Act. In your view, what role should 
the FSOC play, if any, in improving financial regulation, and 
how would you plan to carry out your responsibilities as a 
member, if confirmed?

A.19. I think that it is appropriate for FHFA to be a voting 
member of the FSOC, given that the agency's regulated entities 
have a significant role in the housing finance system today. I 
understand that most of the members of the Council are also 
engaged in various aspects of the interagency rule-making to 
develop the regulations required to implement Dodd-Frank. If 
confirmed, I will continue to support these efforts, providing 
information and data, as necessary, as well as the expertise of 
agency staff to discuss and debate the important issues to be 
addressed in the regulations.

Q.20. Fed and Systemic Risk. The ``Housing and Economic 
Recovery Act'' (HERA) required that the FHFA consult the 
Federal Reserve (Fed) on all regulatory matters related to 
authorities granted by HERA. This was an effort to make certain 
that the FHFA remained mindful of the impact of its decisions 
on financial system stability. Going forward, what do you 
believe should be the role of the FSOC or the Fed in mitigating 
systemic risks posed by Fannie and Freddie?

A.20. My understanding of the provision in HERA that required 
FHFA to consult with the Federal Reserve on significant rules 
is that it expired in December 2009. I would note that HERA 
requires an oversight board for FHFA with certain regulators 
providing advice to the agency. In addition, the Dodd-Frank 
bill makes FHFA a member of the Financial Stability Oversight 
Council. In its role on the FSOC, FHFA would work with other 
regulators to consider the systemic impact of the GSEs on 
markets as well as the impact of market events on the GSEs. 
FHFA has primary authority to work to avoid unsafe and unsound 
practices at the GSEs that could have a systemic risk.

Q.21. Influence and Oversight. Given the involvement of both 
Treasury and HUD in loan modification programs in which Fannie 
and Freddie participate, there may be instances in which these 
agencies have strong opinions as to what actions Fannie and 
Freddie should take regarding certain policies. What is your 
view of the appropriate role for either the Secretary of 
Treasury or the HUD Secretary with respect to the oversight and 
management of Fannie Mae and Freddie Mac? Does either have any 
authority related to FHFA and its responsibilities as 
conservator?

A.21. As I understand it, FHFA is an independent regulator and 
therefore is not accountable to the Treasury Department or 
Department of Housing and Urban Development for its decisions. 
I would note that the Treasury Department does have a 
contractual relationship with the GSEs through the Preferred 
Stock Purchase Agreements and the financial agent contracts for 
the Making Home Affordable program. FHFA also works with the 
Treasury Department and other Federal regulators through the 
Financial Stability Oversight Council and, should I be 
confirmed, I would, of course, willingly listen to their views 
and coordinate with them on systemic risk issues. However, my 
role as Director would be to make the appropriate decisions 
related to the entities that I would regulate--the GSEs--and I 
would prioritize the goals of the conservatorship in any 
decision I make.

Q.22. Would it be appropriate for either to ask you to take 
some action that is inconsistent with conserving Fannie Mae and 
Freddie Mac assets, such as principle reductions or not 
pursuing ``putbacks'' to protect bank solvency?

A.22. Should I be confirmed as Director of the FHFA, my main 
duty would be to conserve and preserve the assets of the GSEs 
in conservatorship. While I would consider input from a variety 
of sources in reaching a decision, any decision would 
ultimately be made in light of my role as an independent 
regulator and conservator of the GSEs. Regarding principal 
reduction specifically, I understand that FHFA has publicly 
stated that the idea of principal reduction is under review. I 
have no further knowledge of the topic, other than what I have 
read in press accounts.

Q.23. If confirmed, what course of action would you take if 
asked to make a decision that might somehow benefit the public, 
but would be detrimental to Fannie Mae and Freddie Mac and thus 
also detrimental to the interest of the taxpayer?

A.23. If confirmed, my main duty as Director of FHFA would be 
to conserve and preserve the assets of Fannie Mae and Freddie 
Mac in conservatorship. My course of action would entail 
seeking input from a variety of sources, both within FHFA and 
the GSEs, as well as seeking input from external sources. The 
ultimate decision would conform to my role as an independent 
regulator and conservator of the GSEs, to preserve and conserve 
GSE assets.

Q.24. Freddie Mac Suing IRS. On October 22, Freddie Mac filed 
suit against the Internal Revenue Service (IRS), disputing the 
IRS's determination that Freddie Mac owes $3 billion of 
additional income taxes and penalties for the 1998 to 2005 tax 
years. While, as conservator, the FHFA has a duty to preserve 
and conserve Freddie Mac's assets and property, and the 
Secretary of the Treasury has the duty to enforce revenue laws, 
this dispute seems to be an instance of the right hand suing 
the left, given that the taxpayers essentially own Freddie Mac.
    If confirmed, would you expect that the FHFA and Treasury 
could work out a solution to this dispute that would avoid a 
scenario in which the taxpayers gain nothing but a bill for 
attorney fees? Would you pursue such a solution? How would you 
go about making this happen?

A.24. I am unaware of the details of the dispute between 
Freddie Mac and the IRS, but I understand that this matter is 
now before the U.S. Tax Court. If confirmed as Director of 
FHFA, I would work with my colleagues at the FHFA and the IRS 
to determine if a resolution is possible, without the need for 
further litigation.

Q.25. When To Expedite Foreclosures. Press reports detailing 
problems with the preparation and notarization of foreclosure 
documents by some servicers has led to increased discussions 
regarding foreclosure procedures and their impact on the 
housing market. One such issue is the length of time now 
required to foreclose in certain States. While every homeowner 
deserves the right to proper due process, averages approaching 
a year and a half in some instances add significant costs to 
our economy.
    In what instances, if any, should FHFA instruct Fannie Mae 
and Freddie Mac to pursue foreclosure expeditiously? If 
confirmed, would you as FHFA Director advocate suspension of 
the so-called ``dual track'' process of mortgage modification? 
If so, what tradeoffs would you be making and what empirical 
assessment guides your decision?

A.25. As the North Carolina Commissioner of Banks, I have 
worked directly on foreclosure prevention programs and 
therefore have been closely following the national press on 
foreclosure processing problems. I have heard local and city 
officials in North Carolina express serious dismay when vacant 
properties languish and create blight in local communities, and 
I have heard from consumer advocates who oppose the ``dual 
track'' process as unfair to the troubled homeowner, so I am 
very interested in finding a middle ground to address these 
competing problems. While all of my decisions as Director of 
FHFA will be based on the overriding principals of 
conservatorship, if confirmed, I will certainly take a look at 
the situation and work to find some common ground--to ensure 
that homeowners are provided with every opportunity to keep 
their homes, yet to move foreclosure processing along promptly 
when necessary, to protect local neighborhoods from the harmful 
effects of abandoned and vacant properties.

Q.26. Financial Statements. Mr. Smith, as a prospective 
conservator for Government-owned enterprises with large 
portfolios and scales of business, you need to be intimately 
familiar with the financial conditions of the enterprises. What 
financial statements of Fannie Mae, Freddie Mac or the Federal 
Home Loan Banks have you read during the past year, and what 
have you taken away from those statements?

A.26. I have read the SEC filings of the GSEs, with particular 
attention to Fannie Mae, and the consolidated financial 
statements of the Federal Home Loan Banks. I also thoroughly 
read the examination reports published by FHFA on all of their 
regulated entities. Frankly, I find the FHFA reports most 
helpful in understanding the weaknesses and condition of the 
GSEs. These reports highlight a number of supervisory concerns 
that I intend to focus on in my role as regulator and 
conservator, if confirmed for this position.
    Several things occurred to me as I reviewed the financial 
statements. Recently, Fannie Mae and Freddie Mac were required, 
due to accounting rule changes, to bring on the balance sheet 
all their guaranteed loans. I was struck by the impact of the 
consolidated statements on the scope of their operations and 
the difficulty it creates in comparing results quarter-to-
quarter or year-to-year. I was also struck by the extensive 
discussions of the national economy and levels of employment, 
which are material factors that have to be disclosed as part of 
the financial statements. The descriptions in the reports 
highlight that there are critical factors to the success of the 
GSEs that are not under FHFA's control, but that must be 
closely monitored.

Q.27. Do you believe that you possess sufficient knowledge of 
FHFA's authorities and responsibilities and of Fannie Mae, 
Freddie Mac, and the FHLB's operations to be able to properly 
manage FHFA immediately, if you are confirmed? Are there any 
areas where you would need time to get yourself up to speed? If 
so, what areas?

A.27. As a result of my nomination, I have done my best to 
familiarize myself with the authorities and responsibilities 
mentioned in your question. If confirmed, I will act only after 
careful study of the relevant authorities and in consultation 
with staff.

Q.28. Leadership and Tradeoffs. In discussing your views about 
leadership at FHFA, you testified that: ``Leadership in this 
context means determining how to address critical local needs 
in conjunction with the agency's duties of conservatorship.''
    Could you elaborate on what you mean by ``local needs'' and 
how you would use resources available to, or guided by, the 
Federal Housing Finance Agency to address those needs? Could 
you describe how you would balance local needs with needs of 
taxpayers who are invested in Fannie Mae and Freddie Mac?

A.28. I was referring to the fact that Fannie Mae and Freddie 
Mac are very large players in the housing finance system and 
that their activities can have an impact on local communities. 
For example, the large numbers of foreclosures are creating a 
high volume of properties that must be sold, which can affect 
neighborhoods if the properties are not moved to sale in an 
expeditious manner. If confirmed, my priority would be to 
minimize further losses to the taxpayer, but I would also be 
conscious of the effect of Enterprise activities on local real 
estate markets.

Q.29. FHFA Role in the Future of Housing. In your testimony, 
you identify that conservatorship of Fannie Mae and Freddie Mac 
cannot be a long-term solution and that Congress and the 
Administration have important decisions to make with respect to 
housing finance. You go on to state that: ``If confirmed, I 
look forward to working with you and having FHFA become an 
active participant in this process.'' Could you elaborate on 
what you mean by FHFA being an ``active participant'' in the 
process involving decisions by Congress and the Administration 
with respect to the Nation's housing finance system?

A.29. In preparing for this nomination, I have had occasion to 
review various proposals and options to restructure the GSEs 
and the housing finance system. I am also aware that the 
Administration is preparing a proposal for Congress's 
consideration in January. If confirmed, I look forward to 
working with my colleagues at FHFA to advise Congress about the 
costs and benefits on any proposals that would be brought 
before you. As Director of FHFA, I expect to provide you 
factual information and data, and I hope that FHFA can serve as 
a trusted adviser as you deliberate the future of the housing 
finance system.

Q.30. Abusive Lending and the Housing Bubble. Mr. Smith, 
according to a November 12 article in the New York Times, you 
played a ``crucial role'' in North Carolina's response to the 
collapse of the housing market.
    The article goes on to say that: ``He identified abuses by 
lenders as an important factor in the boom and bust . . . ''
    Mr. Smith, have you identified abuses by lenders as an 
important factor in the boom and bust that has been experienced 
in the Nation's housing market? If not, do you believe that 
such abuses have been an important factor? If so, could you 
quantify the contribution of lender abuse to the boom and bust 
in the housing market or identify the empirical evidence upon 
which your belief is based?

A.30. During my entire term as North Carolina Commissioner of 
Banks, starting in 2002, I was involved in the implementation 
and enforcement of a licensing system for mortgage brokers and 
bankers not affiliated with banking organizations. The statute 
under which this system was implemented, the North Carolina 
Mortgage Lending Act (MLA), like the high-cost loan law 
(commonly called the ``predatory lending law'') that preceded 
it, had been adopted by large bipartisan majorities of both 
houses of the North Carolina General Assembly in response to 
perceived abuses in the market place, particularly the high-
cost segment of the market, which ranged from churning of loans 
(repeated refinancing with no net benefit to the borrower) to 
outright fraud. Enforcement of the MLA resulted in the removal 
from the market of literally hundreds of originators and their 
employers who had no business being in the mortgage business 
and, in the worst instances, in Federal and State criminal 
prosecutions. As the most recent Conservator's Report of FHFA 
(Second Quarter 2010) shows, the work my colleagues and I have 
done in mortgage licensing has taken place during a period when 
the GSEs (including Ginnie Mae) accounted for a relatively 
small share of the MBS market: 54 percent in 2004, 45 percent 
in 2005, 44 percent in 2006 and 63 percent in 2007. The 
Conservator's Report graphically shows a large increase during 
this period in private label securities. In my view, these 
securities, which were the financing source for the abusive 
practices mentioned above, contributed to the financial crisis.

Q.31. Foreclosure Prevention. Mr. Smith, during your nomination 
hearing before the Senate Committee on Banking, Housing, and 
Urban Affairs, it was identified that you oversaw a 
``foreclosure prevention program'' in North Carolina. Please 
provide a description of the successes or failures of that 
program and summary statistics of the program's performance.

A.31. Pursuant to legislation adopted by the North Carolina 
General Assembly, commencing November 1, 2008, the Office of 
Commissioner of Banks implemented a program that requires 
filing of a notice with the Office of Administrator of the 
Courts prior to the filing of a foreclosure action and a 
deferral period of 45 days (extendable once, for cause shown). 
The law also required, and funded from the agency's reserves, 
outreach to borrowers and referral to counselors with regard to 
high-cost loans. At the time of the statute's adoption, 
foreclosure starts were running at the rate of about 60,000 a 
year, primarily on high-cost loans. In more recent times, the 
rate of foreclosure starts has increased and its composition 
has changed to predominately conforming loans. Pursuant to 
further State legislation reflecting this change, effective 
November 1, 2010, the General Assembly extended the reach of 
the program to all home loans and funded it with a one-time fee 
on the filing of foreclosures. Over the course of its 
operation, the State Home Foreclosure Prevention Program has 
referred over 13,000 borrowers to counseling and has kept 5,237 
families in their homes to date. A ``save'' is determined by 
follow-up with counselors to ensure that the loan has been 
modified or restructured, that the family can afford the 
payments, and that the family is, in fact, still in the home. 
Modifications as the result of counseling are voluntary as a 
rule; my office has no statutory authority to compel 
modifications. I believe that the SHFPP is a success in that it 
has prevented foreclosure for a significant number of families. 
The principal challenges the SHFPP has faced have been 
borrowers' reluctance to respond to outreach efforts in a 
timely way, as well as difficulties experienced by homeowners, 
counselors, and servicers in seeing the loss mitigation process 
through to ultimate resolution. Loan modifications are 
typically a document-intensive process that takes proactive 
coordination on the part of all involved.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                   FROM JOSEPH A. SMITH, JR.

Q.1. At our last full Committee hearing examining foreclosure 
processing and loan modification issues, we heard from Governor 
Tarullo of the Federal Reserve. He said, ``while bank 
regulatory agencies can and should respond to specific failings 
that are being identified in our interagency examination, there 
is a strong case to be made that broader solutions are needed 
both to address structural problems in the mortgage servicing 
industry and to accelerate the pace of mortgage modifications 
or other loss mitigation efforts.'' Do you agree with this 
statement? Why or why not?

A.1. I believe that reform of the mortgage finance system 
should include a coordinated and coherent system of regulation 
of all aspects of the mortgage process from origination through 
foreclosure. The SAFE Act, which is included in the Housing and 
Economic Recovery Act, is an example of the way in which 
Federal and State regulators can work together on the 
origination end; comparable coordination in the remainder of 
the process is very important.

Q.2. What do you see as FHFA's major challenge(s) going 
forward?

A.2. FHFA's major challenges are: (i) managing the tension 
between the duties of conservator, statutory affordable housing 
goals and aspects of the ongoing crisis, the most recent 
manifestations of which involve foreclosure; and (ii) 
attracting, retaining, and motivating the human capital 
necessary to carry out its mission.

Q.3. What would be your top priorities if the Senate confirmed 
you?

A.3. My top priorities would be: (i) prudent and effective 
management of the conservatorship of the Enterprises; (ii) 
effective assistance to Congress as it considers housing 
finance market reforms; and (iii) effective supervision of the 
Federal Home Loan Bank System.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KOHL
                   FROM JOSEPH A. SMITH, JR.

Q.1. Fannie Mae and Freddie Mac have dramatically increased 
their nonguarantee fees over the past 2 years. These include a 
set fee applicable to all mortgages, as well as separate 
delivery fees that are tied to a borrower's credit score, 
initial loan-to-value ratio and other factors. Fannie Mae and 
Freddie Mac claim that these fees are used for risk mitigation 
purposes.
    The GSEs charter requires them to use one of three forms of 
credit enhancement to mitigate their risk on low down payment 
loans. The one used most frequently is mortgage insurance. 
These credit enhancements employ private sector capital which 
minimizes risk to the GSES and, therefore to taxpayers, and are 
less expensive for borrowers. As Director, what will you do to 
eliminate these fees and ensure that the GSE use proper risk 
mitigation tools? Furthermore do you believe that these fees 
are driving homebuyers, who are putting less than 20 percent of 
the home's value toward the down payment, to purchase a home 
with an FHA mortgage rather than with mortgage insurance?

A.1. From what I understand, Fannie Mae and Freddie Mac use 
various strategies to reduce losses to the taxpayer including 
credit enhancements, such as private mortgage insurance, and 
guarantee fees to cover the cost of potential losses. I have 
heard the concerns about loan level pricing by the GSEs, 
including its impact on private mortgage insurance. Should I be 
confirmed as Director of FHFA, I will review this issue with 
staff and the GSEs to better understand how those fees are set, 
to what extent they are necessary to compensate for risk, and 
the interplay between the fees and the credit enhancement.

Q.2. In Wisconsin, 87 percent of our commercial banks are 
members of the Federal Home Loan Bank of Chicago. Bankers in 
Wisconsin tell me how valuable the Federal Home Loan Bank of 
Chicago is to their business as a source of low-cost funding 
and mortgage-related services. During the liquidity crisis of 
2007 and 2008--as other sources of funding dried up virtually 
overnight and before the Federal Reserve or the Administration 
had time to devise a response--the Home Loan Banks proved 
especially valuable as the only reliable source of funding for 
financial institutions, particularly smaller community banks.
    The Chicago Home Loan Bank increased its lending to 
Wisconsin financial institutions approximately 56 percent from 
July of 2007 to January of 2009--resulting in an additional 
$4.9 billion of funding to better help Wisconsin banks serve 
the needs of their customers and their communities. While not 
well understood outside of financial circles, this rapid 
infusion of liquidity into the financial system in a safe and 
controlled manner helped prevent the financial crisis from 
becoming even more disastrous.
    What are your thoughts on the Federal Home Loan Banks and 
their mission of providing funding to community lenders through 
all business cycles?
    Are there any specific areas or operations of the Home Loan 
Banks that you are concerned about or that you plan to focus on 
as their regulator?
    Are there any specific changes to the Home Loan Banks that 
you would recommend?

A.2. As I said in my testimony, community banks are dear to my 
heart and the Federal Home Loan Banks are crucial to the 
success of many community banks. The Federal Home Loan Banks 
provided critically needed liquidity during the financial 
crisis. I am aware that the Federal Home Loan Bank System is a 
matter of heightened supervisory concern for FHFA. If 
confirmed, I intend to address these supervisory concerns with 
the Federal Home Loan Banks and their member banks to maintain 
and strengthen the Home Loan Bank System.

Q.3. Many of the Federal Home Loan Banks, including the Chicago 
Bank, operate mortgage purchase programs that allow their 
member banks to sell traditional fixed-rate loans they 
originate directly to their Home Loan Bank, or to the loans 
through their Home Loan Bank as an alternative secondary market 
option. Many of these programs are different from mortgage 
purchases made by Fannie Mae and Freddie Mac because 
participating lenders are able to share in the credit risks of 
their mortgage loans, thereby keeping ``skin in the game.'' 
This innovative structure has proven to be very successful. The 
percentages of loans that are seriously delinquent or are in 
foreclosure are only about one-third of the loans purchased by 
Fannie Mae and Freddie Mac.
    These programs are also very popular with FHLB member 
banks, particularly community banks. In Wisconsin, more than 
125 lenders have funded more than $13 billion of mortgage loans 
using these programs to help a family buy a new home or lower 
the costs of their existing mortgage through refinancing. The 
superb credit performance of the loans demonstrates that local 
community banks and thrifts originate very high quality 
mortgages.
    Are you familiar with the unique risk sharing structure 
used by the Home Loan Bank mortgage programs?
    Do you plan to encourage the further development and growth 
of these programs?
    Are there lessons in these programs that can be applied as 
we look to reform the housing finance industry?

A.3. Based on the information I have at this time, I am not 
familiar with the details of this program. If confirmed, I 
undertake to consult with my colleagues at FHFA to assess this 
program in light of the supervisory regime for the Federal Home 
Loan Bank of Chicago and the Federal Home Loan Bank System as a 
whole.

Q.4. Farmers back in Wisconsin often tell me that they have 
trouble finding banks that are willing to lend to them. I also 
hear from Bankers that regulators often make it difficult for 
them to expand their agriculture farm loan portfolios. The 
Gramm-Leach-Bliley Act expanded the available collateral from 
Community Financial Institution members of the Federal Home 
Loan Banks to include agricultural and small business loans. A 
recent report released by the Government Accountability Office 
found that:

    Small business and agricultural loans account for 
        only 1 percent of FHLB advances;

    Implementation has fallen short of the 
        congressional intent to improve economic development in 
        local communities and enhance the availability of 
        capital for agricultural loans.

    Why do you think the Federal Home Loan Banks have fallen 
short of the Congressional intent to improve the development of 
local communities?
    Do you think that Federal Home Loan Banks should facilitate 
more agriculture lending?
    Do you plan to encourage Home Loan Banks to facilitate more 
agriculture lending for their member banks?

A.4. Based on my experience as North Carolina Commissioner of 
Banks, I appreciate the difficulties farmers have in obtaining 
credit. If confirmed as Director of FHFA, I intend to review 
the current status of agricultural lending by members of the 
Federal Home Loan Bank System and work with Federal Home Loan 
Banks and their members to develop an appropriate participation 
by such banks in that important market. To the extent that 
these activities are relatively new to the Federal Home Loan 
Banks or their members, any increase in agricultural lending 
would have to be done in a way that does not compromise the 
integrity the Federal Home Loan Banks or the Federal Home Loan 
Bank System.

Q.5. Let me get your views on the structure of Government 
sponsored enterprises (GSEs). Because all GSEs have at least 
the implicit backing of American taxpayers, the structure of 
these entities is very important. The 12 Federal Home Loan 
Banks are each organized as a cooperative, as are the Farm 
Credit Banks. Unlike corporations with publicly traded stock, 
such as Fannie Mae and Freddie Mac, a cooperative structure 
ensures the interests of a GSE's customers are closely aligned 
with those of its shareholders because they are largely the 
same group. This structure also greatly reduces a GSEs' 
incentive to take unnecessary risks in order to meet high 
profit expectations. For example, all Home Loan Bank loans to 
members are underwritten to strict, traditional standards and 
are fully secured by high-quality collateral.
    What are your views of the cooperative structure of the 
Home Loan Banks? Do you believe this structure should be 
preserved and protected, including protecting the par value 
stock of GSE shareholders?
    Do you believe this structure has merit for future housing 
finance entities that Congress might create?

A.5. The model of the Federal Home Loan Banks proved successful 
during the financial crisis, providing critically needed 
liquidity to community banks across the Nation. As Congress 
considers the future of the housing finance system and 
potential options for restructuring, they should consider the 
successes of the Federal Home Loan Bank System as part of their 
deliberations.

Q.6. I would like to discuss a local Government innovation 
called Property Assessed Clean Energy, or PACE financing. 
Wisconsin enacted a law in 2009 that allows local governments 
that set up financing districts to offer loan programs to pay 
back investments in renewable energy systems through property 
tax payments. As a result of this law, the Milwaukee Shines 
Solar PACE Loan Program was created in March 2010 making the 
City of Milwaukee one of the first municipalities in the 
country to implement a PACE financing mechanism. This program 
was suspended in July after the Federal Housing Finance Agency 
released guidance on Pace liens.
    Are you aware that the Federal Housing Finance Agency 
(FHFA) issued a statement on July 6 that blocked PACE pilot 
programs across that Nation and in Wisconsin?
    Will you agree to revisit PACE and work with stakeholders 
on this issue?

A.6. The protection of the priority of liens with respect to 
loans financed or guaranteed by the GSEs is critical to 
conservatorship. However, I understand the FHFA is currently a 
party to litigation with respect to PACE loans. Accordingly, 
should I be confirmed, I may well be a named party in such 
litigation. This being the case, I believe that any further 
comment on the subject would be inappropriate at this time.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BENNET
                   FROM JOSEPH A. SMITH, JR.

Q.1. Property Assessed Clean Energy (PACE) Financing is a 
creative mechanism to help finance the installation of clean 
energy projects and energy efficiency upgrades on residences. 
My home State of Colorado is at an impasse with the FHFA on the 
continued use of this mechanism because the Agency has issued 
guidance that has essentially halted PACE programs across the 
country. Can you state your position on PACE?

A.1. I understand and agree with the goals of PACE programs, to 
provide the opportunity for homeowners to make energy 
improvements to their homes. However, the protection of the 
priority of liens with respect to loans financed or guaranteed 
by the GSEs is critical to FHFA's mandate of conservatorship.

Q.2. The Colorado counties of Gunnison, Pitkin, Eagle, and 
Boulder all passed legislation to promote PACE financing. The 
State legislature and Governor Ritter seized on this momentum 
and recently passed statewide authorizing legislation as well--
all of which are dependent on the establishment of so-called 
``improvement districts.'' Are improvement districts (PACE 
districts) for energy efficiency and renewable energy different 
than the more traditional improvement districts used for water, 
sewer, sidewalks, roadways, etc.--and if so, how and why?

A.2. I am unfamiliar with the specifics regarding Colorado's 
improvement districts and look forward to working with my 
colleagues to better understand the details of the situation, 
should I be confirmed as FHFA Director.

Q.3. Throughout Colorado, many homeowners who had hoped to make 
energy efficiency improvements on their properties have been 
disappointed in FHFA's lack of progress on the PACE program. 
Would you consider revisiting the FHFA's current position on 
the program?

A.3. I understand the FHFA is currently a party to litigation 
with respect to PACE loans. Accordingly, should I be confirmed, 
I may well be a named party in such litigation. This being the 
case, I believe that any further comment on the subject would 
be inappropriate at this time.

Q.4. FHFA has indicated general skepticism about the 
reliability and relative value of energy efficiency capital 
improvements. Do you support solutions to help homeowners save 
money through energy efficiency improvements?

A.4. I do support solutions that help homeowners save money 
through energy efficient improvements to their homes. I believe 
that it is the responsibility of the Department of Energy to 
determine measurable standards for reliability and relative 
value of energy improvements.

Q.5. I hope you can work with me and my staff until we find an 
amicable solution to this impasse on the PACE program. Can I 
have a pledge from you and FHFA that you will continue to work 
with my office to find a solution to this problem?

A.5. It is my understanding that the current impasse and 
related litigation was preceded by a substantial amount of 
discussion and attempts at accommodation between interested 
parties. That being said, and if confirmed, I am more than 
willing to work with you to identify an appropriate approach 
going forward.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                   FROM JOSEPH A. SMITH, JR.

Q.1. We need to fix our Nation's broken housing finance system 
and reduce the Government's involvement in the housing market 
from current levels where the GSEs and FHA are guaranteeing 
about 95 percent of all new mortgages. Some alternatives being 
discussed range from a completely privatized housing finance 
system to a system in which the Government takes the first-loss 
position in the entire conforming mortgage market. What are the 
positive and negative aspects of the range of options for 
reforming Fannie Mae and Freddie Mac?

A.1. In preparing for this nomination, I have had occasion to 
review various proposals and options to restructure the GSEs 
and the housing finance system. I am also aware that the 
Administration is preparing a proposal for Congress' 
consideration in January. If confirmed, I look forward to 
working with my colleagues at FHFA to advise Congress about the 
costs and benefits on any proposals that would be brought 
before you. As Director of FHFA, I expect to provide you 
factual information and data, and I hope that FHFA can serve as 
a trusted adviser as you deliberate on the future of the 
housing finance system.

Q.2. In January, the Treasury Department is required to submit 
its report on how to reform Fannie Mae, Freddie Mac, and the 
housing finance system as a whole. What input has FHFA had in 
this report and what role do you plan to take in this debate?

A.2. I have had no discussions with the Treasury Department or 
Administration on their plan for reforming the housing finance 
system and the GSEs. I am not aware of FHFA's level of 
involvement in developing options on the future structure of 
the GSEs or the housing finance system as a whole. If 
confirmed, I look forward to contributing to the dialogue and, 
as the Director of the FHFA, providing information to help 
facilitate Congress' deliberations on the future of the GSEs.

Q.3. According to an August FHFA report, Fannie Mae and Freddie 
Mac have burnt through $226 billion in capital since the middle 
of the 2007. The Congressional Budget Office has estimated 
that, in the wake of the housing bubble and the unprecedented 
deflation in housing values that resulted, the Government's 
cost to bail out Fannie Mae and Freddie Mac will eventually 
reach $381 billion. If confirmed, what internal steps will you 
take at FHFA to reduce taxpayer losses?

A.3. Should I be confirmed as Director of the FHFA, my main 
duty is to conserve and preserve the assets of the GSEs in 
conservatorship and work to right the ships so that they emerge 
from conservatorship, in whatever form Congress deems 
appropriate, in a stronger position to fulfill whatever 
functions Congress may give them. If confirmed, I intend to 
pursue three main strategies, which are consistent with the 
approach that the prior leadership of the FHFA has taken: (1) 
minimize the losses on the poor quality existing book of 
business; (2) ensure that the GSEs take on good quality 
business going forward, with the fees effectively covering the 
expected risk; and (3) work to stabilize the housing market, 
which is in the best interest of not only the GSEs, but also 
homeowners and taxpayers who have supported these two firms.

Q.4. According to the Wall Street Journal:

        Fannie Mae and Freddie Mac are in talks with Obama 
        administration officials to join fledgling Government 
        programs aimed at reducing loan balances of mortgages 
        where borrowers owe more than their homes are worth, 
        according to people familiar with the situation. An 
        agreement with the two Government-owned mortgage giants 
        to write down so-called underwater loans could reduce 
        the threat to the U.S. housing market from the glut of 
        homeowners believed at risk of default should their 
        personal finances or home prices worsen. A deal would 
        deepen losses at Fannie Mae and Freddie Mac, which 
        already have cost taxpayers about $134 billion.

    What is your perspective on this proposal and how will this 
impact projected losses on Fannie Mae and Freddie Mac?

A.4. While I have read the article you referred to, I have no 
specific knowledge of this particular plan or these discussions 
on principal reduction. If confirmed, I pledge to work with my 
colleagues at FHFA to carefully evaluate any principal 
reduction proposals from the perspective of the conservator, 
working to conserve the GSEs' assets and reduce their losses. I 
believe that all of my decisions related to Fannie Mae and 
Freddie Mac should have the primary goal of protecting the 
taxpayers.

Q.5. On Christmas Eve, the Treasury Department lifted the $400 
billion loss cap on the two companies, creating a potentially 
unlimited liability, and effectively providing the full faith 
and credit of the Government in support of their debt. Would 
you support reestablishing the $200 billion cap per entity and 
accelerate the 10 percent reductions of the mortgage 
portfolios, effectively requiring the companies to shrink those 
portfolios by holding a combined $100 billion from their 
current levels?

A.5. My understanding of the Preferred Stock Purchase 
Agreements is that they are contracts between the Treasury 
Department and the GSEs. From my perspective, should I be 
confirmed as FHFA Director, these agreements are in place and 
stand as agreed to. They are the starting point for my work as 
conservator, to preserve and conserve the GSEs' assets. I 
understand that, under the terms of the agreements, the GSEs 
must reduce their portfolios by 10 percent each year. I have 
personal experience as the North Carolina Commissioner of Banks 
with quick sales of an institution's assets during resolution 
and I do not believe that such actions always result in the 
best price. Consequently, in my view, any decision to 
accelerate the pace of the disposition of assets would need to 
be made after analysis of the impact of such action on real 
estate markets, capital markets, and the financial position of 
the GSEs.

Q.6. During consideration of financial reform, I pushed an 
amendment to include in the debt calculations of the budget 
resolution the debt obligations of Fannie and Freddie as long 
as they were in conservatorship or receivership. Although the 
amendment received a majority of votes (47-46) it failed 
because the procedural vote needed 60 votes to pass. Would you 
support including the debt obligations of Fannie and Freddie in 
the budget?

A.6. Decisions about what should be on or off the Federal 
budget should be made by Congress and the Administration, 
through the Office of Management and Budget. Experts in Federal 
Government accounting are in a better position to make this 
determination.

Q.7. When the Congress developed legislation to combine the 
regulation of Fannie Mae, Freddie Mac and the Federal Home Loan 
Banks under one new regulator, we wanted to be sure that the 
differences between Fannie and Freddie and the Federal Home 
Loan Banks were recognized by the FHFA in its supervision and 
regulatory duties. How will you approach Congress' direction to 
recognize and preserve the differences and unique 
characteristics of the Federal Home Loan Banks as you develop 
policies and regulations for all of your regulated entities?

A.7. As I said in my testimony, community banks are dear to my 
heart and the Federal Home Loan Banks are crucial to the 
success of many community banks. The Federal Home Loan Bank 
model proved successful during the financial crisis, providing 
critically needed liquidity to smaller institutions that cannot 
access the capital markets on their own. However, I am aware 
that the Federal Home Loan Bank System is a matter of 
heightened supervisory concern for FHFA. If confirmed, I intend 
to address these supervisory concerns with the Federal Home 
Loan Banks and their member banks to maintain and strengthen 
the Home Loan Bank System.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
                   FROM JOSEPH A. SMITH, JR.

Q.1. This week the Wall Street Journal reported that Treasury 
may be pressuring Fannie and Freddie to modify loans in their 
portfolio in a manner that will make them eligible for a FHA's 
principle write down refinance program. But as you know, FHFA 
is an independent Federal agency. Can you provide assurance 
that the decisions you make as the Director of FHFA will be 
done independently of political pressure? And will you assure 
us that all decisions you make with regard to the management of 
the GSE's existing books will be done with the principal goal 
of minimizing additional costs to the taxpayer or recouping 
taxpayer losses?

A.1. The Federal Housing Finance Agency is an independent 
agency of Government. I am the head of an independent agency of 
State government now, I understand how important that 
independence is, and I appreciate that I will be similarly 
independent if I am confirmed. While there will be many varying 
interests before the agency, I will consider any proposal first 
and foremost from the perspective of conservator, with eye to 
protecting taxpayers. I understand that FHFA has publicly 
stated that the idea of principal reduction is under review. I 
have no further knowledge of the topic than what I have read in 
press accounts.

Q.2. Please briefly describe some of the general principles 
that you would like to see part of a new American housing 
finance system.

A.2. If confirmed as Director of FHFA, I would, of course, 
defer to Congress on the structure of the future system, but I 
would hope that the new system would include:

    appropriate regulation of all aspects of the 
        mortgage finance system (origination, funding, 
        servicing, foreclosure, REO)

    appropriate levels of consumer protection

    appropriate levels of capital for participants

    proper balancing of the private capital and 
        Government support

    If confirmed, I look forward to contributing to the 
discussion and, as the Director of the FHFA, providing 
information to help facilitate Congress' deliberations on the 
future of the GSEs.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR DEMINT
                   FROM JOSEPH A. SMITH, JR.

Q.1. A December 8th, 2010, article in the Wall Street Journal 
referenced talks between the Obama administration and Fannie 
Mae and Freddie Mac aimed at encouraging the latter to join an 
FHA program whose goal is securing reductions in loan balances 
for homeowners having difficulties making their mortgage 
payments. Do you support having Fannie and Freddie forgive 
principal on mortgages in order for the borrowers to refinance 
into FHA loans?

A.1. While I have read the article you referred to, I have no 
specific knowledge of this particular plan or these discussions 
on principal reduction. If confirmed, I pledge to work with my 
colleagues at FHFA to carefully evaluate any principal 
reduction proposals from the perspective of the conservator 
working to conserve the GSEs assets and reduce their losses. 
All of my decisions related to Fannie Mae and Freddie Mac would 
be considered in the context of the primary goal of protecting 
the taxpayers.

Q.2. If the answer to the previous question is yes, can you 
please provide your reasoning, including how to square the 
potential added losses to Fannie and Freddie would be 
consistent with the FHFA's duties as a conservator to the 
enterprises and the goal of minimizing taxpayer losses?

A.2. Not applicable.

Q.3. Do you believe that reductions in loan balances should be 
a part of any programs that constitute the Government's 
response to the ongoing mortgage crisis?

A.3. I understand that FHFA has publicly stated that principal 
reduction is under review. If confirmed, I would take any prior 
review under consideration. However, the ultimate decision 
would be made to conform with FHFA's role as the regulator and 
conservator of the GSEs' assets.

Q.4. Would you consider the Administration's current HAMP 
program a successful one, and if so, by what standards?

A.4. It's not only appropriate, but also critical that the GSEs 
be fully engaged in loss mitigation efforts, including HAMP and 
non-HAMP modifications. The primary objective of these efforts 
has been to keep families in their homes, to stabilize the 
housing market, but also to minimize losses to Fannie and 
Freddie. I have heard the concerns about the HAMP program, and, 
if confirmed, commit to you that I am open to additional 
assessment of the program guidelines and whether there are 
changes that would make it more effective. In addition, I would 
look forward to hearing your thoughts on the subject.

Q.5. On December 24th, 2009, the Treasury Department removed 
any limits on assistance for Fannie and Freddie, who have 
currently cost taxpayers more than $150 billion dollars--do you 
believe that any limits are appropriate on the amount of 
taxpayer assistance that they can receive, and if so, could you 
please detail what limits you think would be appropriate and 
why? If you do not, could you please explain how that would be 
consistent with the goal of minimizing taxpayer losses?

A.5. My understanding of the Preferred Stock Purchase 
Agreements is that they are contracts between the Treasury 
Department and the GSEs. From my perspective, should I be 
confirmed as FHFA Director, these agreements are in place and 
stand as agreed to. As conservator, my primary responsibility 
is to limit losses to taxpayers from the GSEs.

Q.6. Can you please detail ways that you see or that you intend 
to use to increase the use of private capital, such as private 
mortgage insurance, as ways to mitigate risk of loss in Fannie 
and Freddie portfolios?

A.6. Fannie Mae and Freddie Mac are authorized to use several 
forms of credit enhancement, including private mortgage 
insurance, to mitigate risk. Since the onset of the mortgage 
crisis, the mortgage insurance industry has been fairly credit-
constrained. Therefore, if confirmed, I would expect to 
carefully monitor the regulatory capital condition of these 
critical counterparties, to ensure that they do not pose any 
additional risk to the Enterprises.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                   FROM JOSEPH A. SMITH, JR.

Q.1. In testimony to the Senate Banking Committee on ``Mortgage 
Market Turmoil: Causes and Consequences,'' on March 22, 2007, 
you advocated for ``FHA First'' plan to deal with the problems 
in the mortgage market. You bemoaned the inability of FHA to 
offer subprime loans when you testified:

        Congress should take immediate steps to modernize FHA 
        to enable it to be a viable option for home ownership 
        by borrowers with credit blemishes. Much of the growth 
        of the subprime industry came at the expense of FHA. 
        Clearly, Congressional concerns of the solvency of the 
        FHA insurance fund led it to overreact and hamstrung 
        the FHA from serving the subprime market.

    Are you aware that the Federal Housing Administration 
mortgage insurance fund, used to pay claims, is currently below 
its 2 percent statutorily required capital ratio? If so, when 
did you become aware and does that change your opinion on an 
``FHA First'' solution?

A.1. The testimony in question was on behalf of the Conference 
of State Bank Supervisors and was principally intended to 
present the efforts States had made to address abuses in the 
marketplace,. The discussion of FHA was a minor part of the 
testimony and was intended as a response to what the Federal 
Government might do to provide mortgage financing for low and 
moderate income borrowers. I was not an advocate regarding FHA 
at that time, in 2007, and am not now. If confirmed, I will 
deal with issues relating to the Enterprises, both in their 
current state and as the debate on restructuring goes forward.

Q.2. Are you aware that the 2010 annual study shows that the 
peak losses for the FHA are still 2-5 years out? If so, when 
did you become aware.

A.2. I have not done any review of FHA mortgage insurance fund.

Q.3. Are you aware that if the FHA takes no further action to 
more quickly increase its capital ratio that it will take until 
2015 for the fund to reach that 2 percent requirement? If so, 
when did you become aware?

A.3. I have not done any review of FHA mortgage insurance fund.

Q.4. Do you still believe that Congress overreacted to concerns 
of the solvency of the FHA insurance fund or that the FHA did 
not adequately serve the subprime market?

A.4. I have not done any review of FHA mortgage insurance fund.

Q.5. You also testified at that same hearing in 2007 that, ``in 
addition, Congress should encourage the GSE's to devote their 
primary attention to affordable housing for all Americans, 
particularly the subprime market.'' The action you suggest 
would have a devastating impact on the U.S. taxpayers 
subjecting them to even more dramatic losses. Do you still 
believe that is the appropriate role of the GSE's?

A.5. During that hearing, in which I was testifying solely on 
behalf of the Conference of State Bank Supervisors, the point 
that I was intending to make was that Fannie and Freddie Mac 
could serve some number of creditworthy borrowers who were 
otherwise being offered subprime loans. Access to affordable, 
prime rate financing on safer terms would certainly have been a 
better option for many of these borrowers. I did not intend to 
convey that Fannie Mae and Freddie Mac should follow the lead 
of the subprime market; rather, my point was the opposite--that 
the American public would be better-served if traditional, 
conventional conforming loans represented a greater portion of 
the market.

Q.6. I believe your above comment is an inappropriate sentiment 
for someone who is charged with protecting the American 
taxpayers by governing the conservatorship of these two 
companies. Do you agree the primary goal of the conservator 
should be to limit the amount of taxpayer dollars that need to 
be spent to prop up these companies?

A.6. Yes.

Q.7. The data clearly shows that Federal housing policy clearly 
played a large role in creating this crisis. New research by 
Edward Pinto, a former chief credit officer for Fannie Mae and 
a housing expert has found that, almost half of all mortgages 
in the financial system--27 million loans--were subprime or 
Alt-A mortgages. Two-thirds of these loans were held or 
guaranteed either by the U.S. Government or by Government-
backed and controlled institutions like Fannie Mae and Freddie 
Mac. Clearly, the vast numbers of weak mortgages that have 
resulted in the financial crisis were made as a result of a 
concerted Government policy to increase homeownership in the 
United States.
    This point is particularly timely because this week the 
Wall Street Journal reported that Fannie Mae and Freddie Mac 
are in talks with the Obama administration officials to 
increase the number of loans the two companies will reduce the 
loan balances for underwater borrowers. The article says, ``the 
Obama administration is pressuring Fannie Mae and Freddie Mac, 
through their primary regulator, The Federal Housing Finance 
Agency. The Administration wants the firms to join a program 
run by the Federal Housing Administration that allows banks and 
other creditors, which agree to write down mortgages, to 
essentially hand off reduced loans to the FHA.''
    Of course, taking these write downs will mean not just new, 
huge losses for both Fannie Mae and Freddie Mac but also for 
the American taxpayer.
    The WSJ article continues, ``one of the reasons Fannie Mae 
and Freddie Mac are reluctant to reduce principal is because it 
limits their options to reduce losses.'' They can do this 
either by collecting claims from mortgage insurers or by 
forcing banks to buy back loans.
    If the GSE's are in conservatorship largely because of 
subprime loans they either originated or invested in, do you 
believe that you were wrong to have previously advocated for 
the GSE's to give ``primary attention to affordable housing for 
all Americans, particularly in the subprime market?''

A.7. As I mentioned in response to a previous question, I did 
not intend for my comments to advocate for the GSEs to have a 
greater role in the subprime market. I have carefully read 
FHFA's latest Conservator's Report and, based on that 
information, believe that the vast majority of losses they have 
experienced to date are from the single family guarantee 
business. In fact, according to the third quarter report, 82 
percent of their charges against capital were from the single 
family guarantee business and only 4 percent from investments, 
including purchases of subprime securities. This data suggests 
that the GSEs' subprime investments were not the primary reason 
that it was necessary to place them in conservatorship and that 
my focus as conservator, should I be confirmed, should be on 
minimizing losses in their main line of business in 
conventional mortgages.

Q.8. Can you tell the Committee what you think of the idea of 
forcing these two companies to write down more loans?

A.8. While I have read the article you referred to, I have no 
specific knowledge of this particular plan or these discussions 
on principal reduction. If confirmed, I pledge to work with my 
colleagues at FHFA to carefully evaluate any principal 
reduction proposals from the perspective of the conservator, 
working to conserve the GSEs' assets and reduce their losses. I 
believe all of my decisions related to Fannie Mae and Freddie 
Mac should have the primary goal of protecting the taxpayers.

Q.9. Do you think the two companies should put back all loans 
that are appropriate on the banks that made them and collect 
relevant mortgage insurance to those loans?

A.9. Both Fannie Mae and Freddie Mac have contracts with the 
lenders from whom they purchased the loans which specify that 
the loans meet certain standards. As conservator, I would 
expect these banks and mortgage insurance companies to honor 
their contracts and repurchase any loans that do not meet the 
standards.

Q.10. Do you pledge to resist Administration efforts to use 
your role as the conservator and regulator of Fannie Mae and 
Freddie Mac to force the two companies to participate in a 
dramatic write down program that would subject taxpayers to 
tremendous losses?

A.10. The Federal Housing Finance Agency is an independent 
agency of Government. I am the head of an independent agency of 
State government now, and I understand how important that 
independence is and will be, if I am confirmed. While there 
will be many varying interests before the agency, I will 
consider any proposal first and foremost from the perspective 
of conservator, with an eye to protecting taxpayers. I 
understand that FHFA has publicly stated that the idea of 
principal reduction is under review. I have no further 
knowledge of the topic than what I have read in press accounts.

Q.11. Currently, Fannie Mae and Freddie Mac are owned by the 
taxpayers. Last month Fannie Mae and Freddie Mac posted 
additional losses, increasing the amount they have taken from 
the U.S. Treasury to $153 billion. Thanks to a dramatic 
announcement by the Treasury Department, in what some have 
called the Christmas Eve massacre, the two failed mortgage 
giants can draw an unlimited amount of taxpayer dollars from 
the U.S. Treasury in order to cover losses they suffer. The two 
companies have been delisted from the New York Stock Exchange. 
Unfortunately, the real price tag of resolving these two 
companies has yet to be presented honestly to the taxpayer. Do 
you support putting Fannie Mae and Freddie Mac on budget where 
they belong?

A.11. Decisions about what should be on or off the Federal 
budget are made by Congress and the Administration. If 
confirmed, it would not be my role to make these budgetary 
determinations.

Q.12. The Treasury Department has repeatedly kicked the can 
down the road when it comes to reform of Fannie Mae and Freddie 
Mac. On June 18, 2009, at a Senate Banking Committee hearing on 
the Administration's proposal to modernize the financial 
regulatory system, United States Treasury Secretary Timothy 
Geithner agreed with me that ``Fannie and Freddie were a core 
part of what went wrong in our system,'' and that Congress and 
the Administration are facing ``a challenge for exit, what the 
future should be. We have to fundamentally rethink what the 
appropriate role of the Government is in the future.''
    Yet, the Administration didn't include Fannie and Freddie 
at all when it announced a blue print to reform the financial 
regulatory system. Despite the Administration's promises to 
submit a reform proposal to the Congress along with the 
President's budget earlier this year, they now promise a plan 
next year. According to Inside the GSEs, ``we've been holding 
meetings,'' said a Treasury senior policy advisor, ``and more 
are expected.''
    If confirmed, as the conservator of these two companies, 
what do you see as your role in determining an exit strategy 
for the taxpayers? Will you commit to developing a plan for 
this Committee to review that will end the conservatorship of 
both Fannie and Freddie?

A.12. In preparing for this nomination, I have had occasion to 
review various proposals and options to restructure the GSEs 
and the housing finance system. I am also aware that the 
Administration is preparing a proposal for Congress's 
consideration in January. If confirmed, I look forward to 
working with my colleagues at FHFA to advise Congress about the 
costs and benefits on any proposals that would be brought 
before you. As Director of FHFA, if confirmed, I would provide 
you with factual information and data, and I would hope that 
FHFA would serve as a trusted adviser as you deliberate on the 
future of the housing finance system.

Q.13. The 2009 FHFA annual report, issued in May 2010, said:

        The condition and performance of 6 of the 12 FHLBanks 
        are less than adequate. At these FHLBanks, the 
        principal supervisory issue is private-label mortgage-
        backed securities (MBS) investments. Half the FHLBanks 
        incurred credit-related impairment charges of more than 
        $200 million on private label MBS in 2009. Four 
        FHLBanks have negative accumulated other comprehensive 
        income, mostly reflecting noncredit impairment on 
        private-label MBS, in excess of their retained 
        earnings, and this excess is large at two FHLBanks, 
        Seattle and Boston.

        At the Seattle FHLBank, this condition has led me to 
        use my discretionary authority to deem that FHLBank 
        ``undercapitalized'' despite holding capital in excess 
        of required regulatory minimums. During 2009, the 
        FHLBanks collectively made substantial progress in 
        improving the rigor and consistency of their analytics 
        in determining the valuation of their private-label 
        MBS.

    I believe this issue is of the upmost importance because of 
the Dodd-Frank bill. In Dodd-Frank legislative language 
prohibited institutions from lending to any unaffiliated 
company an amount that exceeds 25 percent of the capital stock 
and surplus of the lending institution. Originally, the Senate 
version applied this rule to the Federal Home Loan Banks. At 
the time this seemed to be appropriate because the FHFA already 
has the authority to institute concentration limits on the 
institutions which it regulates. But, frankly, that increases 
the pressure on you at the FHFA to get this issue right.
    As you may be aware, at one point during the financial 
crisis, the Federal Home Loan Bank of San Francisco had 62 
percent of its advances (loans) to JPMorgan, Citi, and 
Wachovia.
    Do you think that the Federal home loan banks should have a 
concentration limit on loans to one borrower?

A.13. As a banking regulator, the issue of concentrations of 
all kinds is important to me. If confirmed, I intend to address 
this question with FHFA staff as one of a number of supervisory 
issues that should be considered as part of a dialogue 
regarding how best to strengthen the system.

Q.14. What is the maximum amount you think a Federal home loan 
bank should lend to one borrower?

A.14. If confirmed, I will review this issue with FHFA staff 
and revise the current policy, if appropriate.

Q.15. Do you believe that the FHFA should have a policy on 
this?

A.15. I do.

Q.16. What strategic role do you envision for the FHLB System 
in the future?

A.16. I believe that the Federal Home Loan Bank System can be 
an important source of funding and support for community banks. 
To that end, I support Acting Director DeMarco's call for the 
system to return to its core mission and traditional methods of 
operation.

Q.17. How should the role of the FHLBs be addressed in the 
upcoming reform of the U.S. housing finance system?

A.17. This issue will, of course, be for Congress to decide. If 
confirmed, I look forward to working with Congress as it 
considers proposals to deal with this very important matter.

Q.18. Regarding the Federal Home Loan banks, should they be 
consolidated? Why, or why not?

A.18. I am aware that FHFA has recently issued a proposed rule 
on this topic, to permit the merger of Federal Home Loan Banks, 
but I do not have any personal, settled views on the subject.

Q.19. Given that some banks have encountered serious financial 
trouble before and during the crisis, does the Nation need 12 
Federal home loan banks? Why, or why not?

A.19. While I personally prefer a diverse and geographically 
distributed system--a view that is shared by the community 
bankers I talk to--the number of home loan banks will be 
determined by the quality of their operations and, ultimately, 
by Congress.

Q.20. Would the FHLB system be collectively stronger if there 
were fewer FHLBs than currently exist? Why, or why not?

A.20. If confirmed, I would address the issue as part of FHFA's 
supervisory activities with regard to the Federal Home Loan 
Banks system and with Congress, if the system is included in 
reform legislation.

Q.21. Should some or all of the Federal Home Loan banks be 
considered systemically risky?

A.21. Given the interdependence of the member banks of the 
Federal Home Loan Bank System and their relationship to 
community banks, I believe that the Federal Home Loan Banks are 
very important, but not necessarily systemically risky.

Q.22. Freddie Mac has recently announced two fees without 
giving any explanation as to where the money is going. Since 
the company is being kept alive through the forced generosity 
of the taxpayer, taxpayers deserve to know what those fees are 
and how they are being used. Are they being put in a reserve 
fund to pay future losses or is it for something else?

A.22. At this time, I am not familiar with the operational 
aspects of Freddie Mac's accounting and how income generated by 
fees is recorded and retained.

Q.23. What is the appropriate role of FHFA in overseeing and 
commenting on the fees like these and their uses?

A.23. FHFA's primary role in overseeing the Enterprises' fee-
setting and collection activities must be to ensure that the 
loan-level charges are adequate to cover the future potential 
losses as well as any administrative expenses incurred in 
guaranteeing the loans so that the fees cover the costs of 
doing business. In other words, FHFA, as regulator and 
conservator, must prevent any underpricing of risk, which would 
create additional taxpayer losses.

Q.24. Without further explanation, it is unclear who benefits 
from these fees. By FHFA inaction in this area, the fees are 
driving the market to FHA which, despite some limited 
Congressional action to allow for increased premiums, is still 
a ticking time bomb. It is the Banking Committee's 
responsibility to make sure that there isn't a huge taxpayer 
bailout of yet another housing entity. Both the FHA and GSEs 
are completely backed by the U.S. taxpayer and we must 
understand how the pricing used by one company drives taxpayer 
exposure to another company or agency.
    As part of this hearing record will you provide this 
Committee with all the supporting documents necessary to 
understand these new fees, and how they are being used by the 
two companies?

A.24. Until confirmed, I am unable to access nonpublic 
documentation at FHFA's regulated entities. If confirmed, I 
would look into this situation further and would be happy to 
meet with you to discuss pricing.

Q.25. As a State Banking Commissioner, you were in a unique 
position to see more of what was happening ``on the ground.'' 
What changes, if any, would you recommend to the mortgage 
modification programs that have been in place--HAMP and HARP? 
Clearly, the programs, as currently structured, have struggled 
and have not been as effective as the Administration promised 
they would be. It seems that these programs were structured to 
extend the problem and pretend that it would resolve itself 
over time.

A.25. It's not only appropriate, but also critical that the 
GSEs be fully engaged in loss mitigation efforts, including 
HAMP and non-HAMP modifications in order to minimize their 
losses under conservatorship. I would note that the Treasury 
Department runs the HAMP program. I have heard concerns about 
the HAMP program and about the GSE high-LTV refinance program, 
HARP. If confirmed, I commit to you that I am open to 
additional assessment of the program guidelines for the GSEs' 
implementation of HAMP modifications, non-HAMP modifications, 
and HARP refinances, and whether there are changes that would 
make these programs more effective. In addition, I would look 
forward to hearing your thoughts on the subject.

Q.26. What is your view of the recent Foreclosure Crisis (i.e., 
robosigning, etc.)? North Carolina was a nonjudicial State, do 
you believe we should be looking towards some type of global 
settlement so that this problem can be resolved?

A.26. I am concerned about the recent problems in the 
foreclosure process and, from my position as North Carolina 
Commissioner of Banks, have seen the impact both on homeowners 
and neighborhoods and communities in my State. We must strike a 
balance to ensure that homeowners are provided with every 
opportunity to keep their homes, yet to move foreclosure 
processing along promptly when necessary in order to protect 
local neighborhoods from the harmful effects of abandoned and 
vacant properties. I am unaware of any details or plans related 
to a global settlement and therefore cannot comment on it at 
this time.

Q.27. Some have suggested the creation of an explicit 
Government guarantee for mortgage-backed securities in the 
event of significant losses in the market. Fannie and Freddie, 
meanwhile, would be privatized after a transition period and 
any securitizers would pay premiums to the Government for the 
MBS guarantee. What are the benefits or drawbacks of such an 
approach? Do you favor such an approach?

A.27. If Congress decides to provide for an explicit Government 
guarantee, I believe that they should consider the costs of 
such a guarantee and who will bear those costs; any guarantee 
must be appropriately priced to compensate for risk, to cover 
potential losses.

Q.28. How would such a MBS-guarantee-like system have fared in 
the financial crisis?

A.28. Given that a number of other facets of the system would 
likely differ if the Enterprises were set up to provide an 
explicit Federal guarantee, I cannot speculate how such a 
system would have fared.

Q.29. Would the cost of a MBS-guarantee-like system to 
taxpayers have been higher or lower than the estimated cost of 
the conservatorship of Fannie and Freddie?

A.29. As North Carolina Commissioner of Banking, I think that 
it was clear that risk was substantially underpriced during the 
period leading up to the crisis, for both nonguaranteed and 
guaranteed loans alike. That said, I do not think that this 
type of cost analysis would be simple to perform, given the 
numerous external factors that would need to be considered.

Q.30. Should the Government have any significant role in the 
mortgage market? Please describe the role you believe the 
Government should play in the mortgage market.

A.30. I think that we can all agree that there have been 
advantages to the Government role in the housing market, based 
on a system established during the Great Depression, including 
the widespread availability of an affordable 30-year mortgage 
product with the ability to prepay. Going forward, there are 
certainly segments of the larger market where the Government 
can make a difference, for example supporting multifamily 
rental housing and first time homebuyers. Of course, the 
ultimate decisions regarding the role of the Federal Government 
in housing finance will be up to you in Congress. If confirmed, 
I am committed to assisting you in that important work.

Q.31. Property Assessed Clean Energy loans have garnered a lot 
of attention recently. PACE loans encourage home-energy 
improvements through special property-tax assessments for 
homeowners that are senior to existing mortgage debt. This 
summer the FHFA's Acting Director Edward J. DeMarco had this to 
say:

        In keeping with our safety and soundness obligations, 
        the Federal Housing Finance Agency will defend 
        vigorously its actions that aim to protect taxpayers, 
        lenders, Fannie Mae and Freddie Mac. Homeowners should 
        not be placed at risk by programs that alter lien 
        priorities and fail to operate with sound underwriting 
        guidelines and consumer protections. Mortgage holders 
        should not be forced to absorb new credit risks after 
        they have already purchased or guaranteed a mortgage.

    Do you agree with Mr. DeMarco?
    Would you continue to direct Fannie and Freddie to avoid 
participating in the PACE program, or would you reverse the 
FHFA's position on this issue? What affect would PACE loans 
have on the ability for borrowers to get second liens on 
primary residences in general?

A.31. I am familiar with the general direction of FHFA's view 
on PACE and its potential affect on first lien mortgages, but I 
have not studied the issue closely. If confirmed as Director, I 
would consult with the agency experts in this area and review 
their analysis of the situation. The protection of the priority 
of liens with respect to loans financed or guaranteed by the 
GSEs is critical to conservatorship. However, I understand the 
FHFA is currently a party to litigation with respect to PACE 
loans. Accordingly, should I be confirmed, I may well be a 
named party in such litigation. This being the case I believe 
that any further comment on the subject would be inappropriate 
at this time.
              Additional Material Supplied for the Record
Letter Submitted by the Conference of State Bank Supervisors



Letter Submitted by the Mortgage Bankers Association



Letter Submitted by the National Association of Realtors



Letter Submitted by the Independent Community Bankers of America



Letter Submitted by the National Association of Home Builders