Transcript: Hearing Q&A with Rep. David Scott (D-Georgia) & FHFA Director Edward DeMarco on government conservatorship of Fannie Mae & Freddie Mac

Edited by Jenny Jiang

Partial transcript of Q&A with Rep. David Scott (D-Georgia) and Edward DeMarco, Acting Director of the Federal Housing Finance Agency, on the FHFA’s conservatorship of Fannie Mae and Freddie Mac. The House Committee on Financial Services Hearing was held on March 19, 2013:

Rep. David Scott (D-Georgia):
…Mr. DeMarco, with home sales and prices of homes increasing and mortgage spreads back at normal levels, why do Fannie and Freddie continue to assess an adverse market delivery charge that took in nearly $3 billion in 2012? Aren’t these actually fees which are no longer needed and is effectively a tax on new home buyers?

Edward DeMarco:
Well, I wouldn’t say it’s a tax on new home buyers, Congressman, but I would say that we’re on the one hand, as I’ve made clear, we’re on a path of continually raising the G fees. You’re talking about a component piece of the G fees that was put in place when the mortgage markets were in distress. I will say that as part of our evaluation of the next steps for increasing G fees, I am looking at – we are looking at the composition of G fees, including adverse market fees and so forth. So I’m assessing what you’re talking about but I want to be clear that the overall path we are on is to continue to increase G fees.

Rep. David Scott (D-Georgia):
All right. Let me ask you about Loan-Level Price Adjustments as well. Loan-Level Price Adjustments of as much as 30% points make Fannie and Freddie execution uncompetitive relative to the FHA, and reducing these fees would make higher LTV [loan to value] loans with private MI more competitive. Do you agree that these LLPAs are distracting the market and hampering the return of private capital?

Edward DeMarco:
No. I think the more we raise the overall G fees, the more we’re going to encourage private capital back into this marketplace.

Rep. David Scott (D-Georgia):
All right. Now, with the administration’s intent on winding down Fannie and Freddie, is it your sincere and honest belief that the private market in and of itself will be able to absorb this void? Especially considering, Mr. DeMarco, that 90% – this is a huge void – 90% of all of the new mortgages are done by Freddie and Fannie. And it’s just baffling to me that – I just am not satisfied that we have something that can take the place of that.

Edward DeMarco:
Congressman, here’s how I think about it. The short answer to your question, but I want to make sure I frame the question right, is can the government step entirely out of this marketplace and can this single-family mortgage market be supported without any government involvement and is that what I would like to see? That’s not what I anticipate and it’s not really what I am expecting or would like to see.

But I would frame it this way: Single-family mortgage market in the United States is a $10 trillion market and I don’t expect the outcome to be that all $10 trillion is done by private capital without government involvement nor am I expecting all $10 trillion to be done by the government without capital. That dial – you know, if you think about a dial on that range – has moved well towards the government having most of the responsibility of this mortgage market and that dial has moved in the last 5 years.

What I would envision is we’ve got to start moving that dial away from government, away from taxpayer, and back towards more private capital participation. But my gosh, between $0 and $10 trillion, there’s a lot of places to reset that dial, and I think we can make substantial progress away from taxpayers and still have a vibrant role for government. And I’ve suggested elsewhere that in thinking about where that government role ought to be, it might be constructive for Congress to begin with the traditional explicit government guarantee programs, such as the FHA program and the VA program because those are existing programs to provide guarantees, and let’s figure out where Congress intends them to serve the market and then one can think about what’s left and what does the government need to do to support the rest.

Rep. David Scott (D-Georgia):
But that didn’t make sense that we ought to figure out exactly what government’s role should be. If you agree that government has the role here and it does, how do we figure out how to make that work? How do we guarantee that the 30-year fixed mortgage will stay in place and available as an option to them without the government role?

Edward DeMarco: [Time expired. DeMarco will submit written response.]

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