Transcript: Statements by Rep. Gary Miller (R-Calif.) on government conservatorship of Fannie Mae & Freddie Mac

Edited by Jenny Jiang

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

Because of securitization technology, the secondary market of mortgage developed into a deep global market that generally worked well to the advantage of the average American.

But the hybrid public-private model of Freddie and Fannie was fundamentally flawed. They acted as private companies with public policy charters serving two masters.

While [their replacements] must capture the important function they’ve historically performed, we still need a viable secondary mortgage market with sound underwriting principles.

I introduced a bill last year to eliminate Freddie and Fannie, saying that we need to look to secondary markets for residential mortgages and focus on that. I proposed a system separate from the government, eliminating the conflict inherent in the model where the private sector benefitted from the government guarantee – meaning, government risks, private sector rewards.

Make sure the secondary market was the privately financed capital we use – not government funds. It’ll cap the maximum volume of purchases and sales, crowding out the private sector was not a part of the bill; it was a primary portion of it.

Historically, housing led the recovery in this. It has to this time. We need an alternative to Freddie and Fannie and we need it rapidly.

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

Rep. Gary Miller (R-Calif.):
…You released your conservator score card, I believe, on March 4th and you had detailed specific priorities of 3 strategic goals…What effect do you think this new platform will have on getting private sector money back to the secondary market?

Edward DeMarco:
I think it has an opportunity to be an important contributing factor to bringing private capital back into the marketplace. I mean, think about investors and private label mortgage-backed securities and the losses that they have suffered and the problems that have become apparent as a result of the collapse of the housing system, think that investors are going to be more comfortable bringing private capital back to the mortgage market if they can rely better on how securities are going to work, what the rights and protections of investors are, how mortgages are going to be serviced, what kind of transparency is there with regard to the actual performance of the underlying mortgages. These are all things that we’re trying to bring to this platform and we think it will make returning to this market more attractive for investors.

Rep. Gary Miller (R-Calif.):
The problem I have with the hybrid model – Freddie and Fannie – is that you have taxpayers being put at risk with the private sector making all the profits, and you could see where Freddie and Fannie went wrong when it started chasing market share to appease their stockholders basically and they made every mistake that they could make at that point. But what advantages or disadvantages do you see spinning this platform off as private entity?

Edward DeMarco:
Well, we’re constructing it as a jointly-owned entity of Fannie and Freddie. I really expect the Congress of the United States to make the final determination. It’s been an asset of the conservatorship so it’s going to be up to Congress to determine the disposition. Your options are essentially – you can make it a government-owned corporation; you can sell it to a private entity; or you can turn it into a market utility and have it operate really as just that – as a financial market utility.

Rep. Gary Miller (R-Calif.):
My concern is that the approach we use on turning it into a private entity – do you envision avoiding this flaw we’ve had in the past of a hybrid model that exists with Fannie and Freddie today?

Edward DeMarco:
Without some sort of control or knowing what the governing mechanism is, it’s certainly open to going into a direction other than the one I’m designing for right now.

Rep. Gary Miller (R-Calif.):
What do you see is the benefit in spinning it off as a private entity as you talked about?

Edward DeMarco:
Well, let me say, I think the larger benefit, if I may, on this particular one is I think structuring it as a market utility, not as a for-profit entity but as something there to serve market participants. And one of the things I would be concerned about is making sure that however this thing operates in the future, it operates so that small and mid-sized lenders have fair access to secondary market execution.

Rep. Gary Miller (R-Calif.):
If you look at FHA today, there’s been sort of a debate on that. I don’t think FHA is necessarily crowding out the private sector as the private sector is not crowding in today, and much of that is due to legislation we’ve enacted on the private sector and the confusion we’ve created out there, which I think we have to eliminate that. But what are the main barriers you see today that prevent private capital from re-entering the secondary mortgage market?

Edward DeMarco:
I think there are a number of things still inhibiting the full return. One of them is Fannie Mae and Freddie Mac are still the dominant players in the marketplace and they’re operating with taxpayer support, which puts them in a place that other private investors cannot get to. The other is the infrastructure for establishing standards and allowing for investors to feel comfortable returning is not there. And there’s still plenty of regulatory uncertainty with regard to a range of things – risk-based capital rules to regulations still to be implemented under Dodd-Frank.

Rep. Gary Miller (R-Calif.):
You’ve talked about the contraction of the GSEs – eliminate the concept of being a dominant presence in the marketplace and the reforms you’ve enacted to date. But how did the barriers we’ve created for you through legislation – Dodd-Frank as such – impact your ability to do that?

Edward DeMarco:
Well, I mean the biggest impediment, I suppose, for me – or the thing I could use most from Congress is, you know, legislative direction, and even if it’s not the whole picture, at least start to provide some sense of parameters with respect to limit. They take this platform, take how to gradually shrink Fannie and Freddie’s presence in the marketplace. There are steps that we could take incrementally today.

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