Prepared Remarks for Donald J. Bisenius
SVP – Credit Policy & Portfolio Management

New York State Assembly Standing Committees On Judiciary, Banks, Consumer Affairs and Protection, Housing, and Oversight, Analysis and Investigation
Subprime Lending Practices Hearing
May 29, 2007
Albany, New York

Good morning, Chairmen and Members of the Assembly. My name is Don Bisenius, and I am the Senior Vice President of Credit Policy and Portfolio Management at Freddie Mac. Thank you for the opportunity to address these Committees to discuss Freddie Mac's role in the mortgage market, and our efforts to improve the sustainability of homeownership. The Committees are to be commended for holding hearings on the important topic of conditions in the subprime market. These are serious issues, not just in New York, but nationwide.

Freddie Mac's Role In the Mortgage Market

As a government-sponsored enterprise, or GSE, Freddie Mac is a shareholder-owned company created by Congress to serve the public mission of bringing liquidity, stability and affordability to the nation's residential mortgage markets. We currently guarantee securities backed by mortgages totaling almost $1.6 trillion, providing homeownership opportunities for more than 10 million families. As one of the nation's largest providers of mortgage credit, we believe we are in a position to offer insights that may help government, industry participants and families address this problem.

Historically, Freddie Mac has primarily guaranteed mortgages in the "prime" segment of the mortgage market. And while this term has many definitions, it generally is thought to represent more than 80% of the total mortgage market in this country. In addition to guaranteeing the performance of these prime mortgages, Freddie Mac participates in the subprime market as a responsible investor in highly rated AAA bonds backed by subprime mortgages. This participation was driven by our charter objectives to bring additional liquidity to the mortgage market. It has also been an important contributor to our meeting our HUD-mandated affordable housing goals. In fact, by carefully tailoring our bond purchases, more than 70% of our 2006 subprime bond investments meet one or more of our affordable goals.

Following the approach we have used successfully in the prime market for more than 35 years, Freddie Mac has a four-part approach to participation in any segment of the mortgage market, including the subprime market.

• We define investment standards. We do not guarantee or invest in products that we believe are inconsistent with sustainable homeownership.
• We develop products that will truly help families achieve and maintain the dream of homeownership.
• We educate borrowers. Both directly and through our industry partners, we provide financial literacy education for consumers as they prepare for homeownership and in the event that they experience financial distress later.
• We work to prevent foreclosure whenever possible. We have extensive programs and practices to find alternatives to foreclosure.

Let me say a brief word about each.

Setting Standards and Creating Products

Since our inception in 1970, Freddie Mac has been an industry leader in setting standards and providing innovation in the mortgage market. Our most recent demonstration came this past February when we announced sweeping changes to our investment policies in subprime mortgages. After September 2007, we will invest in short-term hybrid subprime adjustable-rate mortgages (ARMs), and securities backed by such mortgages, only if they are underwritten using a fully-indexed, fully-amortizing payment. We will also limit the use of stated income and require income verification in most circumstances. Additionally, we will encourage subprime originators to escrow funds for taxes and insurance. Given our position as an investor in the AAA segment of these bonds, actions such as this are largely unprecedented.

These actions are consistent with Freddie Mac's tradition of leadership, fostering opportunities for successful long-term homeownership. Freddie Mac has taken unilateral, voluntary leadership positions that have helped improve subprime market practices. These actions include bans on single-premium credit life insurance, prepayment penalties greater than three years, and mortgages with mandatory arbitration contracts. We also insist on regular credit reporting so subprime borrowers can build their credit reputations by making timely mortgage payments and, perhaps, qualify for a less expensive prime mortgage. These requirements apply to all of our mortgage purchase and investment activities.

Our ability to influence market behavior is clearly not limitless. We have observed over the last few years that the share of the market that we are able to serve has shrunk, as other market participants have not imposed restrictions similar to ours. In conversations with market participants following our February announcement, we heard very clearly that our actions would likely cost us business unless they were more broadly mandated through government regulations.

Freddie Mac works continuously with our lender partners to develop alternative products for America's homeowners. At this time we are diligently developing more consumer-friendly products to provide stable financing and refinancing alternatives for borrowers. First and foremost, we want to be sure that both the lender and the borrower understand the borrower's capacity to afford the mortgage. While the details are still being finalized, it is our expectation that these products will include fixed-rate mortgages and adjustable rate products with reduced margins and longer fixed periods. Our objective is to reduce the payment shock that many subprime borrowers are facing with the market's current products. Equally important, our offerings will require that in most circumstances a borrower's income and employment information is verified. We expect to begin offering these subprime products by the middle of this summer and as we announced in April, would expect eventually to purchase up to $20 billion of them.

Financial Literacy Education

In addition to helping set standards for sound mortgage lending and developing appropriate mortgage products, Freddie Mac also strives to help borrowers make good mortgage choices. We believe that educating consumers about smart credit habits and helping them understand the importance of obtaining and maintaining good credit are essential to achieving and sustaining homeownership. That is why we designed a multilingual financial literacy curriculum called CreditSmart®. CreditSmart® is designed to give consumers information to help them establish and maintain good credit, make wise financial decisions, and prepare to enjoy the benefits and shoulder the responsibilities of owning a home. CreditSmart® is available in Spanish as CreditSmart Espanol® and in Chinese, Korean and Vietnamese as CreditSmart Asian®.

Freddie Mac is also committed to informing consumers about the dangers of predatory lending. Our Don't Borrow Trouble® consumer awareness campaign is designed to help borrowers avoid such predatory lending practices as being charged excessive points and fees or rushed into signing blank loan documents. In New York, five Don't Borrow Trouble® campaigns are underway in the Buffalo, Long Island, Rochester, Syracuse and New York City areas. Overall, we have launched Don't Borrow Trouble® campaigns in almost 50 communities throughout the country over the past seven years, helping more than 100,000 borrowers across the U.S. learn how to avoid becoming a predatory lending victim. We continue to seek additional outreach and education opportunities in the state of New York.

Foreclosure Prevention

Despite well-educated consumers and sound mortgage offerings, we know that some borrowers will experience financial distress. When this happens, we actively look for alternatives to foreclosure. Foreclosures are a lose-lose-lose situation. The borrower loses their home, the servicer loses a revenue stream, and we, as the investor, lose on our investment. Preserving homeownership by helping delinquent borrowers avoid foreclosure whenever possible is not only part of our mission, it is simply smart business. That is why we authorize our servicers to take reasonable actions to help borrowers through a short-term financial problem. They are authorized to extend forbearance, develop repayment plans and modify loans. Working with our lenders, we help between 40,000 and 50,000 of our borrowers out of foreclosure every year. In New York alone, we helped 3,390 families avoid foreclosure during 2005 and 2006.

It is worth noting that a big challenge in this area is informing delinquent borrowers that they have workout options—and that they must talk to their lender early. Unfortunately, as detailed in a groundbreaking study conducted by Freddie Mac and Roper Public Affairs in 2005, 61 percent of delinquent borrowers did not know that there are workout options and significant percentages of those borrowers did not return lender phone calls out of embarrassment or a lack of faith that anything can be done to help them.

Freddie Mac is addressing this issue through national outreach programs where trained staff from the Consumer Credit Counseling Services of Atlanta and San Francisco contact borrowers after the 45th day of delinquency. We have also joined with NeighborWorks and other financial institutions to support a national ad campaign being developed by the National Advertising Council that will encourage borrowers to call a national counseling hotline at 888-999-HOPE.

We also provide industry and borrower seminars to increase public awareness of default servicing and workout options, including a recent forum for the Local Initiatives Support Corporation (LISC) New York City and their member organizations.

Food for Thought

I'd like to close by offering some thoughts that I hope are useful to you in your deliberations.

First, as noted earlier, borrowers need better information to make informed mortgage choices. To be most effective, consumer disclosures need to occur early in the lending process and must be uniformly and consistently applied.

Second, policymakers need to consider the tradeoffs between putting as many families into homes as possible and ensuring that those families can sustain homeownership over the long term. We know that our own actions discussed above will limit the ability of some families to get into a home. Market participants would benefit from clear regulatory or legislative guidance on the appropriate balance.

Third, any regulation or legislation should ensure a level playing field. As long as some institutions operate under different, or no, regulatory structures, potential for the sort of excesses and abuses we have seen in the subprime market will continue to exist.

We will also need to carefully distinguish between those borrowers who can be "rescued" and those who cannot. Such triage will not be easy or popular, but policy prescriptions such as widespread "bailouts" or foreclosure moratoriums should be considered only in extreme situations, such as in the aftermath of natural disasters. Broad applications of such prescriptions could have lasting, unintended consequences that harm the housing finance system in the long term.

The entire housing finance system rests on the integrity and dependability of mortgage contracts between borrower and lender. Consumers need to have confidence that they understand the implications of the mortgages they take out and are able and willing to meet their obligations. Mortgage disclosures must be understandable. Having agreed to the mortgage terms, lenders must have confidence that they can enforce the terms. In the majority of instances, foreclosure is clearly an undesirable outcome for both parties, and there are strong incentives on both sides to "work things out." However, at the end of the day, the ability to enforce a mortgage contract, including the use of foreclosure, is critical to continued investor confidence in the U.S. housing market.

In the end, as with so many other complex policy issues, we need to strike the right balance. We can't be complacent, but we should resist the impulse to overcorrect this market. Many borrowers have benefited from the innovations in the subprime market. Without the ability to get a subprime mortgage, many borrowers would not be successful homeowners today.

Helping this market transition into a more viable, stable source of financing is a desirable policy objective and Freddie Mac remains committed to creating opportunities for safe, sustainable homeownership for America's families.

Thank you again for the opportunity to appear before the Committees today.