Earlier today, the Senate Banking Committee held a hearing entitled “Future of the Mortgage Market and the Housing Enterprises” to discuss the current state of the mortgage market, regulatory changes that may occur, the future role of Fannie Mae and Freddie Mac (the “Housing Enterprises”), and the role of the Federal Housing Finance Agency in achieving meaningful change. Testifying before the committee were:
- Mr. Edward J. DeMarco , Acting Director
Federal Housing Finance Agency
Director, Financial Markets and Community Investment
U.S. Government Accountability Office
- Mr. Andrew Jakabovics Associate Director for Housing and Economics
Center for American Progress Action Fund
Worley Professor of Financial Management
Wharton School of Business, University of Pennsylvania
Arthur F. Burns Fellow in Financial Policy Studies
American Enterprise Institute
Chairman Christopher Dodd (D-CT) began the hearing by outlining his goals for the future of the mortgage market and the housing enterprises. According to Chairman Dodd, legislators should keep three goals in mind in relation to the mortgage market:
- The mortgage market must remain liquid and stable;
- Product standardization and widespread availability of 30 year fixed rate mortgages without prepay penalties should be encouraged; and
- Mortgage credit must remain available and accessible, and sustainable. Chairman Dodd discussed the fact that although the country needs to have available mortgage credit, the Fed is currently supplying over $1 trillion to the mortgage market, and this cannot go on indefinitely.
The panelists echoed Chairman Dodd’s concerns, particularly with respect to product standardization and creating a mortgage market that is sustainable in the long term. The hearing focused both on the mortgage market as a whole, and more specifically on the future of Fannie Mae and Freddie Mac. William Shear of the U.S. Government Accountability Office (“GAO”) briefly explained the findings of GAO’s recently issued report on options for restructuring the Housing Enterprises. According to the GAO report, there are three options for restructuring:
- The Housing Enterprises could become government agencies which would focus on purchasing certain mortgages and issuing mortgage-backed securities, but would not include mortgage portfolios, which are difficult to manage. Homeownership promotion would be transferred to the FHA.
- The Housing Enterprises could be reestablished as government sponsored enterprises (“GSEs”) with added controls to minimize risk.
- The Housing Enterprises could be completely privatized, with mortgage lending moving completely to the private sector. This option might also include the creation of a federal mortgage insurer to help protect lenders against mortgage losses.
The options outlined in the GAO report strongly resembled the testimony by Dr. Susan Wachter at the June 3, 2009 hearing of the Financial Services Committee’s Subcommittee on Insurance Capital Markets and Government Sponsored Enterprises. As in the June hearing, several panelists warned against the dangers of the Housing Enterprises returning to GSE status, but Edward J. DeMarco of the FHFA also mentioned the challenge of promoting mortgage product standardization in a non-GSE mortgage market that will consist of numerous, relatively small players.