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

Edited by Jenny Jiang

Partial transcript of Q&A with Rep. Emanuel Cleaver (D-Mo.) 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. Emanuel Cleaver (D-Mo.):
…Do you see anything wrong with the mortgage-backed securities actually guaranteeing a return, which is essentially what happens now? I mean, unlike anything else – if you go to Ginnie Mae, it is 100% guaranteed. So do you see anything wrong with someone doing an MBS and saying, “I know I’m going to get my money because it is guaranteed by the federal government.”

Edward DeMarco:
I do, Congressman. I think that the basic risk of the taxpayer guaranteeing most or all of the mortgages in this country is that you’re relying on a civil servant – as loyal as we are and as hardworking as we are – you’re relying on government agents to interpret and study and follow mortgage credit risks and to be able to, from time to time, make adjustments in pricing due to that rather than relying on market participants who actually have their own money to lose having to make that continually informed judgement about what mortgage credit risk actually looks like. While I think…there’s clearly a role for government, there’s also clearly a role for the private sector, for people who have their own money at risk to be able to assess this risk and help price it in the marketplace. That is not a job for government alone.

Rep. Emanuel Cleaver (D-Mo.):
Reform is probably needed but you would agree, I think, that any reform would be massive and messy and the charter allows for the GSEs [Government sponsored enterprises] to do the mortgage-backed securities and so to undo it creates a problem. For me, it always seem a bit unsavory but at the same time I don’t think we can do – I agree with you and Mr. [Al] Green that we absolutely must have the secondary mortgage market. So I don’t know how we fashion this.

Edward DeMarco:
If I may, I may have an explanation of what we’re doing that might help both of us here, help all of us really. Let me try to explain in a slightly different way what we’re doing with this contract strategic goal. What I want to do with mortgages that are being sold to Fannie and Freddie now – rather than Fannie and Freddie and hence the American taxpayer being the only source of guarantee, I want to take some portion and say to market participants, “Here, we’ll do a trade. I’m going to sell you this risk and you’re going to get a return for being willing to bear this risk.” So now I get the benefit of your private equity in backing this and I get the benefit of your perception of what this risk actually looks like rather than just relying on my agency to do that. And so what we get is a market price, market signals about this risk and we are now in a shared risk environment.

So what we’re doing in 2013 is I’ve instructed Fannie and Freddie to undertake multiple types of transactions. There’s different ways of selling off pieces of this credit risk so we can see what kind of execution we can get in the marketplace, how the marketplace is pricing it so that we get a better sense of then, “All right, if this starts to look like there’s good demand for this”, we can then start to proceed gradually to see okay how much more can we sell, how much more will they buy, and how are they continuing to address this risk. And I think that that’s the way that we keep this from being big and messy but we may get orderly and gradual but we do it in a resolute way to bring private capital back to the market.


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