Transcript: Statements by Rep. Jeb Hensarling (R-Texas) on the government conservatorship of Fannie Mae & Freddie Mac

Edited by Jenny Jiang

Partial transcript of Rep. Jeb Hensarling (R-Texas), Chairman of the House Committee on Financial Services, on the government conservatorship of Fannie Mae and Freddie Mac. The House Committee on Financial Services Hearing was held on March 19, 2013:

I would like to start off by quoting from our witness’s testimony. “Few of us could have imagined in 2008 that we would be approaching the fifth anniversary of the placing of Fannie Mae and Freddie Mac in conservatorship and it made little meaningful progress to bring those government conservatorships to an end.”

I could not agree more, and that’s why I am determined that today’s hearing will be a truly historic one. I am determined that this hearing will be the last time that Director DeMarco or, if you believe press reports, his successor will testify before this committee before we finally and belatedly mark up a true GSE reform legislation.

This, I define, is legislation to once and for all abolish Fannie Mae and Freddie Mac as government-sponsored enterprises and, two, one that would create a truly sustainable housing policy – sustainable for our economy, sustainable for those seeking the goal of home ownership, and sustainable for hardworking taxpayers who should never, ever be called upon again to bail out Wall Street.

Now, I know this is a heavy lift, especially in divided government, and that’s why the leadership of this administration is so critical.

Regrettably, they have not released a reform plan. Instead, over two years ago, they issued a white paper of options and simply let it gather dust. The interested public has long since deleted the PDF file from their hard drives.

After 4.5 years, inaction is no longer an option because the GSEs were at the epicenter of the financial crisis. They were part of a tragically misguided government policy to incentivize, browbeat, and mandate financial institutions to loan money to individuals to buy homes they could not afford to keep.

Consequently, millions saw the American dream turned into an American nightmare. Millions more were forced to contribute to what is proven to be the mother of all taxpayer bailouts.

And shamefully, instead of being reformed, Washington continues to functionally grant them a monopoly. So part of today’s hearing will focus upon what FHFA is doing to reduce the size and influence of the GSEs and how to accelerate that process with the goal of repealing their government charters in the foreseeable future and help lead us to a truly sustainable housing finance system.

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

Rep. Jeb Hensarling (R-Texas):
Mr. DeMarco, on page 4 of your testimony, you used the term “sustainable”. That you’re focusing on a more secure, sustainable and competitive model for the secondary mortgage market.

Jeffrey Lacker, the President of the Richmond Federal Reserve, has said “We should phase out government guarantees for home mortgage debt and otherwise financial stability will be elusive and fiscal balance will be threatened by repeated boom-bust cycles in housing. Homeownership may be a likable social goal but if that is our objective, we should subsidize housing equity not housing debt. I, too, am focused on a sustainable housing finance system.”

Mr. Lacker is obviously of the belief that our current system can foment boom-bust cycles.

From your perch and 20 years of experience in housing finance, do you see that as a risk and how do you use the term sustainable as you used it in your testimony?

Edward DeMarco:
I certainly think that the housing market does go through cycles and we’ve certainly experienced a wrenching nationwide cycle now. And I think that there’s plenty of argument out there that a contributing factor has been some government policies but that’s certainly not the only thing contributing to the problems we’ve had in the last few years.

What I mean by sustainable is we’re trying to build a market that truly can last for years and function with whatever role government has that both government and private market participants can rely upon the soundness and stability of that model. So the infrastructure that we’re trying to build is one that starts with basic building blocks – something as simple as data. The first real step FHFA took as conservator to get moving on this future was something we announced back in 2010 with the Uniform Mortgage Data Program. We wanted to do something as simple as bring to the mortgage industry a standard set of data definitions for what gets reported on a mortgage application it comes to an investor, what the form and format and definition for an appraisal look like, so that we have consistency of the data and that produces more quality. It’s a very basic building block. It sounds ho-hum. It’s essential to building a sustainable model.

Other things we are doing are also looking at bringing standards to the marketplace.

Rep. Jeb Hensarling (R-Texas):
Mr. DeMarco, on page 15 of your testimony, any system of housing finance is going to have some costs, some benefits. On page 15 in talking about some of the federal housing policies, including explicit credit support, you said “such policies direct our nation’s investment towards housing, it will also drive up the price of housing other things being equal.” So are you saying that credit guarantees for what they do, perhaps, to lower interest rates and I think the last data I saw from the Federal Reserve’s study several years ago that the Fannie and Freddie model saves about 7 basis points off of the interest to help the consumer but that the consumer may pay in the back end by paying more in their principal. Is that what you’re saying in your testimony?

Edward DeMarco:
Essentially, Mr. Chairman. Right now, as has been pointed out in the opening remarks, over 90% of mortgage securitization is being backed by taxpayer either through Fannie Mae or through the Treasury support of Fannie and Freddie. If you subsidize this credit to everyone buying a house, you’re essentially subsidizing no one. It’s causing, just in simple supply and demand terms, it’s simply causing the price of the good to go up. So if there’s this broad across-the-entire-market subsidy to housing credit, some portion or a good portion of that gets captured by the home seller and is leading to higher prices.


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