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

Edited by Jenny Jiang

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

…As we approach the 5-year anniversary of Freddie and Fannie, we realized that the American taxpayers have injected almost $200 billion into these entities.

And the history of Fannie and Freddie has proven that government involvement in the housing finance not only creates a moral hazard but also creates political pressure for increasingly risky lending practices.

We’ve learned that the government-guaranteed mortgage debt eliminates a central market discipline and the risk aversion for investors, and we’ve learned that the government is incapable of establishing risk-based fees for guarantees and exposing taxpayers to billions of dollars.

Unfortunately, we evidently haven’t learned this lesson yet because here we are 5 years later and we’ve still not done anything meaningful about reforming Freddie and Fannie.

In the meantime, 9 out of every 10 mortgages in this country have some federal nexus and the taxpayers are on the hook for that.

The White House said they wanted to do something about that, but to date, they’ve not put in force any meaningful proposal. They put together a watered-down white paper that says this is what we might do but, as we know, they never took any action on that.

It’s really time for Congress and for the administration to step forward and get the taxpayers off the hook so that we can move forward with having a robust housing finance market in this country.

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

Rep. Randy Neugebauer (R-Texas):
…There’s been a lot of controversy about the principal write-down policy…It’s your responsibility as the conservator, your responsibility is to conserve and do what’s in the best interest of the taxpayers, is that correct?

Edward DeMarco:
Yes, sir.

Rep. Randy Neugebauer (R-Texas):
And so did you conclude then that writing principal down for people already paying their mortgages was not in the best interest of the taxpayers?

Edward DeMarco:
Yes, sir.

Rep. Randy Neugebauer (R-Texas):
…One of the things that’s been said about the housing crisis is that Freddie and Fannie played a part and there’s a lot of people to blame. But one of the things that keeps coming up is that Freddie and Fannie was being used by Congress and other political influence to make housing policy that wasn’t necessarily sound. Would you concur with that finding?

Edward DeMarco:
I would, sir. Yes.

Rep. Randy Neugebauer (R-Texas):
But isn’t that kind of interesting that that’s still going on?

Edward DeMarco:
There’s a certain irony after $188 billion of taxpayer money going into them.

Rep. Randy Neugebauer (R-Texas):
We still have people that want to continue to use Freddie and Fannie for housing policy. Is that correct?

Edward DeMarco:
It would appear that way. Yes.

Rep. Randy Neugebauer (R-Texas):
I found it’s kind of interesting. I noticed that…some of the [state] Attorneys General are calling for your replacement because you didn’t buy into the principal write-down program…It’s also interesting some of those Attorneys General also were part of the settlement and what we do know is that about half of the money that these states received for the settlement went to housing programs but the other half of it didn’t go to housing. Is that correct?

Edward DeMarco:
From what I’ve read in press reports, yes, sir.

Rep. Randy Neugebauer (R-Texas):
So I think one of the things that it points out is that the reason we need to begin to diminish the Freddie and Fannie role is that I think – you heard me say in my opening testimony – we don’t seem to have learned any of the lessons and that, in fact, there continues to be pressure from within Congress and outside groups for Freddie and Fannie to keep doing what they’ve been doing but basically what, as you’ve testified, is we’d just put more and more potential liability on American taxpayers. Is that a fair assessment.

Edward DeMarco:
It is. And certainly, as demonstrated here, this is an emotional issue. It’s one that affects real families and I take very seriously the harm that this financial crisis – this housing crisis – has imposed on families across the country. But we’ve got tough decisions to make and we’ve got to rebuild this system so that we don’t put these families at risk like this again and we don’t put the American taxpayer at risk like this again.

Rep. Randy Neugebauer (R-Texas):
…We are at record low interest rates. In fact, I don’t know how we can go any lower from here but the Chairman of the Federal Reserves seems to be on a mission to try to see if we can get these rates lower. So my opinion is that the value of your portfolio has to be at its maximum by now because as those rates begin to trend back up, the value of your retained portfolio assets will go down. Is that typically how that happens?

Edward DeMarco:
Well, for certain portions of the portfolio, yes. For others, there may be more critical economic factors affecting the value of the assets.

Rep. Randy Neugebauer (R-Texas):
So what efforts do you have underway to kind of accelerate the reduction of the portfolio? What are some of the things that you’re doing in that respect?

Edward DeMarco:
An important thing to understand about the retained portfolio is that Fannie and Freddie – they are much different than they were the day they went into conservatorship. When they went into conservatorship, they were dominated by their own mortgage-backed securities which traded in the marketplace and home mortgage loans that they simply bought the mortgage and put on their balance sheet.

Today, it is much different; it is much less liquid. They have a lot of non-performing loans on their balance sheet. They have a lot of loans that have gone through loan modifications. Those modified loans are sitting on their balance sheet. And as they run off the more liquid stuff, including their own mortgage-backed securities, or sold that in the marketplace, they are left with less liquid assets and that’s what we’re trying to gradually get off their balance sheet.

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