answer that i got to our letter dated april 30th, under your pen on may 8th of 2009. the o code of conduct is set forth in the news release says to improve the reliability of a home apraels. and my question to you is, if a homeowner gets an@@@@ the lender has the right to make the decision. >> i understand that. but what if the lender is open

to another appraisal? d what if the lender is opened to another appraisal? >> what if tlender is opened to another appraisal? >> correct. >> the lender -- in my view, the lender cannot shop around for appraisals. that's one of the big problems we had in the last two or three years. >> i understand. the other problem is this and i refer you to page 3, number 9. we discussed this at length on the telephone and you gave me no answers in the written inquiry. if an appraisal comes back that's in error, the only way that you can get another appraisal, second or subsequent appraisal is if there's a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is

clearly and appropriately noted in the loan file. or unless such appraisal or automated evaluation model is done pursuant to written, preestablished bone tied me or post funding review or quality, et cetera, et cetera. you're inability to understand my question and the inability to answer it is based upon the fact that i don't think that you're organization knows anything about real estate closings. the people that came up with this rule that was. >> the people that came up with the rule are the biggest mortgage lenders in this country. i mean it's fanny and freddie that came up with the rule. >> i understand that. my question is -- >> and the point is that if there is a mistake the mistake klg corrected. not under you're rules if you read it oh. >> every state has an appraisal regulatory board. >> so here we are trying to close a real estate sale and there's i a big problem with a

appraisal -- let me give you an example. in a townhouse area i know end units are $500,000 and inunits were $470,000 and an end unit just sold for $350,000 because the party died and it was out of state heirs and they were in a hurry to get the sale done. so the appraisal comes in at $350,000. and the guy who wants to sell his townhouse, an end unit that should sell for around $500,000, under these rules -- and these are your own rules -- he has to gooert to another lender which is absurd under the circumstances -- or show a reasonable basis to show the initial appraisal was flawed or tainted. i mean, your rules can purposely devalue a home that somebody's trying to sell because you've got so much bureaucracy tide up in it. >> if the appraiseer is

professional, he will have looked at the circumstances of that $350,000 sale. >> that's not connect. you may have somebody that may not know that the original owner died and it was a fire sale. my whole point here is, if your job is to come up with a fair appraisal, which you say to improve the reliability of home appraisals, there's no recourse in here for the homeowner and the homeowner doesn't choose who the mortgage company will be, to say, let's get another appraisal and somehow you think that's collusion and i think that's just a lack of foresight on the part of the people that came up with the regulations. >> well, a lot of this regulation is based on the u.s. path as you know. and -- oh. >> based on what? >> u.s. appraisal practice that is have been -- >> i understand that.

that's methodology of doing it. in fairness, i'm talking about -- it's a simple situation that i brought up and -- >> i'd be happy to see your proposal and we'll certainly forward it to fanny and freddie. >> i'd like you to answer my letter, number one. and number two, we asked for the number of banks that own these appraisal industries. >> we tried to answer your question in the letter and if there's some areas you feel we didn't -- >> i would like to submit this under the authority of the chair if it's okay with mr. can jkanj and let me -- let me finish. >> if you feel there's some we haven't answered -- >> you haven't answered. look at my questions and your answers to them. one of might have questions was very simple. how many banks actually own amcs and you said, we don't know. would you consider -- >> we don't know but we'll try to find out. >> that's not what you told us in the letter. >> well that's what i'm telling you now.

>> then i would like, you know -- would you consider regulation forcing any bank that owns an amc to disclose that so you can avoid any collusion, which is the purpose of this document? would you consider regulation to that effect? >> we don't have powers over banks. we only have powers of fanny and freddie. >> you could make the suggestion or you could even put night an amended rule if your whole purpose is to stop collusion. wouldn't you agree with that? >> excuse me? >> you could amend your rule here, couldn't you? >> it's fanny and freddie's code not ours. >> i understand that. but you're the regulator for them. >> well, i mean, as i said earlier, congressman kanjorski is working on legislation in this area and if there's something you feel that fanny and freddie didn't do properly -- what fanny and freddie were trying to do -- and i think it's an extremely important role and they didn't do as well the last two a three years -- is set better standards in the marketplace and that's

what we're trying to do here and -- >> you gave banks the sole authority to pick the appraisers. that's what you did. >> not at all. >> you did. the bank that chooses the appraiser either through an in-house appraisal company that the bank owns or somebody else -- >> we try to -- >> that's like asking people to go to separate restrooms. i mean, that doesn't work. you know that doesn't work. i mean, if the -- if you have the opportunity to stop collusion, you would say, look it. the banks can't own these amcs. wouldn't you agree that would be the better way to do that? >> again, to the bank regulators as to the ownership of amcs. >> but y could have made that suggestion, could you not have? >> we can make suggestions but wouldn't have the power of -- >> i understand that. do you understand what i'm trying to get around here? >> i certainly understand that

you're concern in this area and certainly, we'll try to respond and we'll be happy to have another meeting with you to go through these issues to figure out what you think should be changed in the code that would make it more responsive to your needs. >> fair enough. >> okay. >> thank you. >> thank very much. and i will recognize for a motion -- >> just for a second. i'd like to introduce into the record -- for the record, a highly confidential restricted report from 2005 that fannie mae staff presented to management at that time. which showed the trade-offs between staying the course and maintaining strong credit discipline in the company, versus accepting higher risk and higher volatility and higher credit losses in order to drive up profits for their shareholders. >> without objection, so

ordered. now we'll recognize the gentleman from california. >> thank you, mr. ckanjorski. i have great respect for the chairman but we happen to disagree. i wrote you a letter and i appreciate your response. i read the letter several times and it basically boils down to one sentence. your response to business practices have been adjusted and each market participant can adapt to a more responsible system that avoids coersion of appraisers and reduces the opportunity for fraud. and i guess the problem i have with this is i know a lot of realtors and mortgage brokers and appraisers have been in the real estate business since i was in my early 20s that are really good people and it seems like we've struck a deal between the attorney general of new york, perhaps for all of new york -- i don't know -- and your office,

that impacts 80% of all of the loans made in this country. period. it didn't go through the administration procedure act or regulatory flexibility act which i think normally it should have. and i'm really bothered that we're in a difficult real estate market. i mean, most of the people i know are somewhat involved in development or real estate. i was a real estate broker and developer since i was in my early 20s and everybody i know is doing pretty bad out there. i know banks are suffering out there because they're having to foreclosure homes and having the issue of the marketplace which is further declining and i have homes out there for sale and i think it's problematic and reaching a real bottom in the market. if we're going to look and say, what can we do that really helps consumers? what can we do that is really fair to business people and

everybody in the broad base? it seems like we're going in the wrong direction. this is my opinion. you would have a mortgage broker who has a client that they're really trying to shop for the best loan they possibly can but they can't even shop for the best loan and provide an appraisal associated with it that lenders can look at and where they can determine whether they can get the best deal for their client, because now we solely have to rely on the bank to do the appraisal. now, when i was a developer and building subdivisions that was very common. you go to the bank and the bank does the appraisal on your subdivision. but a subdivision is altogether different and much more complicated than making a loan on an existing single-family home or a new home that's been completed and you can establish some reasonable fair market value. one has much broader pitfalls and more area that is can go wrong and complicates the appraisal for a lender when you're dealing with a subdivision than an individual

home. i just -- i'm really concerned that we're dealing with a very difficult marketplace. we're dealing with consumers that are having very difficult times even getting loans today, as you know. they have to have stellar credit to get a good loan and if gscs were not in the market they wouldn't make any loans in california to be honest, because they're the only ones willing to lend. ems can't sit on the loan for that long time because they don't have the liquidity to do it. they go to their realtor or local mortgage broker trying to package a loan for them and go out and shop the loan. the marketplace it seems like we're making it much more difficult and hamstringing it in more ways by saying, an agreement that, perhaps works in new york and maybe it's goodor the state of new york, i don't know -- but it doesn't seem to be the best thing for the state of california and many other

parts of the nation, to make it much more difficult and place much more control in the hands of one bank rather than having an individual being able to shop a loan with numerous banks. because the problem is, if you approach a bank for a loan they'll do the appraisal and you can't take it to another bank because the appraisal is proprietary property of the lender. i don't know why we're going in this direction. maybe you can tell me. i understand fraud. but we can deal with fraud. if you have appraisals writing improper or fraudulent appraisals you can hold that appraise ear countable and that's easy to do. that's why we have laws in this country and there are laws against doing that. it seems like we have all these laws on the books that prohibit coersion and fraud but we're saying, we might have laws but we'll make it illegal altogether. i want to understand the benefit of why we're doing this. >> i agree to you that we don't need to make life more difficult

for the housing market at this point. i think you're right on there. on the other hand, we also want to make sure things are done in a safe and sound basis. there is not -- the mortgage broker take a appraisal by one bank and use it for the other banks. that's certainly -- proprietary appraisal in many cases where they prohibit that package from being shopped. >> as i understand it the bank regulators do permit the transfer of it. >> they permit it -- the bank paid for the appraisal, and that's like i'm not allowed -- i'm not trying to interrupt you -- without authorization i'm not allowed to use somebody else's appraisal because somebody paid for the work sflukt there may be some occasions where another bank will order its own appraisal. that, unfortunately, is a little extra friction in the system that could happen. but the idea was that in too

many cases, brokers were getting appraisals during that period that so many things went wrong in the mortgage market and i think -- >> well, let me back up. what went wrong in the mortgage market was gscs did a great job of bundling mortgage-backed securities for years. they'll really did. and if a loan that though bundled went bad, they would replace that loan. and in the all of these other private sector lender said, that's a good idea. look at all the money coming from wall street and they started making loans just for going normal underwriting standards and appraisals and to see if a person had a job. we can go back to predatory versus subprime and we can really define what went wrong in the marketplace and i can blame the lenders who made that and those that made a fortune po bundling mortgage-backed securities making loans that

were not even junk bond quality because they didn't even confirm the person had a job. i don't want to go back and blame my local mortgage broker and realtor who didn't participate in that fraudulent act and say, perhaps there's a few bad apples out there so let's overturn the entire bucket. i'm not trying to argue with you on that. i don't think we thought that particular process through. i think we're lumping -- and i agree. there was a lot of fraud. i can point to a few people out there who made it that caused those problems that i don't need to publicly point out because a lot of them are gone and have been bought by other groups. we know who bundled these and we know who made a fortune bundling them and left the the investors holding the bag who bought the junk. but we seem to be going after a sector in the marketplace that wasn't responsible for that. i would ask you -- i'm trying to be polite in this. i'm not trying to argue with you. i'm not trying to be rude and cut you off.

and i have the greatest respect for mr. kanjorski but we just don't agree on this issue. i would really hope that you would take a moment and have somebody go back and review the process that normally took place. how we would deal with this, look at existing laws on the books and if not, the case needs to be made as far as corrupt brokers and corrupt mortgage brokers and appraisers and without turning the entire cart over because an agreement between one state and your office that, perhaps, maybe there's a real problem in the state of new york. i don't know. maybe there's a real reason why the attorney general would come to you and say there's such rampant fraud within our housing market that we need to turn the laws over. perhaps they need to shine a light on their own problem but i think we've done it nationally and impacting 80% of the marketplace in a very, i think, negative way at the worst time.

and i would ask that you, please, take a moment and revisit this and say, did we really do the right thing? i understand what you were trying to get at and i applaud you for that. forgetting the bad apples out of the marketplace. but what caused us to get in this problem we're in today are not the people i believe that are being impacted by it. i'm asking you if you would take time and mr. kanjorski you've been very generous with your time on something you hate for me to talk about. we're good friends and i have great respect for the individual and mr. lockhart i have great respect for you. and i'm asking -- and you did mention something earlier that for years -- i think we sent five bills to the senate and we fought the strong regulator and changed the way they could do business. we never accomplished that but we tried hard. i would just ask you to please, revisit with earnestness with what we've done.

i think we're going at the wrong people trying to rea legitimate problem. >> there is si legitimate problem and it's not just new york state. why the attorney general of new york got involved is that all the securities were sold in new york. fanny and freddie put out the rule and they're continuing to look at the impact. and as they get impact back and they understand better what's happening out there, they certainly have the ability and will continue to -- >> you'll look at this? >> we'll look at -- we don't see it directly -- >> that's what i'm asking. you're the one responding to my letter so i'm going to to you. you signed it and i thank you for taking your time to respond and -- >> we continue to dialogue. i have meetings now with both c ceos and certainly this issue has come up. we're continuing to dialogue as to what's happening out there in the marketplace and we'll

continue to do that. >> and was lucky to have the dialogue and have my picture take son let's continue the dialogue. >> the other point is that bank regulators are also looking at this issue and looking at potentially making changes. >> but i have a problem with -- when you say "bank regulators are look nook it" we're focusing on one sector. i think i want to look at all the people being impacted. i agree, bank regulators need to look at it but if you would just revisit it and i thank you, sir and i thank you, chairman. >> thank you very much. mr. lockhart, i'm sure we'll have more questions from more members and we still have one left, gentleman from florida. mr. grayson, five minutes. >> thank you. i have the form 10 q filed by fannie mae the month before it went broke. actually, went through it and read it myself personally and i have some questions i want to ask you about that. to try to get a sense of how this happened and what we can

learn from it. specifically, on page 112, it says risk management derivative and there's a table there and it indicates between december 31st of 2007 and june 30th of 2008, fannie mae increased its balances for derivatives by $255 billion. can you give me some idea of the justification for a company like fannie mae increasing its exposure to derivatives at seemingly the worst possible time by a quarter of a trillion dollars? >> the fanny and freddie had many problems that surfaced over the last year. and, certainly, in their june 10-k of last year they mentioned many issues. the derivatives have note been an issue that actually caused any of the problems -- any significant problems that the

two firms. but the derivatives were used to hedge their mortgage portfolios. and what they do, often times, as the market changes, they add a derivative but then rather than closing it out they buy one to counter the one they had before. and so you get this piling up of derivatives. that's an issue we talked to them over the years about. could they close them out rather than buying a counter one? often times they buy it with the same counter party so the actual exposure is not that large. but it's an issue that we've been talking to them about. before the conservativeship and i think congressman garrett asked earlier, there are ways to lessen the exposure through exchanges and clearinghouses and something we're looking at at the moment. >> i wonder if this is really true that this had no effect on them.

logically, have been exposure totalled $1 trillion, 141 billion is something that could conceivably have an effect on your operations particularly since we're talking about a time two months before it went broke. why would they have such an exposure like that unless it were for a purpose and for that purpose, couldn't they have been something that went wrong? the reason i'm asking this question is because if you look at page 78, of the same 10-q you see for nonperforms single and multifamily loans together in their portfolio, which was almost a trillion by itself, the amount of interest income they lost because of nonperforming loans was only $192 million and going down. $192 million versus $255 billion. isn't it more likely they got into trouble over the $255 billion than they did over the $192 million? >> well, i can tell you in

retrospect, the -- they haven't lost significant money in the derivatives area. they are using the derivatives to hedge their mortgage-backed exposure. where the vast majority of those losses, the over $100 billion combined, has been not on their interest rate risk and their interest rate risk management, although there's been some there. most of it has been in credit losses. and it's credit losses related to the private label securities and credit lowses related to their books. when we did a look at the two companies in august, we worked with the occ and the fed. we also treasury had hired an investment bank as an adviser. and as we looked through all the issues in these two companies, the derivatives were an issue but nowhere near the top. the key issues really, were they

had denvered tax asset. they had credit exposure and their private label securities. the three quarterly reports since then have shown that's where the big losses were. >> well, again, let's look at the information i just provided to you. if, in fact, the interest income that was lost and interest income defined in the 10-could you as the amount of interest income that would have been recorded during the period for on balance sheet nonperforming loans, had the loans performed according to their contractual terms. if those losses are only $192 million, how could $192 million loss result in $100 billion plus lost to the taxpayers? how is that possible? >> what has happened since then is they've had to put up reserves for all the loans that are -- not all the loans but they put up reserves for loans that are in default. and they've also had to take, other than temporary impairments

on their private label securities. and they've booked a lot of losses related to credit. the interest give up is a very small issue under proper gaap accounting if you think you can't recover you have to take another temporary impairment. if it's a loan you have to write it down to the value they expect to recover, and that's what's happened. >> my time is up. let me ask you this last follow-up question and thank you, chairman, foi your indulgence. i still don't have a clear understanding from you about how a relatively tiny amount like $192 million in unpaid mortgage interest on what is a trillion dollar portfolio, how that could lead to taxpayers having to shell out $100 billion plus. >> they've had a lot more missed payments since then and it's spread throughout not only their lower-quality book but into some of their prime loans and they've had to put up reserves and they

built the reserves very dramatically since june because of the they tear rags of the mortgage market and the dete deteerttion of the economy and deterioration of the economy and they march through their financial statements. >> i'm sorry we've had two interruptions and taken so long. thank you very much, and we may ask your indulgence again to appear, because i think this is an area that we would like to spend more time. >> thank you for having us, and

we'd be happy to come back. >> our party needs, obviously, a lot of work. >> tonight on c-span's "q & a" indiana's governor mitch daniels on reviving the g.o.p. >> we need to think about how it can speak more meaningfully to the problems of today and to the americans of today, the young people of today, specifically. maybe i can be a little part of that. you don't have to be a candidate to do that. >> "q & a with governor mitch daniels on c-span. also on radio, or download the

c-span podcast. >> you're watching c-span, created for you as a public service by america's cable companies. coming up next, it is "washington journal." after that on "newsmakers" labor secretary solis talks about what's expected in the next few months. then we'll show you president obama's speech at cairo university in egypt on the middle east peace process and equality for women in the muslim world. >> and next on "washington journal," author witched wolf -- richard wolffe discusses his new book. then george runner at 8:30. after that darrell