Transcript: Hearing Q&A with Rep. John Campbell (R-Calif.) & FHFA Director Edward DeMarco on government conservatorship of Fannie Mae & Freddie Mac

Edited by Jenny Jiang

Partial transcript of Q&A with Rep. John Campbell (R-Calif.) 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. John Campbell (R-Calif.):
…You have mentioned that it will take several years to do GSE reform and to transition to a different system. What if we don’t get started? What are the costs or risks of inaction or simply just leaving the GSEs as they are well enough alone?

Edward DeMarco:
There are several. Certainly, to the extent that the ongoing role of the GSEs crowd out market participants or makes it harder for them to compete they’re going to go deploy their capital some place else. So that if you want to draw them back in, you’ve just made it that much harder.

Second, I’ve testified before this committee numerous times about the challenge of having two large companies like this in conservatorship. You think about the two critical foundations of these companies are the people who work there and the basic infrastructures that support their operations. We’ve been asking the employees of Fannie Mae and Freddie Mac for 4.5 years to continue working at these companies under this kind of scrutiny and criticism and at reduced pay, and we’ve asked “We don’t what’s going to happen to you. The administration keeps saying they want to wind you down. All these legislative proposals are that we’re not going back to that business model. But we can’t tell you where we’re going but we want you to say and keep working here.” These individuals – they’ve got careers for themselves and they have choices and so I think we certainly have risks with that kind of uncertainty.

And then another risk that I spoke of earlier is we need to continue to invest in the infrastructure. Everyday we buy a new 30-year mortgage, that’s a 30-year commitment that the American taxpayers made and I got to have a technology infrastructure and an operating infrastructure to be able to manage that risk over its entire lifespan and you know that’s quite a long tail already, and so I’ve got to invest taxpayer dollars to keep that sound. And so this is another area of why I think we should get going.

Rep. John Campbell (R-Calif.):
Looking at the G fees, we mentioned there’s this subsidy there. They’re not equivalent to what as you mentioned…something that might bring private capital back would be a G fee equivalent to what the private sector deemed was the risk. If you look at the G fees we have now and I understand some of those have been diverted and are going to general government purposes that are unrelated to housing or Fannie or Freddie or FHFA or anything, but if you look at the total amount of the G fees, how close are we to a “market” for lack of a better term rate or the kind of rate that would make private capital look and say, “Uhhh, maybe I take that risk for that price?”

Edward DeMarco:
Well, I’ve certainly heard from some market analysts that think we’re getting close. We’ve gone from – my testimony says that we’ve basically doubled the average G fee pre-conservatorship from 25 to 50. And so I think we’re within striking distance of certainly getting there with regard to at least some portion of the credit risk.

One of the things that’s important about the contract element of our strategic plan and what we want to do with these risk-sharing is that is actually give us some actual market observation of what the market is pricing this risk at and that would make me better informed to better answer your question.

Rep. John Campbell (R-Calif.):
And how’s that going to provide information?

Edward DeMarco:
What we’re going to do is we’re going to sell off some portion of the credit exposure on these mortgages and so the investors in the entity taking on that risk is going to want a return on it and so through that price we’ll be able to start to discern how they’re assessing the market price of this risk.

Rep. John Campbell (R-Calif.):
Okay, other than the G fees, what else would attract private capital. What else can we do to start to bring in, crowd in, however you want to call it, private capital back into taking some additional risks in this sector?

Edward DeMarco:
Well, one thing that hasn’t come up here but certainly is on the minds of market participants has to do with the conforming loan limits. Conforming loan limits is something that Congress in the United States has legislated on a number of times since conservatorship but the last act by Congress actually was to see a substantial reduction in the Fannie Mae, Freddie Mac conforming loan limit in high cost areas. In early 2012 it went from basically $730,000 to $625,000 and, you know, market’s still operating and I think there’s room here for, you know, again as with everything else we’re doing – G fees and so forth – a gradual drawing in of conforming loan limits is another way to start attracting capital.

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