Transcript: Hearing Q&A with Rep. Mick Mulvaney (R-S.C.) & FHFA Director Edward DeMarco on government conservatorship of Fannie Mae & Freddie Mac

Edited by Jenny Jiang

Partial transcript of Q&A with Rep. Mick Mulvaney (R-S.C.) 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. Mick Mulvaney (R-S.C.):
…I want to talk a little bit about your strategic plan, which you’ve laid out in your testimony as having 3 basic pieces – the concept of building this new infrastructure, contracting part of the business, maintaining other parts of the business. I want to focus on this concept of contracting because when I look at the details on the contracting part of the business, I see some discussion – I want to talk specifically about single-family. I see some of the discussions about raising fees, some of the discussions about entering into risk-sharing transactions. But it’s not until I move to the multi-family part that I see specific targets in terms of percentage reductions. I think you said a 10% goal this year for shrinking the portion – multi-family portion of your business. Have you set similar targets for shrinking or contracting the single-family of the business?

Edward DeMarco:
No, we’ve not approached it that way and there’s an explanation for that, Congressman. In the multi-family segment, Fannie Mae and Freddie Mac today risk share on virtually all of the multi-family mortgages they purchase. That is, there’s already established processes and business practices whereby Fannie Mae buys a multi-family mortgage, they’re not taking all that credit risk. They’re sharing it with the originator. That’s not the way it works in single-family. So we’ve got another step we’ve got to take first in single-family and that is establishing what these processes are to start sharing the risk.

So my goal is in 2013, let’s get those transactions tested in the marketplace and let’s get the process to do it in place and then in subsequent years we can look towards more like an approach we’re taking with multi-family to say we want to see an increasing share of this sold off.

Rep. Mick Mulvaney (R-S.C.):
Fair enough. Let’s – to the extent we can look down the road a little bit to the future when possibly you’re able to start talking about specific percentage targets for shrinking the single-family portion of the business, how small of market share can you have and still provide the liquidity that you think is necessary for the market? We go back to the early 2000’s you were 80% of the market; mid-2000’s you were 45% of market; now you’re effectively 100% of the market. How small a role can you play and still fulfill that particular function?

Edward DeMarco:
With the particular function of providing liquidity, well, I mean, it certainly can be a good bit less than 90%. But I mean, the point is you’re not going to turn that switch overnight, and I think the way to get to wherever that answer is is to do it incrementally and that’s the path that we’re on.

Rep. Mick Mulvaney (R-S.C.):
It’s fair to say historically, at least, that market can function with you supplying guarantees on less than half…

Edward DeMarco:
Absolutely, Congressman. Yes, Fannie Mae and Freddie Mac traditionally, I believe, have less than half the market.

Rep. Mick Mulvaney (R-S.C.):
…We talked about contracting the market, which obviously folks in here may agree or disagree with. But even when you talk about the strategic plan – all the different pieces of it, including contracting, you’re still talking about operating within the existing system – the existing regime, which is this taxpayer – this implicit taxpayer guarantee…Isn’t that system broken? If your goal in doing this is to protect the taxpayer, isn’t it true that you’re just not going to be able to protect the taxpayer until you get rid of the guarantee? The only way that you’re going to get rid of the potential conflicts that Mr. Ellison so eloquently laid out, which is – look, you’ve got 3 masters right now. You’ve got the taxpayers that you owe money to and you also try to protect them from future risk. There are circumstances under which you’re asked to contribute to a housing trust fund but you’ve got private shareholders. Isn’t that whole system – isn’t the GSE system fundamentally flawed, and regardless of anything you do to contract it, build it, sustain it, we’re still going to have these issues in the long run?

Edward DeMarco:
It is broken, Congressman, and I look forward to working with the Congress to come up with a better…

Rep. Mick Mulvaney (R-S.C.):
Is it possible to fix it with leaving the taxpayer guarantee – implicit taxpayer guarantee in place? Don’t you have to either go to a system where you all become an agency or you become a private entity? Either one or the other? You can’t be both?

Edward DeMarco:
You certainly need to clarify where the government’s role is and its exposure and where private capitals is. The GSE model that you’re talking about being broken – that was the problem – that was the complete melding of private capital and public support in a way that just harmed the American taxpayer.

Rep. Mick Mulvaney (R-S.C.):
And I think that it’s fair to say – and I appreciate the steps that you’re taking to protect the taxpayer because clearly that is the goal of your strategic plan – but I would…put it to the larger group that we’re always going to have this risk, regardless of how successful Mr. DeMarco is in contracting, building, maintaining – whatever. Until we get the taxpayer out of the business of the guarantee, the taxpayer’s always going to be on the hook eventually…I encourage everybody else to consider the possibility that it’s the system that’s broken not the operation of the system.

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