Transcript: Hearing Q&A with Rep. Patrick T. McHenry (R-N.C.) & FHFA Director Edward DeMarco on government conservatorship of Fannie Mae & Freddie Mac

Edited by Jenny Jiang

Partial transcript of Q&A with Rep. Patrick T. McHenry (R-N.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. Patrick T. McHenry (R-N.C.):
…You said that 90% of new mortgage origination are backed by the federal government and a majority of the outstanding mortgages you preside over what is the successors of Fannie and Freddie. Now, I bring this up because the chairman started off by asking…how do you incentivize private capital back into this marketplace? Let me begin one step before that, which is what are the current barriers to private capital coming into this secondary mortgage market?

Edward DeMarco:
Sir, the dominant portion of the market being served by Fannie and Freddie operating with taxpayer support, uncertainty about what the government’s role in the future is going to be, including the timing and ultimate disposition of Fannie and Freddie. There’s uncertainty with regard to rule-making that are still pending in the marketplace, including capital rules, and waiting to see more a bit more how the market itself regains its footing. These are all contributing factors.

Rep. Patrick T. McHenry (R-N.C.):
So the first factor, which is the government backing – the backing of the federal government makes these mortgages cheaper which means the private sector can’t compete?

Edward DeMarco:
That’s basically it.

Rep. Patrick T. McHenry (R-N.C.):
That’s basically it, okay. So how can we incentivize private capital to come in?

Edward DeMarco:
Well, one way we can do it and we are doing is that we are – as we’ve talked about earlier this hearing – gradually increasing the guarantee fees to move towards a pricing that was reflective of what private capital would expect to manage that risk with putting its own equity in place. That’s an important component.

Rep. Patrick T. McHenry (R-N.C.):
So you’ve taken steps to actually put the two separate platforms of Fannie and Freddie together and that process is ongoing?

Edward DeMarco:
It is, and part of our conservator mandate, it’s not just about building for the future important as that is. Fannie and Freddie are operating a combined $5 trillion book of business. We’ve got to continue to invest in the infrastructure for that business.

And I’ve spent a lot of time thinking: What does it mean as conservator to companies that the administration says it wants to wind down – how do I invest taxpayer dollars in continuing to develop and strengthen the underlying infrastructure of their securitization business using taxpayer money but at the same time respecting ultimately to wind these things down? So the platform gives us a more efficient way of utilizing taxpayer dollars.

Rep. Patrick T. McHenry (R-N.C.):
So what are the advantages and disadvantages of spinning off that entity as a private versus sort of a government owned utility?

Edward DeMarco:
I think that certainly if private market participants thought they had a greater stake in what this platform was doing we would get their input into it, it would help shape the design. I’ve said when I put out the score card we’re intending to develop a formal mechanism to be receiving market input on this but I think the more they see this is something they can have access to and participate in what it does to serve the market will attract them more to what we are doing.

Rep. Patrick T. McHenry (R-N.C.):
…What is your role here as conservator and what does that mean? Does that mean you’re here to protect the taxpayer? Does it mean you’re here to see a vibrant housing marketplace with increasing values? Is it to make sure that investors are rewarded for investing in these entities? What is your purpose and role?

Edward DeMarco:
I have – [Laughs] – almost all of that, Congressman. In my prepared statement, I go through the statutory provisions here. But fundamentally, we have a responsibility as conservators to conserve and preserve the assets. And what that means with the American taxpayer providing this capital with all the risk exposure on the legacy book, that meant minimizing losses. We also have a responsibility for ensuring stability and liquidity in the mortgage market. The statute also tells us we’ve got to maximize our efforts to prevent foreclosures, subject to a net present value test where we’re protecting taxpayers.

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