the neighborhood, and it will be worse for the $5.4 trillion book. so the view that i have had and i share it with the management of fannie and freddie is that their number one job at the moment is to help try to stabilize the mortgage market. >> even if that may be in the short term or whatever is not the best thing for the financial result of fannie and freddie? >> it is really a short term negative on the financial result, because they get to take this back in, and in fact, that accounting is going to change january 1st of next year with the consolidation of all of the mortgage-backed securit)ek@ @ @ [captions copyright national cable satellite corp. 2009] [captioning performed by the national captioning institute]

i'll just say, i would have a hard time understanding why members of the committee, given that the fanny and fred ri are under receivership -- conserve toreship -- conservatorship would not be allowed to see this letter. but i would hope the chairman and the committee would support that position. the chairman and the committee would support that position. >> i can tell you this letter has been discussed with the new board at the first meeting of the new board as the new secretaries came in, and we have gone through the contents and continuing to look at those issues and we will continue to work through those issues. i, again, as we work with the board members, it is an advisory board, and they have been very helpful, and i think that it is very useful to have that kind of

dialogue, but to the extent that it gets out in the public is not as helpful and we may not have as much dialogue in the future. >> it is very confidential and the only people i know that have it is the press. >> i guess that makes the point for me. >> thank you, mr. chairman, since we have an oversight responsibility, we should be seeing the letter, but another question is that i believe that the s.e.c., and i believe your belief, sir, is that we have about $150 billion in risky, and there is a fannie and freddie have about $150 billion in risky outstanding mortgages, but the s.e.c. believes it is closer to $1.7 trillion. how do you reconcile that difference or what or why do they feel it is so dramatically higher than i believe, if i have the numbers right that you believe? >> i don't know where the $150 came from, but maybe it is it might be that they have about

$170 billion which are risky no doubt about it. and they also have the $5 trillion. there are higher risk mortgages in that book. some subprime, not much, but interest-only mortgage, option arms. there's a series of things that add up -- they don't add up to $1.7 trillion. the sec double counted some of the mortgages. the numbers i would say 1.4 of the 5.4. >> okay. i'd love to ask more questions but i believe my -- well -- i'll ask this question we discussed earlier. it's my understanding that some of the early default rates, first payment default, that sort of thing on loans made since the first of the year, long after we knew about this crisis at fanny and freddie are equivalent to default rates that were done before all of the subprime stuff kind of became out there.

is that true? and, if so, is that part of the strategy of helping the housing market by continuing to make loans to subprime and other lower qualified and lower underwriting standards? >> it does no one any good and that's one of the lessons we really learned in the last two years, to make a loan we think they'll default on orphan any and freddie thinks they'll default on. it hurts everybody. it's not part of the strategy to make loan that is fanny and freddie think there are be defaults on. fanny and freddie have tightened their standards over the last year and since the conservativership and frankly, they have gotten grief from many groups fosh doing that. but i think it is appropriate. you have to take a balanced look at the credit but it does no one any good to make a loan that someone's going to default on.

>> do you know what the first payment default rate is? >> i don't have the number in front of me but i can provide it to you. it's not only a function of the loan, but it's a function of the economy and as i told you earlier, it can be a function that the underwriting was poorly done and in that case they can return it to the financial institution that sold it to them. >> thank you for your forebeerns there, mr. chairman. >> will can gentleman yield? >> i'm happy to yield whatever time the chairman would allow me to have. >> along the analogy that there may be some short-term costs involved but the long term, the overarching goal is to stabilize the marketplace maybe it's not bad from that analysis. maybe it's not bad to say we're going to underwrite loans at term that is aren't necessarily likely to get paid back because if prop up the economy over the

long term. congressman, you know, a default doesn't help anybody and it doesn't help individuals, neighborhoods and. >> particularly a first-payment default if that information i have is correct. >> right. >> we have two votes on it. we'll takeó?ó

can committee >> the subcommittee will reconvene. >> thank you, mr. chairman. recognize in when mr. whensly. >> mr. lockhart, you stated as, quote, as conservator were their most important goal is to preserve the assets of fanny and freddie but as regulator, their mission is to ensure liquid iit stability in the morning market. that seems like it gets to the crux of the matter. how do you reconcile these two missions? how are you serving two masters? >> we actually reconcile it

pretty easily because the safety and soundness that you left out of that statement is also important in the mission side. and certainly conserving assets is a safety an sound principle. my view and it's critical that the best way to conserve assets for fanny and freddie is to be able to be aggressively modifying loans, refinancing loans and ensuring the liquidity in the mortgage market. if the market continues to fall, those loss also continue to mount so the best way to conserve assets is for them to fulfill their mission of providing liquidity, stability and affordability in the housing market sn market. >> under what scenario would you recommend an alteration of the

status of conservatorship to receivership? we're already at $85 billion of taxpayer exposure. 400 has been authorized but uncle sam is 80% owner of the gse and on the hook for $5.3 trillion, i believe. is there a scenario where you would say the conservator ship is not working. >> we look at the receivership last august and september as we consider had with to do with fanny and freddie. and it was our view that conservatorship was a better alternative for the mortgage markets and the economy and that's still my view. if we're going to stabilize the mortgage market receivership might have the wrong impact and it might unstabilize the market. so at this point, we're not

contemplating the receivership and i don't really see the advantage of receivership versus conservatorship. >> is the taxpayer on the hook for the $5.3 trillion or not? >> the taxpayer is on the hook for the senior preferred facility that the treasury department negotiated and that's $200 billion to fanny and freddie and $200 billion to each of them. >> but the $5.3, the federal governor is owner. >> the fraederal oh foe you're shareholder you're not responsibility for the debts of the company. >> it's a very unique shareholder at the moment. it seems to me that port of the

problem that was created was the whole implicit versus explicit guarantee. and we know that one of the reasons that fanny and freddie is seemingly the only gam in town and their market share of new mortgages roughly doubled, is because of that guarantee. is there any scenario where you would recommend that the full faith and credit of the u.s. be behind all $5.3 trillion of mbs? >> the implicit guarantee was a problem. we talked about it in this room many times and other places that there was no market discipline for these two companies because of that. and we didn't have the powers as the regulator to, you know, control their growth. and the market wasn't doing it

either. my view is that there is no reason at this point to make that explicit. i think the $200 billion senior preferred -- given effective guarantee and i think that's all that's necessary at the moment. and certainly, there are buyers of the debt and mortgage-backed securities. >> don't you think the buyers of the paper that's, once again, congress would come to the rescue and bail them out? >> the buyers of this paper think that there's strong support from the u.s. treasury through the senior preferred, yes. >> so what's the exit strategy? >> the exit strategy is partially the new structure we've been talking about here today and you can't do that in my mind. you can't bring them out in conservatorship until the market is stabilized. there may be a portion as in receivership that gets left

behind in what you might call a bad bank, if you will, that is protected by the senior preferred and then there's a bridge to a new organization. >> thank you. you're out of time. >> the gentle lady from illinois. thank you, mr. chairman. i have several questions, director lockhart, so if i could run through them rather quickly in the time allotted. number one, many consumers in my district are thinking long and hard about purchasing a condo based on all the new requirements that are causing strain for home builders and community bankers. so many people start and then say, i'm not going to go through the process when they get into

that. could you comment on that? >> well, the gses have historically had standards for a new condo that 70% has to be presold. during the period when they lowered the credit standards in many areas they lowered that standard as well. but now they have restored that standard. in some markets there is a big issue of very empty condos and, again, it doesn't make sense to make a loan that might go into default. and so they continue to work with condo developers and to the extent that they see it is a good project they can bend those and change those rules. but it's something that they think from a safety and sound standpoint makes sense. >> so it's a waiver? or just wednesdaying the rules? >> it would be a waiver.

they would look at bending the rules is probably not the right word. they look at projects and to th another illinois issue. why is it fanny and freddie still have a policy, for example, in the state of illinois, they only permit a handful of law firms, i think in illinois, it's two, to handle foreclosures. this continues to bottle next

the system, it's anti-competitive, and i think a disservice to lenders and sellers and borrowers. and think a disservice to lenders and sellers and borrowers. >> i'm not sure about the situation in illinois. but i know in some other states they are trying to expand their legal representation. historically, there were not a lot of foreclosures and now that we're seeing, unfortunately, a pretty rapid growth in them, they, too, will be looking at how to more expeditiously work through the issue. >> is that something -- is there anything -- is there any regulation on this? >> not that i'm aware of. we'll go back and ask fanny and freddie about that issue. >> okay. then why is it that the home evaluation code of conduct has been implemented without the traditional public scrutiny and review? it seems like this new policy

wasn't vetted through congress, but only at a side deal made with the officials from the state of new york. i think it really is a dramatic policy that could severely impact many small businesses in my district and elsewhere. >> the new appraisal code is actually by fanny and freddie and they have historically had appraisal codes. and this is the strengthening of that code. and it was done after a lot of comment, they received many comments from a whole series of different groups and they made significant changes in the appraisal code from what they originally agreed to. and it's really designed not to hurt small businesses. what it's designed to do in many ways, is opposite, to take the pressure off the appraisers to do bad appraisals, to do too

high an appraisal. a lot of problems went on in the last three or four years in the housing market and one of them was appraisal fraud. this code was designed to help reduce that. and chairman kanjorski is working on the piece of legislation as well and we applaud that effort and certainly, fanny and freddie will comply. >> quickly, what's the compelling reason to increase consumer fees? >> the -- if you're talking about the fees related to guarantee fees that fanny and freddie have in place, they have a 25% -- excuse me, 25 basis point adverse market fee they've had for a while. they were going to raise that another 25 basis points burr

after the conservative torship they decided not to. but they've done some risk-based pricing. they've raised the fees where the risks are higher. this is the balance of trying to conserve assets verb us is the mortgage market and there's things that have to be done. we've watched what they've done and we've talked to them about what they've done and they're very much working to try to achieve a balance between safety and soundness. >> thank you. there's no question that we need a gsc reform package. i don't know that we want to have the taxpayers eternally bailing out all of the various companies including the mortgage giant. so, thank you very much for being here. >> thank you. >> thank very much. and now we'll hear from mr. adler from new jersey. >> thank you mr. chairman.

mr. lockhart i want to follow-up on some questions. my sense is that mortgage insure percent lack the capital to underwrite new mortgages. i'm wondering what you think the fha could do to that problem for america? >> that's a good question. as you know fanny and freddie cannot write mortgages above 80% loan to value to they've relied historically on mortgage insurers and in the more recent past something called pi giggyb insurers. the mortgage insurers like many other players in the mortgage market, took some very significant losses and their capital has been completed and that's meant that they can do less mortgage insurance than they have in the past. and rightfully so, they tightened their standards as a result. and means fanny and freddie can make less loans which historically, has been an

affordable space. we've been working with the mortgage insurers. we, being fhfa, but also, fanny and freddie have also worked with the mortgage insurers but fha has been working with the treasury department and if there is a mechanism under the t.a.r.p. funding to help them get back into the marketplace and bring more liquid dity to t mortgage market. >> do you think t.a.r.p. is the proper vehicle? >> it's well within the philosophy of t.a.r.p. related to mortgages and housing as one of the key target markets for the t.a.r.p. funds. we've been talking to treasury about this. it's different. the t.a.r.p. banks all have federal regulators. the insurance companies as you know, don't have federal regulators and with the federal regulators that made the

recommendations to the treasury team. so we're working our way through the various issues. >> leaving aside t.a.r.p. for a second, are there other governmental solutions, congressional solutions you would seek for us to consider that would try to right this situation? >> my view is that the better mechanism would be t.a.r.p. the -- it's difficult to see what these are state regulated entities. it's difficult to see what congress could do to help. >> i think there's enormous concern that fanny and freddie are big and maybe, too big. there's some discussion that maybe we need to have a few smaller entities to provide the gsc service. >> i've always said their portfolios are too big. one way to shrink to them would be toe shrink their portfolios

over time and that's part of the senior preferred agreement. i don't think it should be done right away. i think we need to get through this crisis first. there are proposals on the table that say that maybe there should be more gscs or more players in the secondary mortgage market space and i think that's something that needs to be looked at. i really have not formed an opinion one way or the other but it definitely should be looked at. >> i'm sure we'll look at it. thank you very much. i yield back the rest of my time. >> now we'll hear from the gentleman from california. >> thank you, mr. chairman. when we look at the factors that created this economic catastrophe here, i don't think anybody says there was a sole cause. most economists believe one of the major causes besides fannie mae and freddie mac one of the major cause was the fed fund's

rate in europe and here in the united states, the central banks setting a negative interest rate when adjust ford inflation for four years running. there's no way that wouldn't cause a housing bubble. but the question about the involvement in fanny and freddie purchasing subprime, purchasing the loans and the instruments that, otherwise, would not maybe find ready buyers out there, that is unique. and that is a part of their role as government-sponsored enterprises, really, that they evolved into. as i said originally in '89, they wouldn't go near a lot of these practices and especially wouldn't go near the idea of buying these things for their own portfolio. but then that process changed and politics took over. what i wanted to ask about -- and i'll mention a

couple of other factors as well. i don't think anybody says it was solely fanny and freddie but a number of economists worry about the bullying in the market that went with cra in terms of the direction of loans to be made. there's a lot of worrying about what we placed in statute in terms of the nrsros and the credit rating agencies and the way in which we replace by statute, what otherwise would have been done by market discipline. the implication there were that because these were government-sponsored or because the government was engaged in setting up these standards that it removed market discipline from the equation and that helped to compound the problem and this is the root of my question and i wanted to ask this of mr. lockhart and mr. dickerson. i think one of the most telling statements of the gsc's impact

on the entire mortgage market came for me when a former freddie mac employee who mentioned that the executives at the company understood that when they begin purchasing junk mortgage-backed securities as he called them, based on subprime they were sending a clear message to the market that these were, in fact, safe investments. in other words, if the duopoly that controls the market it's a message that these have been analyzed to save. prior to that time, fannie mae and freddie were exclusively known for buying more conservative, conforming loans so when they began purchasing junk mortgage-backed security it was a clear deviation from their prior endeavors. do you believe the executives at fanny and freddie understood the message they were sending when

they began to invest in junk mortgages on such a large scale? >> they we investing these private-label securities that had subprime, alt a and higher risk mortgages that were nontraditional. no doubt about it. they stayed in the aaa space and as it turned out, they and the rating agency's model fail doppler raded dramatically. whether the management realized it or not i cannot speak for them. i can tell you to pick up your other point, they did get affordable housing goal credit from hud for buying these securities and they thought they were profitable and they were buying them because they thought they were profitable but it helped them to get the credits. >> and i wanted to go to something that the treasury

secretary mentioned, former secretary paulson said this. this has to do with the three objectives that he thought we should have in terms of a reform gsc structure and i'll ask mr. dickerson about this, too. no ambiguity as to government-backing. a clear means of managing the conflict between public support and private profit, and a strong regulatory over oversight of the results institutions taking politics out of the regulatory oversight function and allowing the regulators to do their job. do you agree these three objectives should be achieved? and what do we risk if we fail to meet that task in the future? >> i definitely agree with the three objectives and i think i incorporated them in my five principles as well. it's extremely important to get it right. the ambiguity between public and private, the m big youity between mission and safety and

soundness, helped to cause some of the problems we have today. so as we go forward we're going to have to really concentrate on what i said, the five principles and what he said was three. to make sure that we can recreate the secondary mortgage market in th country in a safe and sound fashion. >> you want to -- >> i would agree with that. certainly the need for strong regulatory oversight is going to be a need that we'll need to continue for sure. >> thank you very much, mr. chairman. >> five minutes, please. >> thank you, mr. chairman. mr. lockhart, first i want to thank you for the phone conversation we had several weeks ago concerning the home evaluation code of conduct. but i'm very