mandate on payments to federal contractors followed later by a procedural vote on the measure. live gavel-to-gavel coverage here on c-span2. >> also today british prime minister david cameron speaks to members of the house of commons about last week's g20 summit in front. leaders of the g20 countries pledged to increase the international monetary fund in an effort to help struggling euro zone countries such as greece and italy. following his remarks, prime minister cameron will answer questions from members of parliament. you can watch that live at 10:30 a.m. ian over on c-span. >> so this is okay, the formal part of filling out the declaration of candidacy which has been completed except for the -- >> all it needs is a signature on there. i can do that. >> and this is the filing fee of

$1,000. >> that's right. you got that. >> and then this is some last -- >> all right. see if we -- >> you might want to leave. we do this every four years. >> well, you've got a great secretary of state. you've dope a great job, and you will for the next 40 or 50 years, bill. we appreciate your leadership. you're going to insure that new hampshire remains first in the nation. it's a responsibility and honor which new hampshire richly deserves, and i'm happy to be part of this process putting my name on this paper hoping this time it'll take -- [laughter] and hopefully i'll be able to become the nominee of the party. >> the new hampshire primary is now set for january 10th, and you can follow campaign 2012 online with the c-span video library. click on the campaign 2012 tab to access the candidates and events all searchable, shareable and free. the c-span video library.

it's washington your way. >> next, proposed changes to the secondary housing mortgage market. federal housing finance agency acting director edward demarco recently testified before a house subcommittee that's examining legislation to replace the market that's now primarily dominated by fannie may and freddie mac. both groups have been under control of the government since 2008 after the collapse of the housing market. this first panel of the hearing runs about an hour and 50 minutes. >> and good morning, everyone, and call to order the subcommittee of capital markets and gses, specifically on the private mortgage market investment act is called to order. and we welcome everyone to this hearing today. and to begin, i will, we will begin with opening statements, and i will yield myself three minutes to do so. as i say, today the subcommittee is holding a hearing on the

private mortgage market investment act, a product of many discussions that we've had both formally like the subcommittee's recent hearing up in new york city and informal hi about the steps that need to be taken to bring about private capital markets back to our nation's secondary mortgage market. currently, the federal government is guaranteeing or insuring over 90% of the u.s. mortgage market, and everyone on both sides of the aisle and all market participants claim that they genuinely support the efforts to bring additional private capital back to the secondary mortgage market. so there are two things that must be done. one, we must begin to roll back some of the government's involvement in the housing market. the subcommittee has already passed 14 bills so far this year with the intent of, what? reducing the government's foot print and setting the course for the abolishment of fannie and freddie. this is a key and vital part of getting private capital going again because as long as the cheaper government option is available, that will be the route that is chosen.

secondly, we must take actions to facilitate investor interest in this secondary market by facilitating continued standardization and uniformity within the market and providing legal certainty through a clear rule of law. if you do that, there will be robust investor participation in the housing market without exposing the american taxpayer to trillion dollars of additional risk. so the legislation we're discussing today essentially sets up a new qualified securitization market. the fhfa is tasked with establishing a number of categories or mortgages using traditional underwriting standards that have different levels associated with each category. also the fhfa is responsible for creating standardized securitization agreement for this marketplace. these securitization agreement will do what? they'll standardize the servicing rangements of a loan, process the loan will go through a modified warranty and allow the investor the ability to put back in quality loans.

for securities that meet this specific underwriting guidelines for category and contain the standard agreements, then those securities will be eligible for exemption from sec registration. so this standardization and registration exemption will allow for a futures market as well in these qualified securities. and investors with varying credit risk appetites will then be able to buy these securities that meet these investment needs. next, the legislation also removes one of the biggest regulatory impediments to private capital reemerging, and it does so by striking risk retention provisions from the dodd-frank act. while i agree that risk retention has benefits, and we've talked about that, the way it's currently being implemented will create a multitude of negative unintended consequences in the marketplace. for one i'm not sure, really, when you think about it what good the risk retention rule that we have right now will do if we exempt fannie and freddie and ginny and loans with down

payment of 5% or more. that sounds like just about every loan that is made out there. also fannie and freddie had risk retention previously, and we see where that got us. so i believe that a better form of risk retention is an improved standardized reps and warrants system that includes a stuff that insures investors' claims will be honored at the end of the day. so the legislation also provides a much-needed fix to the qm, the qualified mortgage definition created by dodd-frank. we insure that loans that meet this test are able to qualify for a true safe harbor instead of remaining summit to liability, and to bring private investment back to our mortgage market, it's essential that the rule of law is clear, specific and upheld. investor rights and contracts must be honored, so by facilitating the adjudication of disagreements between issuers, clarifying rules around the lien

holder's rights and by preventing forced loan modifications that would negatively impact investors, investors will finally have the certainty they need to get back into the market. finally, in regards or to transparency and disclosure, investors should be empowered, if you will, and enabled to do their own analysis of the assets underlying the securities that they're investing in. so by disclosing more detailed loan level data while at the same time protecting privacy of the borrowers and by allowing more time for the investors to study that additional information, investors will be able to conduct more due diligence and lessen their reliance on rating agencies. so that's a capsule, if you will, of what we're doing with the legislation. in regard to the director's testimony that we're about to hear and the ongoing work over at the fhfa, let me just say to you directly i think that you are doing a very good job under very, very difficult circumstances, and i know that

you have been called upon by some more extreme element asking that you allow for americans, basically, to pay for other americans' mortgages, and i appreciate the positions that you've taken because as you sit here and as you stand in your position, you are basically the last wall, if you will, protecting the taxpayers from literally billions and billions and billions of additional losses over these entities. and i thank you for the work that you have done. and with that, i yield back, and i yield to two minutes to mr. miller. >> thank you, mr. chairman. there is a lot to like in mr. garrett's bill, it is very similar to legislation that i have introduced in this congress and in the previous congress as well. h.r. 1783, the foreclosure fraud and homeowner abuse prevention act, and the differences for whatever reason we have not yet

worked across the aisle on this legislation, but i'd certain hi welcome the chance to. it appears that the differences that we have are not deep philosophical differences, they're not, there's no partisan divide. we're trying to do the same thing in a somewhat different way, but it seems to be the practical difference, not, not a philosophical difference. um, i certainly support the idea of standardizing contracts like pooling and servicing agreements, making, making clearer transparent the underlying loan files and making sure that servicing standards are uniform. those are all things that are in the bill that i've introduced. i've certainly welcomed the idea of amending existing laws to make the mortgage securities market function like other asset securities markets. that appears to be the -- we appear to be trying to accomplish the same thing in this respect, but the bill under discussion today would really

just create an entirely mortgage market, a secondary mortgage market from scratch. when there appears to be a career model for doing it and grants great discretionary power to fhfa to fill in the blanks when there is a model that appears to work. any grants and agency that we originally thought would be an oversight agency remarkable powers over an important part of our economy. um, there are other provisions where the intent 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 for servicer owning secondary mortgages or liens where the servicers are servicing liens that are effectively owned by someone else, where the beneficial ownership is with someone else.

this bill prohibits any servicer from holding a second mortgage which does not really -- goes beyond that conflict of interest, um, and it is not clear why it should, why it would not make moreceps simply to make the prohibition which i welcome generally on only where the servicer actually has, does not own the mortgages that they are servicing. um, it goes on. there are other issues where we are trying to get to the same place, we simply are taking different paths. but the paths are not incompatible at all. so i hope there will be the opportunity to work on this issue across party lines. thank you very much. i yield back. >> gentleman yields back, and i'll just say that, absolutely, especially on some of the points that you've raised. this is a draft version of the legislation here, not wed to some of the provisions in here. on that last point, very complicated issue and look forward to -- not only

complicated, but divergent views to how you get to the end of the day, so look forward to working with you. the gentleman from arizona for two minutes. >> thank you, mr. chairman. first, i'd hike to start with a thank you to mr. demarco. you, your staff have in many ways almost been stunningly accessible when we've had technical questions, when we've just wanted to cut through some folklore. there's very few people in the bureaucracy i've found here in washington who will return a phone call that fast and be willing to be that detailed with us. so there's a great appreciation there. be um, as i've shared many times with the chairman and many of the members here, my personal fixation is the proper pricing of risk. because i believe that the failure to properly price risk is actually what's caused many of the cascades that we see around us today. as i'm being told, freddie mac lost another $6 billion last quarter.

you know, we are basically suffering through, you know, sins of the past but sins of not pricing risk. um, the other thing i do want to stand here and make it clear, um, i understand this is a draft bill. there's a lot of things in here i am excited about, there's a lot of things i'm hoping as we hear testimony we'll ferret out and work through the details and the mechanics. but the number of folks who have come to my office, mr. chairman, and talked about the risk retention particularly in asset-backed, you know, credit cards, automobiles, all these other things, and many of those markets actually have held up surprisingly well. maybe we should not be going where we're going. are we going to, ultimately, do more damage to the economy and the ability to finance our pooch in the and with that, mr. chairman, i yield back my time. >> gentleman yields back. mr. peters for two minutes. >> thank you, mr. chairman, for holding this hearing. i think we all agree that the american housing market is

severely depressed which in turn is holding back our entire economy. i believe that there is also a widespread bipartisan appreciation for the fact that the existing gse system is a failure. allowing fannie and freddie to pass on massive profits to their shareholders and huge bonuses to their executives and employees while sticking taxpayers with losses was a huge mistake, and it should never be repeated. however, we need to make sure that we are moving toward with caution -- forward with caution. chairman garrett's proposed legislation is a helpful position the ongoing debate. i think the bill attempts to replicate some of the thing that is the existing gses do right. it'll provide transparency and standardization, it'll make it easier for investors to have dvd in the market for private label secures. however, i'm concerned that chairman garrett's bill does not do enough to insure that 30-year fixed rate mortgages are

affordable to the middle class. we should not abandon a system that has for decades made the american dream of home ownership a reality for millions of middle class americans just because irresponsible lending exploited a weaknd. in fact, i think we should work to eliminate that weaknd while strengthening the system. representative campbell and i have introduced legislation that would retain a limited role for government in the securitization markets to insure that we would continue to have deep liquid secondary markets. my colleagues have also introduced bipartisan legislation on this topic, and i would hope that as the subcommittee continues to debate these important issues, that those bills would also be given a full and thorough debate. mr. chairman, i think it's very important that these bills come before the committee and are subject to a hearing, and i look forward to you scheduling such a hearing in the near future. as a society, we value home ownership as a pathway to a better life, therefore, it is appropriate that our country

create opportunities so that we can extend the american dream beyond the wealthiest americans and insure that owning a home remains affordable for the middle class, and i hope that we're able to accomplish that with this going forward. i yield back the balance of my time. >> gentleman yields back. thank you very much. ms. biggert is recognized for two minutes. >> thank you, mr. chairman, and thank you for holding today' hearing on your proposal, a discussion draft entitled "the private mortgage market investment act." in march treasury secretary geithner testified before our committee and said, and i quote, the administration and congress have a responsibility to look forward, reconsider the role government has played in the past and work together to build a stronger and more balanced system of housing finance, end quote. i agree. today's draft is part of this committee's deliberative dialogue about how to stabilize the housing market, reduce taxpayers' liabilities and facilitate a reentry of private

sector capital for single-family and multifamily housing. we've learned that for private capital to assume an increased role in housing financial, investors need regulatory certainty, relief and common sense. what they don't need is rushed and unworkable rules like the unfair competition from federal program like fannie may, freddie mac and fha. i look forward to today's discussion and yield back the balance of my time. >> oh, gentleman is recognized for six minutes. >> thank you, mr. chairman. i would note the ranking member is on -- >> gentleman is iraq niced for, excuse me, five minutes, the remainder of the time. >> yeah. if gentle woman from california arrives, i will yield her part of that time. she may have been delayed. but i thank you. um, i appreciated, mr. chairman, you said to the gentleman from north carolina, this was a draft

bill. the reason i say that, and i would yield some time for an answer, we have been informed that a markup on the subject of securitization was scheduled for november 15th. but i would think consistent with your saying this is a draft bill that that would not be for this bill. i would yield, if you would. is there an intention to markup this bill on the 15th? i would think that was probably not the case, but i wanted to clear up the confusion. >> no. today is, um, we're focused on this, on this bill. um, my comments with regard to the draft is just that what we're talking about here. >> no. my question is, there was a markup scheduled by the committee for the 15th, i believe, in subcommittee on securitization. my question is, is this, is this legislation the subject of that markup? >> i've got ya. so i don't have a date certain on any markups, would that i could that i do that, i would. [laughter] >> i had a more -- so that 15th

date is not a markup date for this bill? >> i have not a definite markup date for this bill from the committee chairman -- >> all right. well, i appreciate that. then that clears it up because we had been told there was a markup on the 15th, the securitization bill, an assumption it might be this bill, but it take it from that now -- >> yeah. i have not gotten -- i put requests in to move things along, not requestses, but -- >> i appreciate it, but the fact you say it was a draft bill, and i would also say this is a very important be topic, and i appreciate the tone so far, and i think we have some very important issues to grapple with, and i appreciate the non-dogmatic tone of some of the testimony, people have recognized there are questions here. i think, mr. chairman, my recommendation would be we probably would want at least another hearing on this. i notice, you know, we have one group of witnesses, and you don't want to get too many witnesses and wore the hell out of -- bore the hell out of each other --

[laughter] we don't have any direct lenders here, and i would ask unanimous concept to put into the record at this point a letter from the national association of home builders expressing some doubts about this. nahb looks forward to working with the subcommittee but remains concerned that the effort currently underway would remove sport of the nation's mortgage market. and it says while nahb sports the objective of the draft bill, we look forward to contributing thoughtful recommendations to unanswered provisions. we remain concerned about dishasn'ting all government backing. i would assume we would want to hear from some of the direct lenders as well as other groups that have an interest, and i would ask is that this be put into the record. >> without objection. >> and then i would also, i have some questions. i would say my major substantive concern here is the repeal of securitization. i think risk retech.

i think the ability to make loans and not stand behind them was a problem, and i think there is -- the proposal, i know, was to replace risk retention as an assurance here in effect with a fairly complicated set of regulations that would come from the fhfa classifying different mortgages. my own view was that we would be better off with risk retention because that makes one government policy and then leaves it to the market, leaves it to the lender to decide. i think we have a fairly elaborate set of rules here. i notice many mr. wallace's testimony he had some questions about the specific restrictions on who are put on who can do this and that. frankly, it seems to me the solution that's in the bill as an alternative to risk retention is access my elaborate and relies on the decision of regulators and the judgment of regulators and not enough on a market center. but i think risk retention does that. it does can impose the basic

retention, but after that it's entirely up to the market, and that's one i would hope we would pursue. and the final question i have, mr. chairman, is where we stand in terms of housing finance legislation in general. we have. >> 14 bills, i believe, that have been approved by subcommittee. in april the majority criticized us for delaying subcommittee deliberation by one day. we have still not gotten to full committee, so i guess aisle accept blame for one day's delay and the majority takes blame for about seven months' delay because i would -- and i think other people are interested. we had the hensarling bill that was offered to financial reform last year where there was criticism for not being included. that bill is off in limbo somewhere. it was reinto deuced and has never been mentioned. so i think there's a question this is to replace the current gses, but i think there is interest in what the plans are for the majority to deal with the hensarling bill that abolishes fannie and freddie and

the 14 bills and maybe more to come that make changes to fannie and freddie, and i think that would be helpful if that, at some point, could be claire tide. >> gentleman yields? mr. dole is recognized for two minutes. >> thank you, mr. chairman. right now through the gse the taxpayers are effectively on the hook for over $5 trillion in total mortgage debt, and the gses are also responsible for nearly all new mortgages originating in this country since the financial crisis. and while taxpayers remain exposed to enormous and increasingly potential liability in our current mortgage financing system, our housing market remains severely challenged. this situation is plainly unsustainable for both the taxpayers and the housing market apartments. instead of a market dominated by taxpayer guarantees, we need new and creative solutions that create conditions for the private sector's return to a mortgage financing market

without taxpayer guarantees. to create those private sector conditions, we must have a legal framework that establishes and enforces uniform standards, transparency and legal certainty for the private sector lenders and investors. and i think chairman garrett's discussion draft which we're discussing today goes a long ways toward creating those private sector conditions. so i want to thank the chairman for his work and his leadership on this important issue, and i certainly look forward to hearing from our witnesses today. i yield back. >> um, we have just a minute and a half left on our side, i'll just claim a minute of that and, um, just to recoup where we are. so from one sense, i guess, some would suggest that we're moving too quickly, and some other perspectives some would argue that we're moving too slowly. i guess in comparison to the way that, um, dodd-frank moved which moved through the committee

process, actually, without even many or at all subcommittee hearings and not through regular order, i guess we're moving at the appropriate speed because we are doing this through a subcommittee process, and we're doing it through hearings, what have you. comparatively, others say we're moving too quickly. well, we've had so far 17 hearings so far on housing financial, and the ranking member lists the number of organizations and groups and trade associations that would probably like to chime in on some of this legislation. well, by and large each and every one of those have been able to be at the table where mr. demarco is right now and have had the opportunity during the course of those 17 hearings, um, to answer the questions from either side of the aisle on, at any particular facet of housing finance. also the question has been raised with regard to the other legislation that has been out there. again, we've had 17 hearings from those piece of legislation and others, and the general topics of those to be discussed and questions raised to the

members of the panel, and i would suggest also that today if anyone has questions on any other piece of legislation that mr. demarco 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 -- >> [inaudible] >> our first witness, our first panel, mr. demarco, and, again, i thank you very much for your work and your testimony today. >> very good. thank you, chairman garrett. >> make sure it's on. >> there we go. sorry about that. members of the subcommittee, thank you for having me here this morning. i'm pleased that the subcommittee is beginning the serious work of considering housing finance reform options which will lead to the ultimate resolution of the enterprises, fannie mae and freddie mac. my written statement provides a brief review of some of fhfa's work since i last appeared

before you. i'll focus now on the need for legislation. placing the enterprises into conservatorship was designed to maintain market stability while providing lawmakers time to consider the appropriate course for housing finance reform and the transition from the current enterprise structure. 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 a housing financial reform -- finance reform solution, but we must move forward on this process. as the conservatorships lengthen, fhfa must continually make decisions regarding investments in business platforms and 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 that there will always be some portion of the mortgage market that will be

assisted by government programs. in the future design of our housing finance system, careful consideration should be given to targeting subsidies to specific groups that lawmakers determine warrant that benefit. for example, the explicit government guarantees that the federal housing administration and veterans' administration provide reflect policymakers' judgment as to the public benefits from targeting certain eligible borrowers with those programs. acknowledging that there will be a role for government, the next question is what type of structure is necessary to replace the activities that are currently undertaken by the enterprises. there seems to be relatively broad agreement that the government-sponsored model of the past where private sector companies were provided certain benefits and charged with achieving certain public policy goals did not work. that model relied on investors providing funding for housing at

preferential rates based on a perception of government support. this perception proved true, and the cost to the american taxpayers is now more than $170 billion. in place of this system, the chairman's discussion draft would establish a functioning mortgage-backed security market by replacing some of the standard setting that the enterprises provide today with a regulatory regime that sets those standards. this model would not rely on a government guarantee to attract funding to the mortgage market, but rather would look to standardization and rules for enforcing contracts to provide a degree of certainty to investors. the process of undertaking housing finance reform is difficult. the discussion draft is a thoughtful approach to a framework that does not rely on a 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, i'd like to thank you for helping to move the housing finance reform discussion forward by offering your discussion draft and by holding this hearing. i believe the private capital markets can and should reclaim a prominent position in providing housing finance, and and your draft proposal broadens the discussion of how that might be done. ..

>> there is widespread disagreement from various factions with regard to what to do in general with regard to gses. the gse reform. but i think there's pretty broad acceptance to the idea that we don't want to have a system, one of the terms you mentioned, with implicit guarantee going forward. so look at draft legislation, basic question, is there anything that you see in which a before you that would create any implicit guarantee in this legislation? >> no, mr. chairman. based on the review i've been under it -- able to undertake today i don't see how one could interpret or perceive and five guarantee as a subtle taxpayer and a general framework that is outlined here. i believe it is pretty clear this is putting investors on the hook for assessing enduring mortgage credit. >> that segues into the next couple of questions. so what we try to do here is

create a system where they fhfa is able to do what? go out and set up uniformity, homogeneity and is a decision side and the underwriting side, right? let's stop right there already and ask you, if this were to occur, how do you see that playing out, if you will and how do you see those two aspects at the end of day and asked to the point of the investors, what would you be doing to attract either broad sector of investors interest in this, or narrow? >> i think we would certainly be striving to have a deep efficient and liquid mortgage market. and so we would want to attract a broad set of investors to that. i think that in the framework that your bill proposes that a key responsibility to fhfa would be in defining both securitization structure and the

classification of mortgages, that it be done in a way that allows for the market to reach that depth of liquidity and clarity about credit risk that would be necessary, appropriate to get efficient pricing of that 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 work is so that investors could have confidence, both in the forward market that would be created, and then in the execution, the secondary market that investors could understand the risk characteristics of particular groups of mortgages. >> as a sidenote. what would be the benefit of creating that liquidity in the forward market? >> so, it allows investors to be able to make commitments for

investing in mortgages before the polls themselves are actually structured. but in order for investors to do that there needs to be pretty good clarity and certainty regarding the characteristics of the mortgages that are being committed to be delivered into the marketplace. >> but even further than that, okay, that's from the investor -- >> it allows the borrowers to commit and a lender to commit to a borrower, a mortgage rate that can be locked in during the process of completing the transaction. >> speaking hypothetically, if this were in place today, and i know it is not today, but the depth of the pools as far as what would be offered, how would you see that growing over time? i mean, we know what happened with regard to 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 it? >> well, you know, part of what is to be determined really in a marketplace in this framework is how these securities would be broken up and offered to investors that were looking for particular characteristics. but look, we've got almost $11 trillion in single-family mortgage market. you get several groups of classification i think it would be a great deal of depth and liquidity that would emerge in the marketplace, given the size of the overall market. >> an interesting point. some people raise questions about this as we went through. i only have a couple seconds left to the point on that is unique that depth and you need that liquidity for the trade to occur in order for the rich to be there, as far as the 30 year fixed and the rest, craig? >> that's right. >> in the statute we could have said this will be one or it's going to be 22 of these

categories but you would at this point in time that's not a statutory provision that you want to do, right? >> i believe that's right. i'd think that's best sort of determined by getting feedback from investors and wholesome stakeholders so we can get the most efficient as possible. >> i appreciate your testimony. >> thank you, mr. chairman. first i will acknowledge you and i very different definitions of the regular order. you mentioned subcommittee. i will say if you look at the procedures which got to the financial reform bill, there were more hearings, markups, amendments, recorded those, than any other bill i can remember. but i don't believe its regular order to have subcommittee consideration and then have six months go by and no committee. regular order of sims a progression. we have 14 bills some of which were marked up in subcommittee and there has been no sign that any of them will go to the full committee.

this bill is premised on the situation when there is no more fannie and freddie but this committee has the power to deal with it. hasn't moved on that regard. i don't think, as i said, subcommittee alone is not regular order. that assumes progression but we're getting late in the year and i think the uncertainty is not helpful. beyond that i have a couple of questions. i note you said the conversation, the conservatorship is appropriate. that came from this committee in 2007-2008 working with mr. paulson. one of the questions was and the goal of course of the conservatorship was to stop the bleeding to a great extent and to try to preserve some function in housing market without the losses that had preceded it. is that essential work. i know we don't want to keep the conservatorship ad infinitum. you don't want to be sentenced to a lifetime as a conservative, i appreciate that. has that worked out what you say it has been appropriate? >> i believe as. i believe we brought this stability to the marketplace so

that mortgage finances continue to operate fairly effectively during the duration of conservatorship. >> i think you're done will be often try to edit our to do, i give credit to mr. paulson and his committee and work together. and we always try india seems to be able to get the good things to happen and minimize the bad things. it is correct to say we reset? that is, as we look at the losses, and we can't be sure, it's only three years, what is your estimate, what's the situation with the loans that have been made since conservatorship or the purchases? what do you expect the loss rate to be with respect to the pope conservatorship as opposed to the previous one's? >> i believe for both enterprises, it will be profitable. >> i appreciate that, and this committee did that 2007-2008. the next question is you don't want to be the conservator for ever.

but someone will be doing something forever. the director shall for purposes of the section prescribe classification for mortgages having various degrees of credit risk, classification mortgages having no credit risk to classification of mortgages having substantial credit risk with the goals et cetera, and that lists all these things. that's a pretty good job. this bill company -- fhfa in perpetuity and i know you've read the bill, it's a pretty big job for the director. what kind of staff do you think this would require, what kind of a permanent operation would we need to undertake the responsibilities given to the director of the fhfa under this bill? >> i certainly won't say that i have worked through that. the bill is pretty new here. by without fhfa today is approximately 520 employees. we are still growing. but i would expect that we have

quite an examination of workforce in our current structure, because the current structure is focused on an immense undertaking of safety and soundness examinations of fannie and freddie. and this bill would replace that. there wouldn't be that function going forward. so with regard to the size i'm not sure how much it would change. i think we would see a change in the direction and principle elements of work from the safety and soundness examinations to being assessing the mortgage market and establishing standards. >> i think that's relevant. people shouldn't think, after i this package were to go through and we abolish any and freddie and adopted this, that we would see it go away. i must say that my own concern is it is a very specific set of sort of government intervention in the market, in addition to that you would have to establish a variety of things. it would be described mortgage

default. loan documentation, and then you would do the standard for servicing, modification. this is really a very significant government intervention in the mortgage market. i understand we are told it's more efficient or better than risk retention. i think risk retention has a greater simplicity, and i am concerned about the capacity of any federal agency to take on the degree of supervision of the mortgage market on an indefinite basis that this bill calls for. i yield back. >> 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 gses hold right now? and performing paper and prepared paper and actually the number of properties that the whole title ii?

let's start with a because i've always been very curious if there's a number of assets that would help you prime the pump, you know, if they're sold without a guarantee and just getting that pricing model. what would the markets be and what would the market absorb? >> so, in broad strokes the two companies together have in order of magnitude, $5 trillion worth of mortgages, single-family and multifamily, that they either own and finest record on the balance sheet or that they provide guarantees to market investors. the finance portfolio of both companies are declining over time, and there's a minimum required shrinkage of those portfolios that i don't know exactly what are the top of my head. they think is in the order of a little over 700 billion right now, and freddie mac is in the 600 billion range. but those are shrinking over time. there's a change in the characteristic of the finance portfolio. it is nothing less from whole

loans and own mortgage-backed security to being mortgages that have been purchased out of mortgage-backed securities i do for loan modification purposes or because they are delinquent. >> just to make sure, and so let's take that 700 billion, and those are ones where you hold, you know, the total paper? >> so not only to have the credit risk on them but also have a market risk of having to hedge the interest rate risk. and then you asked about reo properties. these are properties that have title ii because property has gone through foreclosure. currently, account for that is a bit less than 200,000 properties that's in the 190,000 or so properties. >> okay. mr. chairman, mr. demarco, has there ever been, and forgive me, i saw an article on this but this is something i didn't

follow up on, requesting pricing saying look, here's our portfolio of performing paper, here's our entire paper, what would you, you know, market? what would you pay for parts of this with guarantee and without a guarantee? >> yes, sir. in september i gave a speech in which i was sort of looking forward to next things on the horizon for us as conservator, things that i think are appropriate both the conservative mandate and preparing, you know, attract more private capital back into the mortgage market to reduce the taxpayers over all exposure. and at the time i talked about two things. the potential for our my expectation that we will continue to see gradually increasing guarantee fees. but the second is an this goes to your question, if we would work on engaging more lost sharing with private capital for the mortgage activity, new mortgage acquisitions fannie and freddie are doing.

that are too broad was outlined in the remarks that could be done. one is to increase the depth, 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 was of mortgages in a fashion in which you may sell a portion of the pool the mortgage investors, and do so without any fannie and freddie, without a tax guarantee and start to get a more true market price for the credit risk. so these are options that we are exploring. >> mr. chairman, transport any of that data coming into you, have you had anyone call you and say hey, we would love to buy a few billion dollars and we will buy without a guarantee and here is what we're willing to pay on the you've? >> with certain invited that with respect to the disposition of our yell and got a lot of public interest.

i believe as we prepare to move and a more formal sense on the risk-sharing we will get, we'll get those kind of offers. i have informally had market participants said just and openness to purchasing that sort of paper. >> down to the last 30 seconds. i am very please with what you've been doing on the reo site. i am one of those who genuinely believe our real estate market does not come back into this country until we get is properties in peoples hands, whether they be investors or first time homebuyers. when you have a couple hundred thousand properties out there, we need to get those back to 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 complex, potential conflicts of holding seconds and then servicing first held by others, owned by, owned by

others. d.c., and i've asked the leading services, although our affiliates, subsidiaries of the biggest banks, what business reason there was for the apparent conflict, or at least that climate of interest that are not identical, which creates potential for conflict. and all i got was they were marketing opportunities that seem to not be a persuasive reason to do you see any reason to have that climate of interest? >> i do, mr. miller. as a general proposition i think one of the lessons to the, taken from the last several years is the difficulty that second liens posed for resolving problems with first liens. and i think the potential conflicts of interest need to be identified and how seconds that

come in after firsts altering with the risk characteristic of the first, all of these things need to be steady and i think should be part of housing finance reform. >> when you begin your question, that had come of that year disagree with me but you were in fact agree with me. you do not see a reason to have servicers of beneficial, of mortgages owned by others holding seconds on those? >> i believe that pose a conflict of interest. there's another way of resolving the conflict by providing clarity and law about what has to be done is another option. but the way things stand now i agree with your. >> do not have the market power grids could you not just by contract require that? i've been frustrated at the enormous market power of fannie and freddie, upholding have the mortgages, legacy mortgages and having almost complete monopoly power with respect to the mortgages, and the unwillingness to use that market power, not

statutory power, not regulatory power but just market power. why had he not required that? >> if the question why have i not required by contract if second liens cannot commit or restrictions on who may make the second liens, rather than put legal counsel on the spot, i'm going to believe that that's not legally within my and he did but i will say, mr. miller, i will go back and we've studied that question. if i'm incorrect in my answer i will report back to your. >> we have discussed the principle modification. i offended you i think a peer-reviewed economic study from the federal reserve board of new york that shows modifications that reduce principle lead to performing loans to reduce losses the mortgage holders. and again, fannie and freddie have been very, very comment 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 maryland, and an essential part of that is that the investors in those mortgages are insisting that bank of america give up the servicing, take out servicing where mortgages go into default to smaller, smaller servicers, higher tech service and they modify principles, the principle, reduce the principle to produce a mortgage that will not go through the hideous losses of foreclosure, but is something that the homeowner can be. have you talked with the folks who seem to have come to a different conclusion about what is in their best interest? >> let me pause for just a second, mr. miller. i wanted to check my recollection was correct. mr. miller, my understanding of

the proposed settlement agreement that you are referring to does not contain a mandate for principal forgiveness in it. it does actually contain some requirements that bank of america and any subsurface or that would result from this would service these loans according to the standards action that we develop it at fhfa in the form of our servicing alliance initiative to promote loan modifications and those sorts of activities. i don't believe the mandate for principal forgiveness -- but it does go to the servicing of the loss mitigation strategy spent the former program does have in the statute i think certainly in the regulation, not just under extenders which would be a good thing we make mortgages to people who can actually pay it back in the future. the other didn't work that well as a business model. but also sets out procedures for when a mortgage goes into default and provides for principal obligation. how you look at how that program has worked and whether that worked? >> i have not looked at thatcome

at the particular program, no, sir. i do understand that chairman spill would have part of what we would establish in terms of standards would, in fact, be lost dedication protocol that would be part of the service and standards that would be developed so market investment certainty about how a servicers was expected to minimize the investors lost in the event of a delinquency. >> i think the witness. ms. biggert is recognized. >> thank you, mr. chairman, and nice to see you here, mr. demarco,. >> thank you. >> question, does fannie mae and freddie mac and fha's dominance of the market, mortgage market, allow for innovation in the private sector collects you know, we've already heard about some of the businesses being shut down and job loss because they can't compete with the taxpayer backed government

programs like fha. so should we continue to allow the government sponsored housing programs to compete and edge out the private sector? >> to the first part with regard to innovation i don't believe the model of having fannie mae and freddie mac in conservatorship is one really conducive to anything new products. in fact, as a concert i said we're not introducing new products. so i think the sort of market framework that would allow for innovation and introduction of new instruments and so forth would better happen outside of the realm we are in today. >> okay. then in the white paper, treasuries option one was to privatize system of housing finance government insurance role, limited to the fha, the usda and department of veterans affairs, assistance for narrowly

targeting groups of borrowers, a lot. and that looks a lot like the plan that republicans have been promoting for a couple of years. and so, what is your view of option one? >> i believe option one, that the treasury department before it is certainly a credible option. i believe chairman garrett discussion draft is one of the first next developments, if you will, refinements of treasuries option one in that it provides income a basic framework for treasuries option one to be implemented legislatively. >> okay. do you believe that if fhfa create 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 a bill that should get that sort of assurance to investors. >> i think that's always something we are really working to make sure that we don't fall into may be a trap that again. and those are my questions. i would yield back. >> gentlelady yield's back. >> i'm just looking pastor 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 conservative or of fannie mae and freddie mac? >> well, i perceive this legislation as acts of being in tandem with other legislation that has already been pending

before the subcommittee and the full committee. i don't believe this is intended to be undertaken with an ongoing and definite conservatorship of fannie and freddie. i believe this is trying to be a replacement. how that transition works i believe remains to be worked out. >> if that is so, how does fhfa have the capacity how did have the expertise in house to implement such a program that will go into effect no later than six months from the enactment? >> interestingly, congressman, there's a number of things that we would be required to do in this legislation that, in fact, we are already doing it servicing, the servicing climate initiative we have undertaken as conservator, gaining 40, to establish more robust and consistent and effective mortgage servicing standards is something we're already well along with and is already, the implementation of it has begun. that would be a key component of what would go into a

standard-setting that the chairman's discussion draft would have. the second thing is i've already made clear that as conservator of fannie and freddie i'm working towards changing their security nation process so that mortgage market investors would have detailed low-level data on the loans underlying the pool. this is also a provision that is part of the chairman to do. this is something we are working towards already. so i believe there is 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 are doing in our current role is well with was proposed in the new role. >> so, what does the secondary mortgage market look like with no government guaranteed on the long-term fixed rate debt? >> so, for long-term fixed-rate mortgages i believe it looks like one that is pricing, pricing the risk of 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 associate with the long-term fixed-rate asset. the concept behind the grouping of the mortgages is to give greater homogeneity in the securitization process so that investors would understand, you know, class, you know, this is a class type of pool and investors know what the key credit characteristics differences are between those different pools. we would see that price accordingly in the marketplace. and listen to the dialogue that you had with my friend and colleague, congressman miller, regarding the principle modification, and your response was principal 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 where the person buys a house for 300,000, and then it drops in market value to 200,000, they still have an indent in his for some part of 300,000. we are asking consideration of those modifications, and i need you to get me some clarification because i'm not clear on your response to congressman the. >> i will apologize to congressman miller if i misunderstood his question and didn't get an appropriate answer, but to your question, congressman, about principal forgiveness. here's how i have looked at this as the conservator of fannie mae and freddie mac. i believe that we have an obligation to minimize taxpayer losses from the book of business that they have. i also believe we have an obligation it's in fact in

statute to be minimizing or to be maximizing our efforts to avoid foreclosures, recognizing the net present diet of the taxpayer. that's a statutory mandate that we have. so what we're doing in the loss mitigation space with fannie and freddie is that there's a whole protocol that is in place at each company that the mortgages servicer is supposed to execute on their behalf. what this protocol is about is when a bar workers delinquent on their mortgage there's supposed the immediate outreach to the borrower to find out what the reason for the missed payment is. if the borrower is going to be incapable of continuing to make the full mortgage payment that they are obligated to, the first alternative we turn to get a loan modification appropriate. the borrower is committed to continue to make a payment they can afford and committed to staying in house. if so, that's the outcome we all want to see and that is our first priority. the way we go about that, the

first step is, in fact, following the precepts of the treasury department's home affordable modification program, or ham. hamp program is designed to do is to combine what is an affordable payment and it's been defined since the beginning as a payment that is equal to 31% bobbers monthly income but the notion is 31% of income would go to pay the mortgage. so though be a series of modifications made to the mortgage to get the borrower into the payment of that size. we are, in fact, doing that in fannie mae and freddie mac together have completed just under one been completed loan modifications. if they can't mod doesn't fit the borrower, they don't qualify meaning fannie and freddie both have proprietary mods that may go, they address the particular situation of the borrower. so that's what we are doing. but principal forgiveness in that context, we have found we can get the borrower that payment without doing principal forgiveness and would better protect the taxpayer by

preserving an upside potential that the borrower is successful in the modification. >> i thank the gentleman. the gentleman from california is recognized for five minutes. >> thank you, mr. chairman and mr. demarco. as was discussed earlier, there's general agreement that the conservatorship was the right thing to do in 2008. there's also general agreement that conservatorship in the current system is not a permanent solution and that we need to replace it with something. i think the question viewers here today is whether or not this bill is the sole and sufficient replacement for fannie and freddie as opposed to some of the other alternatives that are offered by other members of this committee, including myself. so my first question to you would be, if any and freddie were to disappear tomorrow, and this bill were the sole replacement for that, is that sufficient, is that sufficient? could this field and he is serve

the entire marketplace? >> could not do it tomorrow. >> why not? >> because this would take some time for standards to be developed and are depleted in order to attract private capital and to build up the infrastructure to do the securitization that is proposed in this bill. private capital will want to know what these standards are, how the securitization of require, what the secret station requirements are going to be, and then make the necessary and appropriate estimates in infrastructure and in risk management to be able to execute it. can over time that develop and implement a? if the market has certainty that these are the rules of the road and that these rules of the road are not going to be changed every three months, i believe that 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 the fha and federal home loan banks to the

volume through them if this were, if any every workout and this was the sole solution? >> fha even with fannie and freddie mac's operating in conservatorship, there's an unprecedented volume today relative to any kind of recent history. and they believe, you know, for lawmakers, you all consider the housing finance system very broadly, i would expect consideration of fha's role here, whether it expands, contracts, gets redefined, all part of what you would figure out. >> if you left it alone, huge portion of the market would probably go through fha. if any of the disappeared and he just had this, wouldn't you suspect? >> i wouldn't necessary draw that conclusion, no. >> if there were no changes, now they've come to lend a first resort for many people, particularly anybody with less than 20% down. >> well, i mean there's an awful lot of credit worthy borrowers out there that would have defined market execution as an

attractive price without having to go through fha. >> okay. this bill has actually has a lot of government restriction and control over the marketplace. and want the things that require fhfa to do is to promulgate underwriting standards. could this not be construed as a stamp of approval by fhfa and, therefore, had to open to litigation or to legal liability from investors were those portfolios to go bad in the future? >> 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 it looks to me as though the bill is taking great pains to make clear that, in fact, that's not permissible and is not intended. >> that it is not permissible -- because you're essentially --

under this bill, as i see, you're essentially filling the role of the bond rating agenci agencies. >> no circuit i believe what we're doing is we are setting definitions and rules in terms of mortgages with this group of characteristics will be classified in this class. rules with a different set of credit risk characteristics will be given this classic title. and so mortgage investors will know when and often is made for this class, is homogeneity about the risk characteristics. been for this different class, there's homogeneity about the risk characteristics. >> can i study there because my time that i want to get to this last question. you're not just the drug of fhfa but you are a noted economist. it's a 30 year fixed rate mortgage were to vanish, no government guarantee because private market doesn't want to accept the duration risk and interest rate risk and center in addition to the credit risk, if there were no 30 year fixed-rate mortgages what effect would that

have on housing prices? a lot of what we're talking but here's trying to keep the housing market falls further, the economy will fall and a lot of jobs will disappear. that's what we don't want to have happen. >> well, that is a predicate to the question i wouldn't necessarily agree with. that the implication that this bill would cause that to happen. >> my question for you -- >> i understand that the question is suddenly outlawed 30 year fixed-rate mortgages, would there be an effect on house prices. well, there could be but there also could be an effect on mortgage interest rates which are also affecting house prices. and you know, in some ways it could, you know, there's trade-offs there. there's been a lot of bars that don't use the third year fixed-rate mortgages, after some bars, a 30 year fixed-rate mortgage is probably not the optimal insurance for them.

>> thank the gentleman. the generally from california is recognized for five minutes. >> thank you, mr. chairman. and let me thank mr. demarco, for his presence here today, and you for inviting him to come. and testified on your draft legislation. title iii of the discussion draft presents federal departments or agencies from engaging in force principle right down. i'm not clear looking at the whether or not you were talking about a ban on principal write-downs as it applies to new loans, or just to loans, however. this is respect to any tight mortgage loan. been mr. demarco, you've said given the calculations of fhfa, principal write-downs of fannie mae and freddie mac, 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 principal write-downs is appropriate, or should the director of fhfa have the flexibility to pursue principle right down to future data, demonstrate that it is appropriate? the reason i ask this question is that, and has been so stated by my colleagues, one of my colleagues, that many of us are very, very sympathetic to the homeowners who are underwater. and we really do believe principal write-downs make good sense. and we believe that principal write-downs will keep many of our homeowners in their homes, but for principal write-downs they will end up perhaps foreclosed on. so, my question began is what i already kind of stated, should this be in law, should we ban or

prohibit principal write-downs and laws? would you like to have flexibility in dealing with this issue? >> 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 him and i believe it is equally legitimate for the congress of the united states to pass a law that is not an appropriate use of taxpayer money. i pretty believe that is at this point a question for lawmakers. i made clear to my current responsibly as conservator with the source of money i have today, i've made clear my view of why i am not doing it. but i believe it is really up to lawmakers to make that sort of determination because we're talking about the use of taxpayer funds. i believe that rightfully fits as a determination of lawmakers.

>> all right. let me to segue to another issue that i've talked to you about, but i guess i'm interested in the timing now. i am, and i think other members, are very pleased about the requester ideas that you put out relative to disposal of the 300,000 reos that you have on the books. could you tell us something about the timing of that? how fast is this going to move? win can we see request for proposals go out? >> so, so thank you for that. than the subcommittee is aware that we recently made an important set of announcements regarding their program. i will say that program has been focused on that as a predicate now that that work is just about complete, moving to this our real question in finalizing our review of the 4000 submissions is our next priority. i would 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 gentleman from florida. >> thank you, mr. chairman. mr. demarco, first i just want to say i applaud your written testimony, page three, you're going back and attempting to recover some compensatory damages. question is hopeful yes or no, on any of the federal law enforcement agencies working with you to recover some punitive damages? >> i can only speak to the actions that i've taken, mr. posey, and so, i mean, we have done as was undertaken the lawsuits that are public complaints. again, i'm not in a position to speak for law enforcement agencies or the government. >> so you're not aware that they are then?

>> i can't speak for what law enforcement is doing, mr. posey. >> not ask you to speak for what they're doing but i'm asking you if you're aware that working with you, behind you, beside you, if you have an interest in a? >> from time to time we are certainly approached by law enforcement about various things that they are reviewing. we always provide our full cooperation to law enforcement. so certainly, you know, as a general matter are there issues out there that law enforcement is pursuing in the mortgage area, the answer is yes and we're providing our support to them when asked. >> okay. do you notify law enforcement when you discover fraud, as you attempt to recover damages? >> would have a mortgage fraud reporting machine that fannie mae and freddie mac have. there's a very great deal of reporting that is done, and they will oftentimes come back to us and ask for additional

information or guidance and we will provide a. >> i think the last time we heard, -- 100 city two main dollars. can you give us an updated number? >> not off the top of my head. i would be happy to provide in writing to i suspect given the pace of this is not changed much since my last appearance. >> i understand century or that a court has ordered at least one of the executive to replace him 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 taxpayer to stopping the defense these of those croaks? >> mr. posey, i'm sorry, i'm not aware of the particular issue or circumstance that he just described. so i would have to find out

exactly what, what really was made that you are referring to and then have to assess that. i'm not aware that you i've not had much talk about that. >> i'm going to make a couple statements, and ask you to tell me what's wrong with them. for about 60 years we have had fha loans, 3% down payment loans, which require an extra half percent mortgage interest the the extra insurance premium has paid enough to its accumulation for the losses that had been interested alone fix the base of it has been a pretty good sound system. va, which has no down payment, only has a loss ratio of about 2.5%, which is incredible because the great job they do it under running and working with their clients. so i think that is one argument if we're not reinventing the wheel, i'll ask you, in a minute. number two, the bubble wasn't

caused by mortgage lending or low down payment and i wager that at least three cores of the people in this room, if they follow the national trend, bought their home at least their first home on a 3% down fha loan. and didn't default as most people didn't. most of the bubble in the crisis was caused by fraud, enacted when the borrowers and lenders. and if we are sure to eliminate that fraud, the system should work with that additional regulation, red tape, and so forth. can you see anything patently wrong with the statements? >> i apologize. certainly mortgage fraud has been an important element of the debacle of the last several years, but i, i wouldn't say

that borrowers generally, you sit fha, fha has a very small book of business during this peak periods. but i believe highly leveraged acquisitions of houses with 0% down or close to 0% down, in fact was very much a computing factor to the housing bubble and to the losses that taxpayers have absorbed. i would go further to your point about fha and va, say that these are certainly credible explicitly government guaranteed programs with targeted populations of eligible barbers. and i believe, i fully expect that where ever we end up in housing finance that we will continue to have a robust fha and va program. one of the decisions of the lawmakers, in a post-fannie mae-freddie mac world, whether this consideration to be given in terms of default anyway, the

program or eligibility of fha or va. >> i don't want to cut you off but i'm running out of time here. >> actually you're over your time. spink and i just one real quick follow-up? thank you, mr. chairman. >> if their -- >> it's been my impression that congress pushed fannie and freddie to make many of the loans that we now regret it and i hold congress accountable for the. you think that is a fair assessment? >> i certain think that congress in establishing, establish certain expectations that drove fannie and freddie, but i will not relieve executives of those companies for making very poor and imprudent business decisions prior to conservatorship. >> thank you. thank you, mr. chairman. >> the gentleman now yields back? the gentleman from california. >> we have recently seen some

bonuses at fannie and freddie. i wonder if every comment on that. >> yes, sir. i will say several things about the recent news. the first is that the compensation programs that are being reported about are the same compensation programs that have been in place since 2009 at the same levels that i have extensively testified before congress about. and i will say that, that as a number of executives have turned over at the companies we seek, in every incidence to be bring in new executive at lower compensation than their predecessors. and, finally, i believe that this compensation problem will be solved fastest when congress gets on with coming to a final resolution of the conservatorship's. >> now, this bill that we are talking about today is either a very small bill, in its importance, or a very large one. it is certainly useful to have standards of weights and

measures for ounces and pounds. 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 is no government guaranteed of a long-term fixed-rate mortgages? >> as i said earlier in the hearing, i don't see the fha or va going away. so i believe there will, in fact, continue to be government guarantees, 30 year fixed-rate mortgages. and i for the believe that in a construct that is here it would certainly be an opportunity for mortgage investors to price and be willing to accept 30 year fixed-rate mortgages without a

government guaranteed. >> so what does it look like -- well, to the average home buyer right now, if they have a qualified loan, conforming loan, they're paying a certain rate of interest, how much higher is that going to be without the government guaranteed? 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? >> that is a very complicated question because one needs to be more specific about -- i can make a general observation for you, mr. sherman, i think will be helpful. we continue to have a mortgage market is outside the fannie freddie realm. and certainly looking, looking i just recently but back at past

-- past history to suggest some more the order of three aides to have a percentage point greater on mortgage rates. but those borrowers also reflect a different critical while it is not just -- >> same credit profile because they were talking to 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 it would be 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 prices, and i would say that the incredible subsidization, you know, over long period of time to fannie and freddie affecting mortgage interest rates have been capitalized in the fight of homes, inflating those values.

>> do you have any evidence or studies that would disagree with what i see, which would be a another 15-20% decline in the value of our? >> i don't have studies to point to with regard to -- >> you don't have anything that would disagree with that, and what does it do to the national economy if the average home in this country declined by 15 or 20% over the next year as a result of action taken in different? >> well, obviously substantial decline in house prices would not be good for the economy or for the taxpayer. but we will see how this actually evolves, what sort of transition there is and so forth. >> i yield back. >> thank you. the gentleman yields back. thank you. the gentleman from new mexico is recognized. >> thank you, mr. chairman. mr. demarco, nice to see. just to get the record straight, the last time you were here in committee we had -- just put in the record, you came into the

office and made a very professional presentation on the status of the institution. i appreciate that, and still work from those notes. >> thank you. >> put it into the record here spent i appreciate that. >> if we pursue just a little bit, the last question that mr. posey was on, what would be the definition of fraud? you were hesitant to say that a great percent of the loans are fraudulent. what would be the definition of fraud? and i will go ahead and give what i'm thinking about. i've been in discussion with one of the bottom line lenders from wall street, and her performance bonuses were based ont, and here bonuses were based on taking loans out the door. you've got to get them in, kick them out. she wouldn't compromise the standards the other people sitting on the desks making loans did. their bonuses were higher. her supervisor gets bonuses if

they get bonuses. so she's under pressure to make the loans. would that become in your estimation, fraudulent? or is that just, it does across the ethical line, that is other? >> as you described it, i would not perceive it to be fraud so long as those credit characteristics are being appropriately reported to the buyer or investor in the mortgage. >> i think where i'm going with this is nowhere tricky, just any market is going to have that same pressure, whether it is this bill in front of us or the market friends and that is towards you right now. is a pressure that is going to be there. is there any way to regulate that pressure? is there anyway to deal with that? it's not technically fraud but if they're putting mortgages out there that haven't, that maybe don't, i'm not going to perform as well and that's not, they are

not categorized that way in order to get their bonuses. that's a problem in a system that i don't know how you get around myself. >> incentive compensation programs can be looked at as creating either positive or adverse incentives for how credit markets are functioning. so senate come programs are pretty critically whether we talk about executives ordered rank-and-file employees. the mortgage fraud issues generally can run quite a wide gamut of participants. it can involve a pressure to become involved lenders. it can involve buyer worse. it can involve companies that are actually pooling and securitizing mortgages, fraud can occur in any number of places including those. >> if we switch gears just a second, continuing drumbeat of concern that i have from small banks in new mexico is if we go to some private market, that

they will dedicate the rates of return that they can in the large markets, and they are suspicious of really, of movement away from, they don't like the explicit guaranteed by the implicit guarantee. what reinsurance could we give people in new mexico, the lenders, that they will be okay, that the private mortgage market will actually provide liquidity to them? is that a reassurance that is possible? isn't one that is advisable to give? >> i think that's a great issue. it's one that concerns be a lot. i would answer it slightly differently. and that is, as we consider how to finance reform, whether it's the chairman's discussion draft or any other framework that is put forward, one of the things i would suggest policymakers and lawmakers alike should be assessing is what does this framework offer to small and midsized lenders, whether

community banks, mortgage bankers and so forth, to be able to be active participants in the mortgage market so that we would have a more competitive marketplace, and one in which it is not dominated either the mortgage origination point for the mortgage service or point. that it is not dominated by handful of very, very large institutions. >> i yield back, mr. chairman. thank you for your response. >> the gentleman yields back. and before we go to -- the gentleman from california, the gentleman raise a good question with regard to compensation issues and what have you and what needs to be done about the. the gentleman is remind we had legislation, h.r. 1220, equity that was sponsored by the full chairman of this committee which we basically try to address that and suspend the current compensation packages for employees of fannie and freddie

and the stars compensation system that is consistent with that of an executive schedule which i guess would be a lot less about was out there. that passed the committee 27-6. i believe the gentleman from california voted no on that piece of legislation. so just for the record we are trying to address that situation. and with that ideal to the gentlelady from new york. >> thank you, and welcome, mr. demarco, and we appreciate your comments on what is the 15th proposal this subcommittee has reviewed in the area of the secondary mortgage markets this year. i know that this question is not exactly on point with what we are reviewing today, but since you are here i wanted to follow-up on something i have been involved with your office over the past several months. ..

>> 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 counsel's response raises questions in height of the recent "times "story. the piece showed this seems to be conflicts between these gas leases and mortgage rules which could become a problem with investors who may 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 residential mortgages are owned by freddie and fannie. and so many people have already signed these, 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, mrs. maloney. as you noted, my staff has been working with, with you and your staff to better understand this emerging issue and its implications including its risks for fannie and freddie. and as you noted, we've provided one set of responses. um, with regard to the more recent development that you reported to, i will confess that i'm not up to speed on that and, um, if you would indulge me, i

would be happy to get a more fulsome response and to get back to 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 fracking is environmentally dangerous. and i believe that that determination is irrelevant. something does not have to be environmentally dangerous for it to negative negatively impact property values or violate mortgage rules. just take the example of land have fill. 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 or freddie going to do an audit to see how many mortgages across the country have noncompliant leases on them. this is a serious issue. it could cost billions going forward. >> so, congresswoman maloney, as i said, i'll be very happy to go back and take a serious look at whether an audit is in order, whether that's feasible and practical, what it is we would expect to get out of it. um, i'm sorry, i'm just not prepared -- >> are there any efforts, following up, are there any efforts in fhfa to see how many mortgages in the united states are overlaid with noncompliant leases? is there any effort to look at

that? >> i'm being advised, mrs. maloney, that, um, these leases that you're referring to may 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 i'll be happy to follow up promptly with your office to advise you of where we stand. >> well, thank you very much, and my time has expired. thank you. >> and i thank the gentlelady. gentleman from texas. >> thank you, chairman, 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. i think this is very important for the long-term stability of housing that we have a robust private financing market. mr. demarco, thanks for coming again. you have maybe what's one of the most difficult but most

important jobs in our country right now. i guess the taxpayers and you've got some bad news this morning. it looks like freddie needs another infusion of about $6 billion. what i found troubling about that was that they lost six billion in the previous quarter, but if you go back a year ago, they only lost 4.1. and with the amount of origination thai got, you would -- they've got, you would expect their earnings to start showing some improvement. so i find that troubling. i would assume that you do as well. >> well, i certainly do, congressman. i would say that a portion of these -- so to breakdown briefly, there are three key contributors to this. one is an additional increment of credit losses. this is continuing to reflect, um, both the preconservatorship bulk of business and the difficulty certain housing markets are having in stabilizing. it also reflects, um, losses due

to hedging in terms of the financing of, the hedging of the financing risk of their retained portfolio. and 1.6 billion of that is the dividend that is owed to the treasury didn't. >> so recently, you know, september 30th, the loan limit had a temporary increase. it was granted, it expired, and so the new loan limits are in place. have, have you, has anybody done an analysis of how much that would effect 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 fannie and freddie had originated this 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,

um, but we can get that for you. >> you expect it's a relatively small number if i'm -- would you agree -- >> certainly relative to their book, it's a very small number. >> yeah. and so the question is, and mr. scott has a great proposal of bringing some certainty to the market, but what is the, what would be the incentive in the private market to originate anything in the current space that the gses are allowed to operate? what would be the incentive for the private market not to go ahead and let the federal taxpayers guarantee that book of business form? >> well, um, it's pretty hard to compete with the, with the federal government and the degree of support that's being provided right now. >> so 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. right, it's hard to compete with a government guarantee. so as long as there's a wide foot print for that, that's going to be a wide space in the market that would be hard for private participants to compete in in terms of the financing. >> do you think though the fact we did kind of 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. was that, 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 certainly is an opportunity to provide a modest amount of additional running room, if you will, for the jumbo market to be able to establish, reestablish itself. >> and so you would support

that? >> well, i've been, remained faithfully agnostic on the question of what the loan limits should be viewing that very much is a decision of lawmakers. but to your, to your premise that by having this well announced in advance, gradual decline in loan limits in just certain areas, does that create greater opportunity for the private sector to reestablish itself, the answer i would say is certainly, yes. >> so here's a final question. i think recently we wrote you, and we'll be anxious to hear your response. you know, with the fact that freddie and fannie in certain spaces basically has a monopoly on that origination space, what would be the reason to give certain originators different g fees than others? why would you have a spectrum? there's -- you're not competing for the business, you're getting

all of the business. >> right. i mean, very fair question. and, um, i would say two things. one is, in fact, those gaps have been declining, and the second is that i've said publicly 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 so much, mr. chairman, and i do want to thank our guest for taking this time. um, i just, first, want to mention that i'm really happy to see that you've filed lawsuits against these 18 financial institutions to recover the losses suffered by freddie and fannie. and to speak compensatory damages for the losses that the enterprises have suffered. um, there's been a lot of talk about the, you know, malfeasance, i guess, of freddie and fannie, but i think we too

often forget that they were victims themselves of, of criminal activity. how much do you think you could recover from, from this? you know, as compared to the exposure that freddie and fannie are are -- have? >> so i appreciate the question, but i'm afraid that's something given that i'm in litigation is really impossible for me to answer. >> okay, thank you. >> we are seeking to recover appropriate funds. >> okay, thank you. um, right now the federal, um, the fhfa is funded through the fees that the gses received. you indicated earlier in your testimony that you need considerable staffing up in order to fill that tva space. how would you, under this bill, how would you fund the gses? >> well, i'm not sure that there

would be gses, but in terms of the funding for fhfa -- >> right. >> -- it's not determined in this bill, so that would be something that would have to be figured out. >> i mean, what -- >> it's a gap right now. >> i mean, a gap of a cavern? is it a small gap, or is it an insignificant thing or -- >> well, for me, since i have to manage the budget, a significant thing since i want to know where the funds are coming from. but -- >> how much does it cost right now to run it under -- >> well, our budget today is, oh, golly, on the order of $180 million? so, i'm being told it's probably less than that. >> okay. >> but it's, we're funded through assessments on fannie and freddie, but also assessments on the 12 federal home loan banks because we do supervisory respond for them. >> okay, thank you. right now the investors in

fannie and freddie securities are basically rate investors. but under this bill they'd have to, um, add credit risk as well as the rates. what -- is there any indication that we'd be able to attract these kind of investors and totally privatize market without the gses? is. >> well, that's quite right. we are in a rate market today because of the guarantees associated with fannie and freddie securities. um, what the, what the pricing of this credit risk would be is going to depend on, um, market appetite for credit risk and, also, it's also going to depend upon the clarity and resiliency of the standards and structures that are put in place. >> and so what would, you know, what would a borrower, a mortgage borrower have to look like? it would be totally risk averse to these investors?

what's the risk tolerance, um, in order to be able to raise the appropriate amount of funds? i mean, if we want our mortgage market to come back, we have to be able to fund mortgage-backed securities. and be so what is your assessment of the, of the tolerance for this credit risk in the private market only without the gses? >> i believe that there's certainly tolerance to, for private capital to fund this, fund this risk. but they're going to want to know what are the rules of the road, and do i have pretty good clarity into, you know, how to assess the amount of risk i would be undertaking. >> you know, not ninja loans, but what would be the standard do you suspect? >> the standards in terms of the underwriting standards? is. >> yeah. >> yeah. so, i mean, actually the discussion draft would require us to be -- >> would it be, like, 20% down? >> i don't, i don't understand the bill to require that sort of thing at all.

i think the bill requires us to establish risk buckets, buckets of mortgages that are defined by the risk characteristics and i would certainly -- >> my time is about to expire, and i see you're not going to answer this question. i am -- the largest mortgage guarantee service is located in my district in wisconsin. what impact do you think this legislation would have on the mortgage insurance industry? >> well, i think that's an interesting question because i believe there are some investors that may well look to having various forms of credit enhancement either on mortgages or on pools of mortgages, and i think it certainly creates a market opportunity for private guarantors to replace what is currently a federal garon tore. guarantor. >> thank you so much, my time has expired. thank you. i yield back, mr. chairman. >> gentlelady yields back and appreciate the gentleman's answer and, of course, the gentlelady knows that's one of the variables that may be considered by the fhpfa as

well -- fhfa as well. mr. cotter is recognized for five minutes. >> thank you, mr. chairman. i'd like to start by yielding 30 seconds to my colleague, mr. pierce. >> thank you, mr. chairman. just in response to my other friend from the other side of the aisle who's talking about the negative impact of drilling on properties. if that was really the case, then you wouldn't have any properties in my hometown. we've got gas wells in the front yards, backyards, on the school grounds. in fact, it positively impacts the values of homes in our town. so when you go, you're going to create a fannie mae dead zone if you limit, limit loans to private residences in areas where they drill. so be careful in new mexico. we don't mind out there, thank you. >> reclaiming my time -- [laughter] i have a question on economics

and then a question about the past. the question is one of our colleagues had talked about how is subsidizing of the federal government into the housing realm has helped to keep interest rates low. and then if all of a 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 it work that if government subsidized the housing market purchases, that that would mean they'd be more available to more people? and if 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? isn't that pretty much how that would work? >> well, in posing that sort of system in the short run, yes. in the long run, you'd see a change in the supply of housing. >> you'd see the prices come down which would upset the homeowners, but not necessarily the people purchasing them which would then make the actual down

payments smaller because the 3% of the asking price of the house would be lower than it would be at the government inflated rates. >> right. yes, sir. >> i just wanted to make sure i actually read the book in college that some might have skipped through. a practical question about the past would be, as you've stated and i think everyone concedes, this: in the operation of these entities, there were mistakes made by these boards and the people in charge of operating them. is that a fair statement? >> yes, sir. >> and let me just say thank you very much for trying to go in there and fix this. and working so well with us to do it. so this is not directed at you in any wayment but just as a matter of curiosity as well as public record, is there anywhere we can go and find just a very succinct list of who was on the boards and what bad decisions these boards made? because these people made a

whole lot of money to screw this thing up. and i think that under the tons of credit where credit is due, i know a lot of people who would like to thank them personally for their efforts. >> well, since these were public companies, um, certainly in their annual disclosures and annual reports the leadership of the companies is a matter of lick record. public record. >> oh, that's heartening. that's very heartening. i was always curious, since they are public entities, in those reports is there anywhere we can find out how they managed to get these jobs? i mean, these are important jobs. these aren't just something you'd want to go to a political crony who might not have the best of motivations or acumen in terms of dealing with those things. so are those in there too so you can say not only are these the people who should be credited with these decisions, this is also their compensation package, and here's how they were chosen to be on this board? >> i believe that that is available information. >> can you send me the link and

give me a little nice, concise sheet of that so that i can share that with all the people in my district who are wondering why this thing got so badly, so quickly and people were compensated so much for so little? >> we can provide you information off the public record. >> thank you. i yield back. >> the gentleman yields back. appreciate the gentleman's question and also learning the book that he read in college as well. so -- just kidding. >> [inaudible] >> but i used the cliff notes, right. so i do appreciate you for being here today, for all your candid and insightful answers to all the questions, and i believe that's the extent of 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, i'm sure there will be additional questions. again, i thank you for your testimony and time today.

also your work as well. >> thank you so much, mr. chairman. [inaudible conversations] [inaudible conversations] [inaudible conversations] >> coming up on c-span2, we'll return to the house financial services subcommittee hearing with another panel on proposed changes to the secondary housing market. and later the senate's back at 2 p.m. eastern for general speeches followed by debate on a bill to repeal a 3% withholding mandate on payments to government contractors with a procedural vote on the measure at 5:30 eastern. live gavel-to-gavel coverage here on c-span2. >> also today former secretary of state madeleine albright will lead a discussion on the arab spring and transition process.

she'll be joined by activists from several middle eastern nations including libya, syria, yemen and egypt. secretary albright now chairs the national democratic institute which is hosting the event, and you can see that live today at 5 p.m. eastern over on c-span. and tonight a conversation with cbs news chief foreign correspondent laura logan on covering foreign conflicts. she became nationally known this year after being assaulted in egypt's tahrir square during the country's revolution. she'll sit down for an interview with marvin kalb, and that event gets under way live at 8 p.m. eastern from the national press club also on our companion network, c-span. >> almost every other developed country in the world you pay taxes on the money you make in the each country you make it. the united states taxes your global income, so essentially, you're being taxed twice for the same income. it makes the u.s. companies very anti-competitive and literally forces them to leave their money overseas. >> tonight on "the communicators," consumer

electronics association head gary shapiro on recommendations from its members to the deficit reduction committee. >> the thought is here when we need some economic stimulus, we could have this money come back here, pump back into the economy at a lower tax rate -- say 5 or 10% -- and even tie it to jobs or capital investment. and that makes sense. >> "the communicators," tonight at 8 eastern on c-span2. >> we now return to the hearing by the house financial services subcommittee on capital markets on proposed changes to the secondary housing mortgage market. in this panel you'll hear from current and former representatives in the mortgage and securities industries. subcommittee chairman scott garrett is sponsoring legislation that would create a new market to replace the government-sponsored enterprises fannie mae and freddie mac. this runs about 90 minutes. [inaudible conversations] >> greetings and still good morning. we actually were able to complete the first panel while

still in the morning, before 12:00, so we're glad that we have ample time now for hearing the testimony from the second panel, and we welcome all of you, and i know we're going to get our last panelist here before he comes up to, um, testify. and so we'll begin with mr. deutsche from the american securitization forum. welcome. obviously, you're recognized for, as you know, for five minutes. your full transcripts will be made part of the record. and we look forward to your testimony this morning. >> thank you very much, chairman garrett. my name is tom deutsche, and as the executive director of the american securitization forum, i very much appreciate the ability to testify on behalf of the institutions who originate, structure, trade, service, invest and service trustee for the preponderance of residential mortgage-backed securities created in the united states, including those backed entirely by private p capital as well as those guaranteed by public

entities such as fannie mae, freddie mac and ginny may. let me begin my remarks with what i believe to be a clear consensus proposition. there's very strong political and economic will in the united states today to te crease the overall -- decrease the overall level of federal government involvement in finance and to have more private capital replace many of the risks and rewards of that involvement. given that 90 plus percent of mortgage loans made in america in the first half of 2011 were guaranteed by the gses, there certainly suspect a shortage of opportunity to achieve that goal. to date, though, fannie mae and freddie mac have drawn $169 billion in direct support from the american taxpayer through the department of treasury since they were placed under conservatorship and are predicted to draw a total ranging from $320 billion to $313 billion by the end of 2014. given the substantial losses in today's u.s. mortgage finance system, the ss mick is strongly

supportive of reducing the federal government involvement and role in the mortgage system in america. while there is little opportunity for an overnight transition, there is a strong need to begin that transition over time and work as soon as possible to restore the long-term health of both the u.s. mortgage finance system, the u.s. economy and the u.s. housing market. but reducing dependence on the public guarantees for the mortgage origination necessarily implies that private capital has to flow again into the mortgage market. securitization is an essential funding mechanism for this to occur because bank portfolio lending will not be sufficient to reinvigorate the housing markets, particularly with the process of bank deleveraging and balance sheet reductions still underway and with increased bank capital requirements on the horizon under basel iii. this then begs the question of whether the u.s. mortgage market that has grown up for nearly a decade -- nearly a century now

around the presence of government guarantee can be broken down and rebuilt with investor demand without the backing of the american taxpayer. our recommendation is that congress must begin incremental steps over a period of years to substantially reduce the government's role in mortgage finance, and we commend you, chairman garrett, for proposing today's legislation that works towards that goal. other key areas that may also help incrementally reduce the government involvement is h.r. 1222 which would eventually and over time increase the guarantee fee which would equiliberate with gses with private market competition. also the recent lowering of loan limits creates more opportunities for the private sector to reinvigorate and creates more opportunity for the market to return. finally, reducing or eliminating regulatory competitive advantages of the gses compared to the private label markets will also allow the private markets to better and on equal footing with the xses.

before turning to efforts that may be helpful, let me fist highlight that the securitization industry is experiencing what our professionals may describe as a death by a thousand cuts. if you rook -- look on the last page of my written testimony or i believe it's up on the monitor here, you'll see a bit of a dizzying chart that briefly sums the myriad of efforts that are currently underway impacting securitization. any one of these efforts may be appropriately benign in its own right, but when combined together in this great hole, they serve as an effective poison that will keep private mortgage securitization transactions from occurring in sufficient scale over time. i think this is extremely deadly to the mortgage securitization market, particularly in an effort to try to reduce the private -- the public guarantees on mortgage transactions. but because the gses are exempt from many be of these rules, in particular such as the proposal to explicitly count the government guarantee as the 5%

risk retention, these myriad of new rules will further entrench the gses' artificial advantages over the markets rather than ratcheting it away. additional details on those issues may be found on our written testimony and various comment letters linked to in that testimony. but turning back to your proposals, chairman garrett, the key area you attempt to replicate in the private markets is the tba market. certainly, additional efforts to create standardization in this market will go a long way in creating more private market capital flowing into the mortgage finance market. in particular, we've seen in the loan limit declines over the past month or so we've seen the private mortgage marketwas formerly government guarantees. and, in fact, if you evaluate the numbers on that, you evaluate senator menendez's proposal that came through the senate, you'll see that only approximately a $40 per-month increase in a $700,000 loan would occur because of those

changes. ultimately, i don't think that's a massive or substantially increase in a private mortgage market over the government gap teed rate. so, ultimately, i do believe that private mortgage markets can replace substantially those roles, and over time we look to work with the committee chairman to, ultimately, help that goal be achieved. thank you. >> and i thank you. mr. hughes, you're recognized for five minutes. >> good afternoon. chairman garrett and members of the subcommittee, i'm marty hughes, ceo of redwood trust, and i'm honored to be here to testify today. redwood has a long history as a sponsor and investor in private label mortgage-backed securitizations, including that we've done the only three newly-issued secured privatizations since the crisis began. we hope to do a fourth in the next couple of months. i thought just as an interesting frame of reference, redwood trust has 75 employees and only 25 are dedicated to this effort,

so it can be done. my testimony is focused on the private mortgage investment act, but before i move to the main part of my testimony, i would like to address the ongoing government subsidies for the mortgage market. as i discussed in my previous testimony, government subsidies must be scaled back on a safe and measured basis to reduce and create a level playing field for the private markets to flourish. despite the warning sounds from some, mortgages did not become instantly unaffordable to thousands of perspective home buyers when the limits were reduced on october 1st. we saw a smooth transition in the new market, and in fact, through the month of october the difference in interest rates was less than a half a point between the nonconforming and the conforming rate. i urge the committee to reject the attempts to raise the loan limits back up as some have suggested and give the private markets additional opportunity to return to a sustainable

state. directing my attention specifically to the proposed legislations, we're just going to highlight a few things. and overall i would like to thank you for addressing the overall topics. it's the first omnibus bill that's going in to address all the different elements from servicing that are really investor concerns. my first is i'd like to talk about second liens which is one of redwood's topics, and a lot of the feedback we get, we get from investors. and it's just that we believe the steps taken in the bill are a good first step, but we think you need an additional step. the most important part of skin in the game is at the borrower level. if borrower can remove their skin in the game after the first is given out, the likelihood of default in the first goes up significantly. this was a significant event in the crisis that led to losses, and it's a significant event keeping investors out of the market.

they can do analysis on day one knowing what the first is, they can't do analysis later on and catch up if all of a sudden the credit profile of that borrower has changed. in terms of representation and warrantees moving to mandatory arbitration, we think, is great. we've incorporated it in all three of our deals. we haven't had to use it yet. um, one other thought that we have this terms of the proposed legislation that a third party identify all claims and let them be the one independent party to push through reps and warrantees. in our deal we thought it might be useful that we were in our deal the actual represented as the credit risk manager, and we get that as holding the lower tranches of securities. so maybe the best protection for the higher tranches of securities is if people at the bottom were first in line to absorb losses are the ones to fight claims. our concern is within an

independent third party, there's not the incentive to fight claims for the protection of the senior lenders. if we turn our attention to servicers, um, we -- with respect to surveillance, standards should be developed when a trustee must investigate a servicer's performance. there needs to be events when a servicer needs to be taken whether it's excessive loan losses, modifications, early-pay defaults. while we fully agree that there needs to be accountability, we think the removal of the servicer and the transfer of the servicing is a difficult and time consuming process and probably very difficult for borrowers if they're in the middle of some type of loss mitigation. really what we think would make sense is to have the servicers have a hot backup, a special servicer that would work behind them that's already in place. they would have the systems, they would have the contact

points, and it would be an easy transition to go from the primary servicer to the secondary servicer. so in conclusion, i would just want to thank you for putting this thing forward. this bill is really important. there's a lot of facets to it. um, we do have questions at redwood where we like to evolve with the structure, but we really applaud the efforts and move it ahead and thank you for beginning the process. >> thank you for your testimony. it raises more questions, but that's what we're here for. ms. radcliffe, you're recognized for five minutes. >> good afternoon, chairman garrett and members of the subcommittee. i'm senior fellow at the center for american progress action fund and executive director of the unc center for capital. thank you for the opportunity to comment on the draft private mortgage market investment act which addresses several challenges that must be overcome to restore housing finance in america. i'm also a member of the

mortgage finance working group, authors of a plan for responsible housing mortgage market reform. and though i speak only for myself today, my testimony does draw on our plan. our proposal calls for private capital at risk to play a much greater role in the market than it does today. for that to happen, investor confidence in nonguaranteed securities must be restored, and this bill lays out several steps that will be helpful to that end. importantly, the bill recognize that is the federal government is critical to a well-functioning market even the purely private parts. thoughtful oversight implemented a decade ago could have staved off much of the bubble and bust of the mid 2000s, and i'm pleased to see the regulation of private mortgage-backed securities getting the congressional anticipation it deserves. issues detailed in my written testimony are as follows. first, congress should take step toss restore investor confidence so gses can stop servicing borrowers that don't need them, but some government role remains

critical for the bulk of the $11 trillion mortgage market. it would be unwise to pull the rug out from under the market by scaling back this support too quickly. as the draft bill suggests, standardization of products, terms and conditions is critical, and i particularly commend the proposal for demarking the 30-year fixed rate mortgage category which has been the building block of middle class economic security in this country, and i concur with mr. peters' comments on the need to take additional steps to insure it continues to be broadly available. classifications of mortgage loans should consider loan and channel factors that have been proven to effect risk, and know it's unclear how the categories will be set, it is clear it will be a challenge to get it right. if classification system is based on borrower factors, it could duplicate problems by the proposed qrm situation. moreover, we must avoid the mistake of consigning borrowers to higher risk, higher cost products and channels.

to mr. posey's earlier point, my written testimony provides evidence of high loan to value lending to moderate income families that have proven successful even during this time of market turmoil, and i'd be glad to provide more details during discussion. the bill's loan level disclosures are welcome changes to the pls market. one open question is whether the standardization measures will go enough to foster a private level tba market. in the proposed private market, multiple loan classes, multiple issuers and a lack of government guarantee may likely inhibit a tba market making this not necessarily a viable substitute to serve the enentire conforming loan market. the bill's measures to reduce conflicts of interest relating to second liens are also welcome, however, it should be constructed to favor legitimate down payment assistance programs which are so vital in so many communityies' economic recovery at this time. there are certain provisions of

the draft that should be reconsidered altogether. these include striking risk retention requirements, banning government principal reduction initiatives and easing qualifying mortgage rules. other fundamental questions to be addressed include choosing the best regulator to fill the mandate, how the bill fits in with active gse reform proposals and other next steps towards a more responsible and comprehensive system of housing finance. as promoted by this draft bill, it's essential but not enough. it also requires stability, affordability and consumer protections. in closing, i would like to commend the chairman and the other members of the committee for holding this hearing. as congress and the administration work to design a better system of housing finance, it's important to make sure the rules of the game are laid out careerly and fairly -- clearly and fairly. i believe the private mortgage market investment act, as drafted s a helpful starting point for negotiating those

rules, but it must be seen as a first step towards comprehensive reform, and i look forward to your questions. >> and i thank youment -- thank you. mr. wallison, welcome back. you're recognized for five minutes. >> thank you, mr. chairman. i'm peter wallison, i'm a senior fellow at the american enterprise institute, and i'd like to make the following oral statement. i've also submitted a detailed written statement. there are three serious problems facing this country; unemployment, the nation's enormous debt, and the deplorable state of the housing market. all three are directly involved in the summit of today's -- subject of today's hearings. the proponents don't mention it, but continuing the government's role in housing finance increases the nation's debt. there are $7.5 trillion of government agency debt, most of it fannie's and freddie's, that is off budget but still a burden for the taxpayers. we can reduce it by turning over housing finance to the private

sector like every other part of our economy. securitization, which has worked well for 30 years and is almost universeally used for credit cards and auto loans quite effectively, is necessarily -- is a necessary source of funds for mortgages. this is because there are insufficient funds in the banking system to meet the housing sector's needs. and banks have to raise capital levels which causes them now to reduce their lending. securitization also accesses a huge, currently untapped source of funds. fixed income investors, such as insurance companies and pension funds, have at least $13 trillion to invest and almost all of it now goes to corporates, some of it to junk bonds. institutional investors used to be major buyers of mortgages, but not after the gses came to dominate the field. the yields on gse securities are just too low for their needs. for these investors mortgages that would diversify their risks making them much more stable, it

also provides funds for u.s. homeowners. a win/win situation if there ever was. a robust securitization market will bring in these institutional investors and, of course, if housing market revives with more funding, unemployment will decline. since the financial crisis of 2008, private mortgage securitization has been almost moribund. one of the major reasons is uncertainty about the government's future role in the housing market, for example, whether fannie and fredty or some other program, and because few, if any, firms are going to invest in a securitization program if they understand or believe that they will be competing, ultimately, with the government. beyond that, however, various provisions of the dodd-frank act add substantially to the risks faced by securitizers. these are details in my prepared testimony, but i will name a few now. the 5% risk retention idea gives

a huge financial advantage to fha and the gses. they can securitize any mortgage that is not a qrm without paying the large capital costs of holding a 5% risk slice indefinitely. private mortgage securitizers simply can't compete with this. anyway, the whole 5% retention idea doesn't work to reduce risk taking, only a vertical slice through the pool will qualify for true sale treatment under accounting rules, and the vertical slice does not provide much incentive to avoid risk taking. fortunately, the garrett bill will repeal the risk retention provisions of the dodd-frank act and substitute a more effective means for preventing deterioration of underwriting standards by providing for minimum mortgage standards in securitizations, it reassures investors and prevents the kind of mortgage meltdown that caused the financial crisis in 2008. the bill goes some distance toward eliminating eliminating r bomb lodged in the qm provisions

of dodd-frank. this prevents events to foreclosure if a borrower claims he received a mortgage he could not afford. the bill exempts prime mortgages from this provision and also provides for an exemption for qualified securities based on prime loan. other provisions require the standardization of documentation used in securitizations including trust and servicing agreements, mandatory arbitration and appointment of an independent trustee when a servicer has a conflict of interest with investors. all these provisions will encourage firms to enter the securitization business and institutional investors to buy and hold the resulting securities. there are many more reforms that i haven't mentioned and many that are necessary but not included in the bill. but this legislation is an important start on the process of reviving the private mortgage market. a key to controlling the u.s. debt, creating a growing housing market and reducing unemployment. that concludes my testimony.

thank you. >> and i thank the gentleman for your testimony. i thank the entire panel for all their testimony. so i will recognize myself for five minutes for some questions, and i guess i'll -- right to left, but i'll can you a question, mr. wallison. so i think if i heard right at the very beginning, i think the ranking member said something that this legislation would create a significant intrusion, um, by the federal government into the housing mortgage finance market. um, as if we haven't seen a significant intrusion into the housing finance market for the last few years, ie the diagram we just saw up on the screen. so, but one of the -- so maybe we've gone too far even in this legislation. and perhaps, mr. wallison, you sort of say that in your, at least at one point, with regard to we set out standards for the sponsors. can you comment as to why you think we're going -- is that an overreach when we try to do

that? >> actually, mr. chairman, i don't think you're going too far, i think it's a good idea. >> okay. >> what i think is the responsibility of congress after what we experienced in 2008 is to do something about the problem of gradual mortgage quality deterioration as a bubble grows. the proposal that was made in the dodd-frank act and adopted there, the 5% retention, will not work. what will work is providing certain basic prime mortgage standards that would be available for securitizations. if that happens, you will be preventing the private market from going out of control as it occasionally does when bubbles begin to grow. >> yeah. you're going down -- i appreciate that. you're going down a slightly different road. maybe i didn't say my question good enough. we said also besides the standards or implemented for that, also standards for the securitization, and then with the standards or, um,

certification, if you will, in the bill for the sponsors, for the issuers as well. i thought i read in your testimony that if we do that, we create impediments to folks coming in. >> i'm sorry, i didn't understand your question. it probably was clear, and i didn't want you said it. i am concerned about setting standards for securitizers because i don't think they're necessary. um, i think especially if you're trying to talk about the financial capabilities of securitizers and so forth, it adds costs for them, makes it less likely that more organizations will become securitizers and, thus, reduces competition and the efficiency and innovation that will occur in that market. the really good thing about securitization is that the purchasers of mortgage-backed securities in securitizations, um, are protected by the subordinated pieces in those securitizations, not by the quality, the financial ability

to respond of the upon sor or the securitizer himself. now, i understand that some people may be concerned about whether they are financially responsible. but we have to make a balance here, and what i am always afraid of is that government regulation which always imposes costs will keep many people out of the securitization business that could otherwise profitably engage in it. >> okay. um, i'll have to think all these through. thank you. mr. hughes, you started to -- maybe i just didn't hear the next step with regard to the second lien provision, right? >> yes. >> you sort of said, okay, what you've got here is good, but there's a second step. >> i think there should be some limitation on a borrower's ability to take out a second mortgage all the way up front so that there wouldn't be a test. and either there would be a test that the combined loan to value couldn't be over 80% -- >> okay. >> there'd be approval of the first. or an approval by the first. so the first is not

disadvantaged as a result of -- >> can you walk me through in a real world experience how that actually works? >> it's -- >> it's hard. >> i know you mentioned true main, and everybody says it's impossible to ever change it, but therein lies the problem. so i think there's ways to get there. but just being able to allow a borrower or another lender to hand off and give out another mortgage after the fact is very, very problematic for aaa investors. >> mr. wallison, on that point? >> in commercial lending, mr. chairman, the first always has the approval available for a second lien of some kind on the same property. in this case if first has the approval right and a second lien is proposed, the first always has the choice whether to decide to allow a second lien or not. if he decides not to, he runs the risk that the mortgage will be refinanced away from him. so there is a choice that is

given -- >> right. and i know we have here, but one of the tricks is the notice requirement, i guess? on how you do all this? and i guess we have to work that through. we have language here. out of time, but ms. ratcliff, did you want to chime in on that point? well, i thank the panel for the answers. oh, mr. green is recognized for five minutes. >> mr. chairman, i know you are a stickler for time, but given that we don't have a real long line today -- >> i'll give you an extra 15 seconds? >> not for me, my suggestion is that you be a little bit more liberal with yourself, and i'm not going to object. so by unanimous concept, i would agree that you should finish your questions. >> we can go -- i very much appreciate that. i'll yield to the gentleman for his questions if he has, and we can go around again for closing questions, but that was very nice of you to offer. >> thank you, mr. chairman. and thank you, witnesses, for appearing. let me start with mr. deutsche.

good to see you, it's been a while. and i'd like to start, because you mentioned that there would be an increase in the product, but that increase was not going to be exponential. is this correct? >> an increase on the product of private mortgage securities? >> yes, sir. >> are yes. >> and, um, i'm just curious as to how you arrived at, i think it was $40 for a loan at a value of, what was that value again, please? is. >> 700,000. >> 700,000 loan. >> so -- >> $40 increase. >> yeah. if you run through the quick math of conforming how the conforming jumbo market has changed, on september 30th, obviously, the loan limits went down from 729 to 625 approximately. if you were to look at yesterday's mortgage rates, a conforming loan, jumbo conforming is about 4.25. a loan that's a jumbo loan

that's not conforming, that is the gses wouldn't be willing to buy it, was about 4.5. so it's about 25 basis points' difference. senator menendez's amendment would say that the rate on the conforming loan should go up 15 basis points, that there should be an extra fee on it. so the difference you're looking at for a conforming loan, conforming jumbo versus a nonconforming jumbo would be about 4.4% for the government guarantee and 4.5 for the nongovernment guarantee which works out to be about $40 a month. >> permit me to ask you this, we don't find a lot of these loans being accorded in the market currently, do we? >> it's about, about 3% of all mortgages nationwide were in the 625 to -- >> my point is, is there some concern about, about the loan itself in terms of is that

cost -- cost doesn't appear to be a factor. what would be the factor that causes these loans not to be a product that consumers are eager to purchase? >> i mean, i think consumers are eager to get loans in that band if that's the price of the house that you're looking for. obviously, there's not that many million dollar homes out there that people are looking to purchase, but there are, you know, substantial. amount. >> all right. let me move on and ask, let's see, i believe mr. wallison, is that correct, sir? >> yes, sir. >> thank you. you've indicated that this would repeal the risk retention provisions in the dodd-frank, and you indicated that there would be standards set for securities. and, of course, there will be no federal backstop in i place in this process -- any place in this process. is that correct? >> yes, that is.

>> okay. let's start with the notion that there won't be a federal backstop. is it your opinion there will be a great demand for the products absent federal backstop? is. >> absolutely. my discussions with people in the private sector and also just simply thinking about it would indicate that once the federal government is out and there is no, there is no risk taking by the federal government and no subsidy of government risk taking by the taxpayers, the private market would be very happy to take mortgages and mortgage-backed securities that produce market-based yields that they can, that they can profit from. and as i mentioned in my testimony, the fixed income buyers of securities like insurance companies and pension funds really need market rate securities like mortgage-backed securities. they don't have them now to invest in because of the domination of the market by the gses. when these mortgages become

available through a private market, they will step in and be major supporters, i believe, of the mortgage market which will help housing buyers, housing market and, of course, give them the diversification that they need. >> i don't know that i'm going to adamantly differ with you, but i talk to a lot of people, and most of the people that i talk to have a different opinion. so perhaps you and i should talk more, and perhaps you can enlighten me to a greater extent. >> happy to do that. >> i just don't find that that's the case. one more thing -- >> private mortgage -- [inaudible] >> you do agree that part of the reason we're in the trouble that we're in now is because the originators were not concerned about whether persons were able to pay, they were just originating loans that they could pass on. well, if we eliminate the retention, the risk retention, how will the standards prevent this from occurring again?

is just standards alone? because we had standards before, and this will be my last question, but i would like to hear your answer given that we had standards before and we had the risk passed on to others even with standards. >> this is a much more complicated question than simply those transalaskas. what happened was -- transactions. what happened was that the government was interested in buying mortgages or having fannie and freddie buy mortgages irrespective of the quality of those mortgages because fannie and freddie were required to reach certain quotas in the purchase of mortgages for people who are at or below the median income in various areas where they lived. and so that created what would always happen, and that is the government says we'll buy whatever you can produce. we're not worried about the quality. those things are produced, and that's how we got to the situation we were in. that's one of the reasons why i am very much afraid of having, returning to a market in which

people are no longer interested in the quality of the mortgages that are being produced. that can also happen when a bubble develops in the housing market because the tendency of a bubble is to suppress delinquencies and defaults. so mortgages and mortgage-backed securities look safer than they would normally be. that also produces this kind of excessive demand for low quality mortgages. what this bill would do, as i understand it, is to set minimum standards for mortgages that can be securitized. they would be called prime mortgages. and if it is possible that that can be done, and i gather that mr. demarco believes it is, we could avoid many of these problems of deterioration in mortgage -- >> would it surprise you to know that dodd-frank sets some minimal standards? >> i don't know that i've seen in dodd-frank anything that requires a certain minimum standard. what dodd-frank is trying to do is to penalize people who, um,

do not securitize a qualified residential mortgage, okay? but a qualified residential mortgage as now defined at least by the regulators is a mortgage that is far more, um, of a prime mortgage than it needs to be. it is a much more difficult mortgage to obtain. there would be many, many mortgages that are not as high quality as the qrm has proposed which could be securitized by private, the private sector -- >> but this billowers -- [inaudible conversations] so this bill lores the standard? is. >> we haven't seen what those standards would be, but it would probably be less than the 20% down payment. >> thank you, mr. chairman. you've been generous. i'll wait for the second round. thank you. >> sure, thanks. gentleman from arizona. >> thank you, mr. chairman. um, mr. hughes, you're literally

one of the only folks i think in the market over the last couple of years who's actually done an mbs securitization. what do you think the appetite is out there right now for mortgage-backed debt? >> i think the appetite out there is very high. um, having said that, it's going to require that you meet their standards. a lot of those standards are what are built into this bill and what we have put into the existing deals that are out there. not to go back to the days where they're going to buy subprime. where i really think there's the biggest market is for prime. so to the extent that fannie and freddie are loans, i believe investors would buy on the private side to the extent that you meet the criteria for transparency, disclosures, fairness -- >> okay. properly packaged. >> properly packaged. >> okay. on the previous panel, um,

mr. demarco talked about holding, what, almost a trillion dollars in mortgage debt. i'm assuming that was both performing and nonperforming. if he were to come to you and say, hey, here's $100 billion of performing, you know, gse debt, but we'd like to strip the federal guarantee, um, is there a hunger for that? is that something someone like yourself would package and want to securitize himself? >> that is something i would be interested to the extent from current production on forward. i don't know that we want to jump into -- >> well, okay, so 2009 and later -- >> so to the extent that there was a billion dollar pool and the credit enhancement point was five points on that pool, redwood would absolutely consider to the extent it met the criteria, and if you look at the average criteria for a fannie/freddie pool, they look a

lot like the redwood type pools. yes, we would buy them, and i think there's a pretty deep market to do that. .. >> m. in making a mistake somewhere? >> i will jump in that i think there is a degree with mr. hughes that there's a significant appetite from investors for mortgage-backed securities. ultimately, the question is

what's the price. many if not any investor will buy the appropriate price or at a price they would be willing to purchase that. one of the two challenges over the past few years is the price, sort of the supply demand and that investors are demanding higher prices and want to see higher prices were as issuers want to issue them at lower prices. lower yield. those are just turning to come into the equilibrium and using transactions like redwood. >> in my last minute and a half, all right, one of your members, say i have $10 billion of performing mortgage debt, i want to strip the federal government guarantee off of this. what would be the barriers that you would see within the securitization world right now? where to have an achilles' heel?

>> the first question as a indicator would be the price. what's the price you're trying to some of those at and what do i buy you that as the insurance of the other barriers, assuming fannie and freddie had bought these, they're pretty stringent warranty requirements in place. so most investors would take those as appropriate reps and work is in place. some they want more stringent repurchase requirements to to what has been from a get out in the market. but i think those loans would be able to be sold out to the secondary market, depending on what the priceless. >> ms. ratcliffe, would you have any objection to seeing the gses right now at least offer out some of their debt, see if they could literally go out to privatize the? >> i think it would be benefit of at least getting price discovery. i think the question judges find out our how much. i don't think $11 trillion appetite. i think the question that will come up is what price and using

what products and for whom. so i think price discredit would help show what the real gap is. people refer to the 40-60 points basis different, facing jumbo borrowers versus gse execution. i think that's misleading because it's exactly the jumbo borrowers who can access that kind of product sufficient without any government support. it's not surprising -- >> mr. chairman, ms. ratcliffe, the price discovery is of great interest. actually it may carry some want a premium on my credit risk side. but i've also been trying to do some quick calculations saint okay, if this is debt from the last couple of years and with the federal reserve trying to move us out from the lam, my 30 year interest rate is here today. then maybe a premium to the gses right now on that debt from just the yield standpoint. you know, so, all right, thank you, mr. chairman. i'm sorry i went over my time.

>> the gentleman from california. >> thank you, mr. chairman, and thank you, panel. mr. hughes, your desecuritizations often held up by a lot of people is an example of what could occur if there were no government guarantee in any segment of the market. i have report from business wire dated september 27, 2011, talk to your last securitization. it says the weighted average of original combined loan-to-value ratio its 64.2, meaning an average of 36% down payment, and a weighted average of a joe flacco credit score of 773, which the last i checked i don't have. that is a very high down, very high credit type of issue ensure making, correct? >> correct. a couple of observations that if you were to go look at where

pain and freddie's executions are, you would see 750 fico scores and ricky bobby a 70% loan to value. they are not that dissimilar, and probably the bigger comment is with everything being sold to the government or on a banks bouncy they're the only loans available for us to buy and securitize. if we had access to more loans, there's no loans to buy. with 95% of them going to government we are constrained in what we can buy. >> i find that also another fact of this is that the average bounce of $793,000. these are as we say not conforming loans. i come from the newport beach, irvine area of orange county where my average house price is higher than this. so i can tell you there are plenty of people who are trying to buy houses and trying come into jumble market without any government support, trying to buy houses with 20% down, trying

to bite and sometimes with 40 and 50% am. with fico scores of 740, 750, can't get a loan. i would suggest, and this is not, to say that you can't find those loans, i mean, there's got to be plenty of loans out there with lower fica scores and lower down payments than this. >> okay. redwood trust is not an originator, or a service or. so what we do is align ourselves with banks, large mortgage companies and then draw from their distribution network so we -- >> but doesn't that mean that somebody along the line, maybe risk reduction requires, maybe because of your ability to sell and the secondary markets once these kind of doubt in these kind of credit scores, without a government guarantee, they are not -- i have a dow jones report on the same thing from september 20, and 2011, and i quote, that redwood and lead

manager credit suisse raised the coupon from expected 3.6, one of inspectors that investors are concerned about low yields they are being asked to accept to take the credit risk. which when there's a government guarantee, that credit risk is out of the question. so that means somewhere along the line -- >> i would disagree with the conclusion for the reason we went from 3.60, to 3.9 or i would point to the destruction in the financial markets of widening of credit spread across the board. >> back to my original point. there are plenty of people who'd love to buy a house in the nonconforming mark with 10% or 20% of the don't have this kind of credit score. someone along the line won't make them a loan. somebody along him in, or else you could package it and send it up because there's no government competition there. or is someone else doing it? i mean, it just seems unreasonable to me in this area the market where there is no government competition, to say

that the loan demand can't if you're the only one doing it, why is it someone else doing tempers at loans or 20% loans? >> i don't know. >> mr. deutsch, i spoke to the american service station forum to your group back in june, and i asked the group, 200 or so people, and i asked them whether they would transact in the tv market without a government guarantee on the securitization. i asked people to raise standard not a single hand in the room when a. i then said let me repeat it. make sure you all understand. will anybody in this room do it? not a single hand and went up and i've been said let the record show no hands went up. was that a totally non-represent part of the american securitization forum, i mean, how can become if that is

correct, how could we have a robust securitization mark without a government guarantee if nobody is going to go into the tba market? >> resort appreciate your participation in our annual meeting. i would say the key factor that was omitted from asking that question is what the price would be. as i indicated before, i don't think you'll get any investor to say i'm going to transact without knowing what the price is, what the yields would be, and i think that's where if i was sitting in that audience i wouldn't raise my head because i would want to know and negotiate a price. >> i realize my time has expired. i have lots of more questions but i think we're doing a second round. >> sure. the gentleman from new york is recognized for five minutes. >> thank you, chairman, and thank you to our panelists. appreciate you coming in, giving us your testimony today. mr. deutsch, can you just go into a little bit about how the

gses underprice credit risk? >> well, i think what you see in the credit market right now is the gses have what they call guarantee that the charge the people selling into their securitizations effectively. you can look at various ways. i think fhfa has a good report out on how that guarantee fee is effectively underpriced. so that if you sell a loan to fannie and freddie and they will sell it out to mortgage-backed investors, there's a higher delinquencies of the fall, took a over the last few years. overtime, those aggregate to be more in terms of losses in the guarantee fee they're charging which is one explanation of why you have had $169 billion flowed in and freddie from the u.s. taxpayer. >> thank you. one other question for you as well. i think it was you that mentioned death by a thousand

regulatory cuts. a lack of a private security station, can you just described that a little bit, please? >> sure. i think what we've seen over the past couple years, there's no question in our minds him in our membership mindset that additional reforms have been necessary. we've been very supportive of things, even such as a basic records retention record as once it does not belson was supposed -- bells and whistles that are called for in the dodd-frank act. but those thousand cuts, when you add up so many different initiative regulatory initiatives, it makes it very hard for private sector capital to flow back into this market because if you think about your, running their own business, you've got 10, 20, 30 regulatory initiatives coming at you. you don't know how that will come out. very hard to go to your boss and say hey, we need to build up some infrastructure. we need to hire more staff but we don't know what's going to

happen with fannie and freddie. we don't know what's going to happen with these qrm rules that we don't know what's going to happen exactly with basel iii agreement it very challenging to be able to build and run a business. and i applaud folks like mr. hughes who has been able to come out of the market, get transactions going and be prepared for when the market does turn. i think most of our market, participants would say that may be used standalone, particularly getting the uncertainty around what will happen to fannie and freddie. >> thank you. mr. hughes, you've been critical of qrm, and if you could, just very briefly describe to me what is wrong with the proposed qrm. >> well, we haven't been that critical of qrm. actually the whole risk retention, we're probably one of the few people who are in favor of the risk retention rules, but i would say generally where risk retention has come out in the proposals and with premium capture and where it is going,

and it's just too cumbersome to actually make it work. sansei from a redwood standpoint we would agree with the proposal, rely on representations in warranty rather than a narrow definition of qrm. >> okay. thank you. i'm going to throw this out to the panel. i've often said the economy will fully recover and turn around and grow until we get the housing market turned around. i just think it's too big a sector. and if you could pick two things that you think the congress should make paramount, maybe we will get those -- what would they be? >> i have one.

>> okay. >> is a little theoretical here, but actually peter is a colleague, i would paraphrase, we would just recognize that whether there is an explicit or implicit on unstated government guarantee, the government is always going to step in to preserve markets. and so if we could, if you all could come around to making a confirmatory statement that you do see a role for some kind of limited government guarantee, at least in the foreseeable future for supporting the middle of the market, or the conforming space it is today, i think that would send a tremendous signal to the marketplace to begin planning ahead and moving forward with the conference of understanding of what the market would be like. just in that scene on and moving forward figure out how to structure that guarantee. >> thank you. >> glad to point out that everyone at aei does not agree. mike is the opposite, and that is to the extent that we have

any, involved in the market we will make, we will at least we can of the kind of problems we had because of the financial crisis in 2008. what we out to be sure that we do have is market discipline with firms being able to fail and firms that market for quality mortgages be able to bear the cost of that, or the investors bear the cost of that. so i would strongly oppose any system where we introduce the government to support the housing market in any way. i think they could be done perfectly well by the private sector spent my time has expired. thank you. >> the gentleman yields back. without objection we will do a second round. i would like to do, just with the dedicated people are many here but i'm told i'm not allowed to exclude other members coming in. but be that as it may.

i will start the second round and then go through it. so, from the testimony what we hear in one respect we've heard this before part of the issue is it is a supply problem and not a demand problem, that there is demand out there, this is applied problem from a lack of mortgages underneath them. but to the gentleman from california's question, i think is a good question, why isn't this happening above the conforming loan limits right now. i'll throw this at mr. hughes. could've parlayed in fact because the bank balance sheets as they are, the banks are just taking these things that because these are the million dollar homes and these are the ones, either one of them, ms. ratcliffe, is that what is having? >> that is what is happening. >> ms. ratcliffe agrees. i guess that answers that piece of the. i can't explain what the particular or in any actor will star as to why in certain cases you people are not getting the loans they are looking for but i

know i personally have a good grade -- credit rating score and i have a job. but i could not now going get a loan for a $700,000 because i'm on a fixed income. but to ms. ratcliffe, so, and anybody else on the panel as well, so the issue here is, i think what we're trying to do here is to change the focus from the focus by investors to being on, from the credit rating of the united states, which is having problems by itself, to the credit, credit availability or the credibility of the borrower. isn't that what we really should be trying to do? >> well, i think peter and i continued to argue for ever but it's not going to advance the market and i think if we could say we need to find the minimum appropriate role for government

as well as the responsibility for borrowers, and start moving towards structuring that, that's what i'd call it for you our plant foresees using mostly private chapel in this sector with an fdic like model where, after its off-balance sheets of the securitizers, the issuers would then have a pooled fund. you could go to a super catastrophic government guarantee. >> no one is suggesting that we would not, i think so else testify, no one is suggesting we are not having a government involvement in the housing sector, because even with this if this were to happen tomorrow and no one is suggesting this is happening tomorrow, is that you would still have the fha, you still have the va, you have ginnie mae, he would have a federal home loan bank, you would have the mortgage interest deduction aspect. i know that place into housing finance in the sense that we support borrowing in that way, right?

and, of course, there's probably a nude of other federal programs, some of which, as far supporting people as far as he neared programs. so all those would remain out there. i guess maybe the point that ms. ratcliffe raised, to the extent that what would happen if he did something to send a signal to the marketplace if he did something on top of that. i guess mr. wallison, anybody else, what signal would be if you say we will continue to have a backstop to the marketplace? would you get the same response than to your investors, as far as saying we will wait and see then? >> i think you are selling of securities to investors, tell them there's an implicit backstop with a gifted sensitivities implicit backstop, that will make it more desirable to them and the fact that they will be able to go back to the government, if -- >> so they will go there as opposed to hear?

>> if you have a choice, if you sell to private security and is holding public security, and at the same yield, you would choose the public security every day because your the u.s. government as a backstop and then it becomes called it a covered bonds by the u.s. government. but if you have just the private securitization out there, it will demand more you because they don't have that backstop behind it. >> the credit backstop, there's a difference in liquidity as well. so it's something that could readily -- >> that's what we're trying to do here is trying to get the liquidity up so you can get all the markets. i see mr. wallison commenting. >> i think as soon as people believe that the gum is going to remain in the market in some way through a guarantee, they are not going to put in the investments, put in the activity

to become securitizers, or work themselves into that field. it just doesn't make sense to think you'll be competing against the government. a government backstop of exactly the same effect as the government actually guaranteeing because it would just mean that the government, that the value of that government backstop is included in the risk profile, and reduce the return. and because it reduces the return from private investors will not be terribly interested in it. so you have to really give the investors a signal, not only the securitizers but also the investor market that could government is getting out. one way to do that, of course, is first to provide for the gradual winding down a fannie mae and freddie mac, and then give assurance that no other government activity similar to fannie and freddie, whether implicit or explicit, is going to be put into place to replace it. >> with all due respect, if i could disagree with mr. wallison but i think states stuck on this

point is supporting the status quo with 90% of the marketing supported by 100% government guarantee. the challenge is figure out how to limit the guarantee so that the taxpayers protected and i think you could do that. >> since you gave me -- so what's happening right now, there is an issue as far as that guarantee with regard to conforming loan limit. you saw what happened in the senate. the last question, ms. ratcliffe, should we be propping up the conforming loan limit osha that become inapt? >> if you read our plant, which in the long run we certainly see -- >> what about right now? we've got to get going. >> i agree. i think the difficulty here is exactly what i'm talking about. some of these steps are very hard to execute without a clear idea of where we are headed. where we are headed, the government should not be guaranteeing those high in the jumbo loans. >> so, i will introduce without

objection the statement from the national community reinvestment coalition who, on that point, take the view that we need that direction to the marketplace and we need for the conforming loans. start the trajectory down as was put into law. without objection, so ordered. mr. green is recognized. >> thank you. just to make sure i understand what each witness is on this question, if you're of the opinion that there is no role for the federal government in this market, would you kindly extend a hand into the air? i think it will help me to see. no role at all for the federal government? all right. >> clarify. in what market when you're saying the federal homeland us in market? >> no. no, not the federal homeland housing. >> just in guarantees? >> the market that currently allows for the government to

have, it was implicit but we made it explicit now with gses. because fhfa owns the gses. that's what we're talking about. is it fair to say the record will reflect that not one person, that would be mr. wallison, you -- >> talking only about government guarantees. that is for the private market for middle-class borrowers. >> exactly spent we don't need the government. >> but you're the only one but i just want the record to reflect this is the case. now, having that in the record, let me jade dash it let me just say this. i will get you, mr. hughes, if i may. my time is limited. i want to go to you, ms. ratcliffe. let's talk about this and i hate to use this term apples and oranges because it's become sort of a term that is not in good standing right now after some recent events and debates. but is it fair to compare the nonconforming with the

conforming, if we conclude that, come to some conclusion about jumbos. is it fair to use that for the entire market? >> i think your point is perhaps saying that the benefits of having a government guarantee are able to be quantified or monetized by looking at the spread between the jumble paper and wood of somebody getting a government-backed our government supported gse loan pay for a sum of mortgage product, and that spread doesn't look very good for people say there's not that much value. my point would be that again, it's true that apple and borrowers with a down payment and good incomes should be able to tap into that kind of credit at very efficient rates without a government back to packing. that's what we need to find out where that line is i'm not have government supporting that part of the market. however, if you want deeper into

the market you'd see i think these spreads be much wider but it's hard to know what that be because there's no real place to determine that it i would also say it's very unlikely that such a private market would provide the bodies of 30 year fixed rate mortgage that we're used in this country. so that's a factor that is not necessarily -- that's a higher cost to them because they are taking a great risk of we've seen the consequences of that. >> we always have and have the government involved in the market. at one time the absence of the government we had these loans have big balloons, short payment periods. people were not exactly eager to have their money on the line for 30 years. it was after fannie and freddie got into this market that we found that we could move products, especially for middle-class people and persons who are working people. they were able to afford homes. would you comment on this,

ms. ratcliffe? >> it's true that before effigy was introduced there was very small basically nonexistent market for fixed-rate mortgages and with more voluntary. some of the things we so repeated in the pure private market in the mid-2000. a nice thing about the 30 year fixed-rate mortgages the borrower knows what japan is going to be over time, effectively. and what happens is even with modest increase in their income, net income improves, the ldd automatically improves and it creates an excellent savings vehicle. that's largely thanks to the 30 year fixed-rate mortgage. so that product in of itself makes it possible for more households to be able to get into homeownership and do so sustainably. we study a portfolio of 50,000 mortgages made in the decade prior to the crisis. these mortgages were made by 30 somethings around the country, and generally the median income of these borrowers was 30,000,

most of them put down less than 5%. about how the credit scores were below 680, and yet we've seen the default foreclosure rate on this program staying below 6% even through this terrible crisis, which is much lower than you would see in the subprime market. this is just one example i put forward that these borrowers all had 30 year fixed rate mortgages that were prime price and under risk for a bill to pay. when we look at those identical bars were given different kinds of loan products we see the identical bars with different products had default rates that were three to five times higher than those having the 30 year fixed-rate mortgage. that's evidence about stability a product brings. >> mr. hughes, thank you for being patient. but i do have a question. and, of course, you may give a beneficial answer but my question to you is, with reference to the qrm, are you of the opinion that cannot be adjusted such that it would be suitable?

>> i think with the qrm tied in with risk retention, tied in with premium capture, i think it would be very difficult to try and unbundle it in a way where you could really get something that is actionable for people that would be originating loans and then securitizing them. .. services standard but a

lot of that is going to be done through the private market mechanisms for investors to get comfortable with how servicing will work on a go-forward basis. >> on an impairment? >> on impaired loans. >> any questions? >> i would agree with mr. deutsche. >> nothing to add. >> okay. how about on the tba market? how do you -- from a quick standpoint how do you see it working on the chairman's bill? >> for servicing standards? >> no, for tba, to be announced. >> for any private label security and private originations can replicate, and the price of replication will be a bit higher and doing it through the private markets but it can replicate being able to look borrowers in but i think the real question for secondary market buyers is the liquidity

of the securities without a government guarantee. just being able to move -- you can call things homogenous and they could be relatively homogenous mortgage loans but once you start creating loan level data in a secondary market for what would be tba loans -- without that government guarantee, then they start making differentiation between those loans and that does impair liquidity. >> one of the things we need to think through is what is the proper level. in addition you need these securities to be rated. i know we would -- we have tried to accomplish securitizations without ratings and just see if we can get investors together. it's very, very difficult. so i say in getting a liquid tba market we need to think through subordination levels and we need to figure out whether or not there's a ratings that will ultimately be attached to the security. >> mr. chairman, would you need that to be able to produce, you

know, a 30-day forward or what would -- >> one of the things -- i tried to start out my testimony that we're a little fuzzy on is some of the ideas and thinking it through. and i think probably what we need to do from our side is vet it more with investors and just begin to socialize it. >> we would love that input because that's something we're all talking about saying, you know, are we giving enough guidance to make sure that the private market is able to cover the -- you know, that need. >> i mean, i totally appreciate the emphasis on the tba market and on the emphasis of standards and granularity and categories and loan level data. the problem is there is a tension between these two things. if we do get to category xt, x, y, z of loans and you spread that across multiple issuers and different subordination levels -- the nice thing about the fannie/freddie is private

and i think it's a tremendous challenge. all that said i agree with mr. hughes that, you know, it's time to start exploring these things and trying some things out and see how they can be made to work. >> my understanding is that there was a tba market before there was a fannie and freddy securities and there will be a private sector and the real issue in tba market is liquidity and that's why to the extent there are certain classifications produced by fhfa here that they not be too many so that we would have a relatively few classifications of prime mortgages that are securitized which would allow some depth in that market. all you need is liquidity and then it works. it has nothing to do really in my view with a government credit. >> in our last 30 seconds, give me one or two changes that you think you need to be out there for the market.

>> for which? >> for mortgage insurance? >> we don't have any strong views on the markets. >> the m.i. market for the market that we're working with private investors really, there's very little m.i. that apply to the loans so we really don't have opinions on that. >> ms. radcliffe? >> i'm not sure what i would do to change the m.i. market. i guess it's worth recognizing that -- and we haven't touched on this in the discussion of the bill because it's really not in there. but another approach to improving the functioning of the market is not only to improve the pricing of risk but to improve the levels of capital across the industry sectors that are decade against the kinds of risk people are taking and rationalize that so avoid adverse selection. and the mortgage insurance companies actually have a very interesting model for capitalization that requires them through stockpile reserves and so it's countercyclical and

they draw down those reserves. they've paid some 27 billion in claims to fannie and freddie saving the taxpayers that money and, you know, they're allowed to fail and they're not too big to fail and i think it's a model worth considering. >> i think mortgage is of extreme important mortgage insurers will do their own underwriting. >> are there a couple of changes you would make in today's m.i. world? >> that i would make? m.i., of course, is regulated at the base level and in most cases it's worked pretty well. they have survived with the few exceptions during this terrible financial crisis. so it's a regulatory system that has worked well so far and we ought to make more use of it rather than -- especially when we have a situation where the rating agencies no longer have public confidence. mortgage insurers can -- >> forgive me. i'm way over your time. thank you for your tolerance. >> not at all.

the gentleman from california. >> thank you, mr. chairman. i'm the cleanup hitter here. i'm first going to make a couple of comments myself and then get to a few more questions. the chairman asked a question a question that i had posed before about, you know, perhaps why in this jumbo market there weren't a lot of lower down or lower credit loans and by the way, i bring that up not just because $800,000 loans are the norm by any means but that's completely unaffected by fannie and freddie and government markets. but the answer that everybody gave was that the reason for this was bank balance sheets and so forth and so on. for those of us and myself and ms. radcliffe who believe there ought to be a limited government guarantee explicit limited with lots of private capital in front in order to provide the fungibility that you're looking for, mr. deutsche, and the liquidity that you're looking for, mr. hughes, those of us who

believe that, the reason -- that's exactly the point. that's exactly the point. the housing market is such a huge part of the economy. it is such a gigantic part of each individual's personal net worth and, in fact, their retirement savings. banks are cyclical. everything is cyclical and when they have a loan to anybody and you probably don't need government guarantees. but when they go off like they are, then what? then nobody can get a loan. then nobody can sell a house. and then all kinds of problems happen and it will be procyclical. it will make rescissions into depressions and it will make booms into bigger booms and that's why this stability that ms. radcliffe and i are seeking that also provides that functionibility and that credibility that mr. hughes and mr. deutsche is looking for is the sort of thing we ought to be -- ought to be adding here.

you mentioned private mortgage insurance and we haven't mentioned at all of pmi organization based in mr mr. swikert's today. isn't it right an argument that pmi didn't properly price private insurance either? >> sorry. one of the reasons government doesn't properly price is doesn't have the incentives to price. it has an incentive not to price risk because that works better politically. but the -- >> whoa, whoa, whoa. okay. there's a lot of things that government can does that can work differently politically. that's why you have to try and take that pricing out of our hands 'cause you're right. we'll price it politically. that's not the right thing to do but go on. >> but i'm suggesting that the fdic and many other agencies that are supposed to be pricing in their insurance don't do it properly but in the case the

case of insurance companies -- and the way they do it they create a fund and the fund gets larger and larger over time, and that is what -- >> the private mortgage insurance right now is under huge stress, right. >> yes. >> with the failure of the pmi in the swaps market it's under a huge stress and understand, i believe there ought to be private insurance. i'm not saying there shouldn't be. in fact, i think it's an important part of the market but they mispriced it. >> well, yes, they mispriced it. >> okay. thank you. >> let me finish because i think it's important -- >> i'll get cut off. what's that? >> it's your time. >> you want to give me more time, i'll let him finish. >> yeah. >> we're over time anyway but we will give you the additional time. >> go ahead then. >> the way that the insurance companies work is they create these funds which they allow to grow over a period of time.

now, they are pricing for catastrophic circumstances for creating these funds and by and large the mortgage insurance industry has done that. there are two or three which have been in trouble but the re of them are paying their claims right now and will continue to pay their claims in the future. so they are the one area where we can be actually quite sure that these risks are properly priced. >> you know that a lot of the loss before the frannie and freddie, they're blaming on the fact that pmi failed they now have to step in and cover a lot of the losses for private insurance but, ms. radcliffe, you look like you wanted to say something for the private insurance. >> the m.i.'s are a recalls for hold capital by regulatory performance so it does kind of prevent them from pursuing a race to the bottom. and i think there was probably more of that, for example, in the main competitor to pmi which was the purchase money second, you know, those lenders really underpriced risk and we already talked about today the way the private label risk takers,

mortgage-backed securities market really act procervic -- procyclical. >> ms. radcliffe my question will be to you, relative to -- if there is no guarantees so we have something that's before us and we go forward, we talked about various things that may happen the 30 year fixed rate mortgage could disappear. there could be a premium interest -- in other words, the interest rates that people pay could go up. the number of people who have the ability to get a loan, could go down. there are any number of circumstances. and it could be all of those to some degree or whatever if there were no government. describe to us if we have no if any and freddie and there is no government support and there's just this bill in place, what do

you see that doing to housing prices, to the housing market to whatever you think it might affect? >> it's the result of fewer mortgages being available, fewer fixed mortgages being able and costs necessarily increasing. it would obviously have a strong negative effects on the economy and on household wealth. and those obviously need to be taken into account. moreover, i don't think those things are necessary. and all the things that will result in will results in lots and lots of jobs. and when we're all debating about how to create jobs, the last thing we should be doing is putting in policies that will without question lose jobs and i yield back. >> and you went through whole bunch of other different criteria as to what would happen. did you say what would happen under that scenario if the government does provide the guarantee and the government prices the risk wrong, what happens then? >> well, i would hope we would not price the risk wrong.

we have good benchmarks now for what that risk pricing should look like. and there are a number of things -- government doesn't have always the incentive to make a profit in pricing risk but they also don't have the same incentive to chase profits and take less risk and we saw the fha basically pull away from the market rather than chase it during the peak of the bubble. and so i think there are -- there are elements about government risk-taking. >> just briefly, where are examples historically of where the government price risk well? is that like flood or the pension flood? >> some of those cases that the government takes risks that the private sector will not take on and it takes risk to facilitate the functioning of the other private sector. if you want to look at the whole cost benefit equation you have to take some of those other benefits and externalities into account. >> yeah, but at the end of the day if they don't price the risk, who pays? >> the taxpayer but, again, we do have pretty good markers now on what crisis -- what levels of capital you'd need to have and

what kind of pricing you would have and that would definitely have to change from the old fannie/freddie. >> mr. chairman, the existing bill would have the government setting underwriting standards. they might do that wrong, too. anything the government does could potentially go wrong. >> right. >> but if that happened, who would -- who would bear the burden if that happened, the taxpayer or the investor? >> the american economy, depending on where they set it. >> the gentleman from california has come back for the second round. and the gentleman is recognized. >> i want to commend colleague from california for pointing out the importance of not allowing the conforming loan limit to go down in high cost areas as to pricing risk, i'd point out that the fha has done a good job cbo does a pretty good job, whether it's in the international sphere with loans to foreign countries

or opec insurance. and the idea that the federal government can't price risk, cbo is a tough taskmaster but they predict things that are just as hard to predict as downside risk and, of course, they price risk as well. now, ms. radcliffe, if we didn't have fannie and freddie and you're the average home buyer looking to buy $400,000 home, how much -- how many more basis points are you going to pay? i know kind of what that answer was in 2006, back when mortgage-backed securities were very popular with the market. what are you going to pay now? any idea?

i mean, i've seen estimates of about 75 basis points. do you have anything that would counteract that or contradict it? >> there's no way to know in today's marketplace what the average home buyer would pay if there was no form of government support in forming markets. >> could it be more than 75 basis points? >> certainly, depending on the borrowed characteristics. the loan amount being sought. >> so even people that are qualifying under today's fannie and freddie tougher standards for a particular loan might be paying 100, 125 basis points for that same loan. i see the person next to you nodding his head. >> well, i think making the arguments in the extremes that fannie mae drops off the face of the earth the next day and what is the market going to be like -- >> well, i didn't put it forward the extremes as if there wouldn't be a transition period and everybody would expect fannie to exist and then -- but

let me go on with my limited -- my limited time. what happens to home prices in this country, ms. radcliffe, if -- i've seen estimates that we're talking about a 15 to 20% additional climb in home prices. do you have anything that contradicts that? >> no, sir. >> and this may be a little bit outside of your expertise, but it's something that mr. campbell and i face all the time. what happens to the economy particularly in places where people have so much of their life tied up in the value of their home if we see another 15 or 20% decline? are you aware of any studies on that? >> i'm not aware of any studies. i think we've discussed some of the impacts on, you know -- obviously, on jobs and household

wealth. i think one thing we haven't talked about that's worth always keeping in mind is that today we're seeing a substantial loss of wealth in housing that's going to translate especially as people draw down on their retirements and pay retirements that may be under water. this is kicking the can on down the road to make it a requirement savings problem. >> and i point out, you know, a lot of people think this only relates to folks that are looking to buy a home or looking to sell a home or looking to refinance a home. what i point out to people in my area is, if you're just planning to continue to live in my area and you hear that the home down the street sold for 100 grand less than everybody expected, you're not going out to dinner after that unless the restaurant has golden arches in front of it.

the economy of the san fernando valley reflects 90% of the people who are not buying or selling or refinancing. as to the bill, as i commented earlier today, i don't know whether this bill is just designed to assist what might remain a niche market and that is the nongovernment-involved mortgage-backed securities or whether it's the first step in taking the radical step of pushing government completely out. so if this is just going to make the niche market more efficient, it would be hard to have any of us oppose it. but if it's the first step toward the calamity that i've discussed with ms. radcliffe and others, you won't find a lot of support on this side of the aisle. not -- there will be some nonsupporters on your side of the aisle, too. with that i yield back. >> and the gentleman yields back

recognizing the calamity that we're in right now because of the status quo of the gse's and the government backstop that has been provided to them. with that, i will say that without objection we'll enter into the record a letter from the national association of federal credit unions. seeing none, so ordered. and with that, we will i would like to very much thank this entire panel for all of your expert testimony and input and dialog that we had going back as with the first panel, all panels, the record will remain open for an additional 30 days for additional questions that we may have and, again, i thank the panel very much. and this meeting is adjourned. >> the u.s. senate is preparing to gavel in later today starting

at 2:00 eastern time with about three hours of general speeches. before starting legislative work at 5:00. they'll be working on a bill to repeal a 3% withholding tax from federal contractors. with a procedural vote on the measure at 5:30. you can watch the senate live starting at 2:00 here on c-span2. president obama will address employment opportunities for veterans during a speech from the white house rose garden. that's scheduled for noon eastern time and we'll have live coverage of his remarks on our companion network, c-span. >> and later tonight, former secretary of state madeleine albright will host a forum on the arab spring from the national democratic institute. that gets underway at 5:00 eastern also on c-span. and more live coverage tonight at cbs chief correspondent laura logan speaks at george washington university about

covering conflicts. that's at 8:00 eastern on our companion network, c-span. >> almost every other developed country in the world you pay taxes in each country you make it. the united states taxes your global income so essentially you're being taxed twice for the same income. it makes the u.s. companies anticompetitive and forces them to leave their money overseas. >> tonight on the communicators, gary shapiro on recommendations from its members for the deficit reduction committee. >> the thought is here when we need some economic stimulus, we could have this money come back here, pumped back into the economy at a lower tax rate at 5 or 10%. and that makes sense. >> the communicators, tonight at 8:00 eastern on c-span2. >> last thursday republicans on the house energy and commerce subcommittee on oversight voted to subpoena white house records

related to the solyndra loan guarantees. solyndra is a solar panel manufacturing company that went bankrupt after receiving $535 million from the energy department. during the hearing republicans accuse the administration of refusing to cooperate with the investigation. this is an hour and 45 minutes. >> good morning, everybody. and the subcommittee will come to order. the chair recognizes himself for five minutes for an opening statement. my colleagues, my purpose of today's meeting, business meeting, is to authorize the issue of two subpoenas to the white house and to the office of the vice president for documents relating to the d.o.e. loan guarantee to solyndra incorporated. this is only the second time this subcommittee has considered a resolution authorizing a subpoena in this congress. earlier this year, omb repeatedly failed to cooperate with our investigation and we

agreed to put off a vote on that subpoena because we were assured that engaging in a dialog with the administration and the minority would resolve all the problems without the need to resort to a subpoena. but that was just a stalling tactic. and we were forced to issue a subpoena several weeks later. unfortunately, the same continued uncooperative conduct by the administration has necessitated today's vote. on september 1st, 2011, this committee requested documents from the white house counsel relating to the solyndra loan guarantee. specifically, the committee asked the white house to produce all documents containing communications relating to solyndra between the white house and solyndra. and between the white house and solyndra's investors. two weeks later, white house began to produce selected communication, which revealed that senior advisors in the west

wing were monitoring and discussing solyndra. based on these documents we sent a second request to the white house counsel on october 5th for all internal communications that were relating to solyndra. we requested that they engage in a dialog with us about how best to manage the production of documents. instead, the white house counsel's office waited until october 14th to respond informing us in a letter that in the opinion of the white house, the committee didn't need to see such documents. on october 18th, the committee staff informed the counsel's office that it needed to invoke a valid privilege or produce the responsive documents. when asked again, the contact committee staff in order to start a dialog on this issue, the white house counsel office refused to engage in any discussion. one week later, on october 25th, the white house counsel sent another nonresponsive letter to

the committee, again, refusing to produce the documents because in the administration's opinion, the committee did not need to see such documents. only after repeated failed attempts to engage the white house did the committee notify the white house and the administration that it intended to notice a business meeting to discuss a possible issue of subpoenas to obtain the requested information. this finally got the attention of the white house counsel. and we met with her yesterday, unfortunately, the white house was unable or unwilling to answer the basic questions, do you have any responsive documents? are you going to be asserting executive privilege? what quantity of documents do you have? have you conducted an internal investigation to inform us as to what types of documents you have? without the answers to these basic simple questions, it is nearly impossible to narrow or limit the scope of our request.

as the president himself has stated, quote, the government should not keep information confidential merely because public officials might be embarrassed by disclosure because errors and failures might be revealed or because of speculative or abstract fears, end quote. my colleagues, i regret we have reached this point. the committee has been investigating this for over eight months and it's clearly established the legitimacy of our investigation. two of the first three companies to receive loan guarantees have now filed for bankruptcy protection. just yesterday, the d.o.e./ig stated in his congressional testimony that the low guarantee program has been badly mismanaged and it could not, quote, readily demonstrate how it resolved or mitigated relevant risk prior to granting

loan guarantees, end quote. this is extremely troubling. we have a right to know who's involved, what decisions were made and why. at this point in time, i'm not confident that we will have a good faith response from the white house without issuing a subpoena. now, the committee does not take this action lightly. voting to authorize this subpoena is a necessary step in carrying out this committee's constitutional obligation. we simply cannot allow the executive branch at its highest level to pick and choose what they will produce or whether they will produce anything at all. keeping documents confidential because public officials might be embarrassed by disclosure or, quote, because errors in failures might be revealed, unquote, inexcusable. the american people demand more we have a constitutional duty to pursue this important investigation of the d.o.e. loan guarantee progra f