Earlier today, the House Financial Services Committee’s Subcommittee on Capital Markets, Insurance and Government Sponsored Entities held a hearing entitled “The Future of Housing Finance: A Progress Update on GSEs” to discuss the primary causes of the financial downfall of Fannie Mae and Freddie Mac and to review the progress in improving the management of the GSEs over the two years since they were placed in conservatorship.

Testifying before the Subcommittee were:

  • Michael S. Barr, Assistant Secretary for Financial Institutions, U.S. Department of the Treasury
  • Edward J. DeMarco, Acting Director, Federal Housing Finance Agency (FHFA)

Subcommittee Chairman Paul E. Kanjorski (D-PA) began the hearing by explaining that over the past two years, in order to stabilize the U.S. housing markets, Treasury has purchased or announced plans to purchase approximately $150 billion in the senior preferred stock of the GSEs combined, and Treasury and the Federal Reserve have together purchased $1.36 trillion in the mortgage-backed securities of the GSEs. In order to limit the losses of the GSEs, and to better protect taxpayers from future losses, the FHFA and Treasury have taken numerous actions, which were discussed by the panelists.

Both panelists spent some time discussing the factors that led to the GSEs being put into conservatorship (including inadequate oversight, inadequate capital, and the market’s assumption that the GSEs had a “government backstop”), but focused their remarks on an assessment of the federal government’s response to events of 2008.

Mr. DeMarco discussed the measures that FHFA has taken to stem the losses resulting from the housing market crisis. He noted that the GSEs’ foreclosure prevention efforts, including loan modification and refinancing programs, have played an important role in this process. He explained that since the first full quarter of the conservatorships, over one million homeowners have received assistance from the GSEs in the form of loan modifications and other foreclosure alternatives. In addition, Mr. Barr pointed out that according to an FHFA report released on August 26th, new loans being guaranteed by the GSEs are not materially contributing to the GSEs’ losses.

Other mentioned improvements to the GSEs’ condition included:

  • The GSEs have increased their guarantee fees and adjusted their pricing to better compensate for risk.
  • Both GSEs have significantly decreased low credit purchases, and Alt-A loans now account for 0% of the GSEs’ new book of business since conservatorship, compared to 18-22% in 2006.

The witnesses also discussed the future of the GSEs and federal support for the housing markets. Mr. DeMarco expressed concerns about the "potential costs and risks" of an explicit government guarantee of home loans and questoined whether "all conventional mortgages warrant a government guarantee." Mr. Barr assured the subcommittee that "after reform, the GSEs will not exist in the same form as they did in the past. Private gains will no longer by subsidized by public losses. Capital and underwriting standards will be appropriate, consumer protection will be strengthened and excessive risk-taking will be restrained." The administration's plan for restructuring the GSEs is expected to be released in January.