fill in the blanks when there is a model that appears to work. and he granted an agency we originally thought would be an oversight agency remarkable powers over an important part of our economy. there are other provisions were the intent to make sense, but not exactly the way to go about it. i introduced legislation in the last congress to prohibit servicers from being an affiliate from owning or any affiliate of the service owning secondary mortgages or second glance, where the servicers are servicing means effectively owned by someone else, or the beneficial ownership is for someone else. this bill prohibits any service or from upholding the second mortgage, which does not really -- goes beyond the conflict of interest. and it is not clear why it should, why would not make more

sense to make the prohibition which i welcome generally, only where the service there actually has -- does not own the mortgages they service. there are other issues where we try to get to the same place. we simply take different paths, but the paths are not incompatible at all. so i hope there will be opportunity to work on this issue across party lines. thank you. i yield back. >> jim demint yields back and i'll just say absolutely and especially on some points you raised, this is a draft version of the legislation here, not wedded to some of the provisions on the last point of this very complicated issue and look forward to the version twos on how you get through the end of the day on that. to the gentleman from arizona for two minutes. >> thank you, mr. chairman. first i would like to start this

with a thank you. to mr. demarco, your staff have been in many ways and almost stunningly accessible when we've had very technical questions, what we just wanted to cut through some folklore. there is very few people in the bureaucracy i found her in washington who will return a phone call that fast and be willing to be that detailed with us. so there is a great appreciation there. as i have shared many times that the chairman and many members here, my personal fixation is the proper pricing of risk because i believe that the failure to properly price risk is actually what has caused many of the cascades we see around us today. as i am being told, freddie mac last another $6 billion last quarter. you know, we are basically suffering through sins of the past. but since i've not pricing risk. the other thing i do want to stand here and make it clear.

i understand this is a draft bill. there is a lot of things in here i am excited about. there's a lot of things i'm hoping a three-year testimony will work through the details and mechanics. but the number of folks who come to my office, mr. chairman, and talk about the risk retention particularly in asset-backed credit cards, automobiles, all these other things in many markets held up surprisingly well. maybe we should not be going where we are going or we will ultimately deep more damage to the economy and to finance their future. with that, mr. chairman, i yield back my time. >> mr. petersburg, two minutes. >> thank you, mr. chairman. i think we all agree the american housing market is severely depressed, which in turn is holding back our entire economy. i believe there is also widespread bipartisan appreciation for the fact that the existing ghd passes on

profits to show boulders and huge bonus while sticking taxpayers with losses was a huge mistake and should never be repeated. however, given the importance of the housing industry to the larger economy, we need to make sure we are moving forward with caution. chairman karas propose proposed legislation is a construct a helpful addition to the ongoing debate of the future of housing finance reform. the bill attempts to replicate, or things that the existing gics to write. will provide transparency and standardization will make it easier for investors to have confidence in the market for private-label securities. however, i am concerned chairman karas bill does not do enough to ensure the 30 year fixed-rate mortgages are affordable to the middle-class. we should not abandon a system that has for decades at the american dream of homeownership a reality for millions of middle-class americans just because irresponsible lending

exploited weakness. we should work to eliminate the weakness while strengthening the system. representative campbell and i have introduced legislation to reach team a role for government in securitization markets to ensure we would continue a deep liquid secondary mortgage markets. representatives ellen mccarthy have legislation on this and i hope the subcommittee continues to date these important issues that those bills would also be giving a full and thorough debate. mr. chairman, i think it's very important these bills come before the committee and are subject to a hearing and i look forward to scheduling such a hearing in the near future. as a society, we value homeownership is the pathway to a better life. therefore it's appropriate or country create opportunities to extend the american dream beyond just the wealthiest americans and ensure that only a home remains affordable for the middle-class and i hope are available to accomplish with this going or could i get that

balance of my time. >> gentleman yields back. ms. baker is recognized for two minutes. >> thank you, mr. chairman. and thank you for holding today's hearing on your proposal. a discussion draft entitled to mortgage investment. in march, treasury secretary geithner testified before our committee and sad, the administration have a congress to look forward government has played in the past and work together to build a stronger and more balanced system of housing finance and quote. i agree. today's draft is part of the deliberative dialogue about how to stabilize the housing market, reduce taxpayers liabilities and facilitative reentry of private or capital for single-family and multifamily housing. we have learned for private capital to assume an increased role of an housing finance,

investigators need regulatory relief and common sense, what they don't need as rushed and unworkable rules like the qrs or unfair competition from federal programs like fannie mae, freddie mac and sha. i look forward to today's discussion in the back the balance of my time. >> gentleman is recognized for six minutes. >> thank you, mr. chairman. i would note the ranking member is underway. >> the gentleman is recognized for five minutes, the remainder of the time. >> yeah, if the gentlewoman from california writes, i would yield are part of that time. she may have been delayed. i appreciate it, mr. chairman, you said this was a draft bill. the reason i said i would yield some time for answer. we have been informed that a markup on the subject of securitization was scheduled for

november 15. but i would think consistent with your same draft bill that this would not be for this bill. is there any intention to market this bill on the 15th? i would think having you said this is a draft that would not be the case, but i want to clear up the confusion. >> today we are focused on this bill. my comments with regard to the draft is just so we talk about here. >> there is a markup scheduled by the subcommittee in securitization. is this legislation the subject of the markup? >> i don't have a date certain on any markets. could i do that anyway. >> so that 15th date is not a market day for this bill quite >> i am not a definite mark a date for this bill from the committee chairman. >> i appreciate that.

that clears it up because we have been told there was a mark upon the 15th of securitization. there is assumption of my biggest bill. >> i put request and to try to move things along -- that request, but to move things along. >> i appreciate, but the fact he said it was a draft bill. this is a very important topic and i appreciate the tone so far and i think we have some very important issues to grapple with and i appreciate the nondogmatic tone of some of the testimony. people recognize there are questions here. i think, mr. chairman, my recommendation would really want to raise another hearing on this. i noticed we had one group of witnesses and you don't want too many witnesses and bore the out of each other, but we don't have any direct lenders here. i would ask unanimous consent to into the record at this point of letter from the national association of home builders expressing some doubts about

this. they strengthen and improve legislation and the reform effort underway would remove all federal support of the nation's mortgage market. and it says it supports the draft bill and thoughtful recommendations to enhance provisions we remained concerned about dismantling all government backing. i was in at some point want to hear from home builders, realtors, direct lenders as well as other groups that have an interest. i would isys be put into the record. >> without objection. the mac and then i would also have some questions. i was in a major substantive concern here is the repeal of securitization. risk retention. the ability to make love do not stand behind them is a problem and i think the proposal and it was to replace risk retention

with a fairly complicated set of regulations that would come from the fhfa capacity for mortgages. my own view is that we would be better off with risk retention because that makes one government policy and leaves it to the market, we say to the lender to decide. i think we have a fairly elaborate set of rules here. i noticed in mr. wallace's testimony at questions about some of the specific restrictions put on who can do this and that. frankly at first glance it seems to be a solution that is in the bill as an alternative to risk retention is excessively elaborate and relies too much on decision of regulators and judgment of great leaders and not enough on market. the risk retention doesn't pose the basic retention. but after that comment entirely up to the market. that is what i hope we would pursue. the final question i have is where we stand in terms of housing finance legislation in

general. we have 14 bills i believe approved by subcommittee. an april the majority criticized us for doing subcommittee deliberation by one day. we have still not gotten the full committee, so i guess i would accept them for one distillate mmo troop b. takes seven months delay and i think other people are interested. we potentially bill offered as an amendment to financial reform last year where there is criticism for not being treated. that bill is often limbo somewhere. it was reintroduced and never mentioned. so i think there was a question. this is to replace the current gses, but i think there is interest in what the plans are for the more jordi to do at the hands of an bill that abolishes fannie and freddie in the 14 bills and maybe more to come that make changes and i think would be helpful is that at some point could be clarified. >> the gentleman yields.

>> mr. dole is recognized for five minutes. >> thank you, mr. chairman. right now through the gses, taxpayers are effectively on the hook for over $5 trillion in total mortgage debt. gics are also responsible for nearly all new mortgages originated in this country since the financial crisis. what taxpayers remain exposed to enormous an increasingly potential liability in our system, housing market remains severely challenged. this situation is unsustainable for taxpayers in the housing market participants. a set of a mortgage market dominated by federal government and taxpayer guarantees, we need new and creative solutions that create the conditions for the private sector's return to our mortgage finance the market without taxpayer guarantees. to create this private sector conditions, we must have a legal framework that establishes and enforces uniform standards, transparency and legal certainty for the lenders and investors.

i think chairman garris draft which we consider today goes a long ways towards creating this private sector conditions. i want to thank the chairman for his work and leadership on this important issue and i certainly look forward to hearing from our witnesses today. i yield back. >> we had just a minute and a half glass on our side. i will just claim a minute of that, just to recoup where we are. so from one sense i guess someone suggests we are moving too quickly in some other perspectives would argue that we are moving too slowly. i guess in comparison to the way that dodd-frank moved, through the committee process without any for a subcommittee hearings and not through regular order, i guess we move at the appropriate speed because we are doing

mr. subcommittee process and we are doing it through hearings but have you. comparatively, others say we move too quickly. well, we have had so far 17 hearing so far i'm housing finance. the ranking member listed a number of organizations and groups and trade associations that would like to chime in on some legislation. by and large come each and every one have been able to be at the table for mr. demarco is right now and had the opportunity during the course of the 17 hearings to answer the questions from either side of the aisle at any particular facet of housing finance. also the question is raised with regard to other legislation citizen out there. again we've had 17 hearings for those legislations and others in general topics to be discussed and questions raised members of the panel. i would suggest today that if anyone on the other side of the aisle has questions on legislation that mr. dimarco would be more than happy to

discuss them because he has already raised some of those points in his testimony. with that, i think time on both sides has been expired and with that i will yield to our first witness, our first panel, mr. dimarco. again cut i.t. and you make very much for your work and testimony today. >> thank you, chairman garrett. >> make sure it is fun. >> very go. sorry about that. members of the subcommittee, thank you for having me here this morning. i am pleased that committee is beginning to serious work of finance reform options which relate to the ultimate resolution of the enterprises, fannie mae and freddie mac. in a written statement provides a brief review of some of fhfa's previous work since they appear before you laugh. i focus on the need for legislation. placed in the enterprises and conservatorship was designed to maintain market stability while providing lawmakers time to consider the appropriate course

for housing finance reform in the transition from the current enterprise starcher, conservatorship is not a long-term solution. yet, we just passed the three year anniversary of conservatorship. we all knew it was going to be difficult to develop the housing finance reform solution, but we must move forward on this process. as the conservatorship flank then, fhfa must make decisions regarding investments in business that points in human capital in the face of an uncertain future. to state the obvious, the key question in the debate on housing finance reform is the future role of government. we should be clear about this question at the outset. it seems safe to say there'll always be some portion of the mortgage market will be assisted by government programs. the future design of her housing finance system with careful consideration is given to targeting subsidies to specific groups of lawmakers determined

warrant that benefit. for example, the explicit government guarantees that the federal housing at veteran administration provide preflight policymakers judgment as to the public benefits from targeting certain eligible borrowers with those programs. acknowledging that there will be a role for government, next question is what type of structure is necessary to replace the activities currently undertaken by the enterprises. there's seems to be relatively broad agreement that the government-sponsored enterprise model of the past or private sector companies for providing certain benefits in charge but achieving certain public policy goals did not work. that model relied on investors providing funding of preferential rates based on a perception of government support. this perception proved true in the cost of the american taxpayers is now more than

$170 billion. in place of the system, the chairman's discussion draft would establish a functioning mortgage-backed securities market by replacing some of the standards that need at the enterprise has provided today with the regulatory regimes that sets the standards. this model would not rely on a government guaranteed to attract funding to the mortgage market, but rather with the two standardization and rules for enforcing contracts to provide a degree of certainty to investors. the process of undertaking finance reform is difficult. the discussion draft is a thoughtful approach to a framework that does not rely on the government guarantee. in the end, lawmakers must decide what structure will provide a functioning housing finance market that does not place taxpayers at risk. mr. chairman, are they to thank you for helping to move the housing finance reform discussion forward by offering a

discussion draft and holding this hearing. i believe the private capital markets can and should reclaim a prominent position in providing housing finance. in a draft proposal broadens the discussion of how that might be done. i recognize the senate committee the full committee has difficult and important decisions to make in the coming months and fhfa looks forward to offering technical assistance to the administration and congress has consideration of policy alternatives please needs. thank you. >> with 50 seconds to spare. thank you. so i will yield myself five minutes to begin the questioning. again, thank you for your testimony. so obviously, there is widespread disagreement on various actions with regard to what to do in general with regard to geocities and reform.

there's broad reform to the idea that we don't want to have the system with an implicit guarantee going forward. is there anything that you see and what we've had before you that would create any implicit guarantee in this legislation? >> now, mr. chairman. based on the review i've undertaken today, i don't see how one would interpret or perceived and implied guarantee of the federal taxpayer in the general framework that's outlined here. i believe it is pretty clear that this is putting investors on the hook for assessing and bearing mortgage credit risk. >> this segues into the next couple questions. so we try to do here is create a system where the fhfa is able to go out and set up uniformity, homogeneity and then inviting

site. such a stop right stop right there already and ask you, if this were to occur, how do you see that play now, if you go, and how do you see those two aspects into fruition at the end of the day and asked to the point on the investors, what would you be doing to attract to their broad sector of investors interested ms, or now set to resume this? >> we would certainly be striving to have the deep, efficient and liquid mortgage market. and so we would want to attract a broad set of investors to that. i think in the framework pitcher bill proposes, that a key responsibility to fhfa would be in defining of the securitization structure and the classification of mortgages that it be done in a way that allows for the market to reach the depths of liquidity and clarity about credit risk that would be

necessary and appropriate to get efficient pricing of the credit risk by investors. so i would envision that we would undertake doing this classification process in a way in which we were striving to achieve relatively deep pools of homogeneous market is so that investors could have confidence both in the forward market that would be created and then in the execution of the secondary market that investors can understand the risks are your mistakes of particular groups of mortgages. >> just a side note. what would be the benefit of creating that liquidity in the forward market? >> so, it allows investors to be able to make commitment for investing in mortgages before the polls themselves are actually structured. in order for investors to do that, then he should be clarity uncertainty regarding characteristics of mortgages that are being committed to be

delivered in the marketplace. >> even further than that -- >> from a barber standpoint, it allows borrowers to commit in a letter to commit to a barber and mortgage rate that can be locked in during the process of completing the transaction. >> speaking hypothetically come if this were in place today and i know it's not today, but the depth of the polls as far as what would be offered, how would she see that growing over time? we know it happened with regard to the com right now and where that is, but were that to change, how does that change as far as the depth of each of these pools, as far as what the interest of the investors in the? >> well, you know, part of what is to a determined really in the market place in this framework is how the securities would be

broken up and offered to investors looking for particular characteristics. but look, we've got almost $11 trillion single-family mortgage market. you get several groups of classifications. i think there'd be a great deal of depth and liquidity that would emerge in the market place given the size of the overall market. >> interesting point. some people raise questions as we went through. i only have a couple seconds left. the point i'm not is that you need that death cannot liquidity for the trade to occur and in order for rates to be fair to credit issuance as far as the 30 year fixed, correct? so in the statute, we could've picked is that it's going to be one or 22 of these categories, but really this point in time in time it's not a statutory provision you want to do, right? >> i believe that's right. that is determined by getting feedback from investors is really the whole set of stakeholders so we can get the most efficient group is

possible. >> great. i appreciate your time. >> thank you, mr. chairman. first, i will acknowledge you and i have very different definitions of the regular order. you mentioned subcommittee. i will say if you look at the procedures of the financial reform bill, they're more hearings, market, for time, any other bill i can remember, but i don't believe its regular order to have subcommittee consideration and have six months ago no committee. regular order assumes progression. we have 14 bills, some marked up in april and subcommittee and there has been no sign and he will go to the full committee. there is -- this bill is premised when there is no more skinny and pretty, but this committee has the power to do and is moved anything that regard. so i don't think the sub

committee allowed his regular order. that assumes progression laid in here and i think the insurgency is not helpful. beyond that of a couple couple questions. i know the conservatorship was appropriate and that came from this committee in 2007, to decimate working with with mr. paulson. one of the questions in the gold course of the conservatorship was to stop the bleeding to a great extent and try to preserve some function in the housing market without the losses preceded it. is that essentially work? i know we don't want to keep conservatorship for an item and you don't want to be sentenced to a lifetime as a conservatorship. i like that. but has that essentially work out as appropriate? >> mr. frank, i believe it has. i believe they brought stability to the marketplace so that mortgage financiers continue to operate fairly effectively during the conservatorship. >> i give credit to mr. paulson

in this committee which stated that we were together and your predecessor yourself. we always strive and these things to get the good things to happen and minimize the bad. is it correct to say we sort of reached at? as we look at the losses that we can't be sure it's only three years, what is your estimate? what is situation with the love made since conservatorship for the purchases? what you expect the loss rate to be with the post-conservatorship oppositionist of those two previous ones. >> for both enterprises, conservatorship of businesses will be profitable. >> i appreciate that. this committee in 2007, 2008. the next question as, you don't want to be conservative forever, but someone is going to do something forever if this bill passes. the director of the finance agency for purposes such as prescribed classifications having first aggressive credit

rich have a little to no credit wrister classification of mortgages with the goals, is better at a solid base. that's a pretty big job. so this bill contemplates a fhfa in perpetuity and as director and i have read the bill. that's a pretty big job for the director. what kind of stuff do you think this would require? what kind of permanent operation do we need to undertake responsibilities given to the direct your other fhfa under this bill? >> welcome i certainly won't say i have looked through. the bill is pretty new here. i would note that fhfa today is approximately 520 employees. we are still growing, but i would expect we have got quite an examination workforce in our current structure because the current structure is an immense undertaking of safety and soundness examinations of fannie

and freddie and this bill would replace. there wouldn't be that function going forward. .. >> and then you'll -- you'd do the service reporting and modification. this is really a very significant government intervention in the mortgage market. that's where i said -- and i said we're told it's more

efficient or better than risk retention. i think that has a greater simplicity, and i'm concerned about the capacity of any federal agency to take on the degree of supervision of the mortgage market on an indefinite basis this bill calls for. i yield back. >> the gentleman yields back. the gentleman from arizona. >> thank you, mr. chairman. part of this is also a chance to ask a couple questions. could you walk me through some of the assets that the gse's hold right now in performing paper, impaired paper, in actually the number of properties that are -- they hold title to? let's start right there because i'm always curious if there's a number of assets there that help you prime the pump, you know, if they were sold without a guarantee and just getting that pricing model, you know, what would the market pay and what would it absorb?

>> right. so in broad strokes, the two companies together have what are mag any dude $5 trillion worth of mortgages, single family and multifamily that they owe directly or provide guarantees to market investors. the financedded portfolio of both companies are declining over time, and there's a minimum required shrinking of those port goal owes. -- portfolios. fannie mae is $700 billion and freddie's in the $600 billion range. they are shrinking overdime. there's a change in the characteristic in the advanced portfolio moving to whole loans to mortgage backed securities to being mortgage that are for loan modification purposes or because they are late. >> just to make sure, and so let's take that $700 billion,

and those are ones where you hold the total paper. >> not only do we have the credit risk on them, but the market risk of having to fund them and hedge the risk. you asked about reo properties, properties they have title to because the property's gone through foreclosure. currently, the count for that is a bit less than 200,000 properties. it's in the 190,000 or so properties. >> okay. mr. chairman, mr. marco, has there ever been, and i saw an article on this, but it didn't follow up on, requesting pricing saying here's our performing paper, here's the impaired paper, what would you market -- what would you pay us for parts of this, you know, with a guarantee and without the guarantee?

>> yes, sir. in september, i gave a speech in which i was sort of looking forward to next things on the horizons for us as conservator, things that i think are appropriate both to conservator mandate in preparing to, you know, attract private capital into the mortgage market to reduce the taxpayers' overall exposure. at the time, i talked about two expectations, that we'd continue to see gradually increasing the guarantee fees, and second is, and this goes to your question, that we would work on engaging more loss sharing with private capital so that mortgage activity, the new mortgage acquisitions fannie and freddie are doing, there's two broadways outlined in the remarks that that can be done. one is to increase the depth of participation of private mortgage insurance companies providing insurance guarantees on mortgages. the other is that there are ways in the securitization process to

break up pools of mortgages in a fashion in which you may sell a portion of the pool to mortgage investors and do so without any fannie and freddie guarantee and hence without a taxpayer guarantee and start to get a true market price for the credit risk. these are options we're exploring. >> mr. chairman, any of that data coming into, have you had anyone saying we'd love to buy a few billion dollars without the guarantee, and this is what we pay on the yield? >> we certainly invited that with respect to the disposition of reo and got a lot of interest, and i believe as we prepare to move in a more formal sense on the risk sharing, we will get those offers. i have informally had market participants suggest an openness to, you know, to purchasing that sort of paper. >> okay. mr. chairman, down to the last 30 seconds, and i'm pleased with

what you are doing on the reo side. i'm one of those who believes our real estate market does not come back in this country until we get these properties in people's hands whether they are first time home buyers, you know, when you have a couple hundred thousand properties out there, we need to get those back into productive use. thank you, mr. chairman. my time is over. >> the gentleman yields back. mr. miller is now recognized for five minutes. >> thank you, mr. chairman. mr. demarco, in my opening, i spoke of the conflicts or potential conflicts of holding seconds and in servicing first held by others, owned by others. do you see any, and i've asked the leading servicers, all of whom are affiliates, subside yarrs of the banks, what business reason there was for the apparent conflict or at

least that alignment of interests that are not identical, which creates at least the potential for conflicts and all i got was there were cross marketing opportunities, not a particularly persuasive reason. do you see any reason to have that alignment of interest? >> i do, mr. miller. as a general proposition, i think one of the lessons to be taken from the last several years is the difficulties that second liens pose for resolving problems with first liens, and potential conflicts of interses have to be identified in how seconds that come in after firsts altering really the risk characteristic of the first, all of these things need to be studied, and i think should be part of housing finance reform. >> okay. when you began your answer, i thought you were disagreeing with me, but you agree with me. you don't see a reason to have

servicers of beneficial -- of mortgages beneficially owned by others holding seconds on those? >> i believe that's posed a conflict of interest, and whether there's another way of resolving the conflict by providing clarify and law is another option, but how things are now, i agree with you, sir. >> could you not just contract require that? i've been from thed at the -- i've been frustrated at the enormous power of fannie and freddie and legacy mortgages being in complete monopoly power with respect to new mortgages and the unwillingness to use that market power, not statutory or regulatory power, but just market power. why not require that by contract? >> well, if the question is why is it not required by contract that second liens can't come in or restrictions on who makes the

liens, whether than put legal counsel on the spot, i'll believe that's not legally within my ambit, but we'll study it, and if i'm incorrect, we'll discuss it with you. >> okay. i handed you, i think, a peer review study from new york that shows modifications that reduce principle lead to performing loans that reduce losses to mortgage holders, and, again, fannie and freddie have been very, very -- have been unwilling to reduce principle. there is now a pending settlement that may, in fact, not go through, of bank of america and federal -- the bank of new york, and an essential part of that is that the investors and those mortgages is insisting that bank of america

give up servicing, kick out servicing where mortgages go into default to smaller servicers, higher touch servicers, and that they modify the principle, we deuce the principle to produce a mortgage that will not go through the hideous losses of foreclosure, but it is something that the homeowner can pay. have you talked with the folks at timco and black lock who have a different conclusion about what's in their best interest? >> if i may pause for just a second, mr. miller. my understanding of the proposed settlement agreement does not contain a amendment phenomenon principle forgiveness in it, but it does have requirements that bank of america and any sub servicer that results from this would service the loans according to the standards

actually that we've developed at fhfa in the form of our servicing alignment initiative to promote loan modifications and those sorts of activities. i don't believe there's a mandate for principle forgiveness in there, but it goes to the servicing and loss mitigation strategies. >> the former mack program has in not just underwriting standards, but it would be a good thing, make mortgages to people who can actually pay it back in the future. the other didn't work that well, business model, but this also sets out procedures for when a mortgage goes into default and buys for principle modification. have you looked at that program and whether that works? >> i have not looked at that, at that particular program, no, sir. i do understand the chairman's bill would have part of what we would establish in terms of standards, would, in fact, be loss mitigation protocols, part of the servicing standards that would be developed so that in market investors would have

certainty about how a servicer was expected to minimize the investors' loss in the event of a delinquency. >> i thank the witness. the gentleman yields back. >> thank you, mr. chairman, and nice to see you here, mr. demarco. >> thank you. >> question -- does fannie and freddie and fha's dominance of the mortgage market allow for innovation in the private sector? you know, we're already heard about some of the businesses being shut down and jobs loss because they can't compete with the taxpayer government programs like fha, so should we continue to allow the government sponsored housing programs to compete and reach out throughout the private sector? >> well, to the first part, i don't believe having the model

of fannie and freddie in conservativeship is conducive to innovating new productses, and we're not introducing new products, so i think the sort of, you know, market framework that would allow for innovation and introduction of new instruments and so forth would better happen outside of the realm we're in today. >> okay. then, you know, in the white paper, treasury's option one was a privatetized system of housing finance with government insurance role limited to the fha, the usda, and department of veterans affairs. , assistance for narrowly targeted group of borrowers, and that looks like the plan that republicans have been promoting for a couple of years, and so what is your view of option one? >> well, i believe option one that treasury department put

forward is certainly a credible option. i believe that chairman garret's discussion draft is one of the first next developments, if you will, or refinements of treasury' option one, and that it provides a basic framework for treasury's option one to be implemented legislatively. >> okay. then do you believe that if fhfa creates the mortgage buckets and defines the standards to fit into those buckets, the private sector will perceive that the mortgages in the buckets are implicitly guaranteed by the u.s. government? >> no. that's not how i understand it would work in this bill, and i don't see anything in the bill that should give that sort of assurance to investors. >> yeahment i think that's always something we're working to make sure we don't fall into maybe a trap like that again. those are my questions.

i would yield back. >> gentle lady yields back. >> good morning. i am? >> i'm next? >> you are. i'm looking past you at the same time. >> thank you very much, mr. chairman. mr. demarco, as you review the language of the private mortgage market investment act, how do you believe that this will impact your organization's ability to effectively regulate and be conservator of fannie and freddy? >> well, i perceive this legislation as actually being in tandem with other legislation that is already been pending before the subcommittee and the full committee. i don't believe this is intended to be undertaken within an ongoing indefinite conservativeship of fannie and freddie. this is framed to be a replacement.

how that transition works remains to be worked out. >> if so, how does fhfa have the capacity? how do they have the expertise to house such a program scheduled to go into effect no later than six months of enactment? >> interestingly, congressman, there's a lot of things we're required to do in this legislation that, in fact, we're already doing. the servicing alignment initiative we've undertaken is conservative to fannie and freddie to have robust mortgage servicing standards is something that we're already well along with and already is the implementation of it that's begun. that would be a key component of what goes into the standard setting that the chairman's discussion draft would have. the second thing is i already made clear that as conservator of fannie and freddy, i'm working towards changing their securitization process so mortgage market investors would

have detailed loan level data on the loans underlying a pool. this is also a provision that is part of the chairman's bill. this is something we're working towards already. i believe there's certain things that we have underway already, and we certainly have the expertise in house to be able to develop that, so i think some of the work we're doing in our current role fits well with what's proposed in the new role. >> so what does the secondary mortgage market look like with no government guarantee on the longer term fixed rate debt? >> so, the long term fixed rate mortgages k i believe it looks like one that is pricing the risk according to what it actually is. you'll get a true market price of the risk, not just the credit risk, but the interest rate risk associated with a long term fixed rate asset. by the concept behind the grouping of mortgages is to give

greater homojenaity in the process so they understand this is a class, you know, m type of pool. this is a class p type of pool. this is a class s type of pool, and investors know what the key credit characteristic differences are between those different pools, and we would see that priced accordingly in the marketplace. >> in listening to the dialogue you had with my friend and colleague, congressman miller, regarding the principle modification, and your response was principle forgiveness. there's a heck of a lot of difference, and what we have been discussing here in our committee amongst us is that if we're going to be able to make it possible, situations for the person buying the house for $300,000 and then it drops 234 market value to --

drops in market value to $200,000, they still have indebtedness for the $300,000. we're asking consideration of those modifications, and i need you to give me clarification because i'm not clear on your response to congressman miller. >> i apologize if i misunderstood his question and hence didn't give the appropriate answer, but to your question, congressman, about principle forgiveness. here's how i've looked at this at the conservator. i believe we have an obligation to minimize taxpayer losses from the book of business that they have. i believe we have an obligation, it's, in fact, in statute to be maximizing our efforts to avoid foreclosures, recognizing the net present value to the taxpayer. that's a statutory mandate that we have. what we are doing in the loss mitigation space with fannie and freddie is there's a whole

protocol that's in place at each company that the mortgage servicers are supposed to execute on their behalf. what this protocol is about is when a borrower goes late on their mortgage, there's an outreach to the borrower to find out the reason for the mispayment. if the borrower is incapable of continuing to make the full mortgage payment they're obligated to, the first alternative we turn to is a loan modification, appropriate for this borrowers. the borrower continued to make a payment they can afford and committed to staying in the house. if so, that's the outcome we all want to see, and that's our first priority. the way we go about that, the first step is, in fact, following the presteps of the treasury department's home affordable modification program or hamp. the hamp program is designed to do to define what is an affordable payment, and it's been definedded since the beginning as a payment equal to

31% of the borrower's monthly income. 31% of the income pays the mortgage. there's a series of modification made to the mortgage to get the borrower into a payment of that size. we are, in fact, doing that, and fannie and freddie together completed just under 1 million completed loan modifications. if the hamp mod doesn't fit the boar roarers -- borrower, if they don't qualify, there's proprietary mods to address the particular situations of the borrowers. that's what we're doing. loans in that context, we found we get the borrower to that payment without doing forgiveness and better protect the taxpayer by observing an upside potential if the borrower is successful in its modification. >> thank you. i yield back. >> thank you, mr. chairman, and thank you, mr. demarco. as was discussed earlier, there's general agreement the

conservativeship was the right thing to do in 2008, and there's general agreement that the con -- conservativeship is not the permanent solution and needs to be replaced with something. i think the question before us today is whether or not this bill is the sole and sufficient replacement for fannie and freddie o -- opposed to some of the alternatives that are authored by other members of this committee including myself, so my first question for you would be if fannie and freddie disappeared tomorrow, and this bill were the sole replacement for that, is that sufficient? is that sufficient? could this plmbs serve the entire market place? >> it could not do it tomorrow. >> why not? >> because this would take time for standards to be developed and arctic lappeted, and in order to -- articulated, and in order to gain capital and build out the infrastructure for

securitization in the bill, private capital wants to know what the standards are, how the securitization requirements are going to be, and then make the necessary and appropriate investments in infrastructure and in risk management to be able to execute it. can overtime that develop and be implemented? if the market has certainty these are the rules of the road and they will not be changing every three months, i believe the private market can step in and do a great portion of what is currently being done by fannie and freddie. >> a great portion. okay. let's talk about what would happen, do you think, to fha and federal home loan banks, to the volume through them if fannie and freddie were gone and this was the sole solution? >> even with fannie and freddie operating the conservativeship, fha has volume today relative to any time in recent history, and

i believe for lawmakers, for y'all to consider the housing finance system, i expect a consideration of fha's role here whether it expands, contracts, redefined as certain targets are what you figure out. >> a huge portion of the it goes through fha if fannie and freddie disappeared and this was in the place, wouldn't you suspect? >> i would not necessarily draw that conclusion, no. >> if there were no changes? i mean, it used to be the last resort and now are the first resort for anybody less than 20% down. >> well, there's an awful lot of credit worthy borrowers out there who have market execution with an attractive price without going through fha. >> okay. this bill has actually has a lot of government restriction and control over the market place, and one of the things that require fhfa to do is promulgate

underwriting standards. could this not be construed as a stamp of approval by fhfa and therefore have you been open to litigation or to legal liability from investors where those portfolio to go bad in the future in >> well, i believe that, you know, the discussion and careful review of the discussion draft on that point can and should continue. i would say at first blush a looks as though the bill is taking great pains to make clear that, in fact, that's not permissible, and that's not intended. >> that it's not permissible to? because you're essentially filling -- under this bill as i see it, you're essentially filling the role of the bond rating agency. >> no, sir. i believe what we're doing is setting definitions and rules in terms of this mortgages with this group of characteristics will be classified as this

class, rules with a different set of credit risk characteristics would be given this class title, and so mortgage up vesters know when an offering is made for this class, there's similarities with the characteristics, and this with this class, there's characteristics. >> the interesting thing -- one last question. you're not just the director of fhfa, but a noted economist. if the 30-year fixed rate mortgage vanishes as a result of no government guarantee because the private market doesn't want to accept the duration risk and the interest rate risk, ect. in addition to a credit risk, so if there's no 30-year fixed rate mortgages, what affect would that have on housing prices because what we talk about is trying to keep -- because if the housing market falls further, the economy fall, and a lot of jobs will disappear, and that's what we don't want to have happen. >> well, so that's a predicate

to the question i would not necessarily agree with, so that the implications of the bill causes this to happen, but i understand. the question is if we suddenly outlawed 30-year fixed rate mortgages, would there be an affect on house prices? well, there could be, but there could be an affect on mortgage interest rates, also affecting house prices, and, you know, in some ways, this could, you know, there's tradeoffs there. a lot of borrowers not using the 30-year fixed rate mortgage, and some borrowers the 30-year fixed rate mortgage is not the optimal instrument for them. >> thank you. i thank the gentleman. gentlelady from california is recognized for five minutes. >> thank you, mr. chairman. i thank you, mr. demarco, for your presence here today, and for you to inviting him to come and testify on your draft

legislation. title three of the discussion draft presents federal departments or agencies from ingauging in forced principles, and i'm not clear looking at the bill whether or not you are talking about a ban on principle downs applying to new loans or existing loans, however. this is respect to any securitized mortgage loans. you stated, mr. demarco, you said, given the calculations of fhfa, principle write downs on fannie mae and freddie mack, loans are not appropriate at this time. even though you have qualified that by saying at this time, do you think that a statutory prohibition on write downs is appropriate or should the director of fha have the flexibility to pursue principle write downs should future data

demonstrate it's appropriate? the reason i ask this question is that, and it's not been stated by my colleagues, that many of us are very, very sympathetic to the homeowners who are underwater, and we really do believe principle write downs make goodceps, and we believe that principle write downs will keep many of our homeowners in their homes, but for principle write downs, they will end up, perhaps fore closed on, so my question again is what i already kind of stated. should this be in law? should we ban or prohibit principle write downs in law? would you like to have flexibility in dealing with the issue? >> at least with respect to the first part of the question, ranking member waters, i believe it is equally legitimate for the congress of the united states to

legislate that the use of taxpayer funds to write down principle of other mortgages is an appropriate public policy and to provide for that, and i believe it's equally legitimate for the congress of the united states to pass a law saying that's not an appropriate use of taxpayer money. i really believe that that's, you know, at this point, a question for lawmakers. i've made clear begin my current -- given my current speedometer as conservative with the source of funding i have today, i made clear my view of why i am not doing it, but i believe it's really up to lawmakers to make that sort of determination. this is the use of taxpayer funds, and i believe that rightfully fits as the determination of lawmakers. >> all right. i'll segue to another issue i've talked with you about, but i guess i'm interested in the timing now. i am and other members are pleased about the request for ideas you put out relative to di

disposal of the 300reos on the books. tell us about the timing of that 6789 how fast does this have to move? when can we see requests for the proposals going out? >> right. so thank you for that. the subcommittee's aware that we've recently made an important set of announcements regarding the harp refinance program. i'll say the agency's been focused on that as the first priority. now that that work is just about complete, moving to the reo question and finalizing the review of 4,000 commissions is the next prior citi, and i hope to be at least making some movement, positive movement forward over the next few months with that. i believe that we need to get going with it. >> thank you very much. i yield back the balance of my time. >> the gentlelady yields back. gentleman from florida. >> thank you, mr. chairman.

mr. demarco, first, just want to say i applaud your written testimony, page three, that you're going back to recover exeans story damages. the question is hopefully yes or no. are any of the federal law enforcement agencies working with you to recover punitive damages? >> i can only speak to the actions that i've taken, mr. posey, and so i mean, we've done is undertaken the lawsuits public to complaint, sir. i'm not in a position to speak for law enforcement agencies of the government. >> so you're not aware that they are, then? >> i can't speak for what law enforcement is doing. >> i'm not asking for you to speak for what they're doing, but if they are working behind

you, beside you, or have an interest in it? >> from time to time, sir, we're approached by law enforcement about various things they are reviewing, and we always provide our full cooperation to law enforcement. certainly as a seasonal matter, are there issues out there law enforcement is pursuing in the mortgage area? the answer is yes, and we're providing support to them when asked. >> okay. do you notify law enforcement when you discover fraud as you attempt to recover damages here? >> we have a mortgage fraud reporting regime that fannie and freddie mack have. there's a great deal of reporting that is done, and they will oftentimes come back to us and ask for additional information or guidance and interpret it, and we provide that. >> thank you. i think last time we heard the defense for the fannie and freddie were in excess of $162 million. can you give us an updated number now? >> not off the top of my head.

i'll be happy to provide it in writing. given the pace of this, i doubt it's changed much since my last appearance. >> i understand a court ordered one of the executives to repay bonuses that were apparently received and not deserved? could that be viewed as any type of adjudication of guilt and maybe a reason for the american taxpayers to stop paying the defense fees of these crooks? >> i'm sorry, i'm not aware of the particular issues or circumstance that you just described, so i would have to find out exactly what ruling was made that you're referring to and then have to assess that. i'm not aware of the top of my head what you're talking about. >> okay. i'll make a couple statements and ask you to tell me what's wrong with them. for about 60 years, we've had

fha loans, 3% down payment loans which require an extra half a percent mortgage insurance premium, and to a large extent, the extra half a percent mortgage insurance premium has paid enough through its accumulation for the losses that have been incurred through the loans, so basically, it's been a pretty good sound system. the va, which has no down payment, only has a loss ratio of 2.5%, which is incredible because of the great job they do at underwriting and working with their clients, so i think that's one argument for not reinventing the wheel. i'll ask your comment in a minute. number two, the bubble was not caused by mortgage limits or low down payments. i wager that at least three quarters of the people in the room if they follow the national trend, bought their first home on a 3% down fha loan, and didn't default 234 --

in it as most people didn't. most of the bubble was caused by fraud, enacted between the borrowers and lenders, and if we are sure to eliminate that fraud, the system should work without additional regulation, red tape, and so forth. can you see anything anything wrong with those statements? >> i apologize. certainly mortgage fraud is an important element with the debacle over the last several years, but i would not say that borrowers generally, setting fha aside, there's a small book of business during this peak period, but i believe highly leveraged acquisitions of houses with 0% down or close to 0%

down, in fact, was very much a contributing factor to the housing bubble and to the losses that taxpayers have absorbed. i go further to your point about fha and ba and say these are certainly, credible, explicitly government guaranteed programs with targeted populations and eligible borrowers, and i fully expect wherever we end up in housing finance, we'll continue to have a robust fha and va program, and one of the decisions for lawmakers is in a post fannie and freddie world whether there's consideration to be given in altering in any way the program or eligibility of fha or va. >> i don't want to cut you off, but running out of time here on my 5 minutes. >> actually, you're over your time, so -- >> just one quick follow-up? >> [inaudible] >> thank you, mr. chairman.

>> [inaudible] >> it's been my impression that congress pushed fannie and freddie to make many of the loans that we now regret, and i hold congress culpable for that. do you think that's a fair assessment? >> i certainly think that congress in establishing certain expectations that drove fannie and freddie, but i do not relieve the executives for making poor and imprudent business decisions prior to conservativeship. >> thank you, thank you very much, mr. chairman. >> gentleman yields back, yesman now from california. >> we've recently seen some bonuses that fannie and freddie. do you have a comment on that? >> yes, sir, i'll say several things about the recent news. first is that compensation programs reported about are the same compensation programs in place since 2009 at the same levels that i have extensively

testified before congress about. i will say that as the number of executives turned over the companies we seek in every instance to be bringing in new executives at lower compensation for their predecessor, and timely, i believe that this company cigs problem will be solved -- compensation problem will be solved fastest when congress comes to a final resolution of the conservativeships. >> now, this bill that we're talking about today is either a very small bill, and its importance or a large one. it's important to have standards of weights and measures for ounces and pounds, and it would be good to have federally published standards for mortgage backed securities, but this could be an enormous bill if it is somehow a step towards

abolishing fannie and freddie and not replacing it with anything similar. what does the secondary mortgage market look like to you if there's no government guarantee of a long term fixed rate mortgages? >> i've said earlier in the hearing, i don't see the fha or va going away, so i believe they will, in fact, continue to be government guarantees of 30-year fixed rate mortgages, and i further believe in the construct that's here, it would certainly be an opportunity from mortgage investors to price and to be willing to accept 30-year fixed rate mortgages without a government guarantee. >> so what is it liking like if -- well, to the average home buyer right now if they have a qualified conforming loan, paying a certain rate of

interest. how much higher is that going to be without the government guarantee? now, i know what it was in my area five years ago, before mortgage backed securities got an ugly name, but what -- what kind of increase are we going to see for somebody who's borrowing and not borrowing from fha or va? >> so, i mean, that's a fairly complicated question because one needs to be more specific about the borrowers, but i have a general observation for you that i think is helpful. you know, we continue to have a mortgage market that is outside the fannie and freddie realm, and certainly looking not just recently, but back at the past history, suggests that we're on somewhere in the order of three- eighths of percentage rates, but there's different credit profiles.

it's not just -- >> same credit profile, let's say talking about 75 basis points. what does it do to the value of homes in this country if for the vast majority of buyers, the interest rate is three quarters of a point higher than otherwise? >> i don't have an immediate answer for you on that, mr. sherman. certainly, there's a connection between mortgage interest rates and house price, and i say the incredible sub sigh dation over a -- sub sigh dation over a long time with fannie and freddie in affecting mortgage interest rates have been capitalized into the value of homes inflating those values. >> do you have any evidence or studies that would disagree with what i've seen which is another 15% to 20% decline in the value of homes? ? >> i don't have studies to point to. >> nothing to disagree with

that, and twhas do not -- what does it do to the national economy if the average home in the country declines by 15% or 0% over the next years as a result of action taken in this room? a obviously a substantial decline in house prices is not good for the economy or tax payer, but we'll see what transition there is and so forth. >> i yield back. >> thank you. the gentleman yields back. gentleman from new mexico is recognized, mr. piers. >> thank you, mr. chairman. mr. demarco, nice to see you. to get the record straight, last time you were here in committee, we had a little dust up, and just to put it in the record, you came into the office and made a very professional presentation on the status of the institution, and i appreciate that and still work from those notes. >> thank you, mr. pearce. appreciate it. >> if we pursued just a little

bit the line of questioning that mr. posey was on, what would be the definition of fraud? you're hesitant to say that a great percent of the loans were fraudulent. what would be the definition of fraud and i'll go ahead and give what i'm thinking about. been in discussion with one of the bottom line lenders from wall street, and her performance bonuses were based on kicking loans out the door. get them in and get them out. she wouldn't compromise the standards of the other people sitting on the desks making loans did, and their bonuses were higher. her supervisor gets bonuses if they do, and she's under pressure to make the loans. is that in your estimation fraudulent, or is that just -- it doesn't cross the ethical line, but it's up there? >> well, as you described it, i would not describe it to be

fraud as long as the credit characteristics are being appropriately reported to the buyer or investor in the mortgage. >> do you -- i think where i'm going with this is nowhere tricky, just any market is going to have the same pressure whether that's this bill in front of us and the market operating towards you right now. it's a pressure that's going to be there. any way to regulate that pressure? any way to deal with it? i mean, it's not tech technically fraud, but putting mortgages out there that maybe are not beginning to perform as well, and that's not categorized that way in order to get the bonuses. that's a problem in the system that i don't know how you get around myself. >> well, certainly, incentive compensation programs can be looked at as creating either positive or adverse incentives for how credit markets are

functioning, so incentive comp programs are pretty critical here talking about executives or talking about rank and file employees, but the mortgage fraud issues generally can run quite a wide gamet of apartments. it can involve appraisers, borrowers, companies that are actually pooling and securitytizing mortgages. fraud can occur in any number of places including those. >> the -- switching gears just a second, continuing the drum beat of concern i have for the small banks in new mexico is if we go to some private market that they'll never get the rates of return they can in the large markets, and they are suspicious of really the movement away from -- they don't like the explicit guarantee, but the implicit guarantee.

what reassurance can we give people in new mexico, the lenders that they're going to be okay, that the private mortgage market will actually provide liquidity to them. is that a reassurance that's possible, and is it one that's advisable to give? >> well, i would -- i think that's a great issue. it's one that concerns me a lot. iwould answer it -- i would answer it slightly differently, and that is as we consider housing finance reform whether it's the chairman's discussion draft or any other framework put forward, one of the things i suggest policymakers and lawmakers alike should be assessing is what does this framework offer to small and mid-sized lenders whether it's community banks, mortgage bankers, and so forth to be able to be active participants in the mortgage markets so that we would have a more competitive marketplace and one in which is not dominated either at the mortgage origination point or in

the mortgage servicing point, that is not dominated by a handful of very, very large institutions. >> okay. i yield back, mr. chairman. thank you for your responses. >> gentleman yields back. before we go to ms. maloney, just for advocation for the gentleman from california, the gentleman raised a good question with regard to the complication issues and what needs to be done about that. the gentleman is remiened we had hr1221 #, the company sages act sponsored by the full chairman of this committee which would try to address that and suspend the current compensation packages for employees of fannie and freddie and establish a compensation system consistent with the executive schedule which i guess is a lot less than what's out there. that passed the committee 27-6, but i believe, however, the gentleman from california voted no on that piece of legislation, so just to set the record. we are trying to address that

situation. with that, i yield to the gentlelady from new york. >> thank you. welcome, mr. demarco, and we appreciate your comments on what is the 15th proposal this subcommittee has reviewed in the area of secondary mortgage markets this year. i know that this question is not exactly on point with what we're reviewing today, but because you are here, i wanted to follow-up on something i have been involved with your office over the past several months, and it concerns a recent story that was in the october 19th issue of the "new york times" entitled "rush to drill for natural gas creates conflicts with mortgages." it's raised important questions about how many of the new gas leases on private property in many states that do not have a history of such leases and how this will impact mortgages.

the article reports that there are concerns that these leases do not ensure compliance with certain standards set by secondary lending institutions and earlier this year, i sent you and your staff questions on this area, and i appreciate your response, but your council's response raises question in light of the recent times story and the pee -- piece shows there's conflicts between the leases and mortgage rules that could be problem with investors who want to get rid of their mortgage backed securities, and now that the technical defaults that these leases could create on mortgages, it may force fannie or freddie to buy these mortgages back, and if this happens, i assume it could be incredibly expensive for the u.s. taxpayer since 90% of res

residential mortgages are owned by fannie and freddie, and so many people already signed these oil and gas leases, so my question is as the regulator, what is fhea doing to audit to understand the scope of such a threat? >> so, thank you. as you noted, my staff has been working with you and your staff to better understand this emerging issue and its implications including risks for nanny and freddie, and as you noted, we provided one set of responses. with regard to the more recent development that you reported to, i'll confess that i'm not up to speed on that and if you would indulge me, i'll get a fuller response and get back with you and your office regarding this latest development and to make sure that we provide a full answer to your question. >> well, thank you.

your agency's letter said you were waiting to see what epa determines about whether this is environmentally dangerous, and i believe that determination is irrelevant. something does not have to be environmentally dangerous for it to negatively impact property values or violate mortgage rules. just take the example of a landfill. it is not considered dangerous, but it definitely lowers the value of property, most people would not like a landfill in their backyard, and regardless of what epa and the study finds, most research says that drilling negatively impacts property values, and as the times documents showed, clearly, drilling leases violate fannie and freddie's rules, so the question remains is fhfa or

fannie and freddie going to do an audit to see how many mortgages across the country have noncompliant leases on them? this is a serious issue that could cost billions going forward. >> so, congresswoman, as i said, i'll be happy to go back and take a serious look whether an audit is in order, whether it's feasible, practical, what it is we expect to get out of. i'm not prepared to give you -- >> are there any efforts, following up, any efforts in fhfa to see how many mortgages in the united states are overlaid with noncompliant leases? any effort to look at that? >> i'm advised that these leases you're referring to my or may not be recorded, and so our ability to be able to effectively gather this information is uncertain at the

moment, but i'm told that the staff is looking at this and will continue to and follow-up promptly with your office to advise you as to where we stand. >> well, thank you very much, and my time expired. thank you. >> gentleman from texas five minutes. >> thank you for holding this hearing, and thank you for putting forth a very interesting proposal for, you know, bringing the private market back to mortgage finance. it's very important for the long term stability of housing that we have a robust private financing market. mr. demarco, thank you for coming again. you have maybe what's one of the most difficult, but most important jobs in our country right now, and i guess the taxpayers and you got some bad news this morning. looks like freddie needs another infusion of about $6 billion. what i found troubling about

that is that they lost $6 billion in the previous quart, but a year ago, they lost 4.1, and with the amount of origination, you'd expected their earnings to start showing improvements. i found that troubling. i'll assume that you do as well. >> i certainly do, congressman. i would say that a portion of these -- so the break down briefly -- there's three key contributions to this. one is an additional increment of credit losses that's continuing to reflect both the preconservativeship book of business and difficulty certain housing markets are having in stabilizing. it also reflects losings -- losses due to hedging the financial risk of their retained portfolio and $1.6 billion of that is the dividend owed to the

treasury department. >> recently, september 30th, the loan limits temporary increase expired, and so the new loan limits are in place. have you -- has anybody done analysis of how much that would affect overall origination to the gses for that to move from the 729 down to the 625 number? >> well, i know we have how many mortgages, say in the last year at fannie and freddie had originated in that dollar range in the particular markets that were affected by the change in the loan limit. i'm afraid i don't have that with me, but i could easily provide it. it's really not a huge number, but we can get that for you. >> it's a really small number, would you agree to that? >> i'd say certainly relative to their book, it's a really small number. >> and so the question is, and

mr. scott has great proposal of bring certainty to the market, but what would be the incentive in the private market to originate anything in the current space that the gses are allowed to operate? what's the incentive for the private market not to go ahead and let the taxpayers allow that book of business for them? >> well, it's pretty hard to compete with the federal government and the degree of support that's being provided right now. >> if you're going to get the private sector back into the market, you're going to have to create some space for them to operate because really there's no incentive below whether 625 for the private sector to originate anything that's not sent through the gses. >> right. it's hard to compete with a government guarantee, and as long as there's a wide footprint for that, there's a wide space in the market and hard for

participants to compete in in terms of financing. >> do you think the fact we did create a little bit more space in the jumbo market by letting that, those limits expire, gives us an opportunity to see -- because, in fact, the private sector is operating in the jumbo space now. isn't that a good opportunity to create a little additional space without really a lot of giving up a lot of origination because, as you just said, it's a very small amount of origination. >> well, it's certainly an opportunity to provide a modest amount of additional running room, if you will, for the jumbo market to be able to establish and reestablish itself. >> so you would support that? >> well, i've been remaining faithfully agnostic on the question of what the loan limits should be dealing that very much a decision of lawmakers, but to your premise that by having this

well announced in advance, gradual decline in loan limbs in just certain areas, does that create greater opportunity for the private sector to reestablish itself? the answer i would say is certainly yes. >> and so here's a final question. i think recently we wrote you, and we were anxious for the response. with respect to fannie and freddie in certain spaces basically has a monopoly on that origination space. what would be the reason to give certain originators different fees than others? why would you have a spectrum? there's -- you're cannot competing for the business. you're getting all the business. >> right. that's a very fair question. i would say two things. one is, in fact, those gaps have been declining in, and the second is i said public by back in september that what remains in that space is something that

i'm looking to eliminate. >> thank you very much for your time. >> thank you, sir. >> gentleman yields back, and the gentlelady is recognized for five minutes. >> thank you very so much, mr. chairman, and i do want to thank our guest for taking this time. i just first want to mention that i'm really happy to see that you've filed losses against these 18 financial institutions to recover the losses suffered by fannie and freddy, and so seek compensatory damages for the losses that the enterprises have suffered. there's been a lot of talk about the, you know, the malphenes, i guess, of fannie and freddie, but i think we too often forget they were victims themselves of criminal activity. ..

in order to fill the tba space. how would you under the spout, how would you find the trailer for? >> well, i'm not sure there'd be gses commented in terms terms of the fact date for the sub by the not determined in this bill is about be something that have to be figured out. it is a gap right now.

>> is a big gap or a cavern? is a significant gain? >> for me, since i've been managing the budget is significant that want to know where funds are coming from. >> how much does it cost right now to run under? >> welcome our budget today is 100 -- on the order of $180 million. so i'm told it may be less than that. we are funded to assessments of the total federal homeland banks because the supervisor responsibility. >> thank you. right now the investors in fenian freddy securities are basically reads investors. but under this bill, they have

to add credit risk as well as the race. is there any indication that we would be able to attract these kind of investors is totally privatized market without the gses? >> that is quite right. we are at a rate market because it guarantees associated with fannie and freddie securities. what the pricing of the credit risk would be would depend on market appetite for credit risk and it's also going to depend upon the clarity and resiliency of the standards and structures structures -- >> but so what would a borrower -- a mortgage borrower has to look like? it is totally risk-averse today's investors. what is the risk tolerance in order to be able to raise the appropriate amount of funds? if you want your mortgage or market to come back, we have to be able to fund mortgage that

securities. so what is your assessment of the tolerance of the credit risk in the private market only without the gse? >> i believe there are certainly tolerance for private capital to fund this risk, but they're going to want to know what are the rules of the road into a pretty good clarity to ss the amount of risk i would be undertaking. >> not ninja loans, but what would be the standard do you suspect? >> standards in terms of the underwriting? >> actually the discussion draft would require -- >> would it be 20% down? the mac i don't require the bill. i think the bill requires us to establish race packets of mortgage is defined by characteristics. >> my time is about to expire if you're not going to answer this question.

i am the largest mortgage insurance located in my district the fourth congressional district of wisconsin. what impact you think the legislation would have on the mortgage insurance industry? >> well, that's an interesting question because there's some investors that may well look to having various forms of credit enhanced and either a mortgages or rent pools of mortgages in a search create and market opportunity for private guarantors to replace what is currently a federal territory. >> thank you so much. my time is expired. i yelled back, mr. chairman. >> the gentility yells back. and of course the jellybean as that's one of the variables considered by the fhfa as well. ms. o'connor is recognized by minutes. >> i'd like to start a yielding 30 seconds to collect from

mexico, steven pearce. >> i thank the gentleman for yielding. in response to my good friend from the other side of the aisle talking about the negative impact of drilling on properties , if that were really the case he wouldn't have any properties in my hometown can assert that gas wells in backyards and front yards on the school grounds. in fact, it positively impacts the values of homes in our town. so when you go, are you going to create a fannie mae dead zone if you limit -- limit loans to private residences in areas where the trail. so be careful. in new mexico we don't find out there. thank you. >> reclaiming my time. i have a question on economic semantic question about the path. the question is one of our colleagues attacked about how this has anything of the federal government into the housing realm has helped to keep

interest rates low. about the senate a sudden it went sudden it went away, interest rates would climb back through the roof. my question is, having a rudimentary understanding of the law of supply and demand, wouldn't work that if the government subsidize the housing market purchases but that would mean they'd be more available to more people? and the more people that there are for the limited number of housing, the higher the prices would go for those houses, which would then reduce the availability. it's not pretty much how that would work? >> imposed in that sort of system in the short run, yes. in the long run you would see a change in the supply of housing. >> at coming to see the housing prices come down which upset homeowners, but not necessarily people purchasing which make the down payment smaller because 3% of the asking price of the house to be lower than it would be at the governmentally included rates. i just wanted to make sure that

i actually had read the book in college because i might just skip through. practical question about the past with the come as you stated and i think everyone sees than in the operation of these entities, there were mistakes made by these words in people in charge of operating on. is that a fair statement? >> yes, sir. i'm a just a thank you very much for trying to go in there and fix this by working so well with us to do this so this is not directed at you in any way. just as a matter of curiosity as well as public record, is there anywhere we can go and find just a very sustained list of who was on the boards and whatnot decisions these boards made because these people made a whole lot of money to screw this thing up. i think under the concept of credit where credit is due, i know a lot of people would like them personally for their efforts.

>> well, since these were public companies, certainly in their annual disclosures and annual reports, the leadership of the companies as a matter of public record. >> that's heartening. i was also curious, there are public entities. in those reports, is there anywhere we can find out how they manage to get these jobs? these are important jobs. these are just sent an we want to going out to a political crony and document in terms of dealing with these things. not only are these the people who should be credited with these decisions, this is also the compensation package. and here is how they were chosen to be on this board. >> i believe that is available information. >> can you send me the link and give us a nice concise so i can share that with everybody in my district is wondering why this and that so badly, so quickly

and people were compensated so much for so little. the mac we can provide cheap information on the public record. >> thank you. i yield that. >> jenne kneels back. i appreciate the question and learning the book he read in college as well. but i use the cliff notes. so i do appreciate that. i thank you for you being here and your insightful answers to questions and i believe that is the extent for the questions, although the record as i always say at the end of the hearing is open for an additional 30 days for additional questions and as we go through this, there'll be additional additional questions. again, i thank you her testimony in time today. >> thank you so much, mr. chairman. >> here's a look at our primetime schedule on the c-span networks.

>> you can't understand where marx ideas came from unless he knew what was happening around him. his line that so many people take offense from the line. unless you know that king said they were the emissaries of god, you know, you wouldn't understand what his revolt was about.

>> next common discussion on each of the republican presidential candidates and what their strengths and weaknesses are. we would hear from two political strategists on the latest poll numbers in who they think will win the nomination. post about the national journal, this panel runs for a minute. >> vice president of national journal and on behalf of her or not national journal, to establish her to look at me or i can also give a warm welcome to everyone join in that line on. we're live streaming on national journal.com and we appreciate you tuning in. we hope the various discussions you here this morning will help provide insight on the poll

numbers, trends in key races coast-to-coast and also give you a robust discussion on what's driving the republican presidential contest in president obama's reelection campaign. we are for dynamic panels this morning and i encourage you to stay for the entire session. if you would like to participate in the event today, we encourage you to do so. today we'll be taking questions and facilitating discussions about event with yahoo!, are online tomorrow. i would like to thank yahoo! news, online moderators chris moody and rachel rose hartman were sitting up front. they were moderating questions today. you may post comments and questions via twitter. please use hash tag pound sign mj preview. thank you chris and rachel. additionally in your seats you will have received an index card. you will write your questions and write them up front and they will get passed on for

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years election. we're very proud of our 2012 election partnership with cbs news. together with embedded reporters on the presidential campaign trail and we are sharing content across their digital platforms. our partnership now includes a republican presidential debate in south carolina on november 12 were scott kelley of cbs news and major garrett at national journal blast the entire republican presidential field about the defense and national security and foreign policy issues. we hope you'll watch on cbs in november 12 or watch the live feed on national journal.com. as part of the partnership is my pleasure to introduce the first panel moderated by one of washington's most respected and tired journalist, bob schieffer. as you all know is a washington correspondent for cbs news. joining bob in the middle is steve trent area at the alexandria-based strategic company, purple strategies. steve is a strategic advisor to

the candidates running for federal statewide office. and charlie black, chairman of the policy group of the former political terror at the rnc and served as senior adviser to president ronald reagan and george h.w. bush. welcome, john then. >> alright. i think we have to get right to it. so i am just to ask both of you to start here. herman cain a real journalist. >> well, herman is a good man, sort of a horatio out of the story. and not fiercely without much support or infrastructure in terms of this staff made himself one of the front-runners in the race. it is unfortunate this issue has a resonant sweeting. we do not yet know the facts in the target judge. but herman cain is for real.

>> i think herman cain may or may not be for real. what is for real and you see it time and again is there seems to be a cap on the net from a support and republican primary voter every time he looks like he's about to close the deal thursday to minute, wait a minute, we're not quite ready. so herman cain is the sixth iteration of the alternative to that romney is seems to be a bracket going on where you have somebody who is occupying that space and they are either in the later right with that romney. but that changes and i expect that before too long it's going to change again. interesting thing in my opinion will be to see whether rick perry can get back up off the mat. he said in a play three weeks and i'm not sure his speech in new hampshire helps them very much. >> that's an interesting point and i think what you say because we started out this year but first it was michele bachmann who looked like she would be the alternative to romney and she

went up and then she went down. and then rick perry comes along and he goes straight up and makes a couple of stumbles in the debates. he goes down. the interesting thing about herman cain to me as made several stumbles that would be the most charitable way to describe it, but he still is that fair. and it suggests to me that whatever else you want to say about it, he is connecting with a certain segment of the republican party. but how strong is that, charlie? i mean, cannot sustain because they think -- i think that part of it does have to do with that romney. >> well, you know, herman has a lot of stained power. over several weeks while being in the news every day, i tend to think he will have staying power. as steve describes one way of looking at the waist is sort of romney over here and everybody else can eating to see who's going to run against romney.

i don't think that's the right way to look at it. in fact we have nine candidates in different people coming together with the news coverage. you have to look at the state-by-state contest, which is what it is. we were despairingly dispute, but i don't think it's a cap on romney. mitt romney's unfavorable rating in the states is very low. so he has god in iowa -- i haven't looked at the latest numbers, but is probably something like 60 favorable and 20 unfavorable among republicans, which means choices narrowed. there's not that many. in new hampshire, his rocksolid. all of these other candidates have risen up in the national polls and nobody has ever been within 20 points of mitt romney in new hampshire. [inaudible] >> that's right. he is popular there. it would take a miracle to

defeat romney in new hampshire, which does put them in the finals. maybe somebody else wins iowa and make us into the finals, but i do not think that romney has high negatives to a two person contest. >> steve, let's go back and talk about rick perry. this is another extraordinary story. what happened to him? >> that's a really good question. i don't know the there and i am not sure -- i mean, he's actually very fortunate that this came thing came along at just the moment people are starting to focus on his speech on friday night. for those of you who haven't seen it, go online and wash it and it's not clear exactly what's going on, but it appears he has perhaps been drinking. i don't know that that is the case, but it certainly appears that way. people wonder if that is the case. and it's not very presidential. and to some, it is just died.

i don't know what was going on with. that evening. i do think that he has got to reach his campaign. he can look at the poll numbers state after state in a stolen from the league. nationally he was close to 40% about six or eight weeks ago to about six or 8% running behind new gingrich and rick santorum someplace. suicide to reset and it's got plenty of money. he's actually pretty good campaigner. if you can avoid the debates and avoid giving speeches on friday night, there's a chance he can get back in this thing. i think herman cain at the end of the day is not going to be the person or challenges that romney for the nomination. >> what about this? have you seen at? i would just describe it. i don't know what perry. i don't go anything about his personal habits, but it was the

strangest -- i have seen some of his speeches. i've never seen anything quite like it. he is jumping around and for want of a better word, certified and silly. what do you think was going on? >> well, i was on vacation last weekend. >> i was in the back when it happened. [laughter] it's odd. i haven't asked anybody on governor perry's campaign about it here to look on his a bad back. maybe with pac-man bithynia too much of. but listen, governor perry has a great record as governor. he's ditched the republican electorate philosophically and he is a good campaigner and he has a lot of money, so he is still a competitor in this race. he agree he has fallen recently. i don't think he conducted face. i think that would be a mistake. these debates are important, said he is a tune up his game a little bit.

listen, he is a serious competitor in the race. >> what was the problem between the bush folks and governor perry? there is obviously no love lost between those camps. i know you are very identified with george bush and worked with both. >> well, i don't think we have enough time because there is a whole history here. [laughter] as often happens, their attentions to develop sometimes the tensions between status of people than between principals and i think that's the case here. but governor perry is a tough campaigner, including the primaries. there is a primary care for governor last year. senator kay bailey hutchison who is beloved by a lot of people in the republican party in texas ran against perry. that caused people to pick up size and was a pretty bitter race, so there is lingering problems over that. but i think president bush and governor perry would does say

they get along fine. they just don't hang out together all the time. >> but it is extraordinary. i talked here yesterday i think it was that had herman cain actually leading. and taxes. cannot be for real? >> well, it might be. again, the robot to focus on who they are going to vote for until the last week or so of the primary. said they have the option of linking six or seven or eight of the nine people running. again, governor perry has added the primary texas recently, so it's not unanimously popular, but he is popular and is running a good race. he certainly would win the republican primary for president in texas. >> how do you think -- i'll discuss those of you here. how do you think it and it it comes down? what is the white house saying? do you think in the end romney gets the nomination?

>> you can tell who the white house is going after. they're not spending a lot of time on herman cain or even non-rick perry. they are going full-time soccer mitt romney. they think is going to be the nominee. i think is going to be the nominee and love in the process of watching it. but at the end of the night he's going to be a very formidable candidate. >> i think that's right. he has always been the front runner is other people rose and fell in the polls and he's got a traffic organization and its got that bastian in new hampshire that i mentioned that we have that cash to vote yet and still competitive, but he is the front runner. the democratic national committee is running against romney, state specific ads in the target states. i saw one in arizona this weekend. so if we did something like that, there'd be a lot of news

about as meddling in the other guy's primary, but i guess it is okay when we do it. >> it seems to me that right now there is a deep divide not just in the country, but a deep divide within the republican party where you have kind of the establishment of republicans over here and it seems to me that romney is slowly building some strength in that wing of the party. but she got this other site over here headed up by the team party folks and they seem to be the ones with the most questions about romney. do you think we could see something in the ad where if romney does get the nomination that those folks on the right over there in the republican party would just break away and say we can't do it and may be performed some sort of a third party headed by someone like ron paul or someone like that. >> that's actually not going to happen. for one thing, if someone wasn't trying to get on the ballot in

one state they should have started ready and to be today. but there is some differences on some issues among republicans, but they are united on one thing. they all want to defeat president obama. and you've been out talking to people out in the trenches. i matter what they have to say about her respect, there was finished the conversation with we must beat obama. if they think governor romney can do that, they will be behind him. i think would have united party whoever the nominee is. >> you think republicans will be excited about that romney? right now they don't seem to be. >> they will get excited. if you think about these things, primary contacts and up with whoever emerges as the nominee is stronger as a result of the process. that was true of john kerry in the last campaign. president obama was a lot stronger candidate having gone through the one-time test that

hillary clinton than he would've been without a contest. whoever our nominee is will look stronger next april or than they do now. i actually think we are favored to win the election. there will be a close election. president obama is a terrific. he is personally popular and likable. so i expect this to be a close race. but unless there is some dramatic turn in the economy, i think we are going to win the election. the mac last week talked about republicans. this talk about obviously i guess most people think that barack obama is going to be the nominee. what is he got to do here? and what kind of shape is the end right now? i think he has problems. ..