NOVEMBER 17, 2011






[*] JOHNSON: Good morning. I call this hearing to order.

Thanks to all -- all of our nominees for joining us here today. I also extend a warm welcome to their families and friends who are here with us.

Today we'll consider two nominees for the Department of Housing and Urban Development and one for the Federal Deposit Insurance Corporation.

Mr. Maurice Jones is the administration's nominee for the post of HUD Tech deputy secretary. The HUD deputy secretary plays an important role in the management of a department responsible for providing critical rental assistance for 5.5 million families, countercyclical support for the housing market, and assistance to state and local governments.

Today, HUD and its partners face a challenging changing physical economic environment as well as human capital and technology challenges. It is important that Secretary Donovan have a management team in place to help HUD respond effectively and responsibly to these challenges.

Ms. Carol J. Galante has been nominated to be the HUD assistant secretary for housing and federal housing commissioner.

FHA is playing an important countercyclical role in the housing market providing credit as private sources of capital have withdrawn. Much has been done by the administration and Congress to strengthen FHA's underwriting and fiscal position in recent years.

But as we have seen in a recent report on the financial status of the FHA fund, their legacy of loans insured in prior years still pose a threat to the fund that must be managed. It is important that the administration have its management team place their continued oversight of FHA.

We also have Mr. Tom Hoenig before us today. As a former president and CEO of the Federal Reserve Bank of Kansas City on 1991 to 2011, Mr. Hoenig is well -- is prepared to serve as vice chair of the FDIC.

I have been long committed to helping small banks in the rural communities continue to be a federal engine for economic growth. I don't know if Mr. Hoenig shares my interest in rural communities and the need to preserve a committee-banking model.

With Mr. Hoenig's nomination in today's hearing, I'm hopeful that we're one step closer to moving the other nominees who will make up the FDICs board of directors -- Mr. Gruenberg to be FDIC chair, Mr. Curry to serve as comptroller of the currency and FDIC board member, and Mr. Cordray to be CFPB director and FDIC board member.

Given FDIC's new responsibilities and prowess to unwind thinning financial firms it will prevent systemic problems, ensuring (inaudible) operating at full strength and is a top priority.

I now turn to Senator Shelby for any opening remarks he may have.

Senator Shelby?

SHELBY: Thank you, Mr. Chairman.

Today as the chairman has indicated, the committee will consider three very important nominations.

Mr. Maurice Jones has been nominated as he -- as he said to be the deputy secretary of the U.S. Department of Housing and Urban Development, a very, very important post.

Previously, Mr. Jones was president and publisher of Pilot Media Group, a print digital and direct marketing organization. He also has many years of experience serving the government including working at the U.S. Treasury Department.

I look forward hearing how his private and public sector experience will help guide his management of the Department of Housing and Urban Development.

The committee will also consider today the nomination of Ms. Carol Galante to be assistant secretary of the U.S. Department of Housing and Urban Development and the commissioner of the Federal Housing Administration.

If confirmed she will face difficult task. We talked about this. She brings a lot of experience with this position. She's been nominated too.

As we all will recall earlier this week FHA's annual report to Congress on the mutual mortgage insurance fund stated that there is nearly a 50 percent chance that the fund would require taxpayer bailout. It's not good news. She has been involved -- she's led the FHA's multifamily division since 2009 and her appointment as FHA's acting commissioner in July is -- I hope served her well.

Given her familiarity with FHA I look forward hearing how she would ensure that the taxpayers hopefully would not need a bailout of FHA.

Also, before us today is Dr. Thomas Hoenig who has been nominated to serve as the vice chair and a member of the board of directors of the Federal Deposit Insurance Corporation. He brings a sterling resume here.

Dr. Hoenig has been -- many -- has many years of experience in banking supervision. He joined the Federal Reserve Bank of Kansas City in 1973 as an economist in the banking supervision and regulation division. Later he was promoted to vice president and then to senior vice president of banking regulation until ultimately serving as president, a role that he filled for 10 years until this past October.

Given the many years of experience, Doctor, that you have in banking supervision, I look forward hearing from you here today about the policy that you believe will work to keep the banking sector safe and sound as -- as any additional work that remains to insure, you know, we'll be faced with.

I look forward hearing from all the nominations and I look forward moving and -- along with you, Mr. Chairman.

JOHNSON: Thank you, Senator Shelby.

Are there any other members who wish to make a brief opening statement before we proceed to introducing the nominees?

VITTER: Mr. Chairman?


VITTER: Thank you, Mr. Chairman. I'll be brief.

But I also want to thank you for the hearing and thank Mr. Hoenig in particular for his past service at the board of directors of Kansas City Federal Reserve and hopefully his future service if the confirmation goes through.

His comments about the past crisis and steps we need to continue to take to ensure that we're not in the position of sort of open-ended bailouts we were in 2008 I think are very important and I hope the committee gives them thought as we look at policy issues outside including outside the ambit of FDIC.

In terms of the FHA, this is no comment on the nominee, but I certainly share Senator Shelby and other's concerns about this significant chance rated at 50 percent chance that there'll have to be a taxpayer bailout in the next year and whether there is or not. Of course they're way, way below their normal required capital compliance requirements. So I hope we as a committee and as a Senate and a as a Congress address that also apart from this confirmation process.

Thank you, Mr. Chairman.

JOHNSON: Yes. Senator Moran?

MORAN: Mr. Chairman, thank you. I welcome all the nominees and look forward to their testimony.

I want to particularly express my appreciation for the service of Mr. Hoenig at the Kansas City Federal Reserve. And I know he will be introduced by his proud home state senators.

Only until recently did I discover that Mr. Hoenig was not a Kansan. Introduced as one chink (ph) that I can find and fault that poor discretion was -- was made on his part some years ago.

But it is one of the few things at the moment that Kansan and Missourians agree upon is the tremendous service that Mr. Hoenig has provided the Federal Reserve and I'm pleased that Ms. McCaskill and Mr. Blunt are here in support of their home state nominee.

Mr. Hoenig has been a friend and an advisor of mine for several years now and I always appreciated his frank and honest advice and suggestions. He is highly regarded in our state and in our region. ] And the role of FDIC is a -- is a significant one and significant issues to be resolved now that Dodd Frank is being implemented.

Questions such as how do you restrict a bank from becoming systemically significant such that its failure will cost significant problems to the entire economy, how should policymakers wind down a large financial institution without exposing taxpayers to loss. And one that's especially important to me, how do we make certain that the benefits of -- of community banking in rural America are preserved in light of the ever increasing regulatory burden.

And Thomas spent his professional life pursuing answers to those questions. And it's always appealing to me that while his positions have been thoughtful they've not always been popular. And to me that shows a sign of significant intellectual capabilities in analyzing not for the -- for the crowd at the moment but for what's in the long-term best interest of our country. And we as elected officials could learn something from -- from that role model.

I received a letter from one of Mr. Hoenig's friends, Michael Haverty (ph) of Kansas City, in which he was supporting this nomination. And I would ask that it be included in the record. But in -- in Mr. Haverty's (ph) letter he praises Tom for, quote, "Being honest, open, and dedicated to doing the right thing even when it's difficult," and that's exactly the kind of nominees and those that we will confirm, the officials that we need in this country.

And I welcome all of you and encourage you to pursue that same kind of reputation that Mr. Hoenig has in his current position.

And I thank the chairman -- ask for unanimous consent to include the letter in the record.

JOHNSON: Without Objection.

MORAN: Thank you, Mr. Chairman.

JOHNSON: Thank you.

I want to remind my colleagues that the record will be open until next Tuesday for opening statements and any added materials you would like to submit.

We will now...


JOHNSON: We will now introduce our three nominees. Senator Warner will introduce Maurice Jones.

Senator Warner?

WARNER: Well thank you, Mr. Chairman.

I, again, want to welcome all the nominees and let me assure you considering the temperature in the room this is not a frosty reception from the committee. And I have a -- I'm honored today to introduce the nominee for deputy secretary of Department of Housing and Urban Development, Maurice Jones.

I mean, Senator Shelby laid out part of Maurice's background. He left out what I think is perhaps one of the most critical parts of Mr. Jone's background. He also had the distinction to serve with a certain Virginia governor as administration and I'm going to -- 'm going to get to that in a moment.

Following an impressive academic record, Maurice entered the Treasury Department becoming director of the CDFI Fund in 2000. In 2002 I had the -- the honor or recruiting Maurice Jones to serve in my -- my new administration -- and first as my deputy chief of staff where he performed admirably and then he took on the role of commissioner at the Department of Social Services.

And I can't speak to every state, but generally in most states Department of Social Services while terribly important are bureaucratic nightmares. My states Department of Social Service was -- was that and Maurice brought a remarkable -- both management ability -- ability to kind of sort through and see his own problems, get to the core of the problem, help with structural reorganization and really brought a sense of long-term vision and planning to an organization that probably many competent heads of social service in the past there always had been a set of bureaucracy that it was hard to overcome.

And, again, no reflection on anybody in the current HUD administration, but I think HUD has some of those same long-term systemic challenges as well. And I think Maurice will -- will be a great, great asset to -- on the organizational and management side at HUD.

After he left our administration he did actually make -- as you pointed out, Senator Shelby, make the, I think, the good choice on one hand of going to the private sector side. A little strange going into the, you know, the news business, but where he served ably as -- as vice president of Landmark Publishing Group and ended up becoming publisher of one of our leading daily newspapers in the Commonwealth of Virginia. And, obviously anybody that manages a newspaper and publishing organization through these challenging times as well, I think, reflects a -- a great deal of skill and expertise.

Based on his service for Virginia, his service at the Treasury Department, his service in the private sector I'm most confident that he will be able to enter HUD at this critical time when there's so many challenges around the housing crisis that still overhangs our economy.

I want to welcome him to the banking committee. I know he's got members of his family here as well.

This is a guy good and we are lucky to have him before us, and so I'm proud, Mr. Chairman, to present and introduce my good friend and someone who -- I hope that the committee with act favorable on Maurice Jones as the nominee for deputy secretary for the Department of Housing and Urban Development.

JOHNSON: thank you, Senator Warner.

Senators McCaskill and Blunt will introduce Tom Hoenig.

Senator McCaskill.

MCCASKILL: Thank you, Mr. Chairman.

I -- I am not going to spend any time on -- on Tom Hoenig's resume because you all have it in front of you and you know how strong it is, but I do want to talk about him as a member of a board of directors.

If you look around this country and some of the frustration that this country has with some of the abuses that are out there a lot of it can be traced to board of directors that as one CEO said to me, we have too many lapdogs and not enough Doberman pinschers. I want to say that I think Tom is capable of being a Doberman pinscher if the intellectual policy is there. He is so respected in Kansas City. In fact, I don' know what his secret is, but I wish I could emulate him because he manages to be completely forthright and completely engaging and get respect from all corridors.

This is a guy who went to a Tea Party rally to speak to them and listen to them when they were chanting, "End the Fed."

This is a guy who sits down with the AFL-CIO. Even though he strongly disagrees with their views on monetary policy, he wants to sit down with them and listen.

This is a guy who is not afraid to tell community banks about supervision being needed, but still they know he respects their business model and that he is the kind of man that they can rely on to never play with the gypsies (ph).

So, in this environment, in this country right now, with the challenges that face our economy and our financial sector I can't think of no better member we could find in this country for the board of director's of the FDIC.

I wish I could command the respect in all corridors that he has in Kansas City and the greater Kansas City region, which unfortunately or fortunately may include a little bit of Kansas. But it is -- it is my honor to introduce him today and I know that -- that -- that there are many, many times that my colleague and I agree on things and I know that this is one where Senator Blunt and I feel very fortunate that we have the opportunity to introduce a man of this stature and this capability who I know will help at the FDIC in terms of their board of directors.

JOHNSON: Thank you, Senator McCaskill.

Senator Blunt?

BLUNT: Thanks, Senator Johnson. Thank you, Chairman, and to Senator Shelby for holding the hearing today.

I'm pleased to join with Senator McCaskill to present Tom Hoenig to the committee. I particularly appreciated the comments Mr. Vitter made and Mr. Moran made about Tom's service in the -- in the job that he has had for the last 10 years, and we're proud that he's a Missourian and proud that he's still a friend of Mr. Moran in spite of -- in spite of that.

He works hard. All the things that Senator McCaskill said are exactly right in terms of his courage and his commitment to his job. He's been the Kansas City Fed president for 10 years.

He has a Ph.D. in economics. He's had 35 years of experience at the Federal Reserve and is well, well qualified for the job that he's nominated for. In fact he's probably, well, over qualified for the job he's nominated for, but he's willing to do it and we're lucky to have him as a nominee and to be able to present him today. He has advocated for a careful and cautious approach when addressing the problems facing our economy. He is known for his candor through the economic challenges that we have faced recently. He's given -- he's given consumers, stakeholders, members of Congress and the media a perspective that's both unique and valuable as we seek an appropriate path in recovery.

Often, Tom Hoenig was cited as the lone -- the center at the fed. He not only possesses the courage to speak out against excessive risk taking by large institutions, but he also has a real sense of main street, of the ag economy, of community banks and regional banks. And he spent his career figuring out how those banks operate, how critical they are to what happens in communities. And my experience with him as a trusted advisor for some time has been that -- that he has a perspective of -- at all levels of what it takes to make this economy work.

His ability to shed light on areas of concern when others are unable to see beyond the status quo will serve him well as vice chairman of the FDIC. He isn't afraid to speak up. However, he's equally talented listening to the concerns of stakeholders and consumers alike.

It's certainly my pleasure to present him to the committee and to join Senator McCaskill and others already on the committee including -- Senator Johanns in -- in our deep respect for him and his ability.

JOHNSON: Thank you, Senator Blunt.

I appreciate Senators McCaskill and Blunt. They have a very great (ph) busy schedule and you may be excused.

I will now introduce Ms. Carol Galante. Ms. Galante currently serves in the position for which she has been nominee, acting assistant secretary for housing -- federal housing commissioner, at the U.S. Department of Housing and Urban Development.

Prior to her designation as acting FHA commissioner, Ms. Galante served as HUD's deputy assistant secretary for multifamily housing programs.

Prior to joining HUD, Ms. Galante was president and chief executive of Bridge Housing Corporation and has also served the local governments of Santa Barbara, Philadelphia, and Richmond, California.

Will the nominees please rise and raise your right hand?

Do you swear or affirm that the testimony that you are about to give is the truth, the whole truth and nothing but the truth, so help you God?

Do you agree to appear and testify before any duly constituted committee of the Senate?

Please be seated. Please be assured that your written statement will be part of the record. Please also note that members of the committee may submit written questions to you for the record and you should respond to these questions promptly in order for the committee to proceed on your nomination.

I invite all the nominees to introduce your family and friends in attendance before beginning your statement.

Mr. Jones, please proceed.

JONES: I'd like to -- I apologize.

Thank you, Mr. Chairman and Ranking Member Shelby.

I do have my wife here with me, Lisa, who is sitting to my right. And we've been married for 10 years now.

Excuse me a minute.

Mr. Chairman, Ranking Member Shelby and distinguished members of the committee, thank you for the opportunity to appear before you today as President Obama's nominee to be deputy secretary of HUD.

I've already introduced my wife. Our most precious gift, our 9- year-old daughter, is in school this morning, but she is with us in spirit.

I am humbled by the nomination and grateful to the president for the trust he is bestowing upon me. I'm also thankful to Secretary Donovan for his support.

If confirmed, I pledge to work collaboratively with the members of this committee to ensure that HUD achieves the operational excellence the country needs from this organization.

Public service has been a passion of mine since at least my high school days in rural Lunenburg County, Virginia. In 1979, as a ninth grader, I was fortunate enough to be selected to serve as a page during that year's legislative session of the Virginia General Assembly. The experience changed my life. I observed and assisted legislators working on the public's business, and I was inspired. I resolved, then, to try to enter public service when I grew up.

Following law school and three years of law practice, I was blessed with the opportunity to work at the Treasury Department. Over the course of six years at Treasury, I served as special assistant to the general counsel, legal counsel to the CDFI Fund, deputy director for policy and programs and director of the fund. I loved these jobs and they taught me valuable lessons and skills.

My experiences at the CDFI Fund, in particular, called upon me to lead people in the building of a high-performing, results-oriented government organization with a compelling mission. And because the fund was essentially a start-up entity at that time we had to put in place the necessary infrastructure for the programs and operations of the organization. It was on the job training in building a government entity.

Over a five-year period, working collaboratively with Congress, we grew from a 10-person organization with an annual budget of $150 (sic) million to a 60-person organization with an annual budget of $120 million.

We invested approximately $400 million in over 300 mostly non- profit entities that used those monies to make loans and other investments in low-income communities across America.

Following my time at the fund and approximately nine months with the foundation I was honored to be asked by then Governor, now senator, Warner, to join his administration.

I started as his deputy chief of staff and subsequently also became his commissioner of the State Department of Social Services.

At Social Services, I led a team of more than 1,500 state government employees who work with several thousand local government workers to provide social services to the people of the Commonwealth of Virginia.

I spent the bulk of my time attempting to transform structures, processes, practices and people in an effort to make the system more efficient and more effective.

During my tenure, Social Services received a $922,000 reward for increasing the number of children adopted from state-supervised foster care; earned over $28 million in federal incentives for record performances in child support and collections; and received around $24 million in federal awards for successfully placing welfare participants in jobs.

I departed the Warner administration after more than three years to join a regional media company. I wanted to run a newspaper because I wanted the challenge of leading a private sector enterprise that pursued both excellent business results and distinguished public service. Little did I know that I was entering an industry that was and is in the midst of the most far-reaching transformation of its history.

Very quickly I had to develop a point of view about the newspapers biggest challenges and attempt to set us on a path to achieve our double bottom line mission. It has been an incredible educational journey, and I continue to learn lessons from the challenge.

We have transformed the way we do business in every area of the company, from integrating departments to launching new businesses, to eliminating products no longer valued by our customers. As a result, we are a debt-free, profitable enterprise well-positioned to assist the community in taking advantage of its opportunities.

The Virginian-Pilot has been voted the best newspaper in Virginia by its peers every year I've been its publisher.

These are the experiences I bring to the opportunity we are discussing today.

HUD aspires to transform itself into an organization that consistently delivers excellent results. To realize this aspiration, more changes are needed across the agency.

I want to help lead this journey. My public and private sector work have helped to prepare me for this role. And particularly in light of the housing and related economic challenges our country continues to face, which have come down so hard on so many Americans, I can think of no more important time to be at HUD.

I'm humbled by the president's decision to nominate me for this role, and I'm grateful for the committee for allowing me to appear before you today and for considering my nomination.

I'd be happy to answer any questions.

Thank you very much.

JOHNSON: Thank you, Mr. Jones.

Ms. Galante, please proceed.

GALANTE: Good morning, Chairman Johnson, Ranking Member Shelby, and members of the committee. I'm honored to be here today to testify and humbled by President Obama and Secretary Donovan's decision to nominate me as assistant secretary for Housing -- FHA commissioner. I would also like to thank this committee for the time you're committing for this hearing. I look forward to hearing your thoughts on the housing challenges facing the nation particularly FHA.

Before I begin, I would like to introduce my youngest son, Chris Roberts, who is here today. He and my older son, Matt, are both exceptional young men who I know will make the world an even better place as they proceed through their careers. I also want to thank my wonderful husband of 26 years, Jim Roberts. Without his steadfast support, I surely would not be sitting before you all today.

Mr. Chairman, my entire professional life has been dedicated to real estate development, finance, community planning, and affordable housing and economic development. My more than three decades of experience in all three business lines served by FHA --single family, multifamily, and healthcare -- has equipped me with a deep understanding of the industries, organizations and individuals that HUD serves.

Immediately before my appointment as deputy assistant secretary for multifamily housing at HUD and my subsequent tenure as acting assistant secretary for housing, I served for 13 years as president and chief executive of Bridge Housing Corporation, the largest non- profit housing developer in California.

During my tenure, I developed Bridge into a financially sustainable family of companies with annual revenues in excess of $115 million and assets of more than a billion dollars. I also developed new and innovative business lines to serve our mission such as HomeBricks which assists first time homebuyers to access affordable ownership opportunities.

At Bridge and throughout my career I have worked to demonstrate that partnership between the government, private and nonprofit sectors to create opportunity is not just good policy but smart business. And I brought that conviction with me to HUD.

As the deputy assistant secretary for multifamily housing, I led major changes in the office. Under my leadership, FHA multifamily grew from an annual level of $2.5 billion in 2008 to over $12 billion in 2011 providing key liquidity to this market segment during the toughest housing environment since the Great Depression.

In addition, I led the first major overhaul of underwriting standards and loan documents in the 40 year history of the FHA multifamily insurance program. These changes allow us to more effectively manage risk while better aligning programs with the norms and practices of the private sector.

As acting assistant secretary for housing, I have continued to focus on making FHA's programs work for all our stakeholders. Toward that end, I am spearheading an overhaul of HUD's housing counseling program including the development of a new Office of Housing Counseling.

Given that families receiving housing counseling are twice as likely to receive a mortgage modification, this work is particularly important as our economy continues to recover.

In addition, I have placed a strong focus on risk management. This includes continued development of FHA's Office of Risk Management and Regulatory Affairs, as well as a commitment to hold lenders accountable for non-compliance with FHA's requirements.

Just last week I hosted a kick-off meeting with FHA's new senior risk -- advisor for risk and many of the recently hired credit risk officers, along with their counterparts in all of the program offices so that we can ensure that risk management is fully integrated into FHA's operational practices.

If confirmed by the Senate, I will continue to provide effective leadership for FHA in achieving its important role of providing liquidity in the nation's housing markets while maintaining a strong focus on protecting the department's insurance funds.

As is clear from the report we released on Tuesday regarding the current status of the FHA Mutual Mortgage Insurance Fund, FHA is at a critical juncture. As a result of the sweeping reforms instituted under Secretary Donovan's leadership, the MMI capital reserve remains positive and we have originated the highest quality books of business in FHA's history. However, the residual effects of poor performing books from prior years will require FHA to be vigilant in managing its business moving forward.

Therefore, should I be confirmed, my highest priority would be the balancing of FHA's historic mission with responsible management of risk. At this important point in our economic recovery, ensuring the flow of mortgage capital necessary to restore our housing markets is vital and FHA is playing a key countercyclical effort particularly for low and moderate income, minority and first-time homebuyers. However, FHA can fulfill its mission only if it effectively manages the resources that make its programs available.

Thank you again for your time and for considering my nomination. I appreciate the opportunity to be here and, if I am honored to be confirmed, I will look forward earning your ongoing trust.

Thank you.

JOHNSON: Thank you, Ms. Galante.

Mr. Hoenig, please proceed.

HOENIG: Thank you.

Chairman Johnson, Ranking Member Shelby, members of the committee, it is my honor and privilege to come before you as the president's nominee to serve as vice-chairman and member of the board of the Federal Deposit Insurance Corporation.

I do want to thank Senators McCaskill and Blunt for their warm introduction and also Senator Moran for your kind words.

I would also like to note my appreciation for the committee's use of technology this morning. My family could not be here in Washington with me today, but my wife (inaudible) is in Missouri with our grandchildren. She is able to join me through the committee's live stream system. So they're watching and I say that for the camera's sake and theirs.

I recognize that the job as vice-chair for the FDIC is an important responsibility. I believe my experience in bank supervision and regulation within the Federal Reserve System for the past 38 years has me -- has prepared me for this role.

I started my career as an analyst at the Federal Reserve Bank of Kansas City working in the areas of research and policy. During that time, I also shared responsibility as part of a team that analyzed bank holding company merger applications.

Later, I was assigned responsibility for the Federal Reserve Bank of Kansas City's discount window lending and led the bank's examination work for the supervision of bank holding companies and state member banks.

In 1986, I was given the opportunity to lead the bank's division of bank supervision and structure, directing the oversight of over 1,000 banks and bank holding companies ranging in size from less than $100 million to $20 billion in assets.

And finally, I served as president of the Federal Reserve Bank of Kansas City for 20 years. Actually from October 1991 until October of this year. During my career I was involved with the banking crisis of the decade of the 80s that involved agriculture, energy and commercial real estate. In the Tenth Federal Reserve District, we dealt with 350 banks in the Midwest and mountain states that either failed or required assistance between roughly 1982 and 1992, including the failure of Penn Square Bank that later contributed to the failure of Continental Illinois National Bank and Trust.

As a member of the Federal Open Market Committee, I was involved in an indirect manner in the efforts to mitigate the effects of the financial panics in Asia, South America, Russia and Mexico that occurred with regularity during the decade of the 90's.

Finally, I worked with financial and non-financial firms in the Midwest through the recent financial crisis and recession.

Each one of these unfortunate events was difficult on Americans. Each of these events provided me with experience in dealing with financial crises. I have observed how distorted financial incentives encourage institutions to take on excessive risk. Just as importantly, I understand the difficulties of managing a crisis and restoring confidence to an economy that involves both Wall Street and Main Street.

Should the Senate choose to confirm me, I would serve with commitment and with the best interest of the country as my first priority as we continue to face national and global financial and economic challenges.

Thank you for the opportunity to appear before you today and I look forward to answering questions.

JOHNSON: Thank you, Mr. Hoenig.

Ms. Galante, a major cause of the recent financial crisis was a relaxed underwriting criteria for thousands of loans that were originated during the housing boom. How has the quality of loans underwritten by FHA changed since the housing crisis? What are -- what impact are loans underwritten during the peak of the housing bubble particularly those during 2007 and 2008 have on the capital reserve account compared to those underwritten as to the burst of the housing bubble?

GALANTE: Thank you, Senator, for that question.

This administration has put in place as I mentioned in my testimony sweeping reforms that have resulted in the best book of business starting in mid 2009 through 2011. Things like -- with the help of Congress -- getting rid of the seller down payment program which created a significant drag on our books for the previous books of business. $14 billion is estimated by the actuary for that class of legacy loans alone.

So, we have put in place many, many programs including lender enforcement. We have the highest credit score quality in this most recent book of business with seriously delinquent loans basically negligible for early -- early default.

So we have put in place numerous activities including lender enforcement that are resulting in -- as I said -- the best book of business FHA has ever had. Having said that we are still suffering from the very large poor-performing legacy books of business and need to continue to build on the reforms that we've made.

JOHNSON: Mr. Jones, the deputy secretary of HUD has often served as the chief operating officer of the department heating up its management efforts. What do you see as HUD's top management challenges? How have the experienced you mentioned in your statement prepared you to confront these challenges?

JONES: Thank you for that question, Mr. Chairman.

I think the -- there are probably two or three top challenges. I will tell you that I suspect I'll learn more if confirmed and -- and get on the job.

But based on the experience I've had both in the public and private sector, usually your top challenge with moving any organization to a standard of excellence is having the right people in the right places. And that certainly will be one of my first focus, is -- is making sure that we've -- we've got a human capital system that enables us to put the best people in the best places. So that would be one.

Second to that, I think you also -- particularly in these tough times you have to make sure that the organization is operating as efficiently as possible. And that probably will require looking at financial systems, procurement systems, I.T. systems -- all of the things that if they're not running well you won't have excellent program results.

My both public and private sector experience have enabled me to learn about all of those and I look forward to try and bring that experience and talent.

JOHNSON: Mr. Hoenig, one of the things that made the FDIC so effective over the last three years was the strong working relationship between the chair and the vice chair, and it's my hope that will continue. Mr. Hoenig, can you describe how you will build a strong working relationship with the chair of the FDIC and the other members of the board?

HOENIG: Yes, Senator.

Assuming that Mr. Gruenberg is confirmed also and that's -- whoever the chair is, but in this particular instance I know we have a common interest in community banks which is, I think, a very important part of our -- of our banking system.

I also have had the opportunity to speak with members at -- with the staff of the FDIC. I think there are many common areas that we have. And therefore, I feel like if I am confirmed we would go in there and continue to have a common mission. We know we have a huge job ahead of us wit Dodd/Frank as well as just dealing with the commercial banks through this time of stress so I feel very confident that we would have a strong working relationship going forward with whomever.

JOHNSON: Senator Shelby?

SHELBY: Thank you, Mr. Chairman.

Dr. Hoenig, in a speech you gave earlier this year you stated and I quote, "Today we have a far -- we have a far more concentrate and less competitive banking system. There are fewer banks operating across the country and the five largest institutions control more than half of the industry's assets which is equal to almost 6 percent of GDP."

Senator Moran raised this earlier about community banks and the demise of them so we're all concerned about it. What do you believe are the principal causes of consolidation in the banking sector?

HOENIG: Well, Senator, there are probably several. One of them being just economies of scale and the technology they brought forward.

I think another has been -- and this is one thing I am sensitive too for community banks -- the fact that when you do introduce new regulations, whatever, you know, the right reasons and so forth it does put kind of a fixed cost over those banks. They require more dollars to spread those cost over and that does encourage consolidation.

So I think one of the challenges that the regulatory authorities have is to inform community banks -- all banks, but community banks in particular in terms of how these regulations can be put in place, get them -- at least point them in the right direction so that they can control some of those costs and compete on a -- on a cost structure basis abroad across a broad economy. And that's -- that's essential as we go forward.

SHELBY: Aren't our community banks inextricably linked to allow the small businesses and job growth across this country or lack thereof?

HOENIG: Absolutely, they are critical. And, in fact, during the recession, community banks were, I think, very involved in lending.

Even though lending was very difficult during that period a good portion of them were still in the business of lending. You have small businesses. That's much easier for them in many cases and especially in communities across the United States to look to these banks for help, for loans, and so I think they're very important for the future of this country and -- and that needs to be recognized.

SHELBY: Ms. Galante, House and Senate negotiators -- you probably know this -- recently restate -- I'll call it a costly deal on extending the conforming loan limits. The deal would not boost the conforming loan limits for the GSEs but would raise FHA's loan limit from $625,000 to $729,000. This means that taxpayers will be subsidized in the purchase of expensive homes by wealthy buyers. Interestingly, Secretaries Donovan and Geithner has stated that the loan limits should revert to the limits established under -- under HERA which would keep FHA's limit at $625,000.

What's your position on increasing FHA's loan limit to $729,000, you know, as it would occur in this new deal especially in view of the financial challenges that FHA has that's been pulling around here (ph) and what steps -- do you agree with Secretary Geithner and Secretary Donovan on this or do you have a different view?

GALANTE: Thank you, Senator.

Yes, it has been the administration's position since we put out the whitepaper on the housing reform that we believe that lowering the limits is a step to ensuring that private capital will return to the market. We -- we understand at -- at the present time FHA is -- is playing a somewhat outsized role in the market and so we continue to support the limits being returned as they did October 1.

We do understand that the markets are fragile and there are reasonable people who may want to see us continue to stay in the business. And -- and I would just say we will implement whatever Congress decides on this matter.

SHELBY: How much household income would a borrower typically need to qualify for $725,000 loan from the federal housing industries?

GALANTE: You know...


SHELBY: Just roughly.

GALANTE: Yes, I don't have those.

SHELBY: Can you furnish that for the record?

GALANTE: I certainly can furnish that for the record.

SHELBY: In your opinion, is helping wealthy homeowners -- wealthy homeowners purchase expensive homes at odds with FHA's affordable housing mission which you've been in a long time?

GALANTE: So, again, I would say our, you know, our traditional mission is to help first time homebuyers --low and moderate income families -- and that, you know, continues to be the core of our mission. Even when the loan limits were higher it was a very, very small percentage of the work that FHA does.

SHELBY: Mr. Jones, one of HUDs core missions is to, quote, "Provide grants to states and communities for community development activities." The Home Investments Partnership Program, referred to as Home, is one of the largest community development grant programs that HUD administers. Home has been the subject -- as you probably know here -- of a Washington Post investigation called million-dollar wasteland and has been cited by the HUD inspector general as having a, quote, "A pattern of non-achievement in delivering its housing goals."

If confirmed in your position here, what would you do to improve the accountability and effectiveness on the home program which is under attack right now?

JONES: Yes, sir. Thank you for that question.

First thing I would do is learn the facts. I've read newspaper reports and I've also seen the department's...

SHELBY: But you also have the inspector generals involved here -- of a...

JONES: I have -- I have seen the department's response and I have not read thoroughly the -- the I.G.'s commentary, but I think my first job -- certainly, being somebody who's coming to this new -- will be to dig deeply and to find the facts. And -- and then I -- my job as I see it would be to go where the facts take me.

And I understand that the department is already working on making improvements to the home program. There are proposed set of rules out there now that are being considered.

SHELBY: Would this be one of your high priorities if you're confirmed?

JONES: If the secretary says it will be, yes, sir, it will be one of my high priorities.

SHELBY: Thank you.

Dr. Hoenig, a recent report by the Government Accountability Office, GAO, found that prompt corrective action has not prevented widespread losses to the Deposit Insurance Fund. In that report the GAO found that since 2008 every bank that underwent prompt corrective action because of capital deficiencies and fail produced a loss to the department -- to the Deposit Insurance Fund.

Then GAO further found that the presence and timeliness of enforcement actions were inconsistent.

What steps should be taken to fix prompt corrective action and minimize losses to the Deposit Insurance Fund?

HOENIG: I think that is always a challenge in the bank -- business, Mr. -- Senator Shelby. It is very difficult to anticipate where losses are going to be, but I think that's where, number one...

SHELBY: Well that's part of your supervision.

HOENIG: It is. Number one is to make sure you do have a strong capital base. SHELBY: One?

HOENIG: Number one. Number two...


SHELBY: And what is -- what's two?

HOENIG: To examine the assets and make sure that they are sound and if not to force the write downs and then force the actions that will minimize losses first to the bank and then to the insurance fund.

There is always judgment in that and it does -- it can be -- because we are human beings it all can become inconsistent. But what you have to do is keep pushing that concept, pushing around the capital standards and strong examination procedures.

SHELBY: Lastly, do you know of any bank -- you used -- you were a president of the Federal Reserve in Kansas City and you are also a member of the Federal Open Market Committee...



SHELBY: Do you know of any bank in your area that was well- capitalized, and well-managed, and well-supervised that failed?

HOENIG: I -- I can't think off the top a single one. If it's well-managed, well-capitalized and well-supervised they -- they tend to do -- earn consistently...

SHELBY: That's not asking too much, is it?

HOENIG: No. That's -- that's the standard.

SHELBY: That's the standard.

HOENIG: I agree. I agree with you on that.

SHELBY: Thank you, Mr. Chairman.

JOHNSON: Senator Warner?

WARNER: Hard -- hard to quibble with the ranking member's qualifications of well-capitalize, well-managed, and well-supervised -- I just wish we -- we -- we saw more of that.

Amen, amen, amen.

I'll be very brief with my questions.

One -- and I want to go back to Mr. Jones comments about, you know, best people and best places. I -- I do think when you are dealing with large organizations, when I think about our Department of Social Services, and from an outsider, my view of HUD putting best people in bets places easy to say harder to do.

And I would just like to, you know, commend again, Mr. Jones, for when he served in my administration what he did at the Department of Social Services, where there were a series of entrenched folks who regardless with the administration had never changed and he managed to shake the place up in a very positive way and I -- and I do believe and -- and think that -- I hope at least and one of the reasons why I so firmly support him is he would bring that same approach to HUD.

And while -- I heard your comments about following where the facts lead you on the home program and that -- that, you know, if -- whether answering Senator Shelby's question, whether that would b a top priority or not, your response, being that if it was the secretary's top priority I had (inaudible). Recall from, personal experience, you know, at least when we had the opportunity to work together you followed the facts even if it wasn't the -- you tried to at least make the case that that ought to be your boss' top priority if the facts said there was a problem.

JONES: Yes, sir.

WARNER: I'd like you to comment on that in terms of -- perhaps clarifying a little bit to Senator Shelby your response.

JONES: Yes, you are correct. Although I think I defer to you most often as well.


WARNER: We have different memories.


JONES: But, no -- no -- no question, I -- I thank you for the chance to clarify.

It will be my job to also make the case that home and other programs should be priorities. And -- and I -- I commit to you that if confirmed I will dig deeply, find the facts and -- and try to make a contribution to us improving across the board.

WARNER: And if there's inefficiencies, inappropriate behavior or activities that are not (inaudible) with the standards, you know...

JONES: I have one standard and that's excellence. And anything that's less that I'm going to work on moving it up...

WARNER: Thank you for that.

JONES: ...across the board.

Ms. Galante, let me -- I know you moved over into this FHA acting role now, but I do want to commend you for some of your previous work at HUD. I know we've had a -- we had an incident of a -- of a case in Virginia where -- with some of the HUD backlog and some of these multifamily projects. You know, the ability to try to cut through some of the bureaucracy, and I know you've moved in to this new role, but is there -- do you have any council (inaudible) who are still looking at HUD in terms of some of these huge backlog of -- of projects that -- that need -- need this kind of HUD financing since the private sector financing is not there and how we might find creative ways to move it along so we don't have these bottlenecks?

GALANTE: Yes, thank you, Senator.

This is one of the consequences of going from, you know, $2 billion a year to $12 billion a year business so we are doing more and more. And our staff certainly has not increased during that period of time so I have been having a major focus while I was in the multifamily role and will continue that.

You know, multifamily is still part of the responsibilities of the assistant secretary for -- for housing. Changing our business practices to ensure that we are managing the risk but that we also are moving projects in the multifamily side through the pipeline as quickly as -- as possible.

And we have major business improvement initiatives underway at this moment. We have folks out across the country rolling out, changes to our -- our processes to ensure that we can get these developments done and get them built and generate jobs and homes for people.

WARNER: And I know my time has expired so I won't get to ask -- the question I wanted about cross-border resolution. And I think Senator Shelby raised the issues -- I know Senator Corker and I had a conversation about this as well on the what you call the costly price on -- on some of the homes. And I think you make a very, very good point that we need to move back from $729 to $625 (ph). I would only point out that this -- the notion that $729,000 is only buying a mansion in many communities, I can point -- and unfortunately in many places in Northern Virginia where $729,000 buy you a one-bedroom condo and I'm not sure that that necessarily is the case in every market around the country obviously, but there are areas where that price doesn't compete. And -- and Senator Corker and I had a great exchange in the floor about when and how we move back those numbers and you may actually have been right on that.

(UNKNOWN): But we're moving in the right direction which has been get FHA.


(UNKNOWN): You know, FHA should (inaudible).

WARNER: Yes. Thank you -

JOHNSON: Thank you.

Senator Corker?

CORKER: Thank you, Mr. Chairman. And -- and thank you for the -- for the exchange we just had and I hope we have many more. And I want to say to Ms. Galante, thank you for your service. I -- I think what I just heard you say is that you all really are not in support of FHA's limits being raised to the level that the House is sending over to us in this -- in this conference report. Is that correct?

GALANTE: That's correct, Senator. We -- we maintain that it is appropriate to take a step back on the loan limits.

CORKER: I -- I just want to say I don't know how some of the organizations like you lead deal with the hypocrisy of Congress basically saying that we need to -- to -- to lower limits and move away from Fannie and Freddie and yet finding these backdoor way for FHA to basically fill-in the gap. And while I agree with the comments that Senator Warner made, there are, in fact, loans being made in the private markets above the $625 level. They're happening every single day.

So, I have to tell you I think it's uncomfortable what is coming over from the House. Totally uncomfortable and -- and I'm going to do everything I can to urge as many senators as I can to vote against the conference report because of the lack of courage that this body is showing and actually moving in the direction that we all know need to move.

And I would say to you, this is not reprimanding in any way, but, you know, the administration did send out a whitepaper, but whitepaper and a bill are two very different things and it wasn't multiple choice whitepaper, pick which one you like. I have -- I will say that we've offered a piece of legislation that I hope will attract people like Senator Warner and others that I think is thoughtful and will move us over a 10-year period away from the reliance that we have on Fannie and Freddie. And I sure hope that you and your department will look at that and offer any comments that you might have.

But, again, I thank you for your leadership. I thank you for your statement. And I am just absolutely so discouraged at Congress in lacking the courage to deal with this issue that we all know needs to be dealt with.

With that I move to Mr. Hoenig. Thank you for coming by the office the other day. I think you know that we talked a little bit about Title II and obviously as vice chairman -- Title II in the Dodd/Frank bill, as vice chairman you're going to be in-charge of orderly liquidations I think.

And my question to you, number one, is, do you think that -- that the FDIC has the ability to unwind a highly-complex top five banking entity in this country if it fails?

HOENIG: I think, Senator, that will be one of the major challenges -- is one of the major challenges with the regulatory agencies, the FDIC, in particular, have ahead of them.

These -- these institutions are -- some of them over trillion dollars and the impact of a failure on the economy will be unavoidably bad. So, how you do this under the law that Dodd/Frank has given us is, I think, the great challenge that the FDIC has in front of it.

You know, there is reference to, first of all, understanding the organization that might be insolvent. You have to make that choice so whether solvent or liquidity crisis you have to do it in a very short period of time and you have to have the right steps in place to take control, make a decision whether it's in bankruptcy and so forth.

So I -- I think we will find out only when the time comes, for sure, when you have to then execute these -- these actions to deal with these very large institutions, it's not magic, it's not automatic, it's going to take a lot of hard work between now and some -- hopefully long time in the future situation that we have to confront.

CORKER: It's interesting I've had some calls from some of the larger institutions that know that you're going to be doing what you're doing and obviously you've made a lot of comments, I think, in the past about the fact that any organization that's too big to fail is too big. And some of them are concerned. I think it's an interesting dynamic personally and I thank you for bringing many of these thoughts to the table, but a lot of them are concerned that maybe their "funeral plans" don't quite meet your standards and you break them apart anyway.

I'd love for you to expand -- by the way I'm not giving judgment on that. I'm just expressing something that's been expressed to me. And I'd love for you to talk a little bit about what you think ought to happen with some of our larger institutions, and, secondly, will that effect how you look at the, quote, "funeral plans" that each of these have to produce and I think you have to approve. Is that correct?

HOENIG: Correct.

Yes. And let me say I'm not against big. I said that several times. I'm against too big to fail because too big to fail does impact the taxpayer in significant ways.


HOENIG: And what my concern has been -- and I voiced this -- is that, if you take the safety net and you place it underneath these institutions and you give them and their creditors protections that they know or presume strongly are in place, then they do increase the risk and they do increase the fragility. And you can see it as an example in leverage because the -- the higher the safety net the more you tend to encourage leverage so you get a higher return on equity.

Now, if you have a strong capital that you compete from a position of strength, if you are highly leveraged they're vulnerable. So I think it's incumbent upon these institutions to understand themselves and their risk profile and how much capital they have.

(inaudible) very important that the regulatory agencies and the Federal Department Insurance Corporation understand these institutions. And that if they present these living wills or -- or what we chose to call them, they have to be understandable. And if the management and the directors don't understand it I don't think we can understand it.

So the burdens on them to show that they are manageable, that their risk will not impact the taxpayer in the future and -- that's -- that's capitalism and I think I -- I would be supportive of that. But I don't support future bailouts by the taxpayer for institutions that are allowed to take on too much risk.

CORKER: Mr. Chairman, thank you or letting me talk with the witness 120 seconds over. I will say to you that I'm looking forward to this. I could not agree more with you that we need to absolutely end any thought of taxpayer bailouts.

Title II is crafted and when crafted exactly perfectly in my opinion and I want you to know as I told you in the office, we're working on a bankruptcy title to -- to create a much bigger bankruptcy or much better bankruptcy provision also for highly complex financial institutions. I look forward working with you on that and I certainly look forward to seeing what you're going to do at the FDIC to ensure that we do not have a situation where too big to fail continues to -- to be part of our vernacular.

Thank you.

And I look forward to your service.

HOENIG: Thank you.

JOHNSON: Senator Menendez?

MENENDEZ: Thank you, Mr. Chairman.

I appreciate all the nominees. Congratulations on your nominations. I've had the chance to meet with them all.

I want to start off with something that both Senator Isakson and I have been pursuing and I've got a strong bipartisan support here in the Senate of 60 votes, and that is -- some of my colleagues have talked about in more disparaging ways, but I've a different view of -- which is loan limits.

The reality is -- is that according to CBO who does the scoring around here loan limits won't cost the taxpayers one dime. And I think that's incredibly important.

And the suggestion that this is only about the wealthy, the reality is, is that this doesn't just affect high cost loans because hundreds of counties experience FHA loan limit declines somewhere around the high $300,000 to about $270,000 per year.

Now, you know, I wish that people could -- throughout the country be able to obtain homes in that price range, but if you live on the coast of this country which has a huge amount not only of the land mass but the population mass of the country, the reality is -- is that cost per homes are simply much higher than that. And so, we would be taking out of the housing market at a critical time in which the housing market is all raising -- already facing enormous challenges a key component of being able to help a large universe of people who can be responsible borrowers and for which it won't cost the taxpayers any money at all. You know, a -- a vehicle by which they can get access to our mortgage.

Now, Ms. Galante, am I misstating the fact that it's not just a question of the higher limits but the fact that there are declines from the high $300,000 to around $270,000 per year that affect counties throughout -- numerous counties throughout the nation?

GALANTE: Senator, that -- that is correct. I don't have the exact number of counties in front of me, but there are hundreds of counties that are affected by the change in -- in the loan limits. And you are correct, it is not just about the highest amounts.

MENENDEZ: Let me ask you this, we have had number run that suggests that actually the higher loan -- cost loans actually have better performance records than others. Is that -- to your knowledge is that true?

GALANTE: Yes, Senator. We have not had a large opportunity to investigate this, but based on our historical data -- again, we've done a small number that are at the higher limits, but it -- our -- our data does show lower seriously delinquent percentages for loans during the higher loan category.

MENENDEZ: So the reality is that, if we -- if our information is right and you're, you know, the universe that you have already reviewed although maybe not as large as you'd like to show, that in fact that there are lower loan defaults, it seems to me that we improve FHA's financing.

So, you know, I certainly hope that our colleagues will join the House and support the effort here when we come to passage.

Let me ask you, I announced at a previous hearing that I am working on a bill to promote shared appreciation mortgages at FHA as a -- as one there is no simple silver bullet to solve our whole housing challenge that has multiple dimensions to it, but as one I'll create a solution (inaudible) of our housing (inaudible).

What do you think of shared appreciation mortgages where lenders reduce principal in exchange for a percentage of future home price appreciation?

GALANTE: Yes, Senator. I think that is something that we should look at very carefully and thoughtfully. I do agree that shared appreciation can be a good vehicle. I -- I can tell y