On June 3, the House Financial Services Committee’s Subcommittee on Insurance Capital Markets and Government Sponsored Enterprises held a two-panel hearing entitled “The Present Condition and Future Status of Fannie Mae and Freddie Mac.” Appearing at the hearing were the following witnesses: Panel I (the members of which presented joint written testimony):
- James E. Lockhart III, Director, Federal Housing Finance Agency
- Edward J. DeMarco, Chief Operating Officer and Senior Deputy Director for Housing Mission and Goals, Federal Housing Finance Agency
- Christopher Dickerson, Deputy Director for Enterprise Regulation, Federal Housing Finance Agency
- Bruce A. Morrison, Chairman, Morrison Public Affairs Group
- Susan M. Wachter, Richard B. Worley Professor of Financial Management, The Wharton School, University of Pennsylvania
- Frances Martinez Meyers, Senior Vice President, Fox & Roach/Trident, L.P. on behalf of the National Association of Realtors
- Lawrence J. White, Arthur E. Impertore Professor of Economics, Leonard N. Stern School of Business, New York University
- Michael D. Berman, CMB, Vice Chairman, Mortgage Bankers Association
- Joe Robson, Robson Companies and Chairman of the Board, National Association of Homebuilders.
Subcommittee Chairman Paul E. Kanjorski (D-PA) began the hearing by emphasizing that the “emergency actions taken to date by the Federal Housing Finance Agency, the Treasury Department, and the Federal Reserve” were necessary, noting that “Fannie Mae and Freddie Mac have ensured that millions of Americans can continue to purchase and own their homes.” Kanjorski stated that this first in a series of hearings on the future of the GSEs will lead to a “a long-distance relay between Congresses, not a 100-meter sprint within the 111th Congress.” He outlined the six primary options before Congress:
- Reconstituting Fannie Mae and Freddie Mac as they were prior to conservatorship;
- Splitting them into smaller operating companies;
- Regulating the prices charged by the GSEs;
- Creating cooperative non-profit ventures; 5.Revolving them back into the government; and
Ranking Member Scott Garrett (R-NJ) asserted that “any regulatory reform that does not reform GSEs is not true reform” and that “Fannie and Freddie were a large part of the problem, and reforming them should be a large part of the solution.” He also cautioned against the creation of a systemic risk regulator, claiming that “we could essentially establish a dozen new Fannie and Freddies that will be ‘too big to fail.’” Garrett expressed his support for covered bonds as a catalyst for “a viable and liquid secondary mortgage market.” “This type of securitization is widely used in Europe to provide liquidity to their mortgage market, and I believe they could be very effective in increasing mortgage funding in the U.S.”
Testifying on behalf of the Federal Housing Finance Agency (FHFA), James B. Lockhart III stated that his agency’s “most important goal is to preserve the assets of Fannie Mae and Freddie Mac.” Lockhart explained that FHFA continues to classify the GSEs as “critical supervisory concerns,” elaborating that credit-related expenses continue to increase, and that the “short-term outlook for the two entities is poor.” He also remarked on the cooperation between the Obama administration, the FHFA and the GSEs, noting that, as a part of developing the Obama administration’s Making Home Affordable program, Fannie Mae is working to implement the Home Affordable Modifications program, which will assist homeowners able to make their mortgage payments. Also in conjunction with the Administration’s plan, Freddie Mac is overseeing “servicer compliance with program terms and conditions.”
As for the Federal Home Loan Banks, Lockhart stated that “despite stress in financial markets and among other institutions, investments in the FHL Bank System have remained sound.” However, he indicated FHFA’s concerns about some of the banks, noting potential losses associated with private-label mortgage-backed securities.
Lockhart set out three potential roles for the GSEs in the future, including (i) “liquidity providers of last resort for the secondary market” for various types of asset-backed securities, (ii) guarantors or “catastrophic risk insurers of the credit risk of conventional mortgage-backed securities,” and (iii) to provide subsidies or using other means to increase supply or reduce the cost of mortgage credit to targeted borrowers. He concluded by encouraging regulators to take “a more unified and cohesive approach to supervising mortgage products, markets, and institutions,” and noting that “it is important to get the restructuring right” for the overall U.S. economy.
Bruce A. Morrison emphasized the “overall success of the government’s investment in housing opportunity,” and warned that “a radical privatization agenda is neither wise policy nor a politically viable choice.” He argued that “good social policy requires the federal government to provide structural and financial support to housing finance,” and that “regulatory strength, independence and expertise is essential.” Morrison stated that “cooperative ownership by mortgage originators” holds “the greatest promise for removing conflicts between the interests of shareholders and the mission of the enterprises.” He concluded with six specific recommendations:
- Keep Fannie Mae and Freddie Mac privately capitalized but closely regulated;
- Capitalize the GSEs through a cooperative structure;
- Limit the GSEs to issuing securities backed by loans they buy with a government-backed guarantee;
- Limit the scope of such guarantee to catastrophic loss;
- Abandon arbitrary limitations on the size or credit quality of mortgages that can use the GSEs to avoid the avoidance of credit discipline; and
- Rebuild a mortgage market regulatory capacity within the restructured financial regulatory system.
Susan M. Wachter envisioned “three options for the future of the GSEs: (1) privatization; (2) nationalization; and (3) a return to their original federal charter as hybrid public-private entities.” She favored standardized mortgage products as a means of promoting liquidity, suitability and systemic stability. Wachter conceded that “standardization can stifle innovation,” but countered that innovation “is not always positive for social impacts.” She also favored the implementation of safeguards to “discourage excessive risk-taking by the GSEs.”
Frances Martinez Meyers, testifying on behalf of the National Association of Realtors, outlined the NRA’s nine “Principles for Ensuring a Robust Financing Environment for Homeownership.” They include:
- Ensuring an active secondary mortgage market by facilitating the flow of capital into the mortgage market;
- Seeking to ensure affordable mortgage rates for qualified borrowers;
- Establishing reasonable affordable housing goals to encourage home ownership;
- Requiring lenders to “pass on” lower borrowing costs by making mortgages with lower rates available to qualified borrowers;
- Ensuring mortgage availability nationwide;
- Requiring sound underwriting standards;
- Requiring high transparency and soundness standards with respect to the structuring and disclosure of mortgage-related securities;
- Ensuring the availability of sufficient capital to support lending in all types of markets; and 9.Providing rigorous oversight.
Meyers noted the consistent themes behind all nine principles -- that the housing market must work in all economic environments, and that mortgage capital must be available to all qualified consumers.
Lawrence J. White encouraged leaving Fannie Mae and Freddie Mac as “wards of the federal government,” so long as the current economic crisis continues. However, he favored “full and true” privatization after the economy stabilizes. At that point, White argued that there should be “no special burdens restrictions on their activities, except for those that would be part of any special prudential regulatory regime that is likely to be established by the federal government to deal with large financial companies that pose systemic risks.” He favored replacing the GSEs with “targeted programs” that provide subsidies to moderate and low-income buyers. He noted the American Dream Downpayment Assistance Act of 2003 and the $8,000 “first time homebuyer tax credit,” a provision of the American Recovery and Reinvestment Act of 2009, as examples of such programs.
Michael D. Berman, testifying on behalf of the Mortgage Bankers Association, discussed conclusions and recommendations from a council of mortgage finance experts, convened in 2008. He argued that private investor should bear the majority of risk associated with mortgage-related investments, stating that “the secondary market functions optimally when those investors also understand and assume the risks associated with those transactions.” He acknowledged that government support was necessary, but generally only at a level required to provide sufficient investor confidence. In “periods of extreme market distress,” Berman advocated a “government-supported program to provide liquidity.” Berman concluded by highlighting the need to provide transition from the present to the future state of the GSEs, particularly in the “quite fragile” market.
Joe Robson, testifying on behalf of the National Association of Homebuilders, stated the federal government continuing to provide a sound underpinning for the U.S. housing finance system is “critical” in ensuring “a reliable and adequate flow of affordable housing credit.” He pointed to NAHB’s conclusion that “Fannie Mae and Freddie Mac should not return to operating with a public charter while their stock is traded publicly,” emphasizing the “friction” between the “housing mission and the interests of private stockholders.” He also opposed the more extreme options, such as privatization, as the companies “could not be counted on to provide liquidity in times of crisis,” and nationalization because of the burden of “government red tape.” Robson argued that there should be continued federal backing of the GSEs, but it should be “limited primarily to providing credit enhancement of mortgage-backed securities.” He concluded by supporting rolling back recent changes in underwriting requirements that “are resulting in the denial of credit to viable projects and impeding economic recovery.”