Transcript: Statements by Rep. Brad Sherman (D-Calif.) on government conservatorship of Fannie Mae & Freddie Mac

Edited by Jenny Jiang

Partial transcript of remarks by Rep. Brad Sherman (D-Calif.) on the government conservatorship of Fannie Mae and Freddie Mac. The House Committee on Financial Services Hearing was held on March 19, 2013:

1930s we tried the idea of no federal rule in home finance, it did not work out.

Then we tried this GSE model, where organizations run by those rewarded for profits have a full implicit federal guarantee. So they took risks to benefit their shareholders and the taxpayers left holding the bag. So that is not something we should return to.

And I’ll agree with the Chairman if that’s as far as he goes.

But I do think we need a federal agency or more than one involved in the market, otherwise we’ll see the end of the 30-year mortgage with fixed rates available to average middle-class families.
What percentage of the market this government agency or agencies should control or be involved in is a subject I’ll look forward to discussing in this room.

We all want to help those homeowners who are in trouble or underwater but we should recognize that many of the ways we help actually cost the federal government money or should I say reduce the value of instruments held or, in effect, guaranteed by the federal government.

I want to commend the GSEs for their help in allowing homeowners to refinance even if they’re underwater since that usually doesn’t cost the federal government any money; what it does cost are those investors who are reaping 5%, 6%, 7% yields on government-guaranteed paper. So I commend you for that effort…

Q&A with Edward DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA):

Rep. Brad Sherman (D-Calif.):
It seems to be a universal belief that it’s a bad idea that the taxpayers take all the risks and private shareholders get the upside. And we tend to view the two GSEs as government agencies, but as I understand it technically they’re 21% owned by the private shareholders. Furthermore, by keeping this 21% ownership, the net operating losses, the tax benefits are still retained in effect by these entities.

We’ve got a net of $137 billion of taxpayer money – it’s on its way up to $200 billion. Haven’t the taxpayers done enough to deserve 100% ownership of these entities and to know that we’re not going to lose revenue to the net operating loss going forward? Why aren’t we taking steps to acquire 100% ownership?

Edward DeMarco:
I look forward to legislative action by the Congress of the United States to make those determinations.

Rep. Brad Sherman (D-Calif.):
But until then, the taxpayers own 21% on something we’re paying already $137 billion for and until then, we are going to suffer the tax reductions of the largest pools of net operating losses I’m aware of – losses, in effect, financed by our money. Perhaps there will be some action by Congress on that…

Over the last year or so, you’ve raised the guarantee fees in an attempt to level the playing field for private capital. Can you provide the committee with the findings regarding the increase in private capital participation in the secondary market as the result of your fees or in conjunction with your fee increase?

Edward DeMarco:
Well, given that along with Ginnie Mae, Fannie and Freddie are still representing over 90% of the securitization market and well over 80% of mortgage flow, I can’t say this has led to a dramatic reversal with regard to their share. But I can report that – I’ve said this publicly – that in our own conversations with market participants and observations with market practices, we do believe we’re getting closer to a price in which you’re going to see more mortgages not get sold to Fannie and Freddie because there’s a more profitable execution elsewhere in the marketplace.

Rep. Brad Sherman (D-Calif.):
So you think you’re getting there…

Edward DeMarco:
Making progress.

Rep. Brad Sherman (D-Calif.):
So you’re not there yet…It was interesting to hear your opening remarks saying that the beneficiaries of the GSE activity are not so much the homebuyer as the homeowner. But I don’t think that’s necessarily a bad thing. Had we seen a further collapse in home prices, this country would be in much worse shape than we are now.

Edward DeMarco:
And I wasn’t putting a value judgement…I was simply noting that if you subsidize everybody there’s a basic economic principle…

Rep. Brad Sherman (D-Calif.):
I think we all understand that you provide lower interest rates and that support housing prices.
Now, can you provide the committee with a timeline of the completion of this single securitization platform that you’re constructing?

Edward DeMarco:
I cannot. We’ve said at the outset that it’ll be multi-year effort. In response to an earlier question, I said that I would like to see this transition can be done within 5 years but beyond that it’s very hard to put a strict timeline on something you’re still in a design phase, trying to scope out what it is and you know it’s a pretty material undertaking…

Rep. Brad Sherman (D-Calif.):
You’ve talked about creating a “market utility” or “public utility” and there are private sector enterprises and we could have some public utility that can package loans and sell them to the market. But only a federal government could provide a federal guarantee. Are you anticipating that this public utility is providing a federal guarantee or just packaging and selling?

Edward DeMarco:
I’m anticipating that this utility be structured and situated – it can issue mortgage-backed securities that have a federal guarantee on them and can also issue mortgage-backed securities that do not have a federal guarantee on them. They would not, presumably, be the entity providing that guarantee for the government. This is the operational platform under which the securities would be produced, sold into the marketplace. Because it would be done as a market utility, that consistency would make the market more liquid.


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