Transcript: Statements by Rep. Scott Garrett (R-N.J.) on government conservatorship of Fannie Mae & Freddie Mac

Edited by Jenny Jiang

Partial transcript of remarks by Rep. Scott Garrett (R-N.J.) 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 thanking Director DeMarco and also the entire team for all their hard work during what has been very, very challenging times.

Director DeMarco should be commended for his outstanding public service and his determination to stand up for the American taxpayer and for American homeowners as well, and he does so against the tremendous pressure from outside who would like to look at these institutions – these enterprises – as their own piggy banks, if you will.

It’s also encouraging to hear the recent announcement by the Director that he plans to continue this and to continue the process of transitioning some of the credit exposure of Fannie and Freddie outside to the private sector.

Everyone can agree, I think, on this committee that having over 90% of the housing market backed by the federal government is completely unsustainable.

I believe these changes will allow us to examine some new approaches and better ways to facilitate more private sector involvement in the mortgage market.

And with $16 trillion in debt and annual trillion dollar deficits, we really cannot afford to continue keeping $11 trillion of mortgage credit on the back of the taxpayer.

I’d also note that these steps taken by the Director are far more than any reforms this administration has undertaken. It appears to me that they are more content to keep their head in the sand, if you will, and act as if no reforms are needed in our housing finance system.

Finally…it does not appear that the Director feels this way. I thank him for his thoughtful work, look forward to working with him and also members of this committee to pursue this process of reform.

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

Rep. Scott Garrett (R-N.J.):
You said something interesting in response to the Chairman’s question about 90% of the market and subsidizing the market to such an extent you said we’re basically subsidizing everybody. That’s interesting. And so when you subsidize everybody, what is the effect then on pricing in the market and what is the effect then on the first-time homebuyer trying to get into that market?

Edward DeMarco:
Well, basic economics would suggest that if you’re subsidizing everybody on the demands side for housing that it’s going to push up the price of housing other things equal. There’s a lot of other things going on in the marketplace, including the actions of the Federal Reserve but that’s just a basic economic observation.

Rep. Scott Garrett (R-N.J.):
It is but when you said it a light bulb just went off there. Because for those who say let’s just subsidize everyone, at the end of the day you’re actually harming them because it’s going to be harder for that person to get into the market or stay in the market.

Let’s talk a little bit about the risk, though, that in the meantime of what the public is on. Because the GSEs have credit risk, right?

Edward DeMarco:
Yes, sir.

Rep. Scott Garrett (R-N.J.):
Okay. And so can you talk a little about your work or your ideas about trying to sell off some of that credit risk because when the GSEs have credit risk that means that you and I as taxpayers have credit risk too, right?

Edward DeMarco:
That’s correct.

Rep. Scott Garrett (R-N.J.):
What are your plans there?

Edward DeMarco:
So right now with every single family mortgage that Fanny Mae and Freddie Mac buy and then securitize, they are standing behind that mortgage 100%, which means the American taxpayer’s standing behind it. What we would like to do is engage in transactions with private investors, with private financial – with the capital markets, to sell off some portion of this credit risk, meaning that the mortgages that Fannie Mae and Freddie Mac are buying now if they default that some portion of that loss – those early losses – would be absorbed by a private investor rather than the American taxpayer.

Rep. Scott Garrett (R-N.J.):
So you mentioned somewhere that you have a target of around $30 billion in 2013, is that right?

Edward DeMarco:
Yes, sir.

Rep. Scott Garrett (R-N.J.):
Is that the total amount of risk that would be sent out to the private sector?

Edward DeMarco:
No, sir. That would be – that’s the unpaid principal balance of mortgages. So we want to see $30 billion worth of mortgages in which there’s some amount of the credit loss associated with those mortgages has been sold off to the private market.

Rep. Scott Garrett (R-N.J.):
And what is that percentage-wise of all the credit risk that the GSEs have of it?

Edward DeMarco:
Well, between them right now in terms of the stock, they’ve got about $5 trillion in mortgage guarantees so it’s a pretty tiny fraction.

Rep. Scott Garrett (R-N.J.):
This is less than a pilot program.

Edward DeMarco:
It’s a start.

Edward DeMarco [responding to question on whether Fannie Mae and Freddie Mac are making money]:
Right now, they are starting to make money. Yes, and I’m pleased by that. That money right now, every quarter is swept in the dividend payment back to the Treasury Department. The way that a senior agreement with the Treasury works is the actual liquidation preference of that senior preferred stock is not declined regardless of how much is paid in dividend. So there’s still a liquidation preference retained by the Treasury Department that is substantial.

Rep. Scott Garrett (R-N.J.):
And isn’t it the bottom line that if we did this, this would just basically put us back into the situation that we were pre-crisis days as part of this public-private partnership that just did not work?

Edward DeMarco:
Yes, sir. If we tried to in any fashion recapitalize Fannie and Freddie as they are and put them back out there.

Rep. Scott Garrett (R-N.J.):
…Are you familiar with the preferred stock purchase agreement with the changes that the administration made to it recently? Can you just talk about that, whether these changes hurt or help your ability to fix, reform the system?

Edward DeMarco:
I think that they helped in that they provided some assurance to investors in Fannie Mae and Freddie Mac securities that the dividend – that Fannie Mae and Freddie Mac would not continue to borrow from the Treasury in order to pay the Treasury with regard to dividends. It also is ensuring that the taxpayers start to see even more of a return on the support that’s been provided and it does not allow for the companies to take their earnings and essentially recapitalize themselves.
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